Alzheimer's Drug Bapi Looks Done (Again)

by: Stephen Simpson, CFA

Denial and bargaining are integral parts of the Kübler-Ross grief hypothesis, and anybody who writes about the healthcare and biotech sectors knows that Elisabeth Kübler-Ross was on to something. When I last wrote about the disappointing results of bapineuzumab (or bapi), a drug that Pfizer (NYSE:PFE), Johnson & Johnson (NYSE:JNJ), and Elan (NYSE:ELN) were developing for Alzheimer's disease, I suggested that the drug was a goner and investors should respond accordingly.

I heard from several investors who disagreed with that conclusion, some of whom wrote long defenses of the drug and mentioned the possibilities that one or more of the three remaining Phase III studies would show enough efficacy to merit approval. Although I won't underestimate the ability of some investors to keep hope alive, additional news from Pfizer and Johnson & Johnson on Monday night indicates that insofar as these Big Pharma names are concerned, bapi is all but dead as an Alzheimer's drug.

The Second Verse, Basically the Same as the First

On Monday night, Johnson & Johnson and Pfizer both announced that bapi failed to show efficacy (improved cognitive or functional performance) in patients who did not have the ApoE4 gene variant. This news followed about two weeks after Pfizer announced that the first Phase III study (also run by Johnson & Johnson) in ApoE4 carriers also failed. Given that optimists were hanging on to the possibility that ApoE4 non-carrier data would be meaningfully better, this is pretty much the final nail in the coffin for bapi as an effective drug in mild-to-moderate Alzheimer's, and Pfizer is terminating its two other Phase III studies.

I admit a little surprise to see that Pfizer shares are down about 1.5% on the news. With 50% economics on the drug, Pfizer certainly had a lot to gain from a drug that could have been a multibillion-dollar blockbuster for a devastating disease with minimal therapy/treatment options. Nevertheless, I would have thought that investors would have largely stripped out any anticipated revenue after the July 23 news, but apparently there were still more than a few investors who were still thinking that non-carrier data would work out.

At this point, there's really no upside to Johnson & Johnson or Pfizer from this news. The vast majority of R&D dollars that the drug would require to get to market have already been spent and there's little left to do but take some accounting charges and move on.

But Wait...

Actually, that's not entirely true. Bapi is not completely dead yet. These trials involved the use of bapi as an IV therapy and the companies are going to continue with a Phase II study of bapi delivered by subcutaneous injection. I can't see why the route of administration would make a significant difference, but stranger things have happened.

And it may not be entirely out of the question that bapi could get picked up by another company. These Phase III studies explored the use of bapi in mild-to-moderate Alzheimer's patients, but there is a school of thought out there that says this is the wrong patient group to target. The argument is basically that the brains of these patients are already damaged and that companies ought to focus on patients who are not yet symptomatic. Unfortunately, diagnosing/identifying these patients is not easy, but I could see how a company might try to design a trial for bapi in pre-symptomatic patients; particularly if improving diagnostic capabilities allow for better patient identification.

What Now?

Despite this setback, I don't expect Big Pharma to abandon Alzheimer's as a disease target. A drug with the right mix of safety and efficacy could be worth many billions of dollars (perhaps $10 billion or even $20 billion), and that's simply a target that is too attractive to ignore. Pfizer in particular seems to be committed to this space, even though the failure of bapi and the failure of Medivation's (NASDAQ:MDVN) Dimebon (for which Pfizer paid $225 million upfront to partner with Medivation) within one year represent costly setbacks.

For Johnson & Johnson and Pfizer, the impact is little more than I thought back in July -- it's a disappointing setback, but one that doesn't really matter much in the grand scheme of things. For smaller partner Elan, it's confirmation of a major setback, but the stock should be worth at least $10 on the basis of its of Tysabri partnership with Biogen Idec (NASDAQ:BIIB). In fact, given Elan's very early stage pipeline, the stock could be attractive to Biogen Idec as a buyout just on the basis of owning 100% of Tysabri.

This news should also have limited impact on the two other large companies with late-stage Alzheimer's drug candidates. I fully acknowledge that Lilly's (NYSE:LLY) solanezumab is a different drug than bapi and that Lilly management has expressed a fair bit of confidence in this drug. Nevertheless, I just don't think that the bapi/solanezumab approach is the right one, and I don't hold much hope that Lilly's Phase III trial will show approvable efficacy.

For Baxter (NYSE:BAX), though, I have more optimism. Gammagard is a different approach (immunoglobulin) and earlier Phase II study data has been more encouraging (including dose-related differences in response). What's more, less Alzheimer's hope seems baked into Baxter's valuation, so it's a less expensive option on what is still a low probability outcome.

As it stands today, though, Alzheimer's remains one of the trickiest problems in healthcare. I am hopeful that somebody will ultimately crack the code and figure out an effective therapy for this devastating disease, but hope alone is not a good basis on which to make an investment.

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