Intra-Cellular Therapies, Inc. (NASDAQ:ITCI) just took a serious hit on its latest release. The release, at first glance, looks somewhat positive, so the degree to which the company has declined, again at first glance, might seem like something of an overreaction. Dig a little deeper into the implications of the news, however, and the justification becomes slightly clearer.

Even with that said, there may be an opportunity to get in at something of a discount on a potential market overreaction.

Here’s what we’re looking at as supportive of this statement.

So, the drug in question is called lumateperone, and Intra-Cellular is trying to get it approved as a treatment for schizophrenia. Schizophrenia is a large potential market in the US, and there’s an equally large unmet need within the patient population. Current treatments are ineffective across large portions of said population, or bring about some pretty nasty side effects, or both. If a company can get a drug in front of the FDA that improves on either of these elements (i.e. an improved efficacy or a cleaner safety profile, or again both) then there’s a decent change of the agency approving said drug.

Things haven’t been particularly plain sailing for lumateperone, however. Things looked good initially – the drug passed phase II with flying colors, and then did the same thing in an initial phase III study. A follow up phase III, however, failed to demonstrate an improvement over placebo in a relatively large patient population, and the company collapsed on the back of the news.

At its release, Intra-Cellular attributed the failure to an unusually high placebo performance. Markets are generally pretty cynical about a company making a statement like this, and in the vast majority of cases, the cynicism is warranted. In this indication, however, it’s often valid. These are mental disorders, and disorders that affect the way people think are especially susceptible to suggestive type placebo. Not necessarily long term – a patient suffering from depression or schizophrenia isn’t going to be cured if they take a sugar pill once a day that they think is a real drug – but in the short term, suggestion can be extremely powerful. If the drug hadn’t shown any clinical benefit in the earlier stages of its development pathway, we’d be less open to the claim that placebo was unusually powerful. That’s not the case. This drug performed well in early stages and then performed well in a phase III study.

Again, we’re not saying that the phase III outcome was wrong. There is the potential for it to be misleading in its implications, however, and with markets selling off on this company to the degree that they did, some traders may be willing to take on the risk associated with making this assumption.

And that’s before we even consider the latest news.

This week, Intra-Cellular has announced that it believes that the FDA is happy to accept a New Drug Application (NDA) for the drug based on the data collected to date, but that the company has to put together some fresh data related to certain toxicology studies of the asset in question. Basically, the agency thinks that there may be a safety risk with the drug (or maybe it’s better to say that the agency isn’t convinced that there might not be a safety risk associated with the asset) and it’s now up to Intra-Cellular to prove that there’s no such risk.

As a note to this, data from the earlier studies suggested that the tolerability profile of the drug might actually be superior to some current standard of care treatment, which would give it an edge if and when it hits the market.

So this brings things up to date.

What we’ve got here is a drug that looked like a sure thing, has suffered a setback, and then has suffered a subsequent setback in this latest news. Sure, the extra data is probably going to cost a bit of money to collect (money which, unusually, this company does have some of already), but as a potential play on things working out, and the NDA filing picking up a regulatory green light when or if it gets in front of the agency in the US, this one’s far more than just a punt.