Eli Lilly & Co. (LLY - Get Report) and Incyte (INCY - Get Report) chose to disclose the FDA rejection of their rheumatoid arthritis pill baricitinib on Friday, a market holiday, so the repercussions from the regulatory setback are hitting both stocks Monday.
Lilly shares were down just over 4% to $ 82.38 at Monday's close, while Incyte shares were down nearly 11% to $126.07.
Baricitinib was expected to secure U.S. approval and deliver $2 billion or more in peak sales as the most effective, once-daily oral JAK inhibitor for rheumatoid arthritis, supplanting Pfizer's (PFE - Get Report) Xeljanz.
Those plans are now on hold indefinitely. In a statement, Lilly said the FDA's complete response letter included a request for additional clinical data to determine appropriate doses of baricitinib. The FDA also asked for more safety data.
Lilly and Incyte said they disagree with the FDA's conclusions and plan to resubmit baricitinib for another shot at approval. A timeline for resubmission was not provided.
The European Medicines Agency approved baricitinib for the treatment of rheumatoid arthritis in February. The drug is marketed there under the brand name Olumiant.
Piper Jaffray analyst Josh Schimmer downgraded Incyte to neutral and cut his price target to $124 from $140. "Incyte has a differentiated flagship product in Jakafi, a leading management team, a strong R&D engine and strategic sense, and still strong growth prospects. But baricitinib in the U.S. was an important part of the valuation and outlook for us," Schimmer wrote, in his downgrade note.
Leerink analyst Michael Schmidt said baricitinib contributes 18%, or $25, to his Incyte $141 price target. "We expect Incyte shares to be weak on Monday given that approximately one-year U.S. approval delay now seems likely in our view, in a best case scenario," Schmidt said in a research note.
Lilly licensed baricitinib from Incyte in 2009. The pharma giant took the lead on the drug's development, conducting all the clinical trials and handling regulatory duties. Lilly retains the bulk of baricitinib's sales under the Incyte licensing deal, so the FDA rejection hits the pharma giant -- desperate for new blockbuster drugs -- particularly hard.
Lilly reiterated 2017 earnings guidance but has not said how the baricitinib setback will impact its 2018 financial outlook.
Why FDA turned away baricitinib is not entirely clear, although analysts speculate regulators picked up a concerning safety signal with the higher 4 mg dose. Pfizer faced the same problem with Xeljanz before FDA ultimately approved a lower dose.
Lilly was counting on the greater efficacy of a higher baricitinib dose to separate from Xeljanz. If Lilly can only move forward with a lower, 2 mg dose of baricitinib, it risks losing an efficacy advantage over its oral JAK inhibitor competitor.
Some winners emerge from Lilly and Incyte's troubles. Pfizer, of course, wins because Xeljanz escapes competition for one year maybe even longer.
Gilead Sciences (GILD - Get Report) wins because its oral JAK inhibitor filgotinib -- currently in a phase III study for rheumatoid arthritis, among other indications -- has a good chance to catch up.
As marketers of TNF inhibitor injections for rheumatoid arthritis, Abbvie (ABBV - Get Report) , Amgen (AMGN - Get Report) and Johnson & Johnson (JNJ - Get Report) all win from the delay of another oral competitor.Lastly, Regeneron Pharma ( REGN - Get Report) and Sanofi ( SNY - Get Report) win because they'll now have more time to establish a marketing presence for their IL-6 inhibitor sarilumab, assuming the injected drug can overcome a manufacturing delay and win FDA approval later this year.