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Biotech Rally Sparked by Alzheimer’s Drug Has Staying Power

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Wall Street is rightfully celebrating the first approval of an Alzheimer’s disease treatment in nearly two decades. A familiar threat is likely to re-emerge, but investors won’t likely be caught off guard.

The Food and Drug Administration gave the green light to

Biogen’s

BIIB -4.36%

drug Aduhelm on Monday. Significant controversy surrounds the approval. An outside committee of experts assembled by the FDA recommended not to approve the drug last year. Three members of the committee have since resigned over the decision, which one former member called a debacle.

Dust-up or not, stock prices are moving higher. Biogen shares rocketed 38% higher that day, and the rest of the sector has come along for the ride.

Eli Lilly,

LLY -4.05%

which has a similar Alzheimer’s drug under development, rallied 10% on Monday. The Nasdaq Biotechnology Index rose 6% for the week.

There is reason to expect the trend to continue. Alzheimer’s has been a particularly confounding corner of drug research for decades; a 2018 analysis found that 146 experimental drugs had failed in clinical trials over the past 20 years.

In a flash, that history suddenly matters little. The FDA’s decision to approve Aduhelm despite significant concerns over its efficacy changes the outlook for those research efforts. Now, drugs that reduce the buildup of a substance known as amyloid, like Aduhelm, seem more likely to reach the market. Even the perception of a more forgiving regulatory agency is enough to spark fresh enthusiasm for biotech, and not only for companies with an Alzheimer’s program. For instance, regulatory flexibility would boost the business prospects of biotechs working to develop drugs that treat rare diseases.

But things might get more complicated as midterm elections approach. Biogen’s drug, already the subject of significant controversy, lists for $56,000 a year. What is more, most patients with the disease are eligible for Medicare, meaning taxpayers will be footing a large chunk of the bill.

Threats from politicians to crack down on high drug prices before an election have sunk the sector in the recent past. An index of small biotech stocks fell about 50% in late 2015.

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Investors shouldn’t dismiss the possibility of a sequel, but it isn’t the most likely outcome. This time around, politicians might not be in such a hurry to criticize the Aduhelm price. After all, there are more than six million people in the U.S. with Alzheimer’s disease, and a far greater number help care for an Alzheimer’s patient. That is a large group of potential voters that has desperately awaited any sort of suitable treatment option.

What is more, the 2015 blowup happened with the sector at record highs, while recent trading has been fairly muted. The biotech index is up 7% this year, compared with 13% for the S&P 500, and sits 6% below the record set back in February.

Never mind the politicians. It is time for investors to say yes to drugs.

Write to Charley Grant at charles.grant@wsj.com

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