Is Lilly's Solanezumab Worth $3 Billion More?

| About: Eli Lilly (LLY)
This article is now exclusive for PRO subscribers.

We saw a very nice spike in trading activity in shares of Eli Lilly (NYSE: LLY) Monday in reaction to Eli Lilly's press release that released the detailed results for its phase III clinical trials for Solanezumab in the treatment of mild to moderate Alzheimer's Disease - known as the EXPEDITION trials.

Shares rallied over 5% higher by the closing bell, which equates to the sudden addition of ~$3 billion to the company's valuation. Since LLY is a conservative mover, we can basically say that the market considered this news worth $3 billion. The stock also made a new 52-week high on this news, which may get technical traders interested in the "breakout."

Before we figure out where LLY is headed, we should take a step back to see if Eli Lilly's solanezumab is actually going to do anything for the company with these results.

Alzheimer's Disease is an extremely common illness (found in roughly 1/8 older Americans) that results in loss of memory, and significantly alters one's thinking and behavior. This is also a progressive disease that does not go away.

Solanezumab is one of Lilly's 12 phase III programs, but has garnered a disproportionate amount of attention from the market due to its "lottery-ticket" appeal. There is no cure for Alzheimer's Disease, and few reliable methods to slow its progression. Every pharmaceutical company would like to take over this huge potential drug market, but the actual science between Alzheimer's made it too difficult to find an effective drug that could pass its clinical trials.

Lilly's approach was to make a molecule that would bind to beta amyloid proteins, which have been linked to the progression of Alzheimer's disease. After a lot of struggle with the expensive and time-consuming program, it reached phase III trials. We can summarize simply by saying that LLY investors have been waiting (with frustration) for the data that could show that the effort was actually worth it.

The new results from the EXPEDITION trials do show signs that solanezumab was able to perform against the placebo for slowing the progression of AD, but the results were not statistically significant. This means that the endpoints were not met, and the phase III studies can't be used for an NDA submission of solanezumab. From the company's press release:

"Alzheimer's disease research has been extremely challenging," said Dr. Doody. "The data results from the solanezumab Phase 3 trials were encouraging to the ADCS team. These results represent an important step for the medical, academic, and scientific communities in understanding brain amyloid as a target of AD therapies."

While Solanezumab was a nice step in the right direction for AD treatment, it's not going to make it to the drug market. This means that LLY gains nothing from its huge investment in this compound.

Most drug developers get hammered on any failed clinical trials, but Solanezumab seems to get special treatment. The explanation of the 5% rally (or $3 billion jump) in LLY can be attributed to cherry-picked and headlined results by Lilly that a Solanezumab arm was able to reduce cognitive decline by 42% versus a placebo arm of mild AD patients enrolled in EXPEDITION 1.

This sounds incredible at a glance, but remember that Solanezumab's efficacy cannot be proven without statistically significant results. It's not worth any more than it was yesterday - especially not $3 billion like the market is pricing in. The only thing that changed is the price of LLY stock, which has become much less attractive.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.