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But what about phase 2 -- the Jan Brady of the drug development process? Phase 2 is widely misunderstood by most investors, which is why a well-informed Fool can earn great returns by identifying opportunities during this clinical mid-stage. While there is no set number of phase 2 studies a company must conduct before moving on to pivotal trials, nor a set amount of time a drug will spend in phase 2, this stage is the most critical and most informative of the entire drug-development process. A company that takes its time and gets phase 2 right greatly increases its chances of positive phase 3 results. At Rule Breakers, we pay special attention to phase 2 tests in order to identify drugs that have better-than-average chances of making it big on the market.
But don't be lulled into a false sense of security by all phase 2 "successes." Many aggressive, cash-strapped biotechs will take shortcuts in phase 2, conducting one or two quick studies before moving into phase 3. Without complete and sound data, these products are more likely to fail at the most expensive stage of the process.
ICOS (Nasdaq: ICOS), for example, made a big deal out of the "spectacular" phase 2 results it got with Pafase, an anti-inflammatory drug it was developing in partnership with Daiichi Suntory to treat sepsis. ICOS took results from a single phase 2 trial (and another small exploratory study done a couple years earlier) and rushed into a phase 3 program, where the drug flamed out.
Could investors have somehow known in advance that Pafase was doomed? Not at all. But they should have been extremely cautious about the program, and discounted its chances for success significantly. ICOS lacked complete phase 2 data, and sepsis is a complicated illness that has proved to be an incredibly difficult nut to crack. (The only approved drug for severe sepsis, Eli Lilly's (NYSE: LLY) Xigris, is only modestly effective, has significant risks, and has not been a big seller.) There's no way to know, but more early phase 2 work might have prevented ICOS from making the larger phase 3 investment, might have changed the phase 3 design in such a way that the drug could have succeeded, or might have led the partners to a different inflammatory indication that would have met with better success.
3. Access to new drugs
"Platform technology" was a buzz phrase during the genomics bubble of 2000, but it's since become unfashionable. Companies don't want to talk about their discovery capabilities because they think Wall Street doesn't care. They're probably right -- all it seems the Wall Street pros care about these days are products, regardless of how the company came by them.
But the truth is, drugs fail. A short-term focus on quick revenue can make for real investment disaster. The formerly high-flying (and research-light) Pharmion (Nasdaq: PHRM) and Tercica (Nasdaq: TRCA), among others, rely heavily on in-licensing. That strategy has the makings of disaster -- and when that happens, investors are far better off with a company that has a discovery and research engine that can produce new drug candidates. (In fact, I first warned about Tercica's and Pharmion's business models last August. Since then, they have dropped 31% and 45%, respectively). That's why, at Rule Breakers, we put particular importance on credible discovery platforms.
Source: The Montley Fool, http://www.fool.com/news/commentary/2006/commentary06072016.htm;
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