Intercept Pharmaceuticals (NASDAQ:ICPT) fully expected approval from the Food and Drug Administration for obeticholic acid (OCA) in treating non-alcoholic steatohepatitis (NASH). CEO Mark Pruzanski even stated on the company's Q1 conference call last month that the drugmaker would be "prepared to launch as soon as possible" after that anticipated approval.

That launch won't happen anytime soon. On Monday, Intercept announced that it had received a complete response letter (CRL) from the FDA. Unsurprisingly, the drugmaker's shares plunged on the news. But should you throw in the towel on Intercept after its big setback?

A rubber stamp reading FDA Not Approved

Image source: Getty Images.

What we know about the bad news

The FDA doesn't release CRLs to the public, so we don't know for sure everything that was in it. However, Intercept basically stated that the agency found that the benefit of OCA doesn't outweigh the potential risks. That's a surefire recipe for an FDA rejection.

But there's more to the story. Intercept's filing for OCA was for an accelerated approval, based on positive interim analysis results from the late-stage Regenerate study. With accelerated approvals, the FDA allows a surrogate endpoint to be used for faster approval.

Intercept said that the FDA believes that "the predicted benefit of OCA based on a surrogate histopathologic endpoint remains uncertain." This surrogate endpoint measured the change in liver tissues caused by NASH.

What about the potential risks that concerned the FDA? The most common adverse event in the Regenerate study was itching, which was experienced by more than half of the patients receiving the 25 mg dose of OCA. That percentage fell to 28% of patients receiving the 10 mg dose of the drug.

Intercept's next steps

Intercept's executives seemed livid about the FDA's decision. Pruzanski emphasized that "at no point during the review did the FDA communicate that OCA was not approvable on an accelerated basis." He added that Intercept "strongly believe[s] that the totality of the data submitted to date both meet the requirements of the Agency's own guidance and clearly support the positive benefit-risk profile of OCA."

It even sounds as if Intercept thinks the FDA is making it too hard to win approval. Pruzanski stated that the company is "very concerned that the Agency's apparently still evolving expectations will make it exceedingly challenging to bring innovative therapies to NASH patients with high unmet medical need."

But the FDA didn't rule out the possibility of approval of OCA in treating NASH. The agency recommended that Intercept submit more efficacy and safety data from the ongoing Regenerate study. Intercept intends to review the CRL with the FDA as soon as possible, and discuss a path for obtaining approval.

The company says that it will submit additional data from the Regenerate study. It will also continue moving forward with the long-term outcomes phase of the phase 3 clinical trial.

Throw in the towel?

If you think that Intercept doesn't have much of a chance to win approval for OCA in treating NASH, selling the biotech stock now is your best option. Even though OCA is already on the market for treating another liver disease, primary biliary cholangitis, NASH is the main growth opportunity for Intercept.

But completely ruling out the possibility of FDA approval of OCA in treating NASH seems premature, despite Intercept's bad news this week. Winning accelerated approval certainly appears to be more difficult than before -- but not totally out of the question. And even if accelerated approval turns out to be too steep a hill to climb, Intercept could ultimately demonstrate safety and efficacy for OCA when the Regenerate study wraps up, and pursue a traditional approval pathway.

Having said that, the outlook for Intercept is murkier now than it's been. There are certainly other stocks with more solid risk-reward profiles that investors could buy. I think throwing in the towel on Intercept could be premature. However, I also think that there are better stocks to buy right now.