Towards the end of last week, $1.5 billion market capitalization biotechnology company Intercept Pharmaceuticals Inc (NASDAQ:ICPT) reported that the US Food And Drug Administration (FDA) had issued a warning letter highlighting a number of patient deaths in patients that had received incorrect dosing of its drug Ocaliva (obeticholic acid).

On the issuing of a press release detailing the warning letter, the company took a considerable hit and currently sits considerably down on its early week pricing. On September 20, Intercept went for $98 a share. At close on September 22, the company went for $61 apiece – a close to 40% depreciation in a matter of days.

Premarket on Monday, activity has brought Intercept some degree of early-morning reprieve, with markets trading up around 6% on the back of management releasing this update, which outlines the issues and the response.

So what happened?

Basically, this is a case of misinformation.

Physicians have been prescribing the drug, in certain cases, at a far higher dose than the company recommends and at which Intercept was able to demonstrate both safety and efficacy in the trial that underpinned the New Drug Application for this asset. Reports suggest that some patients received daily dosing, whereas the recommended schedule calls for once-weekly dosing. This translates to a dosing volume 7 times higher than that at which the drug is labeled. This, in turn, led to a deterioration in the health of some patients and, in a few cases, the death of the patients in question.

As a response, Intercept has outlined that it intends to implement a program designed to increase the awareness of safety issues surrounding excessive dosing of the active compound and that, in turn, that the company expects this program to resolve any uncertainty surrounding administration.

Why is this important today?

Because the whole situation has presented something of an opportunity to shorter-term traders or longer-term investors who want to pick up exposure to this sector. While it is true (and, of course, sad) that certain patients have died because of an excessive dosing regimen of Ocaliva, the deaths are rooted in misinformation and physician uncertainty surrounding those levels as opposed to the drug itself. Well, that’s slightly inaccurate in the sense that it is the drug that is causing the deaths, but if Ocaliva is used correctly, it is perfectly safe.

As such, while markets are selling off on Intercept on the back of this news, and while the FDA has issued a letter to the company outlining the problem, it’s far from an unresolvable issue and – by proxy – far from a long-term value input from a market capitalization perspective for Intercept.

The opportunity, then, is rooted in picking up some Intercept shares at current price, which represents a substantial discount (as outlined above) to the company’s inherent valuation and the valuation towards which Intercept will almost certainly recover moving forward.

Exactly how long any recovery will take remains unclear. This sort of safety concern driven situation is one that the FDA generally takes incredibly seriously and, while the agency’s actions have so far been somewhat informal (in the sense that the regulatory authority is allowing Intercept to deal with the problem itself), there is no guarantee that this will remain the case. If, for example, we get word of further patient deaths and it comes to light that the program that Intercept is trying to put in place fails to be effective, then the FDA might step in and issue some sort of temporary suspension of dosing while it takes steps to resolve the issue itself.

That is a downside risk and one that would almost certainly add further pressure to the company’s share price going forward. It is a risk, but it’s unlikely. The most likely scenario is that an education push and a reissue of information related to standard dosing regimens should help physicians to clear up any uncertainty surrounding correct administration and, in turn, should lead to a quick and relatively simple resolution to the problem.

Bottom line is this: there is a small downside risk if the company is unable to resolve the situation quickly but there is a much larger upside reward potential and the current market response looks like a severe oversell.