You often see the word "pivotal" used to describe phase 3 drug trials, but I think phase 2 studies are often more crucial in the development of a drug. It's the time when a company needs to decide whether to shell out big bucks for a phase 3 trial or cut its losses.

Teva Pharmaceuticals (NASDAQ:TEVA) has one of those decisions to make with its lupus-treating drug, edratide. The company announced yesterday that edratide failed to meet the primary endpoint in its phase 2 trial. After 26 weeks of treatment, the drug failed to reduce lupus disease activity in subjects as measured by the Systemic Lupus Erythematosus Disease Activity Index (SLEDAI).

Teva said that it was still reviewing the data to see if the drug might have met any of the secondary endpoints the trial was designed to test. It didn't say what the endpoints were, but they likely included the ability of the drug to lower the patient's need for steroids, which have undesirable side effects.

The problem with continuing at this point is that phase 3 lupus trials take a considerable amount of time -- one to three years -- meaning they're expensive. Teva could try another phase 2 trial, but those are usually just a shot in the dark. I'd rather see the company quit while it hasn't spent too much in research and development funds on the compound.

It hasn't been the best month for lupus patients. Last week, Aspreva Pharmaceuticals (NASDAQ:ASPV) decided not to file a marketing application to use its CellCept drug as an induction therapy for lupus. At least Human Genome Sciences' (NASDAQ:HGSI) and GlaxoSmithKline's (NYSE:GSK) Lymphostat-B had a successful phase 2 trial and should release interim phase 3 results next year.

For Teva, the blow isn't a major one. With eight other drugs in clinical trials, around 150 generic drug applications awaiting approval from the FDA, and many attempts to break patents in court, the company still has plenty of opportunities to expand its top-line growth.

Would you like to know some of the potentially lucrative picks from David and Tom Gardner's market-beating Motley Fool Stock Advisor newsletter? Click here to start your 30-day risk-free trial. It's free.

Fool contributor Brian Orelli, Ph.D., doesn't own shares of any company mentioned in this article. Glaxo is a selection of the Income Investor newsletter. The Fool has a disclosure policy.