Why Cempra Inc Got Crushed Today

By Markets Fool.com

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What happened

Cempra (NASDAQ: CEMP) ended the day down 21% after announcing its third-quarter earnings report and providing a "corporate update."

So what

It would be the latter of those two that caused the decline (without any drugs on the market, earnings numbers are relatively meaningless). Unfortunately, investors actually had to listen to the conference call to find out the details that weren't included in the associated press release.

Cempra's lead drug solithromycinis currently under review at the Food and Drug Administration with an advisory committee meeting scheduled for Nov. 4 followed by a decision expected in late December.

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On the conference call, management disclosed that the FDA may not allow Cempra to use drug produced by its contract manufacturer Wockhardt. The problem isn't specific to solithromycin; it's an overall problem at Wockhardt having to do with the company following good manufacturing practices.

Cempra had already started working with a new supplier to increase production in anticipation of a commercial launch, so if Wockhardt can't get its issues fixed quickly, Cempra's backup plan is to accelerate the process of getting the second manufacturer set up and then gain FDA approval with that manufacturer.

Now what

The good news for investors is that this is a fixable problem. The bad news is that it's going to take time, and that's especially disappointing since solithromycin treats pneumonia, which is more likely to happen in the winter time during flu season. A delay of a few months in getting approval is really a delay of almost a year since peak sales won't come around until the next pneumonia season in late 2017.

If Cempra retains the people it hired recently in anticipation of a launch in a few months, the company's costs will increase without any money coming in. Cempra ended the third quarter with cash and equivalents of almost $250 million, so the company has some cash to work with before needing to raise capital.

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