What happened?

Shares of Reata Pharmaceuticals (NASDAQ:RETA) were down by about 32% as of 12:21 p.m. EDT on Monday after the company released its second-quarter earnings report before the market opened. The financial results weren't the big story, however: In the update, the company said that its regulatory filing for Omaveloxolone, one of its leading pipeline candidates, could be delayed. 

So what

Omaveloxolone is a potential treatment for Friedreich's Ataxia (FA), a rare genetic disorder that causes difficulty walking and impaired speech. Following a successful phase 2 clinical trial, the results of which Reata Pharmaceuticals announced in October, the company had planned to submit the drug to the U.S. Food and Drug Administration for marketing approval. However, the FDA isn't confident that those phase 2 results will support a marketing authorization for Omaveloxolone. 

Road sign that says "risk ahead."

Image source: Getty Images.

The regulator may request that Reata Pharmaceuticals conduct another clinical trial, which could be a serious problem. Running a clinical study for FA is a challenging endeavor because the disease is rare and it progresses slowly, two factors that make it hard to find trial participants. The COVID-19 pandemic would render the task even more difficult. Thus, the need to conduct an additional trial for Omaveloxolone would significantly delay any potential approval of the drug, which explains why investors are selling off shares of Reata Pharmaceuticals. 

Now what

Reata Pharmaceuticals proposed that it conduct a crossover study that would test the efficacy of Omaveloxolone on patients who were previously randomized into the placebo arm of the phase 2 study, and who are currently taking the drug in the open-label extension of the study. Pending approval of that plan by the FDA, the company said it could finish the crossover study by year's end.

If, however, the FDA does not accept this proposal -- or if the data from that study proves inconclusive -- the healthcare company will have to conduct another clinical trial. Given the uncertainty associated with Omaveloxolone, and considering Reata Pharmaceuticals currently has no approved drugs on the market, investors might want to watch this one unfold from a safe distance, at least for now.