The cost of clinical trials jumps significantly when drugmakers move from phase 1 to phase 2 and phase 2 to phase 3. To reduce research and development costs, drugmakers are increasingly embracing exploratory interim trials. But that's not the only reason why the biopharma industry does them.

In this clip from The Motley Fool's Industry Focus: Healthcare podcast, analyst Kristine Harjes and contributor Todd Campbell explain how these trials are allowing drugmakers to tweak endpoints and customize patient populations to improve their odds at phase 3 success.

A full transcript follows the video.

This video was recorded on Sept. 20, 2017.

Kristine Harjes: One of our listeners named Brian wrote in, and he asked us, "How/why do companies do phase 1b or phase 1/2 studies?" What he's referencing here is, we talk about all the time on the show phase 1, phase 2, phase 3 clinical trials to get a drug from being discovered all the way through to having the FDA say, "Yep, you are good to go, you can sell this to actual people for use." It doesn't actually always go in that specific order. Sometimes you get weird trials like these phase 1b or 2b or phase 1/2 trial. What Brian was wondering overall was, why would a company choose to not go by the standard phase 1, phase 2, phase 3, submit?

Todd Campbell: We're seeing a lot more of these, which probably prompted this question. It seems like we're getting a lot more of these, "In phase 1/2," or, "In phase 2b," or whatever. It's not like it's something that's so rare that you're never going to see it as a biotech or biopharma investor. I think it's an important question to answer. Probably the easiest way to explain it would be, if I told you, Kristine, to go to a certain location in your car but I didn't give you a map and you didn't have your GPS, it will be kind of hard to figure out if you really are on the right path to get there. What phase 1 and 2 trials and 2b trials do is they allow you to course-correct. Rather than going through all of the massive expense that is associated in jumping straight from a phase 1 to a phase 2, and from a phase 2 to a phase 3, you can then say, "I want to explore something before I spend all that money in phase 2 , and make sure that I'm actually on the right track before I commit to a full study." Does that make sense to you?

Harjes: Yeah, absolutely. When you think about the differences in scale between the three different traditional phases, it's huge. It's orders of magnitude more people involved, it'll take more time, it costs more money to run the larger, later stage trials. So, I completely understand why one might want to course correct along the way. When you think about the intention behind some of the earlier stage trials, they're just to establish proof of concept, make sure that it's safe and you're seeing, not even efficacy. At that point, phase 1 especially, you're really just focused on safety.

Campbell: Yeah, dose and safety, Kristine. Phase 1 and phase 2, dose and safety.

Harjes: Yeah, and it's entirely possible that you get all the way through phase 2 and you're still not really convinced that this drug has the efficacy that you think it has. So, I can see how if I were a drug developer, I would be at the end of phase 2, I would be staring down my options, I'm looking at phase 3, I know it's going to be expensive. Maybe I don't have any positive cash flow yet so far, so I'm trying to keep costs to a minimum, at least not plunge into the deep end right away with a giant phase 3. That's when you might want to run a phase 2b trial. It's somewhere in between a phase 2 and a phase 3, it's not quite as large and expensive as the phase 3, but it can allow you to make sure that you really have a promising drug candidate before you move forward.

Campbell: Right. I think to help put that in perspective a little more, research and development budgets have been under pressure for a decade now. You've had some pretty high-profile patent expirations that have hit the industry over the course of the last decade. And as a result, companies have gotten a lot more selective in what compounds they want to bring all the way through the clinic. The more that they can hone their process and their practice, the more that they can figure out what exact specific patient population, indication, etc. they should be targeting, the more likely it is that the R&D spending is going to translate into an actual approved, commercialized drug that's generating revenue. Just to put the expenses in a little bit more context for listeners, the average costs of enrolling a patient in a phase 2 study is about $19,000. In a phase 3 study, it's $26,000. So, significantly more per patient. And then you think about the fact that, phase 2 trials, maybe they're only enrolling, what, 40 to 100 patients, something like that? Phase 3 trials will enroll hundreds of patients. And depending on the indication, they can enroll thousands of patients. These trials can end up costing, in phase 3, upwards of hundreds of millions of dollars into the billion-dollar range depending on what you're talking about and how many phase 3 trials have to be studied. So, it makes sense to improve the odds of success. And that's especially important in indications like cancer, for example, where you'll definitely see a lot more of this phase 1/2 stuff and this phase 2b stuff, and Alzheimer's disease, because those indications have such incredibly high failure rates already. So, anything you can do to improve those failure rates is a good thing.

Harjes: Yeah. So, some of these strategies that these companies can take when they go into phase 3, if they have more and more data behind them that they've already found, you can tweak your endpoints to say, "Oh, I'm going to use this very specific way of gauging mental function in Alzheimer's," or something like that, or you can also tweak the patient populations, where maybe in oncology, you know that if a tumor expresses in a certain way, it's more likely that this drug will have an effect, therefore when I go to enroll for phase 3, I'm going to actively select for patients that have the greatest chance of success.