The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.
NEW YORK (
) -- 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 trials.
Would Rory McIlroy have liked a do-over on Sunday at Augusta?
Phase II trials are my favorite time to get involved in a biotech company. I'll explain why in a moment. But first, a quick review of the 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 body.
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 particular drug.
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.