Last week, Incyte's (INCY -1.99%) IDO inhibitor epacadostat failed a phase 3 study in a major way, and shareholders are really feeling it. In this segment from Industry Focus: Healthcare, analysts Michael Douglass and Shannon Jones explain what happened.

Find out why investors and patients were so excited about epacadostat, how the drug was supposed to work with PD-1 inhibitors like Keytruda and Opdivo, and why this phase 3 flop is even worse than it might initially seem for the drug's prospects.

A full transcript follows the video.

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This video was recorded on April 11, 2018.

Michael Douglass: Incyte had a major drug flop. Let's talk about that a little bit.

Shannon Jones: I would even say "major drug flop" is probably an understatement at this point. This was, and probably will be for 2018, one of the biggest pipeline blow-ups, I think. In particular, what happened: Incyte, last Friday, announced a failed Phase III study where basically, they were pairing Merck's checkpoint inhibitor Keytruda, which we have all known to grow and love, with Incyte's drug, Epacadostat, an IDO inhibitor, in patients with melanoma. Long story short, the study was stopped. They found that the combination of these two drugs together wasn't more than what was already being seen with Keytruda alone. So, in a lot of ways, I think this study is not only bad for Incyte, but really bad for the immunotherapy industry in general.

Douglass: Yes. We'll get into some of those broader implications in a minute. But first, why people were so excited about Epacadostat. By the way, dear listeners, we both looked this up before the episode, because we're used to reading these drug names, not saying them. I know Kristine has talked about this before, but here we are. So, if I pause beforehand, it's because I'm checking my notes for how to pronounce it, because it's kind of a mouthful, Epacadostat.

So, the idea here is, PD-1 inhibitors are supposed to take the brakes off the immune system, and Epacadostat was supposed to essentially boost that. Now Keytruda and Opdivo, which is Bristol-Myers' drug, have both been at the center of this revolution that we've seen in cancer care with the PD-1 Inhibitors. The broad goal has been, these PD-1 inhibitors look like they're going to be some kind of standard of care. Maybe it's in second or third line, depending on the cancer and what the data says and all of that. But, if you can't beat them, join them. So, let's go ahead and try to join these drugs with our drugs and see what happens. This was, in many ways, a very surprising failure because past data had been so good.

Jones: Exactly. Last year at the ASCO healthcare conference, the American Society of Clinical Oncology, Incyte presented really compelling Phase II data. Investors were quick to jump on the Incyte bandwagon with this particular drug, and really, many expected this Phase III trial to be an easy home-run win. It was really anything but. And when you consider the fact that it failed in what's considered the low-hanging fruit of therapeutic indications, which is melanoma, it makes this failure that much worse.

Douglass: Yes. And it certainly says a lot of negative things about the drug's future, potentially.