UPDATE 3-Lilly halts Alzheimer's drug as symptoms worsen

* Drug tied to worsening of cognition, link to skin cancer

* Still testing other late-stage Alzheimer's drug

* Concerns raised on Lilly's Cymbalta for chronic pain

* Shares fall 2.4 percent (Changes first sentence, adds analyst comment, background)

By Lewis Krauskopf

NEW YORK, Aug 17 (Reuters) - Eli Lilly and Co (LLY.N) halted development of an Alzheimer's drug after it worsened patients' symptoms in late-stage studies, dealing a fresh blow to the U.S. drugmaker and to research to fight the disease.

The Alzheimer's setback comes as U.S. regulators raised concerns about using Lilly's antidepressant Cymbalta to treat chronic pain and follows patent case losses on two other key products in the last month. [ID:nN17117870]

Shares in Lilly fell 2.4 percent on investor concerns that the company will be unable to stem an increasingly steep revenue decline expected in the next few years as more of its drugs lose patent protection.

"Their ongoing business is going to run into massive problems ... Without a pipeline, you obviously just take that hit with no replacement of revenue," said Hapoalim Securities analyst Jon LeCroy.

The setbacks increase pressure on Lilly to strike further deals for new drugs, but rivals also are on the hunt, he said. France's Sanofi-Aventis (SASY.PA) is trying to buy U.S. biotech Genzyme GENZ.O for $18.4 billion, while other drugmakers are pursuing smaller acquisitions or licensing deals.

"Everyone is under the same pressure, so even if they're (Lilly) more desperate than other companies, everyone is going after the same targets," LeCroy said.

The failure for Alzheimer's drug semagacestat eliminates one of a few treatments in late-stage development for the degenerative aging disease, which afflicts 26 million people.

Drugs such as Pfizer Inc's (PFE.N) Aricept only improve symptoms marginally, and development of effective treatments has proved elusive.

COGNITION WORSENS

The preliminary semagacestat results stem from two long-term Phase III studies. The drug was compared with placebo in more than 2,600 patients with mild to moderate Alzheimer's.

An interim analysis of the studies showed patients on semagacestat saw a deterioration in cognition and the ability to perform daily tasks compared to those on placebo. Data also showed semagacestat was tied to a higher risk of skin cancer.

Lilly said it was encouraging trial researchers to take all patients off the medicine.

Semagacestat is a gamma secretase inhibitor designed to interfere in a key building block of beta amyloid, a toxic protein that forms sticky brain plaques in people with Alzheimer's. [ID:nN17143270]

It advanced to late-stage trials largely on biomarker data, such as its ability to lower levels of amyloid in cerebral spinal fluid, rather than on evidence that it was improving Alzheimer's symptoms.

Scientists had feared that gamma secretase inhibitors might cause side effects because they interfere with a biological process called Notch signaling, needed in other cellular functions.

Lilly said the decision did not affect clinical trials of solanezumab, its other Alzheimer's drug in Phase III study. Although both experimental drugs focus on the amyloid-beta protein, they work differently.

Semagacestat's setback follows the late-stage failure in March of a high-profile Alzheimer's drug from Medivation Inc (MDVN.O) and Pfizer. [ID:nN03217130]

TEMPORARY SALVE IN CYMBALTA?

Although Alzheimer's drugs are viewed as long shots, Lilly is desperate for new products as its top-selling Zyprexa schizophrenia drug faces generic rivals late next year.

Last week, Lilly lost a patent case that could clear the way for generic versions of its $600 million-a-year Strattera for attention deficit hyperactivity disorder. [ID:nN12148299] A U.S. Court of Appeals for the Federal Circuit late last month backed a lower court decision that shot down a key patent on cancer drug Gemzar. [ID:nN28204615]

Lilly is expected to face a bigger hit from generic competition on its top-selling drugs than any rival between now and 2014, said Deutsche Bank analyst Barbara Ryan. She expects Lilly's earnings to fall 35 percent over the period.

Ryan had not firmly built sales of semagacestat into her outlook but had a "placeholder" estimate of $40 million in 2013 and $100 million in 2014.

"It's disappointing, but given that this field has been a graveyard for many Alzheimer's products in development it's not surprising," Ryan said.

Lilly expects a third-quarter charge of 3 cents to 4 cents per share for the halt, but affirmed its 2010 profit forecast.

The chronic-pain approval for Cymbalta could provide at least a temporary salve to Lilly before the medicine loses U.S. marketing exclusivity as soon as June 2013.

FDA staff, in documents released on the agency's website on Tuesday, said they would ask a panel of outside advisers about the potential for liver toxicity and whether broadening use of the drug would be appropriate. A public meeting will be held on Thursday to weigh the potential new use. (Reporting by Lewis Krauskopf and Ransdell Pierson; Additional reporting by Julie Steenhuysen, Toni Clarke and Susan Heavey; Editing by Michele Gershberg, Lisa Von Ahn and Robert MacMillan)