Often investors we meet are not sure when to invest in a biotechnology company. Companies that you might come across could be in any stage of development – ranging from discovery stage, preclinical, to phase 1, 2, or 3. While there are also Phase 4 clinical trials, we will not cover that stage. Phase 4 trials are post-approval studies once a product received market approval by the FDA.
All of these stages of development can offer different rewards and risk. We compiled a simple overview that could help you to decide when is the right time for you to invest.
Find companies that are about to enter Phase 1 or have an ongoing Phase 1 trial
The notion that investing in a preclinical company that is about to go into Phase 1 is riskier is not always correct, and there can be exciting investment opportunities that show a significant return on investment. First, find out if the company has enough capital to enter into Phase 1 or if they are looking to raise money for this trial.
This could be a good time for investors to get in to increase the value of your investment with limited risk because Phase 1 clinical trials typically involve the initial introduction of the product candidate into healthy human volunteers. In Phase 1 clinical trials, the product candidate is typically tested for safety, dosage tolerance, absorption, metabolism, distribution, excretion and pharmacodynamics.
Phase 1 trials are usually small and can occur rather quickly. Phase 1 studies—which represented 37% of biotech IPOs through the third quarter of 2018 had an average market value of $535 million, according to the Wall Street Journal. That is up from 35% of biotech IPOs with an average market value of $471 million in 2015.
These investment opportunities could be hard to find, so it´s best to find and invest alongside investors that get access to or build biotech companies from the ground up.
Phase 2 Could be the best time to get involved
Phase 2 trials are done only if Phase 1 trials have shown that the drug is safe, but sometimes Phase 1 and Phase 2 trials are combined. Let’s consider you are looking at a company entering a Phase 2 clinical trial.
Phase 2 clinical trials are conducted in a limited patient population to gather evidence about the efficacy of the product candidate for specific, targeted indications; to determine dosage to tolerance and optimal dosage; and to identify possible adverse and safety risks.
Often, after a public biotech company reports positive Phase 2 data, the value of the company goes up significantly. If a company is listed publicly, the stock price is likely to jump as this data will give investors the first real indication that the drug works.
According to Marc Lichtenfeld, Chief Income Strategist, The Oxford Club, “Phase 2 is often the most profitable time to be involved in a small-cap biotech stock. Many times, Phase 2 results are positive. Sometimes it’s because the drug works and other times it’s because the trial is rigged to provide positive results.
Generally, on positive Phase 2 data, a small biotech company will either seek to raise additional capital from a strong VC or look for a partner from a larger biopharma company to start Phase 3 clinical trials.
Phase 3: Big Rewards and Big Risks
Phase 3 trials are the final stage of the development journey; Phase 3 clinical trials are undertaken to evaluate clinical efficacy and to test for safety in an expanded patient population at geographically dispersed clinical trial sites. The size of Phase 3 clinical trials depends upon clinical statistical considerations for the product candidate and disease but sometimes can include several thousand patients. Phase 3 clinical trials are intended to establish the overall risk-benefit ratio of the product candidate and provide an adequate basis for product labelling.
The FDA reviews the results from Phase 3 trials when considering a drug for approval. Like in Phase 2, a positive outcome in Phase 3 will frequently result in a massive increase in valuation. If the companies stock is publicly traded, there will be a surge in the stock price as investors anticipate FDA approval and sometimes a buyout from a larger biopharma company.
However, often, drugs fail in Phase 3 trials due to the drug not working or unexpected side effects. This results could mean a plummet in the value of your investment and almost all your investment lost.
Use extreme caution when holding a stake in a biotech company that is entering or waiting on Phase 3 data. Drugs entering Phase 3 have a 55% chance of failure. If you have held your investment since Phase 1 or Phase 2, it’s suggested to think about protecting your downside and taking some money off the table before Phase 3 data is released.
Hedge risk of failure: Focus on companies developing drugs in areas of lower risk
Try and find companies that are developing drugs for a market with significant unmet medical needs but also has a chance to show real results on the bedside. For example, its widely known that GBM (Glioblastoma), an aggressive form of brain cancer, is a ruthless disease and has no cure.
Roughly 17,000 new cases of glioblastoma are diagnosed every year, with average glioblastoma survival rates resting somewhere in the 11-to-15-month time frame. Senator John McCain died 13 months after his glioblastoma diagnosis.
Investing in a company working on a drug for a disease like GMB could be riskier because the chance of loss of life during the clinical trials is much higher. Stick to investing in companies developing drugs for diseases where the risk of patient death is low during the drugs development life cycle.
Diversify your sources of information
Biotech companies are presenting their latest data results and enrollment at conferences around the world and also report updates at Clinicaltrials.gov. Also, monitor social media feeds from expert biotech journalist and reporters on Twitter and subscribe to platforms like Statnews, or Fierce Biotech for excellent industry news and insights.
Whether you are looking for an early-stage investment opportunity or would like to join an investment at a later stage, be sure to do your homework or team up with a group that works together to buy or build biotech opportunities.
DISCLAIMER: All insights, suggestions, and advice provided herein are for educational purposes only. Nothing contained in this article or within this web site should be interpreted as a recommendation to buy or sell any securities, nor make an offer, solicitation or recommendation of another kind. All readers should always do further research before making a final investment decision.
The author is not a United States Securities Dealer nor Broker nor US Investment Adviser.