Why Phase 2 Trials Are Important To Investors (And Why I’m Enrolled In One)

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), which 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.

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