Solanezumab failed to help patients with mild to moderate symptoms of the memory-robbing disease in two large studies which concluded last summer. The drug delayed by more than 30 percent declines in cognitive function of those with only mild symptoms, but did not slow the loss of abilities to conduct daily activities, like dressing and driving. Eli Lilly shares fell 3.1 percent in early trading.
"Some investors were hoping that Lilly would file for approval now based on existing drug data, but that was overly optimistic," said Richard Purkiss -- an analyst with Atlantic Equities who predicts sales of $5 billion to $10 billion for solanezumab if it is eventually approved.
Lilly said it had decided, after talks with the U.S. Food and Drug Administration and European and Canadian regulators, not to seek U.S. approval of solanezumab, at least for now.
The company plans to begin the new Phase III study by no later than the third quarter of 2013.
An estimated 5 million Americans have Alzheimer's, the biggest cause of dementia. More than 35 million people worldwide are believed to have dementia, including Alzheimer's disease, and those numbers are expected to rise as more people live longer.
Lilly badly needs new medicines because its earnings will plunge through 2014 as its biggest products face competition from cheaper generics.
Solanezumab could play a big role in reviving company results, should it win approval, said Leerink Swann analyst Seamus Fernandez.
A similar, closely watched drug from Pfizer Inc, bapineuzumab, earlier this year also failed in big studies. Researchers did not cite any benefits to patients with mild symptoms.
Both drugs work by blocking beta amyloid - protein fragments that form toxic plaques in the brain that are considered a hallmark of Alzheimer's disease.
Lilly, along with Merck & Co Inc and others, is developing another class of drugs that block amyloid through a different route - by inhibiting production of an enzyme called beta secretase.
Leerink Swann's Fernandez said the BACE inhibitors may be "closer to the Holy Grail" in treating Alzheimer's than drugs like solanezumab, and that a safe and effective one could capture annual sales of $10 billion or more.
Lilly research chief Jan Lundberg, in an interview with Reuters last week, predicted the company will do for Alzheimer's patients what it did almost a century ago for diabetics - find a breakthrough treatment, even though skeptics say it could take years.
(Reporting by Ransdell Pierson; Editing by Jeffrey Benkoe and Theodore d'Afflisio)