Shares of drugmaker Incyte (INCY) and mega-cap partner Eli Lilly (LLY) are sliding after the Food and Drug Administration rejected their application for rheumatoid arthritis therapy baricitinib in its current form, due to safety concerns. Nonetheless, the latter reaffirmed its 2017 and mid-term guidance.

The news sparked varied reactions from Wall Street analysts. While some remain bullish on Eli Lilly, Morgan Stanley analyst David Risinger downgraded the stock to Neutral, while his peer at Piper Jaffray cut Incyte's rating to Neutral.

In a research note this morning following the news, Morgan Stanley's Risinger downgraded Eli Lilly to Equal Weight from Overweight, with an $82 price target, citing the stock's premium valuation and difficulty predicting the next key events for the pharmaceutical giant. Now that baricitinib appears to be "significantly delayed" and he sees the possibility of more mixed news flow ahead, the analyst told investors that he views Eli Lilly as having a balanced risk-reward.

Conversely, some analysts remained bullish on Eli Lilly despite the announcement. SunTrust analyst John Boris noted that he believes Eli Lilly has first mover advantage after EU approval, broad label and superiority to Abbvie's (ABBV) Humira. He reiterated a Buy rating on Eli Lilly's stock and pointed out that he would take advantage of weakness in the shares as the company enters an innovation driven new product cycle.

Meanwhile, his peer at Piper Jaffray said that while the news was surprising and disappointing, baricitinib is one of the least important of Lilly's six new growth drivers. Analyst Richard Purkiss told investors that he estimates the delay to U.S. marketing represents only a 1% hit to his long-run valuation for the stock. The analyst reiterated an Overweight rating on the shares and argued that the company's "compelling growth story" relies largely on its three high margin, wholly owned assets: Trulicity, Taltz, and abemaciclib.

Voicing a similar opinion, Cowen analyst Steve Scala admitted that the complete response letter, or CRL, for baricitinib is a "significant disappointment" for Eli Lilly, but noted that he has always leaned conservatively on the drug and that his baricitinib forecasts are "roughly intact" as he assumes a U.S. launch in January 2019. Scala maintained his Outperform rating on Lilly shares and raised his price target on the stock to $95 from $85 as he expects a number of upcoming new product rollouts and late stage agents over the next few years.

Reacting to the news, Piper Jaffray analyst Joshua Schimmer downgraded Incyte to Neutral and cut his price target on the shares to $124 from $140. Baricitinib's setback could take years to resolve and lead to approval of only the lower dose of the drug, leaving potentially little differentiation from Pfizer's (PFE) rheumatoid arthritis treatment Xeljanz, Schimmer contended. While he says many positives at Incyte remain, the analyst prefers to wait for a "cleaner entry point."

Credit Suisse analyst Vamil Divan told investors in a note of his own that the "surprising" CRL brings baricitinib's potential into question, while boosting key competitors as it removes a potential near-term U.S. competitor to AbbVie's Humira, which is the clear market leader in moderate-severe rheumatoid arthritis. It also helps Pfizer as Xeljanz will remain the only oral JAK inhibitor on the U.S. market for several more quarters, the analyst noted, adding that the gap between baricitinib and future oral JAK inhibitors such as AbbVie's ABT-494 and Gilead Sciences (GILD)/Galapagos' (GLPG) filgotinib will also be much shorter now, likely improving the commercial potential for these agents.

 In morning trading, shares of Eli Lilly have dropped 4% to $82.49, while Incyte's stock plunged about 11% to $125.43.