What happened

Shares of Incyte Corporation (NASDAQ:INCY) fell by as much as 11.9% on Monday as a result of the FDA rejecting its once-daily rheumatoid arthritis pill, baricitinib, for safety and dosing reasons.

Although Eli Lilly (NYSE:LLY) stood the most to gain from an FDA approval due its 2009 worldwide licensing agreement for the drug, Incyte would have been eligible for additional milestone payments, as well as tiered, double-digit royalties on global net sales.

As of 12:36 p.m. EDT, Lilly shares are down by 4%, while Incyte has taken an 11% tumble.

A stock chart declining, with a man in a suit holding his face in his hand

Image source: Getty Images.

So what

The big-picture issue is that baricitinib was expected to grab upwards of $2 billion in peak sales if approved in the United States. Baricitinib, after all, was projected to become the most effective oral rheumatoid arthritis on the market, giving it a good shot at largely displacing Pfizer's rival medication, Xeljanz.

Based on the limited info available about the FDA's reasons for this rejection, though, baricitinib's ability to one day lay claim to the "best in class" prize may now be in serious jeopardy.

Now what

According to Incyte's and Lilly's statements on the matter, the two companies are disputing the FDA's decision, and are apparently gearing up for another regulatory submission following further discussions with the agency.

However, the FDA reportedly asked for additional clinical trials to determine the drug's most appropriate doses, which is the key issue that may ultimately lower its appeal relative to Pfizer's Xeljanz. So, investors should probably consider a quick turnaround on baricitinib's regulatory filing in the U.S. a long-shot scenario at this point, and brace themselves for the possibility of some hefty downward revisions on the drug's commercial prospects.

Unfortunately, some analysts think that baricitinib's impact on Incyte's near-term valuation was already baked in for the most part. As such, it might be a good idea to wait for a more attractive entry point before adding Incyte to your portfolio -- even after today's double-digit dip.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.