FDA Approves New Alzheimer’s Drug But Creators Biogen And Eisai Stock Slides

Key Takeaways

• Leqembi, the first ever drug for treating the cause of Alzheimers has been approved by the FDA
• Even so, the makers of the drug Biogen and Eisai have both fallen on the announcement
• It follows guidance from Medicare and Medicaid in early June on how to access the drug, plus positive commentary from an advisory committee, suggesting that the value of the approval was already built into the stock price

The pharmaceutical industry is often a cycle of booms and busts. Developing a new drug can take years, even decades and cost multiple millions of dollars. But even with massive R&D costs and many drugs never receiving approval, a big hit can make up for all of those costs and losses – and then some.

So when you hear the news that the FDA has approved the first ever drug that is used to slow the development of Alzheimers, you’d think it would be time for shareholders to break out the champagne, right?

Well, unfortunately that’s not the case for shareholders in Japanese pharmaceutical company Eisai and US counterpart Biogen, who have jointly developed this new drug called Leqembi. Eisai saw its stock fall 4.67% on the news and Biogen was down 2.07%.

So why has this supposedly incredible result sent the stock stumbling? Let’s take a closer look.

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What does Leqembi do?

Before we get into the movement of the stock, let’s quickly cover what exactly Leqembi is supposed to do. Up until now, approved Alzehimer drugs have been simply about managing the symptoms of the disease.

Managing symptoms is helpful, but obviously it’s only the very first part of the battle when looking to cure or delay the impact of any type of disease. And with an aging population, Alzheimers is one that is impacting more and more people all the time.

In fact, 73% of Americans over the age of 75 suffer from Alzheimers. So it’s not surprising that finding a drug that cures it would be a huge benefit to the world, and a financial win for the company that creates it.

And that’s the claim with Leqembi. Not that it’s a full on cure, but that it can potentially slow the impacts of the disease by targeting a protein in the brain thought to be one of it’s main causes.

Not only that, but it’s also the first drug of its kind to be approved for broad coverage via Medicare.

Why has Biogen and Eisai stock fallen?

So that sounds like great news, why has the stock of both of these companies fallen? Well like we said at the outset, the pharma game is high risk and high reward. And that high risk doesn’t just come from the chances of not getting a return on the R&D spend, it can also come from lawsuits and major failures due to your approved drugs.

One of the most high profile recent examples is the creator or Oxycontin, Purdue Pharma, who paid settlement damages of a reported $8.3 billion and filed for Chapter 11 bankruptcy.

Controversy of drug efficacy and safety

And this new approval for Leqembi appears to be coming with its fair share of controversy. Firstly, some medical professionals believe that the benefits of the drug are minimal. Neurologist Dr Alberto Espay from the University of Cincinnati College of Medicine even went so far as to say that the level of benefit would not even be noticeable to the patient.

Dr Espay took his criticism even further, saying that the “The odds for brain swelling and hemorrhage are far higher than any actual improvement.”

Now that’s just one doctor, and it’s important to keep in mind that the FDA will have looked at all of the benefits and side effects of Leqembi before deciding to approve it for widespread use. Even so, it’s understandable why some investors might be nervous about statements like those made by Dr Espay.

Buy the rumor, sell the news

It’s an old saying in the investment world but we see it all the time. Markets are forward looking, which means that prices move based on what is expected to happen in the future. If interest rates are predicted to go up, stock prices adjust based on that fact before the actual announcement comes.

If it’s believed that an acquisition is going to happen, the company being taken over will often see their stock price rise in anticipation. If a tech company is expected to announce a new major breakthrough piece of software or hardware, the stock price will move before the announcement is official.

Often, when the actual announcement comes we see all of these traders who got in early dump their stock for a profit. This can create selling pressure which actually sends the price tumbling on the announcement of good news.

Now if you take a look at the share price for Biogen and Eisai, you can see that the stock price had risen in the months prior to the beginning of June, and then have drifted downwards since.

That’s because on June 1st, Medicare and Medicaid provided guidance on how Leqembi could be accessed once it had FDA approval, all but guaranteeing that it was going to happen. Then again on June 9th, an FDA advisory committee provided positive commentary further cementing this view.

So it appears that all of the positive value of the FDA approval has already been reflected in the share price by early June, and this official announcement therefore has no impact on it.

It’s an important lesson to keep in mind for investors, because ‘buy the rumor, sell the news’ is a legitimate trend that we see over and over again. It’s important to keep in mind that this isn’t always the case, in some instances, if an outcome can’t be foreseen, the news itself really can collapse or catapult a share price.

The bottom line

This is a very interesting situation for investors to watch, as it provides a couple of great examples of how the market reacts. Firstly, we’ve seen the risk premium that needs to be attached to pharmaceutical investments, as while the upside can be high, the risk can be too.

Second, it’s a great example of how the release of good news can actually have a negative impact on a stock price, if that news had been expected ahead of time.

For investors who don’t want the headache of getting into the weeds on these strategies and market moves, we’ve got a range of Kits that use the power of AI to take care of the heavy lifting for you. One example is our Emerging Tech Kit, which scans a universe of large cap tech stocks, growth tech stocks and ETFs, to predict how they’re going to perform in the week ahead, before automatically rebalancing accordingly.

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