When the Food and Drug Administration (FDA) rejects a key drug from a healthcare company, it can send the stock spiraling into a sell-off. But that's not what happened to shares of Eli Lilly (LLY -2.63%) in January, even though the FDA didn't grant accelerated approval to the company's promising Alzheimer's treatment, donanemab. So what did happen?
There was insufficient data
In order for the FDA to be confident in a drug's effectiveness, it needs to have a large enough sample size to evaluate it. Unfortunately, in Eli Lilly's case, it simply didn't have enough data points for the agency to make a positive conclusion about the treatment and grant it accelerated approval.
The healthcare company received a letter from the FDA stating that the rejection happened "due to the limited number of patients with at least 12 months of drug exposure data provided in the submission." It's not a negative for the business, especially when you consider why Eli Lilly didn't have enough data for the FDA.
Donanemab was simply too effective
The limited number of patients was the the only reason that Eli Lilly's application for accelerated approval was denied. Ironically, it was the drug's own effectiveness that was a hurdle for the approval, because the clinical trial that produced the data allowed patients to stop dosing if the treatment was proving to be effective -- and it was.
The FDA needed at least 100 patients who were on donanemab for 12 months; however, Eli Lilly says that "while the trial included more than 100 patients treated with donanemab, due to the speed of plaque reduction, many patients were able to stop dosing as early as 6 months of treatment." It's a safe assumption that donanemab otherwise would have obtained accelerated approval because earlier in the month, the FDA granted such approval to Biogen's lecanemab, which, like donanemab, was effective in reducing plaque in the brain.
Why the rejection isn't a big blow for Eli Lilly
Why isn't this a problem for Eli Lilly? For investors and analysts to get bullish on an Alzheimer's treatment, a drugmaker needs to obtain traditional rather than accelerated approval, which still requires a confirmatory trial. That's because without traditional approval, patients can't obtain coverage for the treatment from Medicare unless they're involved in clinical trials. And for a treatment that can cost $20,000 or more per year, Medicare coverage is essential to ensure that it can reach a wide pool of patients. Obtaining just accelerated approval is insufficient, which explains why Biogen's stock didn't take off after lecanemab's accelerated approval.
For Eli Lilly and Biogen, the big test remains whether either of their Alzheimer's treatments obtains full approval. If that happens, both stocks could be off to the races as that would instantly bolster their growth prospects. Analysts project that if donanemab is successful, it could rake in up to $6 billion in revenue by 2026.
Eli Lilly will have phase 3 data available for donanemab as early as the second quarter of this year, and it will use data from that trial as the basis for its application for traditional approval. A positive readout from the trial could have a much more significant impact on the stock than accelerated approval would have had, given the potential implications for full approval from the FDA.
Eli Lilly remains a great buy
Not obtaining accelerated approval doesn't have much of an impact on donanemab's potential. The more important takeaway for investors is that the drug was highly effective, and that's why the rejection can be seen as great news. Although it doesn't mean that full traditional approval is inevitable, it definitely improves the odds that donanemab could attain it.
Eli Lilly is a highly profitable business that generates a net margin of 20%. It has some fantastic growth opportunities ahead, and one of those is donanemab. And so despite a seemingly high valuation, it's not too late to buy the stock.
