What happened?

Shares of Osmotica Pharmaceuticals (NASDAQ:OSMT), a biopharmaceutical company, dropped by as much as 24.4% on Wednesday and closed today's trading session down by 20%. Investors sold off shares of the company following its announcement that the U.S. Food and Drug Administration (FDA) has declined to approve one of its products. 

So what

Osmotica Pharmaceuticals submitted an amended New Drug Application (NDA) for Arbaclofen ER, a potential treatment for spasticity associated with Multiple Sclerosis (MS), on June 30. Spasticity is one of the most common symptoms of MS, characterized by muscle stiffness and spasm. The healthcare company argued that during clinical trials, MS patients who received a 40 mg per day dose of Arbaclofen ER, as well as those who received an 80 mg per day dose of the tablet "derived significant clinical benefit." As the company said: "The compelling evidence provided by these studies clearly demonstrated clinically improved MS spasticity in patients administered Arbaclofen ER."

Doctor giving a thumbs down.

Image source: Getty Images.

However, the FDA disagreed. In a Complete Response Letter (CRL), the regulatory agency argued that Osmotica Pharmaceuticals had failed to demonstrate the efficacy of Arbaclofen ER adequately. The FDA recommended that Osmotica Pharmaceuticals conduct a new study to meet its stringent criteria.

Now what

In addition to the CRL from the FDA, Osmotica Pharmaceuticals was hit with a lower price target -- down to $8 from $11 -- from Truist Financial analyst Gregory Fraser. The analyst kept a buy rating on the stock, though, saying he still likes the risk-reward balance the company presents because of its most important products, Upneeq. Fraser may have a point: On July 9, Upneeq became the only FDA-approved treatment for an eye disease known as ptosis. With several million potential patients with this illness in the U.S. alone and millions more elsewhere, Osmotica Pharmaceuticals' revenue and earnings could increase drastically, thanks to Upneeq.

However, the news that the FDA has declined to approve Arbaclofen ER and that Osmotica Pharmaceuticals may have to run yet another clinical trial is a major blow for the drugmaker and its shareholders. At best, Arbaclofen ER won't hit the market for at least another year and a half or so. Osmotica Pharmaceuticals may be worth considering, but because of the setback related to Arbaclofen ER, it may be best to look from a distance for now. 

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.