Phase Trials and What to Know About Them
We started a little introduction into the Biotech sector here a few weeks ago. Investing in this industry can be tricky. As we’ve discussed before, there are no dividend payouts, and the success of a particular Biotech stock often relies on the approval it receives from the Food and Drug Administration (FDA).
Approval from the FDA can be a tricky process. They are the ones with ultimate power to give a Biotech the chance to succeed or fail. It all falls on their approval—and their approval in not easily won. It can sometimes take years for a Biotech to finally get the FDA’s approval—if it does get it at all. Yet in a world where Covid-19 has changed so much, there have been more frequents instances where the FDA has become more ready to hand out quicker approvals than years before, making the Biotech industry and sector even more appealing to dip the toe in the water.
Usually, the process to earn FDA approval can take a long time. And by a long time, I mean something along the lines 10-15 years. So, the question will be, when should one invest in a Biotech stock?
Well, first we’ll start with the concept of a “pipeline”. A “pipeline” represents the different stages of production and approval a Biotech will go through before it can mass produce its product. Phase 1 is usually an introductory stage that will test the product on healthier individuals. Phase 2 is a more crucial stage where the product will now begin to test on voluntary subjects to determine its efficacy. Phase 3 is probably the most complicated phase in which the drug is being tested on a large set of individuals to truly determine whether it is effective enough to make a difference. This Phase is probably the toughest to pass as only a small percentage of Biotech products get past this stage.
Considering how important Phase 3 is, one might think passing Phase 3 might be the best time to invest into a Biotech. Interestingly enough, it actually isn’t. By the time a Biotech has passed Phase 3, its value in the stock market may well have already skyrocketed, creating a more difficult investment decision. Historically, the best time to invest is actually after it passes Phase 2. While in Phase 3, there remains a great deal of uncertainty regarding a Biotech and there is still a greater than 60-75% chance that it will fail in the upcoming phase. If one wanted to make a big splash, after Phase 2 would be the time to invest in the product, as it has yet to pass the critical phase. If it does, it could skyrocket. However, there are great risks attached to this gamble, for if the Biotech does not pass its Phase 3, then it is likely that its value would plummet.
So now the question remains—which Biotech stock to invest in. While there will be a great deal of tips on the internet, one common strategy that often proves reliable is to focus on Biotech companies that have multiple products that have passed Phase 2 testing. The odds are always low for a new drug to potentially pass Phase 3, so having a company with more than 1 could provide better odds for hitting that jackpot Biotech stock.
The Biotech sector is ripe with opportunity, but one should also be fully aware of the risks. Understanding the process these products go through can help to separate the good opportunities from the even better ones.
