Why Phase 2 Trials Are Important to Investors

By Marc Lichtenfeld, Wealthy Retirement, Thursday, April 8

The biotech sector tends to attract investors who are interested in exciting new medical advances and are drawn to big profits.

There are lots of ways to invest in the sector. Some investors prefer the comfort of big profitable biotechs, like Gilead Sciences (Nasdaq: GILD) and Amgen (Nasdaq: AMGN), that have various product offerings and deep pipelines.

Others would rather take a chance on a small biotech stock that could be a home run.

No other sectors move as much or as quickly as biotech.

Consider Five Prime Therapeutics (Nasdaq: FPRX). In November, the stock was trading at around $5. It jumped 349% in one day on positive Phase 2 data for its cancer drug bemarituzumab.

Then last month, the stock spiked 78% in one day on news it is being acquired by Amgen. Five Prime is now up 605% since the day before the Phase 2 announcement in November.

Five Prime Therapeutics Leaps Higher

Five Prime is a perfect illustration of why Phase 2 trials are my sweet spot in the biotech sector.

First, a brief discussion of the various phases of clinical trials…

  • Phase 1 is a small trial of healthy volunteers. The drug is studied to understand how it works in the human body.

    Cancer drugs are an exception in that they are not given to healthy volunteers because they are typically too toxic. Instead, they are given to cancer patients.

  • Phase 2 is a midsized trial with more patients. Safety and efficacy are analyzed.
  • Phase 3 is a large trial where an optimal dose is studied for safety and efficacy. The data from this trial is what is submitted to regulatory agencies for approval.

Data from Phase 2 trials is usually the first real indication that a drug may be safe and effective. There’s a lot more work to be done before it crosses the finish line and gets to market.

And not all drugs do. Roughly half of all drugs with a successful Phase 2 trial fail in Phase 3. But Phase 2 is the first time you can realistically begin to think the company may have something worthwhile.

For that reason, stocks can spike on strong Phase 2 data, especially smaller stocks. And early investors in the company will often sell some of their position so as not to risk a failure in Phase 3.

So when investing in biotech, I like to find small cap and midcap stocks with upcoming Phase 2 data that can act as a big catalyst for a price move.

On a related note, as I mentioned last week, I’d like to share a personal experience regarding this factor. It has nothing to do with investing.

After 17 years of covering the biotech sector, following clinical trials and analyzing their data, I enrolled in one.

I am participating in a Phase 2 trial for a COVID-19 vaccine. There’s no placebo, so I know I’m getting the vaccine. I just don’t know which dosage.

It’s a fascinating and profound experience knowing that I am helping to expand the knowledge about how to prevent this virus. I have to keep a “diary” of side effects, take my temperature every night for a week after getting each shot and return roughly once per month for about a year to get blood drawn.

I’ve been asked by several people, now that I’ve received both shots, whether I’ll return for all of those follow-up visits. Of course I will. I enrolled in good faith in order to get a vaccine earlier than I would have been eligible to otherwise.

And I use clinical trial data all the time in my work. Though it may be inconvenient, I’m going to make sure that the scientific community gets the information it needs from me in order to reach a sound conclusion about this vaccine.

This experience has made me appreciate much more how many people are involved in the clinical trial process.

Certainly, brilliant scientists create the drugs and vaccines, but it takes an army of people, from the doctors overseeing the trial to the phlebotomists drawing blood to the nurses examining the volunteers to the case managers keeping careful track of records to the other staff making sure patients have all of the information they need, etc.

There’s not an investment angle here, as the company that made the vaccine is a large pharma and, obviously, is late to the party.

If the drug is proven safe and effective and is approved, it will be one of several that can be administered for the prevention of COVID-19. But that likely won’t be decided until the end of the year at the earliest.

It likely won’t move the needle much for this particular company’s revenue, but you never know what discoveries it will lead to.

So if you’re looking for ideas to invest in the biotech sector, look for upcoming Phase 2 trial data releases as a good place to start your research. You know that at the very least you may have a powerful catalyst to move your stock in the near future.

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