Biogen and Lilly: How I Play the Alzheimer’s Drug Stock Game

Eureka!?!

Cambridge, Massachusetts-based biotech Biogen ( BIIB ) and Japanese drugmaker Eisai ( ESALY ) reported Wednesday morning that their experimental Alzheimer’s disease treatment met a key late-stage clinical trial goal. The candidate, Lecanemab, reduced the speed of cognitive decline in patients diagnosed with early-stage disease by 27% over 18 months compared to those treated with a placebo.

This result could be a major achievement for researchers who have been trying for years to find a way to treat Alzheimer’s. The medicine, before Biogen and Eisai started trying to develop it, was licensed from Sweden’s BioArctic.

All three stocks were up in their domestic markets on the news. In fact, both Eli Lilly (LLY) and Roche Holding (RHBY) stocks were higher in early trading as they are also known to be working on treatments like Alzheimer’s. I am long LLY stock.

Just FYI: There were some negative side effects during the Lecanemab trial. Some patients had to deal with brain swelling and/or bleeding. However, serious cases were said to be rare.

Background on Lecanemab and Amyloid

Lecanemab is intended to reduce or remove a toxic protein called amyloid that clutters the brain and is thought by many to be the main cause of Alzheimer’s disease. Many drugs have been tested with less than great results over the years to attack amyloid. The concept that amyloid is the main cause of the disease and that removing or reducing that protein in the patient’s brain would improve the patient’s condition is known as the “amyloid hypothesis.”

This is not the first at-bat for Biogen and Eisai as they try to develop a medication that reduces amyloid. Readers may recall that in mid-2021, the drug Aduhelm, in one trial, slowed a slight cognitive decline in Alzheimer’s patients but showed no effect in another trial. Aduhelm was controversially approved in the United States, but failed commercially because Medicare refused to pay for it, not only because of the price tag, but because of conflicting trial results.

If these results do not prove the amyloid hypothesis, they at least lend some credibility to the idea.

Expectations

Lon Schneider, professor of Psychiatry and Behavioral Sciences at the University of Southern California, was quoted by Bloomberg News. Schneider indicated that he thought Lecanemab would receive full FDA approval based on these clinical results.

He sounded less than thrilled with the 27% slowdown in the speed of cognitive decline, however: “The debate is going to be about the small effect size.” Schneider is not convinced that 27% will be seen as clinically meaningful over 18 months.

Biogen & Lilly

Although highly profitable, Biogen’s stock and the company’s earnings and revenue have been declining year over year. Despite Wall Street beating expectations for top-line and bottom-line performance for the June quarter, Biogen has experienced negative earnings growth in five of the past six quarters and negative revenue growth for eight consecutive quarters.

The company still drove solid free cash flow, while still running with a solid balance sheet. But coming into this news, the stock was trading at just 12 times forward 12-month earnings.

With shares up close to 50% in premarket trading and still more than 35% after Wednesday’s open, that could quickly be 18 times, even before taking into account when (and if) Lecanemab could enhance the company’s financial performance.

The stock is trading around $271 at around 10:00 am

Readers can see that BIIB has not traded in this neighborhood since 2021.

BIIB has traded in literally all of 2022’s consolidated base range. The gap that will be created on Wednesday morning will be huge and I would not be surprised in the least if it fills at least partially if not today or some other “down” day for the market. early. Ultimately, less than 1.5% of the float took place in short positions, so you’re not going to see a squeeze. ​​​​My bet would be bearish on anything approaching $300.

However, I told you that I was long Eli Lilly.

I think Lilly has more going on. Lilly also has a strong balance sheet and strong free cash flow. Lilly seems to have better luck on both revenue and earnings. The company also has the diabetes drug Mounjaro, which appears to be successful in fighting obesity. I’ll be waiting for results from Eli Lilly’s anti-amyloid anti-Alzheimer offering.

In the chart above, readers can see LLY reaching an inflection point as the above pennant formation closes. The stock could go either way in a hurry as it happens.

I know the 200-day simple moving average (SMA) is just as quickly rising about $25 below where the stock is. I see this as supportive as this is something portfolio managers look for when deciding whether to increase or decrease exposure.

My primary target here is the $335 July high, but I see that spot as a bigger pivot.

If LLY were to take and hold $335, which is possible as soon as today, my target moves to $385.

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