Let’s face it…biotech stocks are difficult to understand when you’re first starting out. Biotech stocks are volatile, and your account could suffer, if you don’t know what you’re looking for or understand what a catalyst is indicating for a company. Now, one of the most important things you need to look for and understand when trading or investing in biotech stocks are clinical trials. Clinical trials are simply the testing of a treatment for a specified illness or disease, and it’s typically comprised of three phases, but sometimes you may see studies that include four phases of clinical trials. However, we’ll just be focusing on the Phase I, Phase II and Phase III trials and what they mean for biotech stocks.
Phase I Trial
Now, the Phase I trial, or Phase I study, is usually a study that is conducting on the dosage of healthy volunteers. That in mind, the end goal of a Phase I clinical trial is to figure out the maximum tolerable dosage in healthy volunteers. In this phase of the clinical trials, the company would conduct a pharmacokinetics (PK), which determines the way the human removes, or metabolizes, the drug from the human body, and, or, pharmacodynamics (PD), which aims to determine the safety and tolerance level of the drug, study. That said, if the company has positive results, it would move onto the Phase II stage of the clinical trial. Since this would only be the first phase of the clinical trial, it would not carry too much weight and affect biotech stocks as much as the Phase II or Phase III trials.
Phase II Trial Could Affect Biotech Stocks
As stated earlier, if the company has positive results in the Phase I trial, it would move onto a Phase II trial. Now, the Phase II trial would have more of an effect on a biotech or pharmaceutical company, depending on whether the results are positive or negative. The Phase II trial is typically divided into Phase IIa and Phase IIb. The Phase IIa trial is tested on a small patient population, and is done so in order to determine the dosing requirements in that sample population. The Phase IIb trial is conducted in order to test the initial efficacy of the treatment. That said, the Phase II trial is typically done to determine the safety, as well as efficacy, in some cases, of the treatment.
Let’s take a look an example of how a biotech stock was affected by its phase II clinical trial data.
Capricor Therapeutics Inc (NASDAQ: CAPR) announced, on May 12, 2017, that its ALLSTAR Phase II trial of CAP-1002 showed a low probability of achieving statistically significant difference in the 12-month primary efficacy endpoint of percentage change from the baseline infarct size as a percent of left ventricular mass, measured by cardiac magnetic resonance imaging (MRI).
Here’s a quick look at the press release:
Source: PR Newswire
That in mind, this would be considered a negative catalyst, surrounding the Phase II clinical trial.
Now, let’s see what happened to the stock that day.
CAPR dropped over 50%, from the close on May 11, 2017. Although this was a negative catalyst, the company was still looking to perform analyses of the data in an attempt to better understand the basis for the outcome.
That in mind, you would want to take into account data surrounding Phase II trials, as it could potentially uncover some trading opportunities.
Now, typically, if a company reports negative data in its Phase II trial, it would look to run more tests, or it would stop testing on the treatment. On the other hand, if it’s positive data, the company would move on the Phase III trial.
Phase III Trial
The Phase III trial is typically the last stage of the clinical trial. However, there could be a Phase IV, which is typically conducted after the treatment has been marketed, in order to gather information on the treatment’s efficacy in various populations. Getting back to the Phase III clinical trial.
In the Phase III stage of the clinical trials, the company would conduct a large scale clinical trial in order the further test the safety and efficacy of the treatment. In this stage, there is typically the drug branch and the control branch. Now, the control branch is typically a placebo, and the treatment results are tested against those of the placebo. Again, the Phase III trial is done in order confirm the efficacy of the treatment, as well as monitor the side effects of the treatment.
Let’s take a look at an example of a biotech stock that announced positive data in a Phase III trial.
TG Therapeutics Inc (NASDAQ: TGTX) announced positive data from its Phase III GENUINE Trial of TG-1101 in combination with Ibrutinib in patients with high-risk chronic lymphocytic leukemia. Now, typically, if a company has a cancer treatment and it reports data, the stock typically rises significantly, and the opposite is true.
Check out the hourly chart on TGTX, after it provided this update in its Phase III trial.
That in mind, the stock closed up over 17%, from the previous day’s close, after it announced this pivotal data.
The Bottom Line
If you’re looking to get into biotech stocks, you should look at the company website, and check out the drugs or treatments on the company website. Additionally, you would want to take into account the stages these treatments are in, and when the data for those trials are going to be reported, because this could impact the stock significantly. Typically, you would want to focus on the later stages of the clinical trials, that is, the Phase II and Phase III trials.
Typically, news sources would indicate whether it’s positive or negative data. If you’re risk averse, you would not want to hold onto a stock if it’s going to be releasing data for its Phase II or Phase III trials because these clinical trials are typically binary events…the company either reports good or bad data, and the stock would rise, or fall, respectively. Trading and investing in biotech stocks is pretty overwhelming, but knowing how clinical trials operate should get you jump started on this industry.