3 Alzheimer's Drugs Investors Should Be Watching

Alzheimer's is a disease that individuals and drug companies have been fighting to destroy for decades with little to no success.

As one company has sold off a drug that has failed numerous times, companies like Biogen (BIIB -0.70%) and Eli Lilly (LLY -0.12%) seem to have the code cracked for separate levels of treatment. These biotech companies have tackled some of the diseases that seemed impossible to overcome through the years, and they hold out hope that this malady will soon join the vanquished diseases of the past.

A full transcript follows the video, recorded on Wednesday, July 22, 2015.

Michael Douglass: Fighting back against Alzheimer's and a listener question about Castlight Health (CSLT). This is Industry Focus.

Hi, Fools! Healthcare analyst, Michael Douglass here. Happy Wednesday! We are here to talk about a very tough and disease that's not really fun to talk about. Alzheimer's disease. Then we'll step into a little conversation about Castlight Health from a fantastic question from listener Alan. Let's hop right into it on Alzheimer's first.

This is a disease that is the 6^th leading cause of death in the United States, 5 million cases last reported, as many as 13.5 million people in the U.S. could have it by 2050. Enormous costs and another very frightening statistic about them; 99% of clinical trials regarding Alzheimer's drugs have failed. That's a big number.

I want to go and talk about where we are with potential Alzheimer's treatments that are currently in the clinic. This is timely because the Alzheimer's Association International Conference is happening this week in Washington D.C.

Todd, let's go down the list. Let's lead off with Eli Lilly's Solanezumab.

Todd Campbell: That's a great place to start. Alzheimer's disease is such a huge, unmet need. I wish today you and I were able to talk about drugs that were going to be approved next week.

Douglass: That were clearly going to move the needle, too.

Campbell: Yeah. Unfortunately, all three of the drugs that we're going to talk about today are still in Phase III clinical trials, or about to go into Phase III clinical trials and data readouts are still years away, which means the commercialization is even further out. That being said, Eli Lilly's drug is very interesting. Not because it's proven itself in clinical trials to be a fantastic drug, but because 99% of clinical trials have failed and at least there's some evidence here that Eli Lilly's drug works.

Essentially what happened was, Eli Lilly was studying this drug in Phase III trials that didn't not pan out in 2012. They had spent a lot of money developing this drug, so they went back and did post hoc analysis. They discovered that while it didn't work for everyone, it did seem to work in very early stage, or mild cases of Alzheimer's disease. It delayed the progression of the disease to more moderate, or severe cases.

That's a pretty good finding. It was not for them to say "Let's keep watching this." They studied it for an additional two years and the results were presented today at the conference. Sure enough, it showed that it delayed the progression of the disease in mild Alzheimer's disease patients by about 30%.

That's not a fantastic number, but it's the first evidence we've had in a long time that maybe we're making some headway on curbing just how difficult this disease is to treat.

Douglass: That makes sense. Certainly good news for Eli Lilly. I would say even more importantly, hopefully some good news for the many patients with Alzheimer's. Let's hop into another drug which is early stage -- at least the data that we have thus far is early stage -- but the data looked pretty good. That's Biogen's BIIB037, also known as Aducanumab.

Campbell: Investors loved learning at the end of last year that this drug was making an impact. They think this drug could be a big seller if it can prove out in late stage trials what it's shown so far in early stage trials. What's really interesting about this drug is, the results in the Phase I trials -- normally you look at Phase I and say "It's really early stage, you can't put too much conscience in that." Biogen thought those results were so good that they decided to leapfrog Phase II trials, and they're heading straight into Phase III. They're putting up a lot of money to be able to do that.

Whether or not Phase III trials also show that this drug is effective at improving cognition in Alzheimer's patients; we don't know yet. Essentially the Phase I trials showed that this drug does a great job of reducing the plaque buildups that are thought to interrupt communication between cells in the brain. If we can get rid of those lesions, if we can rid of those plaque buildups and restore the ability for the brain to communicate effectively then this could be a major advance.

What's interesting about this drug is that out of the three drugs that we're discussing, this is the only one who has yet to fail in clinical trials. It will be interesting to see how Phase III plays out, but there's a lot of interest and excitement about this drug as well.

Douglass: For listeners who may not be familiar, the plaque that Todd is talking about; that's known as the beta amyloid plaques. You'll often hear those discussed when people are talking about Alzheimer's drugs. As Todd already described how those plaques worked. Just so you know, the term that's usually used is beta amyloid.

Certainly an exciting drug. As you pointed out; very early stage. The fact that Biogen immediately moved it to Phase III is an encouraging sign, and hopefully that will lead to some good news at some point in the future.

Let's talk about Axovant Sciences' (AXGT) RVT-101

Campbell: This is the third of the three drugs we're discussing today. To me, it's also one of the oddest ones.

Douglass: It's gone a long storied history, right?

Campbell: Yeah. This is a drug that was originally developed by GlaxoSmithKline (NYSE: GSK). Sure enough, this drug failed in clinical trials. GlaxoSmithKline gave up on it and basically said "Who wants to buy this?" They sold it late last year to a company that was created to usher this drug along through trials. This is the only drug that this company -- Axovant Sciences -- has to its name at this point.

The mission is to look at the data, see where it works best, and then be able to structure a Phase III trial for this drug that can play to its strengths and allow it to win eventual approval. My optimism for this drug is less than it is for Eli Lilly's and Biogen's. It's not because I want it to fail. I want it to succeed.

There's a part of me that wonders, if someone as big as Glaxo with resources that Glaxo has and they're willing to step away from this drug and accept a small $5 million payment plus some royalties and milestones from Axovant; it makes me wonder how much potential Glaxo sees in this drug.

Hopefully I'll be proven wrong and this will be a very successful drug. What could end up happening with all three of these drugs is, each one of them is used at a different stage, kind of as we see with cancer drugs. Perhaps what we'll see is the Lilly drug is used at the earliest stage, then for people who fail to respond or their disease still progresses, maybe then they're moved into the Biogen drug. Then if Biogen doesn't work it's moved into this RVT-101 drug that's under development.

Again, all of that is wishful waiting at this point. We've got years before we'll know for sure if these work.

Douglass: That's definitely going to be the trouble with all three of these drugs for public health advocates and investors. While no one can read the future -- as much as we all wish we could -- which of these three drugs are you most excited about? I think I already know your answer.

Campbell: I'm going to go with Biogen.

Douglass: Not a surprise.

Campbell: I like Biogen as a company more than I like these other two companies. For that reason I'm more confident in investing and owning shares in the company in hoping that they'll be able to do something with this drug. Rather than putting all my eggs into Lilly's drug, or Axovant's drug; that's a binary event. It's either going to work, or it's not going to work. The shares could either go up 100%, or down 100%.

Douglass: Right. It's tough to invest in a one trick pony like Axovant. Of course, Eli Lilly has had so much trouble growing their topline because of their massive patent. They have all those patent expirations on all these drugs that they've had such trouble. Of the three, the one I'm most confident in is Biogen.

At the end of the day I think the most important thing is, regardless of who ultimately gets a drug to market for Alzheimer's, the key thing is going to be a drug that helps people and takes this disease, making it more treatable, making it less awful.

Campbell: I think we'll get there. Look at what we did with HIV. Look at what we've done with various cancers and extending life. I think we'll get there, but it can't happen fast enough.

Douglass: Absolutely. This is something we'll be watching very closely. Both during the conference, and after. Let's pivot and shift gears a little bit. We got a listener question. We love listener questions. [email protected]. Send us an email. Anything that's on your mind; we love getting questions. We try to answer them all. We certainly read them all and we're always thrilled when we get something from listeners.

Alan, who's a loyal Market Foolery listener -- by the way feel free to check out the Market Foolery podcast, and the Motley Fool Money podcast that are also available. There are great people on both of those shows. I highly recommend you check them out.

Alan, a local Market Foolery listener wrote a note asking if any of the "Healthcare gurus" -- thank you for referring to me as one, I really appreciated hearing that -- if any of us have an opinion on the healthcare cost transparency space, particularly about Castlight Health.

I think we have opinions on Castlight Health, Todd. They're not the most positive opinions. I think when you look at Castlight, for me at least, it's a tough stock for me to put in my portfolio. Let's take a step back and talk through Castlight's business model. Todd?

Campbell: Growing up I wanted to be a guru rather than a fireman. I absolutely appreciate the comments from the listener. Castlight is one of those companies you want to love and root for. The mission that they have taken on is potentially game changing. It's also a great example of how a great idea doesn't necessarily translate into a profitable business model that's worthy of investor dollars.

Here's the situation: what Castlight does is aggregate data from healthcare insurance companies, payers, etcetera, to determine what the costs should be, or are, for doctor visits, procedures, x-rays, and so on. Then, through employers and healthcare payers, they provide access to patients to be able to go in and select who they want to see for their doctor visit, or procedures based on cost.

What it does is evens the playing ground. It finally creates some price transparency in the healthcare sector. Most people walk into a doctor's office, they're told they need an x-ray and they have no idea how much that x-ray is going to cost. They have no idea how much the lab work is going to cost. Obviously, they're trying to eliminate that headwind, create a more price competitive environment in healthcare that can keep costs down.

Again, it's potentially transformative. However, with that being said, it's not necessarily a business model that you can put your money in.

Douglass: I think there are three main issues. We can break them out separately. The first one is the issue of concentration of risk. Thinking about the fact that the initiating committee of the Wal-Mart stores associates health and welfare plan; 14% of their total revenue in 2014. The fact that their top 10 customers represent 46% of their total revenue. That is such an enormous amount of revenue. It's hard to think about the fact -- what happens if one of those groups pulls out? It's an enormous risk for the company.

Campbell: Yeah. This is in three year contracts. You're always going to be renewing somebody that could theoretically say "no". That's a major risk. Wal-Mart is a huge employer. They're a massively important customer. Granted, they renewed this year so they're safe for a little bit longer, but I think investors have to look at that and ask "What does happen if some of these customers decide that not enough of their employees are using this service? And they're not seeing the savings they had hoped to see providing this access?"

Douglass: I think that segways very nicely into problem number two. That is: what's stopping competition from coming in and a well-heeled competitor like a health insurer that they're aggregating this data from steps in with their own product and consumes the market share that Castlight has been able to gain?

Campbell: Really, nothing. Castlight's inked agreements with most of the major health insurers to gain access to their data. That's great, but there's nothing to say that their prices, the agreements can't change, that those insurers can't walk away from those deals. They don't work with everyone. Sure enough, there are some health insurers -- UnitedHealthcare jumps to mind -- that are working on services that could compete with Castlight.

That's a major risk. They don't control the data that they rely on. I think that's going to make people say "I don't know what that's going to mean for a long term business model."

Douglass: That threat of massive well-heeled competition I should be frightening for people who are thinking about Castlight as an investment. Certainly, it scares me a great deal. Then there's the third piece which is: the valuation. This is healthcare so we don't talk about valuation in quite the same way as everybody else does because so much is based on so many things that you can't predict that could happen in the future. Whether a drug gets through the FDA or doesn't, whether it commercializes well or doesn't. It's very difficult to model out what that risk looks like.

When you've got a company that is extremely reliant on a handful of customers and you've got massive potential threats from well-heeled competitors who may choose to enter that marketplace, then you have to think about valuation and what that company is valued at. It's not cheap. Their market cap is just under $800 million. That's about 10x this year's projected sales.

Campbell: Yeah. When it IPO'd shares soared and then it fell because people look at it and said "Great idea. Rapid revenue growth, no sign of profitability anywhere in sight." This company is spending $16 million a quarter just on sales and marketing. That's more than they're bringing in in revenue. They're expected to lose between $64 and $67 million this year. This would be a different story if we gave you those other risks and then said "Yeah, but they're making money."

Like you said, when you take all three of those and put it together it's very hard to make an argument that you should be going out and putting this one in your portfolio.

Douglass: That's a really good point. Three big issues for Castlight there. Still, it's a company and a concept that we will be rooting for because I love the idea of additional cost transparency. It's definitely a key thing in healthcare. One of the big trends I think we who are all served by healthcare in one way, shape, or form want to see more. It's definitely a story we will be monitoring and sharing more as we know more.

Folks, thank you as always. Thanks to Todd. Todd, thank you for contributing today. Folks, thanks for listening to Industry Focus. We always love to hear from listeners. I'm going to plug on more time: [email protected]. Shoot us an email if you've got anything on your mind. For the Motely Fool, I'm Michael Douglass. Thanks much. Check back to Fool.com for all of your investing needs. Fool on!

As always, people on this program may have interests in the companies that are mentioned and the Motley Fool may have recommendations and own shares for or against stocks that are mentioned here. So, don't do anything with the stock based just on what you hear. Always do your own due diligence. That's how we become great investors.