Every sector, and the industries within it, has their own unique catalysts that will cause significant volatility in stocks. In the healthcare and biotech space, that catalyst is clinical trials.
The clinical trial process is how drugs get approved by the Food & Drug Administration for mass production, and is tightly regulated. Considering drug companies make money by selling drugs—and it takes an incredible amount of time and capital to bring a drug to market—this process is essentially the lifeblood for investors.
Below are some of the key terms everyone who trades or invests in drug stocks should know. Each one of these terms can be the catalyst for immediate upward or downward movement in biotech stocks.
Every drug trial has 3 clinical phases. The first, Phase 1, involves a between 20-100 subjects who have the disease in question and takes place over the course of several months. It’s meant to determine the drug’s general safety and tolerable dosages. According to the FDA, approximately 70% of drugs successfully complete this stage.
The Phase 2 trial involves several hundred patients and measures how effective the drug is in treating the illness, what dosages are safe for patients to take, and any adverse side effects the drug may have. This trial can take up to 2 years, and only about 33% of drugs make it past this phase.
The Phase 3 trial involves as many as 3,000 patients looks for these same results over a larger population of test subjects. This can take up to 4 years, with 25-30% of drugs passing.
Every trial will have a primary endpoint that determines its success or failure. When you see a headline that says a drug “met the primary endpoint”, that indicates the trial worked and that the drug can move on to the next phase.
This is great news for the company, and it’s very common for stocks to immediately spike higher as soon as the press release comes out.
It’s likewise equally bad if a drug “missed the primary endpoint.” That indicates that the company will have to go back and try again. Stocks will very often fall on this headline.
The Prescription Drug User Fee Act (PDUFA) date is essentially the deadline for the FDA to approve or deny a drug. Many companies will publicize their PDUFA dates ahead of time, giving investors a heads up on when there’s likely to be significant volatility in the stock.
If the FDA chooses not to approve a drug, they will issue a Complete Response Letter (CRL) that outlines why they didn’t approve it, and what problems the company needs to fix in order to re-submit the drug and get approval.
CRL’s are very negative catalysts for the companies in question, as it essentially equates to a company finding out at the finish line that they have to go back and re-do the race.
Sometimes the FDA will create an advisory committee to review a specific drug before the PDUFA date. While not bound by the committee’s recommendation, the FDA will generally side with the committee’s advice on whether to approve a drug. A positive review from the AdCom is therefore usually seen as very good news.
The drug approval process is long, complicated, and expensive. The name of the game for these companies is moving forward one step at a time. For investors, these are the most important headlines a drug company will have.
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