Hope was running high at Axovant Sciences (NASDAQ:AXON) that that teaming up their drug intepirdine with the top-selling Alzheimer's disease treatment, Aricept, could improve patients' lives. Unfortunately, intepirdine failed to outperform a placebo in its study, a result that casts doubt over Axovant Sciences' future.

In this clip from the Motley Fool's Industry Focus: Healthcare podcast, analyst Michael Douglass and contributor Todd Campbell unpack this news and offer up their take on why Axovant shares are still risky, even after the 70% drop the took following the disappointing clinical trial news.

A full transcript follows the video.

This video was recorded on Sept. 27, 2017.

Michael Douglass: But let's start by talking about everything that seemed to be going right for them beforehand. I think that's really the key part of this story. Things, in a lot of ways, looked -- as much as they can be whenever someone is studying Alzheimer's -- pretty good for Axovant.

Todd Campbell: Michael, as investors, you and I probably agree, ideally we would love to catch stocks and pick winners early on. But, in biotech, oftentimes, it seems like it's akin to buying a scratch-off ticket.

Douglass: Right.

Campbell: There are just so many things that are out of our control in whether or not we're going to win or lose. Maybe win a dollar, most of the time we're probably going to come up empty. And sure enough, in the case of this Alzheimer's disease drug for Axovant, we did come up dry, we did come up empty with a losing ticket. And I think there's some good lessons here, listeners, that we can take away from this. I think one of the things you're alluding to in saying, let's talk about what was going right.

I think oftentimes, it's very easy for us to look at all of the things that are lining up as evidence. Because obviously, we don't have insight into what's going on in a clinical trial. We don't know if the drug is panning out or not while the study is going on, so we have to build up this body of evidence and come to whatever guesswork we can based on that evidence. And in the case of Axovant, there were a lot of signs that made it encouraging to take a risk and a gamble, even though we're talking about Alzheimer's disease, which is undeniably the most difficult disease to try to develop new drugs for.

Douglass: Right. And not least of those, frankly, when Axovant went public, it was a massive IPO: $360 million. That's unheard of in American biotech.

Campbell: Yeah, it was the biggest at the time in biotech, may still be the biggest IPO. I think the reason for that enthusiasm or optimism was because, again, you're targeting this massive, large population that's growing, and currently has totally inadequate treatment options associated with it. But it wasn't just the fact that they were targeting Alzheimer's disease that made this company intriguing to investors. You have to go back and say, what were they trying to do? What was the drug, walk me through what made this company interesting. And I think, you have to start with the founder, Vivek Ramaswamy.

Vivek is a former hedge fund manager, he's done a lot of things. And at the ripe age of 29, he created a company called Roivant. And Roivant had one mission: to go and hunt through all of the drugs that had been discarded by big pharma, because for one reason or another, big pharma didn't want to spend all that money that's associated with late-stage trials because they just have so many different drugs in development that they have to pick and choose. Find those gems that have been accidentally discarded, buy them for pennies on the dollar, and then, using all of the intelligence tools available to you, design a study with the greatest likelihood of producing a positive result. And that's what Vivek's mission was at Axovant. It was to buy a drug on the cheap -- in this case, intepirdine, which is a drug that he picked up from GlaxoSmithKline for $5 million, which now looks like he overpaid, [laughs] but at the time was a bargain-basement price -- and then look at the Phase II studies that were successful and design a Phase III study that mimicked that Phase II success as closely as possible to try and encourage the likelihood of a win.

Douglass: I think this is one of the really important points to draw out here. You're taking this value-investor mindset to what's really a growth industry. The idea of having a cigar butt that somebody else has discarded, it has a couple more puffs in it, is key to value investing. And basically, finding something that has more value than other people really give it to you for, that's the essence of making money. I think that's very attractive. It's a very attractive story. And let's face it -- healthcare, because so much depends on these clinical trials that you can't predict, and so much depends on whether management knows what they're doing, a lot of your small-cap biotech stocks are story stocks. So, they have this story. And frankly, this was a pretty compelling story.

Campbell: Yeah. Michael, he put together an all-star cast, an all-star team on the bench to try to navigate this drug to market. One of the people that he hired early on is Dr. Lawrence Friedhoff. And Dr. Lawrence Friedhoff is the person who is responsible for developing the top-selling Alzheimer's disease drug of all time, which is Aricept. So, you had this great team in place. Theoretically, you had all of the things lined up that, if you were going to be able to get a few extra puffs out of that cigarette butt that you picked up, they were going to be able to be the ones who would allow you to do it. Unfortunately, obviously, we now know that despite all the king's horses and all of the king's men, all of the efforts that were put forth to try to get this drug across the finish line, it was a failure. They missed on the two primary endpoints of the study, same primary endpoints that they had had in the successful Phase II study. They used the best dose, gave them the best likelihood of success based on that mid-stage study, they enrolled the same population of patients that had been successful in that prior study. I mean, they basically did everything that they were supposed to do. But when push comes to shove, they basically bought a pretty-looking car that doesn't have an engine.

Douglass: Right. I think this really highlights the fact that Alzheimer's is an incredibly difficult disease to invest in. Let's face it: you have an over 99% failure rate for drugs that go to the clinic. Almost all the big pharmas at this point have taken a shot at Alzheimer's and failed. It's very clear -- listen, this is an enormous disease population with tremendous need for new development.

Campbell: 5.5 million Americans, Michael, with Alzheimer's disease. And expected to more than double over the course of the next few decades.

Douglass: Yeah, it's enormous, and frankly, it's a frightening diagnosis and there's a lot of clinical need here.

Campbell: And the current treatment options...

Douglass: They're not great.

Campbell: ...like I said earlier, they don't work well.

Douglass: Yeah. Unfortunately, on the flip side, you have all these people going after this holy grail, and it's just not happening, at least thus far. I'll say, for me personally, I was invested in Biogen (NASDAQ:BIIB) in part because of their Alzheimer's treatment that they were putting in the clinic, which is still ongoing through clinical trials. And that was actually one of the reasons I ended up selling my shares. I looked at Biogen and said, "The risk-reward just isn't great across the board. I'm putting way too many of my hopes for this company on an Alzheimer's drug where, frankly, you have a very tiny chance of success." Now, I could end up regretting that, because Biogen's could be the one that ends up working.

Campbell: But, 1 out of 100, Michael.

Douglass: Yeah, those are not good odds.

Campbell: No, they're really not. Maybe it's not a scratch-off ticket you're buying, it's actually the Mega Millions or something, I don't know. In fairness to Biogen, they're researching different targets. Intepirdine was targeting 5-HT6, and the idea was, if we can boost acetylcholine in the brain, we might be able to improve cognition. And there was some reason for thinking that could be true. If you look at Aricept, which is the drug that was studied alongside Intepirdine in this study, what it does is prevent acetylcholine from being broken down. The idea was, let's deliver a one-two punch where we boost it by using Intepirdine, and we prevent it from getting broken down by Aricept, and maybe that gives us a better outcome. The problem is, we just don't fully understand these targets. So, there's a lot of hypothesis that goes into this, thinking, "If I do this, maybe this happens." Maybe not. We just don't fully understand how the brain works, and how do these synapses communicate. And that's why we've had problems. We look at plaque buildup, we look at tangles and how they're strangling off the nerve endings, all of these different things that we think may be the cause of Alzheimer's disease, but we really just don't know yet.

Douglass: Yeah. And that's going to be a continuing problem for drug development in this area. As for Axovant, they have about $298 million in cash as of the end of June, but frankly, the pipeline outside of intepirdine is pretty early stage, and I think we'll probably not be talking too much about Axovant in the near future.

Campbell: It really depends. If you happen to own it, and hopefully you're diversified, so, if you have 5% in it, you suffered a hit, no question, but it's not a deal-breaker. So now you look at it and say, "As an investor, what's next for me?" They do have another study going on right now for Intepirdine that should read out before the end of the year, and that's a Phase IIB study in dementia patients with Lewy bodies, that's a million-plus population, second-most-common form of dementia in the elderly. Obviously, not a lot of confidence right now that that's going to pan out based on what we just saw.

Douglass: But it's possible.

Campbell: But the wild card is, there's a bigger dose of the drug being used in this trial. So who knows.

Douglass: Absolutely. Here's hoping for good results, because frankly, again, these are a rough series of diagnoses, and it would be very nice to have some positive outcomes. But I think neither of us is terribly confident.

Michael Douglass has no position in any of the stocks mentioned. Todd Campbell has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Biogen. The Motley Fool has a disclosure policy.