Upcoming results from late-stage data will have major impact on sector
After a year of drama for the health-care industry, ranging from the EpiPen pricing scandal to the collapse of Valeant Pharmaceuticals International and Theranos to the unknown future of Obamacare to a series of mergers, it is easy to forget that the business of drug companies is actually to discover new drugs.
That will change in the next two weeks, when Eli Lilly unveils late-stage data for its Alzheimer’s disease drug. The results will be the most important drug discovery event of the year, and will have major implications for several big pharmaceutical companies and their stocks.
Lilly’s results have the potential to wash much of this year’s negativity away. That is because Alzheimer’s is perhaps the largest medical need that is still unmet by the pharmaceutical industry. Currently available treatments do nothing but treat symptoms of the fatal disease, rather than slow or stop its progression.
Given the poor prognosis for patients and the number of people affected, a drug that shows even a modest benefit in a limited population stands to be a blockbuster the moment it becomes available.
Since sentiment can be an important factor in the short-term share price movements of smaller biotech companies, it is possible to envision positive results from Lilly spurring a sector wide rally.
But the flip side of that opportunity is the degree of difficulty: Whoever eventually breaks through with an Alzheimer’s treatment stands to cash in because the odds are so long. A 2014 study by Cleveland Clinic researchers found 99.6% out of more than 400 Alzheimer’s trials failed over a 10-year period.
Lilly’s drug, Solanezumab, has failed twice before in late-stage trials. The latest attempt to show a positive benefit from the drug introduces some hope—the target population and primary criteria for measuring success are both more narrowly focused than in past iterations.
Among other changes to the trial design, Lilly is only testing patients with mild symptoms this time—past trials have focused on patients with mild and moderate symptoms of the disease. While that maneuver would narrow the drug’s total addressable market if approved, it should help boost the odds of success.
Those efforts aside, the trial results introduce a high-risk and high reward moment for Lilly shareholders. And the potential negative stock impact from a failure is significant. Lilly shares trade at more than 19 times forward earnings, according to FactSet. That is a significant premium over any pharma company of comparable size. A positive result would likely justify that premium, while a negative outcome would likely erase it.
Lilly could present results of the trial at a conference on Dec. 8, though the data could be released earlier.
The better way for investors to bet on success of the drug is through two rivals with similar drugs in development that are cheaper than Lilly. Alzheimer’s drug programs at Biogen and Roche Holding are farther away from a final outcome than Lilly’s, but these two stocks trade closer to 15 times forward earnings.
That could allow investors to participate in any benefit from Lilly’s trial—and remove some of the sting should history repeat itself.
Write to Charley Grant at [email protected]