Lilly and Baxter Remain Risk-Mitigated Plays For Alzheimer’s Drugs

With the announcement that Elan’s (NYSE:ELN) bapineuzumab candidate for Alzheimer’s disease failed again in a Phase III clinical trial, partners Pfizer (NYSE:PFE) and Johnson & Johnson (NYSE:JNJ) have decided to pack it in and discontinue development of the compound. The news means that there are just two advanced programs left with drugs that may be able to slow progression of the disease. These programs are being conducted by Eli-Lilly (NYSE:LLY) and Baxter (NYSE:BAX) for their drugs, solanezumab and Gammagard, respectively. Of course, today’s news casts significant doubt that LLY’s candidate will work, given that it acts similarly to bapineuzumab, and as a result, the shares are down in early trading. Baxter’s Gammagard is an approved drug with multiple modes of natural activity, therefore, this product may have the best chance of demonstrating efficacy. Phase III results for LLY’s drug are due out later this summer and Phase III data for Gammagard are anticipated by mid-2013.

Regardless of the outcomes, the price action today enables investors to take advantage of the strong dividend yields for both LLY and BAX, with little expectation in these stocks that their Alzheimer’s treatments will show an effect. In other words, if either of these two treatments work in Alzheimer’s disease, the upside surprise is likely to be significant. Buying LLY and BAX on weakness today makes sense as their high dividend yields offer price protection, while the upside potential for success in Alzheimer’s disease is not priced in.