Why Incyte and NewLink Genetics Crashed Today

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What happened

Shares of Incyte (NASDAQ: INCY) were down 17% at 12:51 p.m. EDT after a phase 3 trial of Incyte's epacadostat and Merck's (NYSE: MRK) Keytruda showed the combination failed to help patients with late-stage melanoma. Merck is down slightly, just 1%, which seems reasonable since Keytruda is already approved as a monotherapy for melanoma patients.

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Meanwhile, shares of NewLink Genetics (NASDAQ: NLNK) fell 43% because its two pipeline drug candidates -- indoximod and NLG802 -- target the IDO (indoleamine 2,3-dioxygenase) pathway, the same strategy that epacadostat uses.

So what

Compared to Keytruda alone, the combination failed to improve progression-free survival -- how long patients live while their tumor doesn't grow. Overall survival was also measured as an end point, but Incyte and Merck said they didn't think the combination would improve that, either, so they're stopping the trial.

The IDO pathway is believed to limit the function of immune cells called T cells and increase immune tolerance, so the thought was that by inhibiting the pathway, Incyte could encourage the T cells to attack tumor cells. Merck's Keytruda is also an immuno-oncology drug, but it works on a different mechanism that inhibits T cells called PD-1.

Now what

For Incyte, investors are hoping that the trial was a fluke -- that is, either inhibiting IDO in melanoma doesn't help but it might in other tumor types, or the companies got unlucky with the patients they enrolled -- because the alternative is that epacadostat just doesn't work at all. The drug is being tested in multiple pivotal clinical trials across a range of tumor types, including lung, renal, bladder, and head and neck cancer, in combination with Keytruda or Bristol-Myers Squibb's (NYSE: BMY) PD-1 drug Opdivo. But it could be a while before investors have a firm answer to the question.

Fortunately, Incyte isn't a one-trick pony. With Jakafi on the market, and multiple other drugs in the pipeline, it'll survive even if epacadostat ends up being a bust.

The same can't be said for NewLink Genetics, which has only two drugs in the clinic -- and NLG802 breaks down in the body into indoximod, so it's really just one mechanism of action. While indoximod and epacadostat work on the same pathway, they work in slightly different ways, so NewLink Genetics could be OK even if epacadostat is a bust. But there's still a legitimate concern that today's failure is because inhibiting the IDO pathway just doesn't help cancer patients.

Data from a phase 2 trial testing indoximod with Keytruda in advanced melanoma looked solid with 61% of patients responding, but there wasn't a control arm with patients who just got Keytruda, so it's difficult to know how much indoximod is contributing to the response. With plans to start a phase 3 trial later this year, investors will have to wait awhile before they know definitively whether indoximod works on melanoma. Data from a phase 2 trial in pancreatic cancer is due out within the next few months, and might give some hints on the drug's activity.

NewLink might be a steal at this knocked-down level, but given the unknowns, it's only appropriate for the most risk-tolerant biotech investors.

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Brian Orelli and The Motley Fool have no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.