An Investor’s Guide to Understanding Clinical Trials – and the Risks Involved

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Over the past year, retail investors have made a comeback. At a time when stock markets were in a free fall, they reinvigorated many sectors – including biotech.

As the world desperately sought a cure for COVID-19, home-bound investors shovelled money into biotech research. And thanks to the massive cash infusion, we now have a slate of viable vaccines and treatments.

But recent results don’t negate reality. Biotech is one of the most volatile sectors in our economy. For every drug that gets approved, countless others land in the reject pile, along with the fortunes of countless biotech speculators.

Know this: When you’re picking biotech stocks, you just can’t check out and call it a day. If you seek success in this sector, you must understand how the clinical trial process works. In this post, we’ll fill you in on what happens during clinical trials, and the risks they pose to biotech investors.

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From Lab to Market: A Drug’s Journey to Your Doctor’s Office

Just because a pharma company is developing a promising treatment does NOT mean it is a sure thing. Far from it – according to analysis done by, less than 10% of phase I drugs make it to market.

To become a successful biotech investor, you must internalize this sobering statistic. That, and it helps to understand what goes on during each stage of the clinical trial process. Below, we’ll break down each step, from preliminary research to FDA approval.

Step #1: Pre-Clinical Trial Research

The Hippocratic Oath (“do no harm”) applies just as readily to drug research as it does to doctors. So before a biotech firm can test a treatment on human subjects, it must have its Investigational New Drug (IND) application approved by the FDA.

For this to happen, the firm must perform preliminary research on “in vivo” or “in vitro” subjects. “In vivo” subjects are animals with similar biological systems to humans, like pigs or rats. Meanwhile, researchers who conduct “in vitro” experiments do so on human tissue or cell cultures.

For the FDA to approve an IND application, the applicant must show that harm to human subjects is unlikely. By submitting benign “in vivo” or “in vitro” research results, biotech firms can receive the IND approval needed to proceed to Phase I trials.

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Step #2: Phase I Trials

The goal of Phase I trials is to determine whether a given drug/treatment is safe. For this reason, researchers keep phase I study/control groups small – the FDA does not allow more than 100 subjects at this stage.

Patients in the study group receive various dosages of the treatment and are monitored for side effects. By doing this, researchers can use the data to fine-tune doses for future trials. If a drug is well-tolerated by its human subjects, it can then proceed to Phase II trials.

Step #3: Phase II Trials

In Phase II trials, the goal is to determine the efficacy of a drug/treatment. To attain statistically significant data, the size of these trials is larger than phase I – the FDA mandates a minimum of 50 and permits a maximum of 300 participants.

Because more is at stake, these studies can last as long as two years. During this time, researchers aren’t just monitoring efficacy – often, smaller phase I trials can cloak potentially serious side effects. In bigger phase II studies, uncovered safety issues are responsible for roughly half of all failures.

If a drug/treatment can demonstrate adequate efficacy without serious side effects, it moves onto phase III trials.

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Step #4: Phase III Trials

Once a drug/treatment reaches phase III trials, the question then becomes: How does it compare to existing treatments on the market? To get a clear answer (and collect the most concrete data on safety/efficacy before FDA approval), the study/control groups in phase III are huge. Researchers need to recruit a study group of at least 300, but no more than 3,000 individuals.

Phase III trial data is even more important than phase II. Because of this, these studies can last as long as four years. So, when you’re investing in a promising biotech firm that’s involved in phase III trials, keep this timeline in mind.

Also, with so many subjects and longer timelines, this phase is the most capital-intensive. This reality can pose problems for smaller biotech companies, as they lack the deep pockets that Big Pharma giants have.

If a drug/treatment shows equal or greater performance than its competition (while continuing to demonstrate safety), it moves onto to the formal FDA approval process.

Step #5: FDA Approval/Phase IV Trials

To bring a successful phase III drug/treatment to market, it must get FDA approval. After phase III trials have concluded, the next step is to file either a BLA (biologics license application) or an NDA (New Drug Application).

The FDA will then review these applications, as well as data submitted from all three trial phases. If the agency determines that a candidate drug/treatment is safe & effective, they will approve it.

But even after approval, a firm may continue to monitor their drug/treatment’s effectiveness. Often referred to as phase IV, this stage monitors patients in non-clinical settings. By collecting this data, the firm gains information on real-world efficacy and previously unforeseen side effects.

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Want to Become a Biotech Investor? Adjust Your Risk Tolerance

Every drug/treatment in pharmacies and doctor’s offices has had to run the clinical trial gauntlet. Most candidates never make it – only 30% of phase II drugs/treatments progress to phase III trials. And of those that make phase III, only half get approved by the FDA.

For this reason, investing in microcap pharma firms is a gamble. Do your research, but never invest money you cannot afford to lose.