Investors and analysts alike received some surprising news last week when Biogen (BIIB -0.70%) announced that its Alzheimer's treatment candidate, aducanumab, was not the complete write off that it had initially believed.

While the company had suspended aducanumab's phase 3 clinical trials back in March based on disappointing initial results, later data from some trial participants suggested that the drug had significant potential to restore cognitive function in Alzheimer's patients.

While shares of Biogen surged on that news, it's worth taking the time to dig into the details of precisely what happened here and consider whether it's as big a deal as Wall Street analysts are making it out to be.

An elderly senior assembling a jigsaw puzzle in the shape of a head with a few pieces around the brain missing.


The fall and rise of aducanumab

In late March, Biogen shares lost almost one-third of their value after revealing that based on an early futility analysis, aducanumab was unlikely to meet the primary endpoints of its phase 3 clinical trial. The company discontinued the treatment's development in light of those findings, and the market moved on.

So it was a surprise to essentially everyone outside of Biogen when the company announced last week that it would be submitting the drug for FDA approval after all.

Turns out, when the studies were terminated in March, the data available to the company only ran through late December. But as further data rolled in during the months that followed, ongoing analysis indicated that the drug was effective in restoring cognitive functions in a subset of Alzheimer's patients who had taken it in higher doses.

A potential Alzheimer's breakthrough?

It's extraordinarily rare for a drug candidate to end up meeting its primary endpoint after its phase 3 study has been suspended. It would be a first-of-its-kind event in the Alzheimer's niche, but more importantly, aducanumab is now one of the few Alzheimer's drugs that has ever shown positive results.

The news from Biogen's rivals in the space has been far less optimistic. In July, Amgen and Novartis discontinued trials of umibecestat, the Alzheimer's candidate they had been developing jointly, after data suggested the drug was accelerating patients' cognitive decline. Merck's verubecestat and Roche's crenezumab have also failed to produce results.

While all these drugs were designed to function similarly -- they attack a specific amyloid plaque-causing protein in the brain -- Biogen's drug differs from the rest in one way. Instead of trying to engineer the best protein-attacker possible, Biogen developed its therapy after examining cells from elderly individuals who were unusually resistant to Alzheimer's-induced cognitive decline. That reverse-engineering approach could be the reason why aducanumab is apparently delivering positive results where other hopeful treatments have failed. 

What does this mean for Biogen?

It is estimated that the market for Alzheimer's treatments will be worth $12.4 billion by 2026, when over 5.8 million patients are expected to have been diagnosed with the condition. Should Biogen's drug receive FDA approval, it's not hard to imagine it capturing most of that market, considering the relative lack of competition at this point. However, while the lack of effective Alzheimer's treatments could lead the FDA to expeditiously approve aducanumab, a thumbs-up is by no means assured. The regulator may yet find something worrying in the full data. 

This announcement is also good news for Biogen's second candidate therapy for Alzheimer's, BAN2401, which works via a similar mechanism to aducanumab. Shareholders had lost faith in BAN2401's chances after aducanumab's suspension; now, they may take a more upbeat view on its prospects for eventual approval and commercial success.  Early clinical trial data showed improvement among patients taking the highest doses of BAN2401, but the final results of its phase 3 trial aren't expected to arrive until 2021 or 2022.

Should investors consider Biogen a buy?

At the moment, Biogen trades at a modest 10.2 price-to-earnings ratio, compared to Novartis and Amgen, which trade at P/Es of 16.1 and 17.3, respectively, or Merck's much higher 33.9. Though this makes Biogen -- one of the smaller large-cap biotechs -- comparatively cheaper than its peers, there are some negatives to factor into the investment thesis. In particular, Biogen has less cash on hand than its peers -- $2.1 billion, compared to Amgen's $21.8 billion and Novartis' $8.4 billion. Nor does it offer a dividend, which its competitors do.

A breakthrough in the Alzheimer's market would definitely be a big deal for Biogen, but according to most analysts, the chances of regulatory approval are around 50-50 -- though the more bullish experts say it's 2-to-1 odds in favor of a positive result.

Rather than gambling on the FDA's verdict, long-term investors should adopt a wait-and-see approach. Instead of following the market's optimism in a knee-jerk reaction to the news, it would be best to see how things play out before choosing to make a move on this biotech stock.