What happened

Shares of Incyte (NASDAQ:INCY) fell more than 12% today after the company announced that a phase 3 trial investigating a combination of itacitinib and corticosteroids as a treatment for treatment-naive acute graft-versus-host (GVHD) disease did not meet its primary or secondary endpoints. The combination failed to deliver a statistically significant improvement in overall response rate (primary endpoint) or nonrelapse mortality (secondary endpoint) compared to a combination of placebo and corticosteroids.

It's certainly a disappointing way to kick off 2020. It stings a little more because of Incyte's poor track record with its late-stage pipeline in recent years, which has kept the company completely dependent on Jakafi. Despite that, today's drop appears to be a bit of an overreaction.

As of 11:25 a.m. EST, the pharma stock had settled to an 11.2% loss.

A chart showing steady gains and then a sudden loss.

Image source: Getty Images.

So what

On the one hand, the failure of itacitinib takes a bite out of the company's plans in GVHD. Incyte was developing itacitinib in steroid-naive individuals (those who never had treatment) and Jakafi in steroid-refractory individuals (those who are no longer responding to steroids). The latter delivered positive results in a phase 2 clinical trial last October, and in general, there's stronger evidence for using JAK inhibitors (both itacitinib and Jakafi belong to this drug class) in steroid-refractory patients.

The combined opportunity was relatively large, according to SVB Leerink analyst Andrew Berens, who previously expected total peak annual sales of $925 million in GVHD.

On the other hand, Wall Street could be overreacting a little. Incyte is plowing ahead with the Jakafi study in steroid-refractory GVHD, recently provided updated results showing the promise of using a JAK inhibitor cream to treat vitiligo, just submitted a new drug application (NDA) for pemigatinib in cholangiocarcinoma, and expects data readouts from two newer pipeline assets in 2020. Pemigatinib might also be one of the more promising drugs in the industry's pipeline for treating certain genetically defined bladder cancers.

Now what

Given the company's past struggles in drug development, it's easy to see why investors are disappointed by today's news. But investors with a long-term mindset will find solace in the company's deep pipeline and the fact that Incyte is comfortably profitable. In the first nine months of 2019, the business delivered operating income of $307 million and operating cash flow of $579 million, marking year-over-year increases of 549% and 129%, respectively.

In other words, Incyte is well positioned to weather a pipeline failure here and there -- something that wasn't true in recent years. That said, the company needs to deliver a handful of successful outcomes from its pipeline to diversify its revenue base and shake its woeful reputation in drug development.