Alzheimer's And The Industry

Includes: JNJ, LLY
by: David Wren

Alzheimer's is a form of dementia that causes worsening of memory, thinking, and behavior over time. According to the Alzheimer's Foundation of America, an estimated 5.1 million Americans have the disease. With a growing population, and an increasing amount of the population above the age of 65, the race to find a cure is on.

Who are some of the top competitors trying to breach this estimated $10 billion market? Eli Lilly and Company (NYSE:LLY) and Johnson & Johnson (NYSE:JNJ). These companies have shoveled loads of money into research for a disease that some people think may not ever be cured. Their drugs attempt to prevent or remove the buildup of a protein called beta amyloid in the brain, effectively thwarting the disease. No drug has been able to prevent this process, some even making it worse.

Johnson & Johnson is expected to release findings of its drug called bapineuzumab as early as next month. In the fall, Eli Lilly will share results of its drug, solanezumab. The Wall Street Journal says,

"The findings are expected to have a significant impact on the companies' stocks, and on the industry's commitment to pursuing Alzheimer's treatments."

Not only will a breakthrough make the company a hero, but prove the controversial amyloid hypothesis to be true. So will they be able to do it? Will somebody finally find a way to treat this abominable disease? The WSJ also goes on to say,

"Researchers and Wall Street analysts are bracing for disappointment. Companies have seen a number of failures in amyloid-targeting drugs..."

Pharmaceuticals and biotechnology analyst, Mark Schoenebaum, gives solanezumab a 15% chance of success. However, if Eli Lilly is able to pull it off, he says the stock could shoot up 50%. Looking back, Eli Lilly halted its earlier Alzheimer's drug semagacestat in 2010. Its stock dropped 5% by the end of that week. Since then, the stock has recovered and is currently trading at about $43. Failure or success of this go-round may yield the same results short term. This does not mean the company or stock is broken though. It could simply provide a good entry point like in 2010.

Johnson & Johnson on the other hand, will not be affected quite as much by a failure as its market cap is nearly three times that of Eli Lilly. The other sectors of the company will cushion the blow should they fail this time around. However, they could use the boost of a huge breakthrough after reporting just average Q2 results.

The upside is tremendous for these companies if they are able to create a safe, effective drug. The chances of the upside happening are, in my mind, slim to none. Another failed drug could hurt these stocks badly in the short term. Until evidence of more successful trials surfaces, I would not make bets in this risky sector. As much as I hope that somebody can treat Alzheimer's, the lack of positive evidence is discouraging.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.