Phase IPhase I is primarily focused on the safety of the drug, but also provides early signs of the drug’s efficacy in small studies conducted in either healthy subjects or patients with the disease. Even though a high percentage of drugs will succeed in this stage, it is still an encouraging milestone for early stage biotechs to achieve. Phase IIIf a drug is shown to be safe it will progress to Phase II trials which test the drug for efficacy in patients with the specific disease (does the drug work as intended?). But how do you know if it is successful? Efficacy is measured through biological metrics that are called endpoints, which are determined by the company BEFORE the trial begins. Examples of endpoints are improvement in quality of life, relief of symptoms, survival and reduction in the infection or disease. When interim and final trial results are released, investors should pay attention to whether these endpoints are reached and if there is statistical significance between the patients that take the drug and the ‘control group’ that take a comparator (either a placebo or another drug). If the endpoint is achieved with statistical significance, it indicates that the results were not just a fluke and the drug is efficient in treating the disease. This is a critical value adding point for the company and investors. Patient recruitment is also an important part of the Phase II (and III) trials, where people with the specific condition are recruited into the trial. Where the parameters for the people with disease are very narrow (like with very rare diseases) this can be an important part of the process, and may take longer than expected. If the drug is successful at this stage it could lead to a significant re-rating of the share price, and it provides the company leverage to negotiate and engage in strategic partnerships with larger pharmaceutical companies. Phase IIIPhase III is a much larger study to validate the earlier clinical studies. This is the final stage before the drug is approved for commercialisation. At this point, the company has a choice to de-risk the project by partnering with a larger pharmaceutical company, or fund the trial themselves by raising capital. Like with Phase II trials, efficacy is measured through endpoints, but here it is done in consultation with the key regulator bodies like the FDA. Again, these endpoints need to reach statistical significance in the clinical studies in order to be eligible for FDA approval. Once approved, the drug can then be commercialised. This is a significant milestone for biotech companies, and will generally see a significant share price increase for investors. Investors should be aware that there is a real possibility that if the initial trial data is not satisfactory to the regulatory body, more trials might be required to gain approval. This can be a costly exercise and a step backward for the company. Key questions for investors: - Did the drug meet the endpoint and receive approval from the relevant regulatory bodies?
- Is the commercial case still valid for the drug?
- What competitors are there on the horizon?
- Is there a partnership that can provide the distribution networks to support commercialisation?
CommercialisationThe holy grail for small biotech companies is a take over by a Big Pharma company with deep pockets and commercialisation expertise. This is where early stage investors realise the gains of their patience and hard work. Rarely will a small biotech grow to directly sell its product to consumers, whereas larger biotechs will take the technology to market - selling it to doctors, negotiating with insurance companies so that patients can get access to the drug. This is a space in which many traditional private equity firms invest. There are also a number of large public companies competing in this segment. Larger pharmaceutical companies are typically valued on generated cash flows from the drugs. Patient uptake, drug pricing, and the evolving competitive landscape need to be carefully considered. Key questions for investors: - What is the distribution strategy for the company?
- Is there a Big Pharma company interested in the drug?
- What are the recurring revenues & cash flow for the company? Are they enough to justify the current valuation?
- What is the competitive landscape for the drug?
As we can see, the process of biotech drug development isn’t easy - there are many important stages, each with their own risks and rewards. Knowing your risk profile is incredibly important in this industry. A smart investor often diversifies through exposure to companies in a number of different stages of development.
ANP is on its way... | 
