A Costly Missed Connection

Earlier this year, I cautioned investors to tread lightly with potential Alzheimer's disease drugs. I sure hope they listened. Medivation (Nasdaq: MDVN  ) is down 67% after results from a phase 3 trial, CONNECTION, showed that its drug candidate, Dimebon, doesn't work.

Medivation and partner Pfizer (NYSE: PFE  ) might as well change the drug's name to Divebomb, because there doesn't seem to be any positive news from the clinical trial. The drug failed to meet its primary and secondary endpoints, and patients taking Dimebon even fared worse than those taking placebo for some measures. The placebo group did a little better than expected, but that didn't affect the outcome; even if the placebo group had ended up within its expected range, the trial would have failed.

Dimebon is still being tested in a pair of clinical trials, in combination with Eisai's and Pfizer's Aricept and Forest Labs' (NYSE: FRX  ) Namenda, but I wouldn't hold out much hope for success.

For Pfizer, the results aren't nearly as disastrous. Assuming Dimebon remains a flop, Pfizer will be out the $225 million it put up to gain the rights, and 60% of the costs associated with the trial. But the company has eight other drugs to treat Alzheimer's disease in the works. Will all of them work? Highly unlikely, but I'd rather have nine shots on goal than one. Investors won't have to wait too long for the next results, either; the first phase 3 trials for bapineuzumab, partnered with Johnson & Johnson (NYSE: JNJ  ) and Elan (NYSE: ELN  ) , are expected to read out later this year.

Today's flop, combined with earlier ones from drugmakers like Myriad Genetics (Nasdaq: MYGN  ) , just reinforces the high-risk nature of developing drugs for complicated diseases. Take the risk if you want -- there's plenty of money to be made if the drug succeeds -- but make sure you keep that risk to a reasonable portion of your portfolio.

Elan is a Motley Fool Rule Breakers recommendation. The newsletter is always on the hunt for hot drug stocks and other cutting-edge picks. Click here to see all of our latest discoveries with a free 30-day trial subscription.

Fool contributor Brian Orelli, Ph.D., doesn't own shares of any company mentioned in this article. Pfizer is a recommendation of the Inside Value newsletter. Johnson & Johnson is an Income Investor selection and Motley Fool Options recommended buying calls on the stock. The Fool's disclosure policy will never forget you.


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  • Report this Comment On March 03, 2010, at 3:54 PM, bert111 wrote:

    Good posting, Brian. Beyond the uncertainties behind producing products that require the arrival of reliable research brilliance and offer a shelf-life of just under 5 years (during which the ROI must be generated), policy maker's are increasingly aware that advancing medical technology is the leading catalyst of healthcare-cost inflation (according to a CBO study from current OMB-director Peter Orzag's tenure as CBO head). With Warren Buffet making the same points during Monday's CNBC interview, cost-constraints on patent-protected, novel therapeutics seem likely (with greater reliance on restrictive formularies, if not outright alteration of the patent laws).

    This would urge sector investments that provide diversified revenue sources (JNJ and PG with home and beauty products serve as an example) or a prominent foot-print in the lower-cost generics market (FRX and TEVA, perhaps), or anscillary firms providing products designed to make R&D development more cost effective (PPDI, SLP, etc.).

    Given the negative margins currently reported by hospitals, physician practice groups, and senior care plus current laws (BBRA and HIPPA) and present proposals seeking compensation reductions for care delivery, those with exposure to CMS 1500 and UB 92 remuneration (including health insurance) require abundant due-diligence to identify a durable moat protecting and expanding profitability.

    With the number of seniors projected to grow from 47 million currently to over 80 million by 2030 and with 70+ % of healthcare costs generated in the last five years of life, healthcare is a sector with a high risk/rewards trade-off. While a little pricey, MCK, as a Fortune 50 stock, strikes me as an above average long-term investment, given its exposure to health management software and medication transport and delivery to pharmacy chains. My DCF model puts it at 40% undervalued (assuming 8.5% growth rate first decade, 5% second decade, 15% discount rate, and current equity serving as continuing value).

    Disclosure: I have active, long-standing positions in every stock mentioned above.

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