As expected, Lilly said the drug didn't meet primary goals in a late-stage human trial. However, Lilly said the drug, solanezumab, did show some promise and the company plans to continue studying it. 

The news was a surprise as many investors had given up on the drug. The initial study data suggested the medicine slowed the cognitive decline -- which usually means things like memory loss -- in patients with mild to moderate Alzheimer's, but did not   improve mental ability.

"We recognize that the solanezumab studies did not meet their primary endpoints, but we are encouraged by the pooled data that appear to show a slowing of cognitive decline," said John C. Lechleiter, chief executive officer of Lilly. "We intend to discuss these data with regulatory authorities to gain their insights on potential next steps."

Shares of Lilly jumped 4% to $44 in trading Friday morning, though the gains were pared to 2.55% around noon. 

However, some analysts cautioned that the drug still has a way to go before being approved.

"Basically the odds of approval just went up from (about) 10% to maybe 20 to 30%," ISI Group analyst Mark Schoenebaum says. He calls chances for the drug's success "still high risk" but notes the study results are much better than expected.

The data will be very controversial, he adds. Had the drug been shown to clearly meet its study goals, Lilly's stock might have jumped 50%, the analyst says. On the other hand, the stock was expected to drop on failure, even though expectations for a positive result were low.

Sentiment toward Lilly's drug soured after a similar treatment being developed by Pfizer (PFE), Johnson & Johnson (JNJ) and Elan (ELN) failed in studies. The disappointing results prompted those companies to pull the plug on their clinical program earlier this month.  

Like other big drug companies, Lilly needs to replace sales of big products that have lost or are losing patent protection, opening them to generic competition.

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