What happened

Shares of Incyte (NASDAQ:INCY) fell over 16% last month, according to data provided by S&P Global Market Intelligence. On the first trading day of the year, the company reported disappointing results from a phase 3 trial investigating the combination of itacitinib and corticosteroids as a treatment for treatment-naive acute graft-versus-host disease (GVHD). The drug candidate didn't meet its primary or secondary end points. 

While investors took the news pretty hard, Incyte followed up the disappointing news with several positive developments in January. The company signed a collaboration license agreement with MorphoSys for a novel monoclonal antibody, and announced positive outcomes in three separate studies for two unique drug candidates in atopic dermatitis. Despite the progress, the pharma stock lost ground as the month progressed. 

A declining pink arrow crashing through the x-axis on a chart.

Image source: Getty Images.

So what

Incyte has a relatively deep pipeline. The two largest and nearest opportunities are in GVHD and skin diseases. While the failure of itacitinib certainly reduces the potential in GVHD, a little nuance can go a long way.

Itacitinib was being studied as a treatment for steroid-naive GVHD, meaning individuals who had never been given corticosteroids. But Incyte is also studying Jakafi as a treatment for steroid-refractory GVHD, meaning individuals who aren't responding to corticosteroids.

The total opportunity in GVHD could generate peak annual sales of $925 million, according to SVB Leerink analyst Andrew Berens. It's not immediately clear how the discontinuation of itacitinib's development will affect that estimate, but the entire opportunity isn't lost. 

Meanwhile, the opportunity in skin diseases could be even larger. Morningstar analyst Karen Andersen projects that ruxolitinib cream could generate peak annual sales of $1 billion if approved in both atopic dermatitis and vitiligo. Yet, when Incyte announced positive phase 2 results for the drug candidate in atopic dermatitis in January, shares didn't even budge. 

Now what

Given Incyte's history of late-stage drug candidate failures, it's easy to see why investors were so disappointed by the itacitinib results in GVHD. But that may not be a fair assessment of the potential of the company's pipeline. If Jakafi and ruxolitinib cream continue to impress in steroid-refractory GVHD and skin diseases, respectively, then the stock's tumble in January will hardly be remembered.

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.