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1 Event That Could Make or Break Biotech Stocks

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Bringing a drug from concept to market is much like running the hurdles -- only if you miss a hurdle here, you fall into a canyon filled with lava. Less than 20% of all drugs, therapies, or treatments pass the three-phase clinical trial process, according to the Tufts Center for the Study of Drug Development, so the impacts on a company passing each stage of a clinical trial can be huge. Today, let's take a look at the phase in which experimental drugs typically have the lowest chance of success: phase 2.

First; a quick refresher on phase 2 trials. This is when a treatment is tested on humans who have the medical condition in question. Prior to this point, the drug is tested to determine two main things: whether the drug is safe for human use, and how much of the drug the human body can tolerate without detrimental side effects. Once a treatment enters phase 2, the window for practical treatment opens, and we get to see how effective the drug really is on the intended indication.

Obviously, the successful completion of a phase 2 trial can have huge impacts on not only a company's profits, but also its patients' outcomes. Today's biotech and pharmaceutical companies are working on some of the most difficult health issues of our time, and they could provide a path to a healthier life for patients with conditions we previously thought were untreatable.

Investors know this, too -- and some companies have seen both the cheers and jeers of Mr. Market following phase 2 results.

When phase 2 goes right
On Oct. 3, Sarepta (Nasdaq: SRPT  ) announced it had successfully met its primary goals in a phase 2 trial of eteplirsen, its drug to treat Duchenne muscular dystrophy. The results of the test appear very promising, and the company hopes the drug will be considered for priority review from the Food and Drug Administration, which would accelerate its introduction into the market. On the day of announcement, the drug company's shares jumped more than 200% and have since settled at a price 100% higher than before the announcement.

When phase 2 goes wrong
Even health care giants like Bristol Meyers-Squibb (NYSE: BMY  ) can't avoid the wrath of Mr. Market when a phase 2 trial goes wrong. Back in August, the company ran into what it called "safety issues" regarding dosing during a trial for a new hepatitis-C drug.  The trial was subsequently suspended, and the company's share price dropped by 8% that day. While Bristol Meyers-Squibb certainly lost out on that drug's failure, the company is developing a slew of other drugs -- including another hepatitis-C treatment called daclatasvir -- which may gain approval. Unlike a small biotech, a company this size usually doesn't depend on a single drug's success to shape its future.

Based on the recent results for these companies, you can see why investors may not sleep too well if their companies are in the process of a phase 2 trial. There are always a slew of companies about to finish the phase 2 gauntlet; let's take a quick peek at a few whose trials are about to wrap up.

Three phase 2 trial results to watch
BioMarin Pharmeceuticals (Nasdaq: BMRN  ) anticipates the conclusion of a phase 1/2 study for BMN-673. The company is testing this drug to determine its ability to inhibit DNA repair in cancerous cells. In theory, this would kill those cancer cells and prevent them from spreading.  While pre-clinical trials were promising for the company, investors have heard little chatter since. BioMarin hopes to publish the results of its findings by the end of the year. While the company's stock shot up 31% following the successful trial of its enzyme deficiency disease treatment and the company is up 43% this year, a poor showing for this cancer drug could send this high-flyer back to Earth.

Isis Pharmaceuticals (Nasdaq: ISIS  ) expects to wrap up its phase 2 study of ISIS-APOCIIIRx, a treatment used to help control high levels of triglycerides for patients. Studies have shown a correlation between heart disease and stroke and high levels of triglycerides. ISIS-APOCIIIRx is part of a suite of drugs Isis is developing to reduce lipid levels in patients, which can help reduce their chances of cardiovascular disease and inflammation of the pancreas . Isis expects to release the results of the trial by the end of the year. A successful trial could be a nice jump for Isis, whose share price took a big hit earlier this year after questions were raised about the links with one of its cholesterol drugs and cancer.

Finally, you have to love "company speak." Halozyme Therapeutics' (Nasdaq: HALO  ) expects to release its recent phase 2 results for HTI-501, which the company describes as a treatment "designed to allow local degradation of the collagenous fibrous components of the extracellular matrix at the injection site by tightly controlling the extent and duration of enzyme activity once injected into the body."  Here's the English translation: This treatment smooths the dimples on the skin associated with cellulite. HTI-501 may not have the life-saving qualities of the other treatments mentioned here, but that doesn't mean it can't be a big win for the company. Halozyme could use some good news this year to bounce back after the FDA rejected one of its immune deficiency treatments and the stock dropped 50% in a day.

What a Fool believes
The world of biotech and pharmaceuticals can be complex and hard to follow. While phase 2 trials can be an initial indicator of success, there are still a few more hurdles that could send you tumbling into that lava-filled canyon.

While you can certainly make huge gains in biotech and pharmaceuticals, the best investing approach is to choose great companies and stick with them for the long term. In our free report "3 Stocks That Will Help You Retire Rich," we name stocks that could help you build long-term wealth and retire well, along with some winning wealth-building strategies that every investor should be aware of. Click here now to keep reading.

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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 07, 2012, at 4:31 PM, ZIOPHARM1 wrote:

    "Halozyme could use some good news this year to bounce back after the FDA rejected one of its immune deficiency treatments"

    - That's not what happened. Please read what happened and restate.FDA asked for more data, got it, things continued.

  • Report this Comment On December 09, 2012, at 7:48 AM, assisgnmeaname wrote:

    Like Zio said, the author misstates what happened with Halozyme. But I expect such shoddiness from Motley Fool.

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