Trading Clinical Trials
What are clinical trials?
Pharmaceutical or bio-medical companies that have new drugs or medical products need to have those new products tested before they can be released in the market. The public needs assurance that these new products are both safe and effective. The process is called a clinical trial and involves many steps. Clinical trials are research studies that explore whether a drug, treatment, or medical device is safe and effective for humans. The process starts with experimental testing on animals as well as phase 1 testing on a very small sample of patients.
If everything goes well in these first two steps, the Food and Drug Administration (FDA) may give further approval to test on humans. In phase 2, researchers test for appropriate dosages and effectiveness. If the drug or device works as expected and there are no deadly side effects, the company will likely get approval to move from phase 2 to phase 3 testing. The point of the phase 3 clinical trial is to prove to the FDA and the company whether or not this drug is actually safe and effective at treating a disease. If the company can successfully get through all the phases of the clinical trial, the FDA will likely give final approval to make the drug or device available for patients.
Why do positive results on clinical trials matter so much to stocks?
Pharmaceutical and biomedical companies spend enormous amounts of time and money researching and developing new drugs, treatments, and devices. Each stage in the clinical trial process is an important step towards bringing that product to market and hopefully earning back some of the money from the research investment. Researchers estimate the budget for phase 3 clinical trials to be anywhere from $500 million to $1 billion. The investment is enormous, so the payoff or loss also has the potential to be enormous for the company and its shareholders.
A few factors determine how much the clinical trial results impact the stock price. First, the stage of the clinical trial is important. The closer the company gets to ultimate FDA approval, the higher the probability of success. So, the volatility surrounding an announcement may decrease. On the other hand, the probability of generating cash flows from the investment increases the value of the firm.
Second, the type of drug or treatment in the clinical trial is related to the market reaction and stock volatility. Products that will only be available to help a relatively small market segment may not experience as strong of a jump in price as products that treat a deadly or widespread medical condition. Treatments that will be able to make huge changes in the outlook for a large number of patients ultimately result in the biggest cash flow for the company.
Third, the volatility surrounding announcements of clinical trials is related to the size of the company. Large companies typically have many existing drugs and treatments in the market that earn cash flows along with a large pipeline of new treatments in various stages of research and trial. The results of one drug and one clinical trial may not have an enormous impact on the overall market valuation of the company. Smaller companies have fewer treatments on the market and less in the pipeline; so good news on a clinical trial can result in an enormous change in the stock price.
• On August 7, 2015, a small company called Aquinox Pharmaceuticals announced favorable results in a clinical trial of a new drug to treat bladder pain. In the three days following the announcement, the stock price increased over 1000%.
• On March 16, 2016, Vitae Pharmaceuticals announced positive results from a phase 2 clinical trial on its experimental medication to treat psoriasis. The stock price increased over 85% the next day.
• On March 14, 2016, Celator Pharmaceuticals announced that it was about to submit its application to the FDA for a final drug approval. Its new drug, Vyxeos, performed well in all clinical trials as a treatment for a type of blood cancer. The company’s stock price closed over 400% higher from the previous day.
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