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By Lewis Krauskopf
NEW YORK, Nov 23 (Reuters) - Eli Lilly & Co's massive setback for its experimental Alzheimer's diseasetreatment on Wednesday sent investors scrambling to re-evaluateshares of the U.S. drugmaker and those of companies makingcompeting therapies, including biotech stalwart Biogen Inc.
Lilly shares tumbled 10.5 percent, and fell to their lowestpoint in two years during the session, after the company saidits drug failed to slow loss of cognitive ability in patientswith mild symptoms.
The shares were on pace for their biggest one-day percentagedecline since the 2008 financial crisis, shaving about $9billion of market value.
Biogen shares were down 4 percent, but had reduced theirinitial losses by more than half from premarket trading asinvestors assessed the damage to the prospects of the company'sdrug that works in a similar way to Lilly's.
The results for Lilly's solanezumab were a highlyanticipated event on Wall Street, with some analysts saying thecompany's shares could have leapt 20 percent or more had theclinical trial succeeded.
Although Alzheimer's disease has been a notoriouslydifficult area for drug development, some investors were clearlyoptimistic that the drug would meet the study goals. A buy-sideinvestor survey by Evercore ISI at the end of September foundthat 56 percent had expected the study to meet its main goal.
Morningstar analyst Damien Conover had been factoring in a50-percent chance of solanezumab approval, with peak probabilitysales of nearly $4 billion a year. "Therefore, the negativetrial results have a large impact on our fair value estimate."
Lilly's shares had traded at just over 19 times earningsestimates for the next 12 months ahead of the study results,making their shares more expensive than other large U.S. andEuropean drugmakers.
Wednesday's decline left shares trading at about 17 timesestimates, below Bristol-Myers Squibb Co but still wellahead of those of Pfizer and GlaxoSmithKline.
PHARMA CUPBOARD NOT BARE
The stock valuation shows investor confidence that Lilly'scupboard is not bare without solanezumab, as medicines fordiabetes, rheumatoid arthritis and psoriasis are expected topropel its business.
Lilly's earnings per share are expected to rise by 14percent a year on average over five years, said SanfordBernstein analyst Tim Anderson, making the company "among thevery best growers in our coverage universe."
According to Starmine data, Lilly's average annual earningsper share growth is expected to be 7.8 percent over the nextfive years, nearly double that of peers.
Lilly executives themselves have told analysts on recentquarterly conference calls they project average annual revenuegrowth of at least 5 percent a year through 2020, even withoutsolanezumab.
"They are telling you that their business can workregardless, so in many ways they provided some prophylaxis tothe market," said Tony Butler, an analyst with GuggenheimSecurities.
The results nonetheless will sting for Lilly investors.Balyasny Asset Management, Franklin Advisers, WellingtonManagement and Vanguard Group made large additions to theirLilly holdings as of Sept 30, according to securities filingstracked by Thomson Reuters.
Lilly's setback raised questions in the strategy oftargeting the beta amyloid protein, believed to cause brainplaques, which Biogen's aducanumab also targets.
But Biogen's drug is different, including data showing itcould be more effective in targeting beta amyloid, according toRaymond James analyst Chris Raymond.
While "the risk has gone up with respect to aducanumab,"Raymond said, part of the reason the stock recovered the bulk ofits initial losses on Wednesday was that investors did notcompletely discount the chance aducanumab could still succeed.
Investors should learn more about aducanumab's potential atan Alzheimer's conference starting Dec. 8.
Another possible support for shares of Biogen, which has aleading franchise of multiple sclerosis drugs: the company, witha market value of about $66 billion, has been the subject oftakeover speculation.
With more data expected in the near term, Raymond said, "weanticipate greater clarity and think this could actually help toresolve questions around how to value aducanumab as it relatesto a potential Biogen takeout." (Reporting by Lewis Krauskopf; Editing by Dan Burns and NickZieminski)
