Investing in biotech stocks can be incredibly rewarding, financially and personally, says Marc Lichtenfeld writing in Investment U. However, timing is crucial to success. Here, Marc walks investors through the three phases of the drug development process…

Investing in Biotech - Phase IThe first trial involving humans is a Phase I trial. The study typically consists of a small number (under 100) of healthy volunteers. Researchers study how the drug interacts inside the human body. Safety is an important component as well.

Phase I trials are so early in the process that biotech investors should not get too excited about any results coming out of these studies.

Investing in Biotech - Phase II

Phase II trials are often the first time the company will attempt to prove that the drug works, inside a human, against the intended disease. A typical Phase II study will consist of anywhere from a few dozen to a few hundred patients who have the particular condition in which the drug is being studied to combat. Some companies will run several Phase II studies at once in different diseases.

Scientists basically want to see the drug works and if it is safe.

Phase II trials can be conducted in many different ways. Sometimes the data is blinded, meaning patients, their doctors and/or the company will not be aware of which patients are taking the drug and which are receiving a placebo. Other times, the trial will be a study of different doses of the drug, in which case patients and their doctors will know that they are receiving the treatment.

Phase II is also when many early investors start to get excited.

• Often, after a company reports positive Phase II data, the stock price will jump.
• Strong data will be the first real indication that the drug works.
• After a price spike, many early investors will take profits. You’ll often see some of the venture capitalists and insiders sell shares.

Since so few drugs actually get approved, taking the money and running is not a bad strategy when the share price climbs.

But trying to figure out which Phase I candidates will eventually report good Phase II data is a tough game to play and involves a lot of risk.

Investing in Biotech - Phase III

This is considered a pivotal trial where the company will prove or confirm in a large patient population that the drug is safe and effective. Between several hundred and several thousand patients will be enrolled in the trial, usually in various testing centers. The drug is usually tested against a placebo, with the data blinded from doctors, patients and the company, until the trial is over.

Typically, after a Phase III trial, the company will apply to the FDA for the drug’s approval.

Like in Phase II, a positive outcome in Phase III will frequently result in a surge in stock price as investors in biotech anticipate FDA approval and the sales and profits to follow.

Trying to figure out which drugs will work and whose stock will benefit as a result is both difficult and lucrative. But understanding when to invest based off what stage a company’s drug is in can be just as important. Those who do it well can be richly rewarded.

Source: How to Profit from the 3 ‘Phases’