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What happened

Shares of Biogen (NASDAQ:BIIB) were down more than 4% in early afternoon trading on Wednesday in response to Eli Lilly (NYSE:LLY) reporting disappointing news about a late-stage clinical trial involving an experimental Alzheimer's disease drug. The decline erased slightly more than $3 billion from the biotech giant's market cap. 

So what

Eli Lilly's EXPEDITION3 trial was testing its experimental compound solanezumab as a treatment for mild dementia due to Alzheimer's disease. A substance called amyloid plaque that accumulates in the brains of patients with Alzheimer's has been hypothesized to lead to the disease's progression. Solanezumab was designed to clear away some of that plaque.

However, the top-line data from the trial showed that patients who took solanezumab did not display a statistically significant slowing of cognitive decline when compared to patients who only received a placebo. As a result, Lilly has stated that it will not seek regulatory approval for the drug.

Traders are selling off shares of Biogen in response because this data suggests that targeting amyloid buildup might not be an effective way to treat Alzheimer's disease. If true, that could mean that Biogen's exciting product candidate aducanumab might also fail during late-stage clinical trials. 

Now what

While this is certainly a development that investors need to watch closely, it is possible that Eli Lilly's failure could actually be a net positive for Biogen. The reason is that the EXPEDITION3 trial did show that solanezumab lead to some cognitive improvement -- just not enough to demonstrate statistical significance. Since imaging from early clinical testing showed that Biogen's aducanumab produces significant reductions in beta amyloid buildup, it is possible that the drug could still perform well in more robust clinical trials. In addition, Eli Lilly's decision to not seek approval removes a potential competitor for aducanumab.

It is still too early to draw any real conclusions about how this data might affect Biogen, but that isn't stopping traders from turning bearish anyway. Biogen is set to present data on aducanumab at next month's Clinical Trials on Alzheimer's Disease meeting. Bulls and bears alike would be advised to listen in and hear what management has to say about the drug's future.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.