What happened

Intercept Pharmaceuticals (NASDAQ:ICPT) is starting the week on a sour note. The drugmaker's shares dropped by as much as 38% in pre-market trading Monday morning in response to the Food and Drug Administration's decision to reject obeticholic acid (OCA) as a treatment for liver fibrosis stemming from nonalcoholic steatohepatitis (NASH).

The FDA's denial reportedly centered around OCA's predicted clinical benefit relative to its potential risks. The agency apparently wanted a well-defined (and highly favorable) risk-to-reward ratio in order to approve the drug on an accelerated basis. As of 9:57 a.m. EDT on Monday, the biotech's shares were still down by a whopping 37.9% in the wake of this disappointing regulatory outcome.

A human liver illustrating the difference between a healthy liver and a fibrotic one.

Image source: Getty Images.

So what

Intercept was set to become the first company with an FDA-approved NASH medication. That's a big deal because the first NASH drug to hit the market could generate anywhere from $2 billion to $5 billion in annual sales within the first five years after approval.     

Now what

The good news is that the agency did recommend that Intercept submit additional efficacy and safety data from OCA's ongoing Regenerate study. What's more, the FDA said that the long-term outcomes phase of the study should continue as well. So there's a chance that OCA could still win this high-value indication at some point down the road.

The bad news is that there are scores of other biotechs racing to bring a NASH treatment to market. Therefore, Intercept will definitely need some luck in order to maintain its potential first-mover advantage after this regulatory setback.