What happened

Shares of Catalyst Pharmaceuticals (NASDAQ:CPRX) are in a tailspin this morning after news broke that the Food and Drug Administration (FDA) surprisingly approved Jacobus Pharma's Lambert-Eaton myasthenic syndrome (LEMS) drug, Ruzurgi, for patients between six to 17 years of age.

Although Catalyst's FDA-approved Firdapse is indicated for adult LEMS patients, doctors are free to prescribe Ruzurgi off-label for patients of any age, potentially setting up a head-to-head battle between the two for market share. As of 10:34 a.m. EDT, Catalyst's stock was down by a whopping 37% on over four times the average daily volume in the wake of this unexpected development.   

A man with his mouth open as if in shock while clasping his hand to his forehead. A downward trending graph in white is in the background.

Image source: Getty Images.

So what

With Firdapse's annual price tag coming in at an eye-popping $375,000 per patient and no competition in sight, Catalyst was set to reap the rewards from its first major FDA approval in a big way. In fact, the drugmaker's shares had already bolted higher earlier this year after Firdapse's initial script numbers came in well above expectations, thanks to little resistance from third-party payers across most of the United States.

This new rival, however, could upset the apple cart. Jacobus is likely to price its LEMS drug at a fraction of Firdapse. Although Catalyst can make the argument to insurance companies that only Firdapse is FDA-approved for adults, payers are almost certain to use Ruzurgi as leverage in future negotiations. 

Now what

Is this sell-off warranted? Yes. The heart of the matter is that Firdapse's premium pricing structure is now at serious risk. Insurance companies usually don't readily reimburse drugs for off-label use, but Ruzurgi should be priced in a manner that makes it far more palatable to payers than Firdapse.

Fortunately, Catalyst is set to report first-quarter earnings next Monday, May 13. This upcoming earnings report should give the company a friendly platform to tell its side of the story. Until then, investors might want to stand pat with this small-cap biotech.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.