I recently 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 II
Would Rory McIlroy have liked a do-over on Sunday at
The Three Distinct Phases of Clinical Trials
Before a new experimental drug is tried in humans, it's put to
work in test tubes and then animals. Once it's ready for human
trials, it's tested in three distinct phases.
The Phase I 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. For drugs targeting
many other diseases, they're given to healthy volunteers so doctors
can better understand how the drug reacts inside the human
If a drug is deemed safe after this period, the company will
proceed to Phase II. This trial usually consists of a few dozen to
several hundred patients receiving varying dosage levels of the
The data that's considered most accurate is from a trial
that's"double blind" (neither the patient nor the doctor know if
the patient has received the drug) and placebo controlled (compared
to a placebo or standard of care). Some, but not most, Phase II
trials are double blind and placebo controlled.
In Phase III, 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 III 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. Many drugs
with seemingly strong Phase III results have been rejected by the
FDA for one reason or another. This can crush investors who
followed a drug stock all the way to the end.
) has seen its stock rise and fall sharply several times. Investors
got their hopes up on
the company's inhaled insulin product Afrezza
, only to see the FDA reject it time and again over safety
This is one reason why Phase II is the real sweet spot for
Phase II Trials: A Profitable Time to be Involved in
Phase II is often the most profitable time to be involved in a
small cap biotech stock
. Many times, Phase II results are positive. Sometimes it's because
the drug works. And other times it's because the trial is rigged to
provide positive results.
), a company that stirs passion (both positive and negative) among
biotech investors, ran a Phase II study on the head and neck cancer
drug Multikine. However, rather than test the drug against other
existing treatments, Multikine was given along with an existing
At the end of the trial, Cel-Sci boasted of a 12 percent
complete response rate. But it was impossible to determine if the
two out of 19 patients who had a complete response saw their tumors
disappear due to Multikine or due to the other treatment.
So, why would a company do that?
To show good results in the hopes of raising additional
There are also times when the science is conducted properly and
Phase II claims are valid, but the drug isn't able to replicate
results in a Phase III trial. Remember, a Phase II trial usually
contains a much smaller sample size, which can easily distort
Very often, when a company reports strong Phase II results, the
stock takes off as it is the first real indication that it might be
approvable. Investors get excited; potential partners begin
sniffing around; and the media begins to cover the drug's
potential. Even though at this point things are just starting to
get promising, it's often a great time to take the money and
Phase III, on the other hand, is fraught with risk. These trials
are expensive to run, and there's no guarantee that the drug will
again show strong results. For example, there have been some
instances where the drug replicated its earlier results, but there
was a stronger than expected response from the placebo group,
narrowing the difference that the drug made and making it appear
Phase II Takes Off and Fails in Phase III
There are many instances of stocks that have taken off during or
after Phase II results, where investors made lots of money but then
suffered losses when the drug failed in Phase III.
A few real world examples - my subscribers made money on
) despite a disastrous Phase III trial that resulted in the stock
Medivation had a drug for Alzheimer's called Dimebon. The Phase
II results were outstanding. They showed a slower deterioration and
fewer side effects than the existing therapies, including
) Aricept. Despite skeptics' doubts, the stock ran in anticipation
of Phase III results. If the data was strong and the drug got
approved, it would likely be an immediate blockbuster.
After the stock doubled, I recommended that subscribers take
half of their profits off of the table. Note, this is not the usual
philosophy, but with
small-cap biotech stocks
that can plummet on one piece of news, I often suggest readers take
their risk capital off the table once the stock has risen 100
percent or more.
So with investors now playing with the"house's money" after
taking their initial investment back, we waited for the Phase III
It turns out, the drug didn't work.
The stock got crushed, and we sold out our remaining position.
But because we had sold half at a 100 percent profit, we still
pocketed a 37 percent gain. Not bad for a failed drug…
If The Smart Money Leaves … Take Your Profits and
There have been several other instances where something similar
has occurred. We made 102 percent gains on
) and 42 percent gains on
(MELA), despite FDA rejections.
Although in these cases the Phase III trials were not deemed a
failure, the FDA has rejected the applications for approval until
more questions are answered.
Lastly, after positive Phase II results, you sometimes see the
early investors and the venture capitalists exit the position.
They've made their money and don't want to stick around for the
risky Phase III. If the smart money is leaving, it may be a good
idea to follow them out the door. At least with part of your
There's nothing wrong with hanging around and seeing if a small
biotech company can get the ball across the goal line and get its
drug approved. But considering that less than half of all drugs in
Phase II actually make it to the market, it's a smart idea to take
profits along the way when you can.
Investment U expressly forbids its writers from having a financial
interest in any security they recommend to our subscribers. All
employees and agents of Investment U (and affiliated companies)
must wait 24 hours after an initial trade recommendation is
published on online - or 72 hours after a direct mail publication
is sent - before acting on that recommendation.
Petrobras Earnings Not Great for Field Service