INDIANAPOLIS ( TheStreet) -- Eli Lilly ( LLY) was forced to halt development of an experimental Alzheimer's disease drug after an early look at results from two late-stage clinical trials determined the drug to be ineffective.

Lilly shares fell 2% to $34.75 in Tuesday's pre-market trading on news of the setback for the Alzheimer's drug semagacestat, one of two drugs being in the company's pipeline that are in late-stage studies against the neuro-degenerative disease.

The failure of semagacestat will also heighten concerns about Lilly's future growth given the looming loss of patent protection through 2014 on drugs that presently account for 60% of the company's revenue.

Tuesday, Lilly said it would take a charge of 3-4 cents a share in the third quarter to account for the halting of the semagacestat clinical trials. The company reiterated 2010 guidance of $4.44 to $4.59 a share on a reported basis.

The two phase III clinical trials of semagacestat enrolled more than 2,600 patients with mild to moderate Alzheimer's, randomizing them to treatment with semagacestat or a placebo. An interim analysis of the studies found that semagacestat-treated patients were performing worse on tests of cognition and ability to complete daily living tasks compared to patients treated with a placebo. In addition, semagacestat patients were at a higher risk for developing skin cancer.

Lilly said Tuesday that phase III trials involving the company's other late-stage Alzheimer's drug solanezumab are continuing.

Both semagacestat and solanezumab are designed to reduce the levels of amyloid beta plaques, protein substances that attach to and destroy neurons in the brain. Amyloid beta is thought to one of the causes of Alzheimer's.

Semagacestat works by inhibiting an enzyme, gamma secretase, which the body uses to form amyloid beta plaques.

Earlier this year, Pfizer ( PFE) and Medivation ( MDVN) said a phase III study of their Alzheimer's drug Dimebon also failed, although additional clinical trials of that drug continue.

-- Reported by Adam Feuerstein in Boston.

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Adam Feuerstein writes regularly for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. Feuerstein appreciates your feedback; click here to send him an email.

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