Following impressive early-stage results, optimism that Incyte Corp.'s (INCY 1.38%) IDO inhibitor could reshape how we treat cancer surged higher. Unfortunately, it didn't pan out. The company reported data earlier this year for the use of it in melanoma patients that was so disappointing that it resulted in a near abandoning of IDO inhibitors not only at Incyte, but at its competitors, too.

In this clip from Industry Focus: Healthcare, host Shannon Jones is joined by Motley Fool contributor Todd Campbell to discuss what lessons investors can learn from Incyte's discouraging failure.

A full transcript follows the video.

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This video was recorded on Oct. 31, 2018.

Shannon Jones: Let's turn our attention to our third and final stock. Todd, this one, for me, there was so much writing on this stock. The company is Incyte, ticker INCY. It's not so much the stock that's scary, it's what happened earlier this year with a drug that literally every investor had been watching, especially those that have been following the cancer immunotherapy space.

They had their lead drug, Epacadostat. Essentially, what they were attempting to do is to see if they could take this drug and combine it with big players like Merck's Keytruda or Bristol-Myers Squibb and Opdivo, and combine these drugs to have the combination effect of added efficacy by joining these drugs together. But what we saw in the trials was, that wasn't exactly the case, and things just started to fall apart. Todd, what can you tell us about that?

Todd Campbell: I think the IDO inhibitor should have been called Uh-Oh. [laughs]

Jones: [laughs] Fair enough!

Campbell: Yeah, there was a ton of excitement leading up to the trial results that came out earlier this year that IDO inhibition could be done alongside of some of these other immuno checkpoint therapies that had been so successful in oncology. That's the PD1s and PDL1s that we've talked about on the show in the past. Matching these two up with slightly different mechanisms of action to be able to allow the immune system to go out, find these cancer cells, and destroy them. And there was some early data that looked really, really encouraging. As a matter of fact, it was so encouraging, Shannon, that Incyte basically jumped the shark. They went out and started up a ton of late-stage trials combining their drug with Keytruda, which is Merck's PD1, to see whether or not they could reshape how we treat various cancers. They went into the bad news with ... I had it written down earlier, I think it was something like eight different late stage, registration-ready studies. And exiting the trial, where it came up short, it just didn't work. It didn't work in metastatic melanoma. They ended up having to ratchet back that program almost entirely. I think they still have a couple lung cancer trials that are going on in combination with Keytruda. But they even downgraded those from registration studies to Phase II mid-stage studies.

Really bad news all around for patients and investors who were excited about the IDO space. And shockwaves, too, that cut across to different companies. Bristol Myers abandoned their IDO program after the news was reported. There was another company, NewLink, who was working on IDO inhibitors. They're trading at like $2 a share now. At one point, they were a $50 stock.

Jones: I think it was actually 18 IDO combo trials going on at the time. Incyte's IDO inhibitor was the furthest along, so the readthrough to the industry was just tremendous. There was so much hope going into the space. As a matter of fact, Epacadostat was at one point #3 on EvaluatePharma's top 10 list of 2018 launches, with projected close to $2 billion in peak sales. There was a lot riding on this.

With that being said, though, of the three stocks, I think Incyte was probably best-prepared to have these setbacks. As you know, being a biopharma investor, no matter how encouraging early stage data looks, oftentimes, when you get to these bigger trials, things just don't work out. But Incyte has, thankfully, approved products that are blockbusters and can lessen the blow of what happened with this drug.

Campbell: I think, out of the three companies we just talked about, this one is most likely best positioned to bounce back and regain some of that ground. It does have a pipeline, it does have products on the market right now, including the blockbuster Jakafi. So, it can withstand that hit. It's disappointing, though. Obviously, having your shares cut in half in the span of a few months is never something that investors want to see. We'll have to see where we go from here with this company. There is some competition coming from Celgene and Fedratinib, potentially, as soon as late next year. We're going to want to keep an eye on that, as well.