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Alzheimer's disease treatment semagacestat wasn't the drug with the highest chance of success for Eli Lilly (NYSE: LLY  ) , but it was one of only a few late stage compounds that could produce the megarevenue that's needed to replace Zyprexa, which is headed for generic competition next year.

Unfortunately, that isn't going to happen.

The company announced today that interim results from two phase 3 trials showed that semagacestat doesn't work. And by "doesn't work," I mean it really doesn't work: The Alzheimer's disease symptoms of the patients taking semagacestat actually got worse than they did for those taking placebo. It's hard to fail harder than that.

But the drug did. Semagacestat also seems to be increasing the risk of developing skin cancer. You can put this one on the shelf behind the five-year-old can of sardines -- semagacestat is dead.

The bigger issue here is what semagacestat's failure means for the development of other Alzheimer's disease drugs. It's a high-risk, high-reward area, but the details of the failure could give investors an idea of the risk.

Semagecestat is an inhibitor of a protein that releases amyloid, which, when misformed, causes plaques seen in Alzheimer's disease patients' brains. If the drug did its job, and the patients still got worse, that would be a bad sign for drugs like bapineuzumab, which is being developed by Elan (NYSE: ELN  ) , Johnson & Johnson (NYSE: JNJ  ) , and Pfizer (NYSE: PFE  ) , along with Eli Lilly's other phase 3 Alzheimer's disease drug solanezumab. Both drugs try to slow the progression of the disease by attacking amyloid, albeit through a different mechanism than semagcestat used. If amyloid is just a bystander and not the cause of Alheimer's disease, those drugs would be just as likely to fail.

Until Eli Lilly releases more data beyond the top-line, it-failed-miserably results announced today, it's hard to know exactly what to make of today's announcement. The only conclusion we can make is that Alzheimer's disease drug development is a risky proposition. But we already knew that.

Is it time to get short again? Maybe not the entire market, but John Del Vecchio has a few good ideas.

Pfizer is a Motley Fool Inside Value recommendation. Elan is a Rule Breakers selection. Johnson & Johnson is an Income Investor recommendation. Motley Fool Options has recommended a diagonal call position on Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Brian Orelli, Ph.D., doesn't own shares of any company mentioned in this article. The Fool has a disclosure policy.

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  • Report this Comment On August 18, 2010, at 1:02 PM, DannyHaszard wrote:

    Lilly has 40,000 of the best minds in the world working for them.

    China could be consumer for Lilly's cash cow Zyprexa which has been reproached in the States for adverse litigation.

    All the best for Eli Lilly and resolution of Zyprexa claims-

    Daniel Haszard

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