Despite learning on Monday that the FDA rejected baricitinib, shares of biotech behemoth Incyte (INCY 2.02%) have been on a roll. Over the past year, Incyte's stock is up 64%, over five years it's up 450%, and since March of 2009, its shares are up nearly 5,300%! Not too shabby.

Why Wall Street fancies Incyte

Incyte stock has risen as much as it has for a plethora of reasons. For starters, the company is profitable. Incyte generated $1.1 billion in sales last year and $104.2 million in net income. By 2020, Wall Street estimates project this profit could sextuple to around $600 million, or a tad over $3.20 per share.

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Incyte's lead drug also currently has no real competition. Jakafi, which is a JAK inhibitor designed to alleviate the symptoms associated with a rare form of bone marrow cancer known as myelofibrosis, grew its sales by 42% year over year. The company's fiscal 2017 guidance pushes Jakafi into blockbuster territory with $1.02 billion to $1.07 billion in sales expected.

Incyte's pipeline has also been a source of promise for investors. Incyte's monstrous clinical pipeline has a number of solid tumor cancer candidates (well over a dozen), some of which have entered pivotal phase 3 trials. There are also a handful of anti-inflammatory drugs in development.

Added together, these factors have made Incyte a hot commodity with investors, and even among its peers. It's been suggested for some time that Incyte's product portfolio, which includes Jakafi and the rights to blood cancer drug Iclusig's European sales (acquired from ARIAD Pharmaceuticals last year), could make it a perfect takeover target. In fact, one well-known Wall Street analyst has suggested that Incyte could fetch north of $200 a share if it were to be acquired, implying a monstrous $40 billion valuation.

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Is Incyte the most overpriced biotech stock?

As for this Fool, I believe Wall Street, investors, and this analyst are insane. In my eyes, Incyte just might be the most overpriced biotech stock.

Let's start with the company's lead drug, Jakafi. Inclusive of the royalty revenue Incyte receives from the sale of Jakavi in Europe, which is licensed to Novartis, Incyte's JAK inhibitor was responsible for almost $964 million of its $1.11 billion in sales last year. Relying heavily on one drug is always a concern -- but it's a particularly prominent problem when a potentially superior competitor is waiting in the wings.

At this very moment, Geron (GERN -0.11%) and its licensing partner Johnson & Johnson (JNJ 1.37%) are studying imetelstat in phase 2 trials as a treatment for myelofibrosis and myelodysplastic syndromes. In phase 1 studies, imetelstat demonstrated partial and complete responses in myelofibrosis patients, which had never been seen in a clinical trial before. In plainer English, imetelstat appeared to treat patients' myelofibrosis as opposed to just focusing on the symptoms associated with the disease.

Johnson & Johnson liked the data so much it wound up giving Geron $35 million in cash up front and dangling $900 million in development, regulatory, and sales milestones in order to license the experimental drug. If imetelstat is approved and makes it to market by 2019, it could literally gobble up nearly all of Incyte's current sales.

Without Jakafi/Jakavi, Incyte isn't a profitable company on Iclusig and baricitinib's European sales alone.

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A major setback takes more wind out of its sails

Incyte and its partner Eli Lilly (LLY -0.91%) were also dealt quite the setback within the past couple of days after the Food and Drug Administration (FDA) issued a complete response letter (CRL) and denied the approval of once-daily baricitinib in the U.S. for rheumatoid arthritis. The FDA's CRL requests that the duo run additional clinical studies to determine the proper dosing of the drug and to further establish safety.

This CRL is a big problem for three reasons. First, it means more spending to get everything done. Eli Lilly has bountiful cash flow, but Incyte does not, meaning a longer-than-expected drag is now anticipated on its free cash flow. Second, the delay also means Wall Street has to readjust its expectations for regulatory and sales milestone payments for Incyte. And third, the potentially two-year filing delay could give competitors more than ample time to bring next-generation drugs to pharmacy shelves in an already overcrowded rheumatoid arthritis market.

Though both companies plan to appeal the CRL, it's unlikely that anything comes of it. As of now, Eli Lilly and Incyte have to wait patiently and spend more to hopefully get their rheumatoid arthritis drug on pharmacy shelves.

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The odds aren't in Incyte's favor

Finally, I think it's important to recognize that while Incyte has what appears to be a deep oncology pipeline, statistically the data is stacked against the company succeeding.

More clinical trials end in failure than success, and Incyte is currently working with well over a dozen novel compounds, many of which are in or nearing pivotal-phase trials. This isn't to say that Incyte can't beat the odds and surprise Wall Street, but the data would suggest that Incyte's entire pipeline succeeding is a utopian dream. But the market has priced Incyte as if its whole oncology pipeline, including its IDO-inhibitors, is going to run the table. This probably won't be the case.

So what do we have? A roughly $26 billion company that:

  • is valued at 230 times trailing-12-month earnings,
  • could see nearly 90% of its sales come under fire from imetelstat within two years, 
  • has about a two-year wait before it has any shot at launching baricitinib into a crowded U.S. market, and
  • has no guarantee that its oncology products will succeed in costly late-stage studies.

And this is worth $40 billion in a buyout? No way! If anything, Incyte may very well be the biotech industry's most overpriced stock. While I wouldn't propose short-selling such a volatile company, I'd certainly suggest keeping your distance.