Eli Lilly and Co. (NYSE:LLY) / Incyte Corporation (NASDAQ:INCY) received a Complete Response Letter for baricitinib (oral Janus Kinase [JAK] 1/2 inhibitor) in rheumatoid arthritis (RA). FDA indicated more clinical data are necessary to determine appropriate doses. Further, FDA stated that additional data are necessary to characterize safety concerns. It is not clear whether a new clinical trial is required. Bank of America Merrill Lynch will listen to updates from Eli Lilly on conversations with FDA on 1Q17 earnings call.
Phase 3 trials showed significant efficacy at primary endpoint (ACR20) for 2mg and 4mg doses, but improvements in secondary endpoints (e.g. swollen or tender joint count) were more pronounced with 4mg dose. Higher proportion of patients with no radiographic progression and superiority to Humira was seen at 4mg dose. While the EU recommends 4mg dose, the label suggests that 2mg dose would be appropriate for elderly, patients with history of infection, and those with renal impairment. Greater impact of laboratory parameters including cholesterol and creatine kinase levels were seen at 4mg dose.
Broad manipulation of JAK signaling cascade may lead to on-target toxicological safety events. BAML notes Pfizer's Xeljanz (JAK1/3 inhibitor) was approved by FDA in 2012 with a "black box" warning label for risk of malignancy and serious infection. The EU recently approved Xeljanz (03/28/17) after initial rejection due to safety concerns. As discussed in BAML's deep dive, rates of malignancy and serious infections were increased in both Xeljanz and baricitinib clinical programs, suggesting a class-specific signal.
The firm believes baricitinib is approvable, but note duration of delay and excess costs that may incur are unknown. BAML pushs out US approval by six months and decrease probability of FDA approval to 80%. The firm reduced the NPV of baricitinib to $25/share from $31/share, lowering its PO to $155. The firm's EPS estimates were reduced by 50%/18%/13% for 2017/18/19E due to delay in baricitinib revenue stream as well as updates in shares outstanding The CRL undoubtedly represents a setback but BAML retains Buy on strength of Jakafi and the attractive oncology pipeline.