I know the headlines on Friday said that the U.S. Food and Drug Administration had “rejected” Olumiant (known more frequently until recently as baricitinib), a new drug for rheumatoid arthritis from Eli Lilly (LLY) and research lead Incyte Corp (INCY.)
And on those headlines shares of Incyte dropped $14.77 a share on Monday to $126.07 from $140.84. The shares trickled lower to $125.84, down 0.13% today.
What you need to know about this story is that the FDA didn’t reject baricitinib. Rather the agency issued a Complete Response Letter. The FDA asked for more clinical data to support the optimum recommended doses for the drug and additional data to further characterize the safety profile across different types of treatment.
This is very different than if the two companies had submitted the drug for approval and had the agency reject it on safety or efficacy grounds. The drug has already been approved for sale in the European Union.
It’s still a big deal because no one knows how long it will take for Lilly and Incyte to generate the data that the FDA wants. If the FDA request can be satisfied by mining data from existing trials, the delay could be relatively minor–six months or so. If the two companies have to conduct new trials to get the answers, then we’re looking at seeing the drug’s approval being pushed off into 2019. That would give competitors a leg up in the market and cut the time from introduction of baricitinib to 2025 when generic competition is likely to emerge.
Friday’s reaction basically embraced the worst of these alternatives and pretty much wiped out all the revenue from baricitinib that Wall Street had written into its calculations for Incyte’s share price. Approval of baricitinib would have generated a $100 million milestone payment to Incyte in 2017. The company’s guidance had included $300 million in 2017 from milestone payments and revenue.
Friday’s reaction was so violent because Wall Street had been licking its chops on the potential for baricitinib. More than 23 million people worldwide suffer from rheumatoid arthritis. Current treatments include injected biologics such as Humira (2016 sales $16 billion) and Enbrel ($6 billion  sales) as well as older anti-inflammatory drugs.
The problem that Lilly and Incyte face in getting the drug pasted the FDA is that since it is a once-a-day oral treatment as opposed to either older twice a day oral medications or to injected drugs, the companies are being asked repeated questions about the efficacy of the drug at different doses. The Complete Response Letter focused on the question of efficacy and safety for the drug at dosing of 2 milligrams and 4 milligrams. At 4 milligrams Olumiant showed a benefit equal to or better than Humira. But that’s also the level that raised some safety concerns at the FDA. (The 4 milligram dosing level was approved in the European Union.) One question that the agency wants answered is what are the relative benefits of the drug at the 4 milligram and 2 milligram levels since at 2 milligrams the drug did reduce inflammation and arthritis damage in subgroups of patients.
The timetable for approval of baricitinib is actually more of an issue for shares of Eli Lilly in the long run than for shares of Incyte. Wall Street’s worries about Lilly center on the quality of the company’s drug pipeline and the assumption of a 2017 or early 2018 approval for Olumiant had reduced that worry for many analysts. Of course, the FDA action revived those worries on Monday. Incyte, on the other hand, is looking at a drug pipeline that is stocked with other potential blockbusters, including in the oncology sector.
It’s never good news when a member of my Jubak Picks portfolio takes a hit like this. But I’d look to add new shares if the stock dropped below $120.
Full disclosure: I own shares of Incyte in my personal portfolio.
