A Powerful Buy Signal

Not long ago, I received a call from an investor relations representative who wanted to know if I’d be interested in hearing about a small biotech company with a drug candidate in Phase 2 trials.

Do Yankees fans want Aaron Judge back in the lineup?

Phase 2 trials are my favorite time to get involved in a biotech company. I’ll explain why in a moment. But first, a quick review of the phases of clinical trials…

The Three Distinct Phases of Clinical Trials

Before a new experimental drug is tried in humans, it’s put to work in test tubes, then animals. Once it’s ready for human trials, it’s tested in three distinct phases.

The Phase 1 trial is conducted with a limited number of subjects, usually fewer than 50. In cancer trials, the drug will be given to patients sometimes as a last resort.

Drugs targeting diseases other than cancer are given to healthy volunteers so doctors can better understand how the drug reacts inside the human body.

If a drug is deemed safe after this period, the company will proceed to Phase 2. This trial usually consists of a few dozen to several hundred patients receiving varying dosage levels of the particular drug.

The data that’s considered most accurate is from a trial that’s “double blind” (neither the patient nor the doctor knows if the patient has received the drug) and placebo-controlled (compared with a placebo or standard of care).

Some, but not most, Phase 2 trials are double blind and placebo-controlled.

In Phase 3, companies test hundreds to thousands of patients. If the data proves that the drug is safe and effective, the company will usually apply for approval.

Naturally, the more patients who take part in a trial, the greater the chance the drug fails. For example, the drug may not work, or there may be unexpected side effects. This is especially common in cancer trials, where the response rates are low, even with approved drugs.

Positive results in Phase 3 can push a stock higher as investors begin focusing on approval and the sales and profits that could follow. However, it doesn’t always work that way.

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