When it comes to paperwork, the clinical trial process for approving new medicines is nearly unparalleled. Between a mountain of consent forms and legal documents describing clinical protocols, pharma companies are under an intense level of oversight. For drug developers, this oversight begins with the investigational new drug (IND) submission, which needs to be authorized by the U.S. Food and Drug Administration (FDA) in order to initiate clinical studies with human subjects.

In competitive positioning, experience with INDs is a major advantage. In fact, major companies like Johnson & Johnson keep track of how many INDs their development pipelines submit per year. But casual investors may not have a deep understanding of the process or why it can make or break a stock in both the short term and the long term. Let's check out what you need to know about INDs, so you'll have a sense of how they might influence your pharma or biotech investing strategy.

A scientist considers a binder of paperwork in the laboratory.

Image source: Getty Images.

What are INDs, and why do they matter so much to pharma investors?

IND applications are large packages of data that manufacturers submit to regulators to argue that they have developed a medicine that is probably safe and plausibly effective, thereby making it worth testing in a clinical trial. To make this argument, pharmaceutical companies are obligated to include data on how their product performs in animal models like mice before they are given authorization to proceed with clinical trials in human subjects.

Similarly, drug developers need to explain to the FDA the details about how they plan to manufacture the medicine while showing evidence that their production facilities are capable of maintaining certain standards of quality.

Finally, INDs require extensive documentation of the company's proposed clinical trial protocols, ranging from the planned scheduling of doses to the qualification of clinicians overseeing the process. If the company makes a strong case in its IND, the FDA gives them the green light to proceed with clinical trials and commits to tracking the project.

The FDA understands that the process of submitting an IND can be daunting, especially for smaller companies that may not have experience in making regulatory filings. If the materials that a company submits in its IND don't meet regulatory standards, the FDA will reject it and indicate where it thinks the company's data is insufficient to safely proceed with human trials. If this rejection occurs before clinical trials start, it's an inconvenience that typically requires spending time and money on additional preclinical development. 

IND setbacks aren't always devastating

If a company's IND is rejected or withdrawn, its stock can crater, because it means the corresponding project can't move forward. In the case of a withdrawal, the FDA essentially forces a halt to the clinical trial process, which can be especially devastating.

To address the high stakes of INDs, the FDA has a handful of frameworks for collaboration with companies working on new submissions. This collaboration process is at the discretion of the aspiring company, and it can start as early as preclinical studies in animal models if the manufacturer thinks that the FDA's guidance will be helpful. In practice, larger and more experienced pharmas like Pfizer (NYSE:PFE) don't need the help, but young biotechs like Moderna (NASDAQ:MRNA) probably do, so be sure to look for any hints that they're seeking regulatory counsel in press releases and presentations. 

The IND process isn't something drug developers can just set and forget. Once an IND is authorized, the FDA requests periodic updates on the progress of the relevant clinical trials. If the research subjects in the trial experience unexpected or unexpectedly severe side effects, the study can be put on a clinical hold. 

As an example, trials for Inovio's candidate were recently put on hold by the FDA after the regulatory agency indicated that it has further questions about the treatment. (This is in contrast to AstraZeneca (NASDAQ:AZN), which recently voluntarily put its coronavirus vaccine trial on hold after some patients reported neurological symptoms.) Clinical holds are common hiccups in the trial process, and their primary purpose is to give regulators and medicine makers time to figure out whether the side effects experienced by research subjects are caused by the new drug under investigation. Regulators can also demand clinical holds if they suspect that there are manufacturing issues with the drug or if any other major issues come to light. 

INDs are living documents that investors should pay keen attention to, especially if they plan on investing in smaller companies with a lot of preclinical projects. If a company keeps getting its INDs rejected, that could be a sign that its preclinical development operations are amiss. Similarly, investors should appreciate the competitive advantage of companies with a history of successfully submitting INDs, because fluency in regulatory affairs is enormously valuable and quite difficult to imitate.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.