Know Your Drug Stock ABCs: Part 2

Investing in the pharmaceutical and biotechnology industries can be difficult, as investors need to know so many technical definitions. To make understanding these companies easier and perhaps to serve as a handy reference guide, this three-part series covers the ins and outs of the terms investors need to know to understand these industries better. My first article covered some of the terminology relating to the drug approval process.

This second article deals with terms used throughout the important clinical trial process while trying to bring a new drug to market. Below are the most common words that investors will encounter when studying up on these companies and the clinical trial process.

Clinical trial process: In order to bring a drug to market, companies typically run their product candidates through three well-defined stages of testing in humans. Each progressive phase of the clinical trial process involves tougher hurdles for a drug to overcome and is designed to help weed out drugs that are unsafe or don't work.

Phase 1 trial: A phase 1 clinical trial is a small study ranging from 20 to 80 patients. It's used to determine a drug's safety, what side effects are associated with it, and the maximum dose patients can handle without having too many intolerable side effects. These trials are almost always unblinded (meaning patients know they're taking the drug) and short in duration.

Phase 2 trial: These studies are designed to show that the drug has some positive effect in what it's being used to treat and also to get a better idea of the drug's safety over longer-term use. As this is the first time that good data on whether a drug works is produced, solid phase 2 trial results can send shares of a small biotech firm flying.

The size of a phase 2 study really depends on the disease the drug is being tested in. Some cancer trials are as small as 30 patients, but other diseases like hepatitis C, which Vertex Pharmaceuticals (NASDAQ:VRTX) is testing its lead compound in, garner as many as 400 patients.

Phase 3 trial: This is the strictest and most costly phase of clinical development. Drugs getting to this stage need to have shown some level of efficacy and safety. They're usually tested in a placebo-controlled, randomized, double-blinded study at this phase of development. This means that neither patients nor doctors in the clinical trial know whether the patients actually receive the drug in question or a placebo until after the study is completed.

The FDA usually requires proof of two positive phase 3 trials for a drug to be approved. Once again, the size of a phase 3 study is dependent on the indication the drug is being tested in. Cancer therapies like Dendreon's (NASDAQ:DNDN) Provenge typically only need to enroll a couple of hundred patients to satisfy the FDA, whereas drugs being tested for use in chronic and widespread indications -- like Merck's (NYSE:MRK) diabetes treatment, Januvia, or a range of heart medications -- are tested on thousands of patients whose progress is followed for years.

Primary endpoint of a trial: When trying to determine whether a drug works, pharmaceutical companies will set some goal beforehand that they want patients on the drug to overcome in order for the trial to be considered a success.

The primary endpoint is the main outcome that patients on a drug have to achieve in a clinical trial. The primary endpoint can differ widely depending on what disease a drug is being tested in. Primary endpoints in cancer studies are usually related to survival or tumor growth reduction, whereas endpoints on studies of patients with HIV these days will be related to the amount of virus detectable in their blood.

For example, the primary endpoint in some of Onyx Pharmaceuticals' (NASDAQ:ONXX) phase 2 and 3 cancer studies is overall survival. In order for a clinical trial to be considered successful, Onyx has to show that patients who took its Nexavar cancer therapy survived longer than those who didn't.

P-value: Oftentimes you'll hear drug companies announcing the results of their clinical trials, and in parentheses will be a number with decimal places. This is the statistical term known as p-value. This is a measure of the probability that a particular outcome will occur by chance.

When a pharmaceutical firm is announcing clinical trial results, it usually wants p-value to be as small as possible so that the odds that a positive outcome occurred by chance are rare.

Shares of drug developer Renovis (NASDAQ:RNVS) were down more than 70% one day last year after it reported results from a pivotal phase 3 trial in which its drug showed a reduction in stroke-related disability versus placebo with a p-value of 0.33. This means that if this clinical trial were run 100 times, the results that Renovis achieved in this study would occur by chance 33 times. With a 33% chance that its drug had no positive effect on stroke-related disability, Renovis and partner AstraZeneca (NYSE:AZN) canceled the drug program.

Statistical significance: One important term related to p-value is the notion of statistical significance. This is the arbitrary maximum cutoff point (usually at a p-value of .05) whereby a p-value that falls below it is considered a true result. So if company X reports that its cancer treatment improves survival with a p-value of .03, then it would deem this trial a success and the results would be considered "statistically significant."

Vertex Pharmaceuticals is a Rule Breakers recommendation.

Fool contributor Brian Lawler does not own shares of any company mentioned in this article. The Fool has a disclosure policy.