On the frontier of some of biopharma's lucrative markets, one competitor's stumble can be a win for one of its rivals. And it looks like Johnson & Johnson (JNJ -0.39%) just hit a bump in the road that'll pave the way for Eli Lilly (LLY -1.59%) to be more dominant in one such market within neuroscience.

Here's what happened, and why it's bullish for Lilly's stock.

This growing market now has one less aspiring entrant

As expected, Johnson & Johnson's Q3 earnings report had many items of interest to investors; these included adjusted earnings per share (EPS) falling by 9% year over year, reaching $2.42, as well as a couple of changes to its annual guidance. But as always, there were a few tidbits that were notable for their absence: For instance, there was no mention of one of the company's clinical-stage programs for treating Alzheimer's disease.

That program was investigating, in a phase 2 clinical trial, whether a molecule called seltorexant might help address symptoms of agitation or aggression in patients with probable Alzheimer's disease. The trial is listed as concluded, and, while there haven't been any results published, it no longer appears on the company's list of active pipeline programs. Therefore, the program is terminated, and it probably won't be developed any further for any indication related for Alzheimer's. It is, however, still being tested in late-stage clinical trials as an adjunct treatment for major depressive disorder with insomnia.

Given that management had previously touted seltorexant as a potential blockbuster drug, capable of bringing in as much as $5 billion in revenue annually, the loss of the Alzheimer's portion of the candidate's potential addressable market is significant. J&J's revenue in the third quarter was $22.5 billion, so if sales of the candidate were on the higher end of that range, it would have constituted a modest yet meaningful boost to the top line over time.

The bigger implications, however, are for Eli Lilly, the current leader in Alzheimer's drugs -- and one of just a couple of businesses (the other is Biogen) that have a medicine on the market at all. Now, a heavyweight competitor has one less chance to commercialize a drug. There's no question that this is a bullish development for Lilly.

There's more to success than a clearer competitive landscape

But how big a factor is Johnson & Johnson's stumble in the investment thesis for Eli Lilly?

As of mid-2024, Lilly's biologic drug Kisunla is approved to treat Alzheimer's. Its therapy appears to be slightly more effective than Biogen's drug at warding off cognitive impairment associated with Alzheimer's; it's also more convenient, as it only needs to be administered once per month instead of twice per month. So it likely has an edge in gaining market share over Biogen's entrant.

Kisunla hasn't been on the market for long, though, so there's no data on its sales yet. In July, Wall Street analysts were predicting that it would bring in roughly $5 billion in revenue annually. Now that there's no need to worry about sharing the market with Johnson & Johnson's terminated program, not to mention other late-stage programs from other biopharmas that have recently failed or have been beset by controversy, that estimate could be on the lower end.

Lilly reported $11.3 billion of revenue in Q2. Therefore, if Kisunla lives up to the expectations, proportionally speaking it'll likely be a slightly larger driver of top-line growth than Johnson and Johnson's program would have been for that business. Still, even with J&J's stumble, Kisunla isn't going to be as big a growth driver as other Lilly medicines, like its blockbuster drugs Mounjaro for type 2 diabetes and Zepbound for obesity.

So the case for buying Lilly did get a bit stronger here. If J&J's other clinical-stage Alzheimer's programs strike out too, that will sweeten the pot even more.