Why Cempra Inc. Got Hammered Down Today

By Brian OrelliMarketsFool.com

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What happened

Cempra (NASDAQ: CEMP) closed with a 12.5% drop today, after investment bank SunTrust Robinson Humphrey downgraded the company from "buy" to "sell."

So what

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Cempra has had a horrible couple of months, with a manufacturing issue for its lead drug candidate, solithromycin, followed by an FDA disclosure before a scheduled advisory committee meeting that there were signs the antibiotic caused liver toxicity during the clinical trials. The FDA advisory committee voted 7 to 6 that efficacy results outweigh the risks for using solithromycin to treat community-acquired bacterial pneumonia.

The FDA doesn't have to follow its outside advisors, but the reviewers were clearly worried about the liver toxicity in the briefing documents and during the meeting. Cempra's saving grace is that bacteria are becoming resistant to current antibiotics, so the FDA may decide, as a slim majority of the committee members did, that the benefits outweigh the risks. Investors will know shortly, as the FDA has a goal of making a decision by Dec. 27.

SunTrust analyst Edward Nash thinks solithromycin will eventually be approved, but not until Cempra fixes its manufacturing issues. And even then, Nash thinks it's going to be hard to sell the drug with the potential liver toxicity.

Now what

Even if the FDA rejects solithromycin next week over manufacturing issues, which seems likely, the event will be important for investors because the agency should tell Cempra the exact reason(s) for the rejection in its complete response letter (CRL). If the FDA cites the manufacturing issues as the only problem, that can be fixed fairly easily, compared with requiring Cempra to run more trials to elucidate how much potential there is for liver toxicity before approving the drug.

Just keep in mind that the FDA only releases CRLs to companies, not the general public, so investors will get the news through Cempra's filter. And as we know from the liver toxicity issue, full disclosure isn't Cempra's strong suit.

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Brian Orelli and The Motley Fool have no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.