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UPDATE 2-Incyte tumbles after combo therapy with Merck fails study

(Adds analyst comments, updates shares)

April 6 (Reuters) - Incyte Corp's shares sank more than 20 percent on Friday after its experimental cancer drug failed to bolster the effectiveness of Merck & Co's blockbuster Keytruda to treat skin cancer patients.

The failure is a big blow for Incyte, which has strung deals with major drugmakers to test its immunotherapy epacadostat in combination with their cancer drugs in separate trials.

Guggenheim analyst Tony Butler noted the data suggests epacadostat provided no additional benefit above Keytruda alone. "We assume the probability of success of other studies with epacadostat is zero."

Epacadostat, a so-called IDO inhibitor, works by blocking an enzyme that protects tumors from the immune system, reported promising clinical data last year.

The development also weighed on stocks of other drugmakers testing combination cancer treatments. Shares of NewLink Genetics Corp tumbled 39 percent, while those of Nektar Therapeutics were down 8 percent.

Incyte's study was evaluating a combination of epacadostat and Keytruda in patients with metastatic melanoma compared with those who were on Keytruda monotherapy.

Keytruda is approved to treat several forms of cancer, including lung cancer and advanced melanoma, and is a PD-1 or PD-L1 inhibitor that blocks a mechanism tumors use to evade detection.

Keytruda competes with Bristol-Myers Squibb's Opdivo. The companies are looking to expand the reach of these drugs by combining them with other therapies.

Incyte has already signed deals with Bristol-Myers and AstraZeneca to test epacadostat.

William Blair analyst Katherine Xu said the result was surprising and the failure will make things difficult for the cause of IDO inhibitors.

Merck and Incyte said the study's second main goal of overall survival was also not expected to reach a statistical significance.

Incyte is currently testing its Jakafi as a treatment for graft versus host disease, a medical complication of transplants from a donor. It is also awaiting an FDA decision for baricitinib, an eczema drug it is developing with Eli Lilly & Co .

Incyte shares were down 17 percent at $68, while Merck was down about 0.5 percent. (Reporting by Mrinalini Krothapalli and Ankur Banerjee; Additional reporting by Tamara Mathias Editing by Arun Koyyur and Saumyadeb Chakrabarty)