Biotech Investing 101: What Investors Need to Know About Phase 1 Trials

Early clinical trial results can be tricky to interpret. Phase I studies are designed to assess safety and tolerability, but early signs of therapeutic potential can be difficult to ignore. Here's what to look for in Phase I and how to avoid getting carried away.

Catherine Shaffer
Catherine Shaffer
Apr 21, 2014 at 6:30PM
Health Care

Clinical trials are huge milestones in drug development, and the success or failure of the whole company can hinge on the outcome of a single trial. The odds are generally against any given drug, as many more drugs fail in clinical trials than succeed. Trial results often trigger gain or loss in stock value, but other clinical trial events, such as initiation of a trial, reporting of interim data, or early termination of a trial can affect stock value. Investors should look for solid safety, tolerability, and efficacy results for phase 1 trials and avoid getting too carried away looking for early blockbuster potential.

The purpose of a phase 1 trial is generally to establish safety and tolerability of a drug, so success in phase 1 usually does not have a big effect on the value of the company's stock because passing a phase 1 safety trial is often expected and assumed by investors. The company will already have an idea of safety and tolerability from preclinical studies or very small proof-of-concept trials in human subjects, so any bad safety results are a large negative surprise.

However, there is no one-size-fits-all clinical trial plan for investigational drugs. In some ways, each drug is a reinvention of the wheel as a clinical program is designed for that particular drug and disease indication. Some diseases have no approved therapy and no precedent of previous clinical trials—that is the case for many rare and orphan diseases. Other drugs are entering a hotly competitive environment that includes both approved therapies and competing drugs in development.

Market response is typically measured
Immunomedics (NASDAQ:IMMU) recently reported results from three phase 1 trials of its cancer candidate IMMU-130 at the annual meeting of the American Association for Cancer Research in San Diego. As in many early cancer trials, the company enrolled cancer patients rather than healthy volunteers, and assessed efficacy along with safety and tolerability.

Therapy responses in the three trials in metastatic colorectal cancer included stable disease, partial responses, and in one case tumor shrinkage. In spite of the positive early efficacy results, Immunomedics' stock price jumped slightly but returned quickly to its previous level around $4 per share.

IMMU Chart

IMMU data by YCharts

Market bullish on Agios phase 1 data
By contrast, phase 1 results  sent stock in Agios Pharmaceuticals (NASDAQ:AGIO) skyrocketing from $35 to $45, and remained elevated.

AGIO Chart

AGIO data by YCharts

Those results, also for a cancer candidate in the area of hematologic malignancy, showed six of seven evaluable patients responding to therapy, with three complete remissions and two complete remissions with incomplete platelet recovery.

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The drug, AG-221, is an inhibitor of a mutated form of the IDH2 protein, a potential cancer target. The study enrolled 22 patients with acute myeloid leukemia or myelodysplastic syndrome whose cancers tested positive for the mutation.

What's the difference?
The primary difference between the two examples is the strength of the efficacy results. Immunomedics's results were good, and definitely merit further study for the drug. But Agios' results, including the magic words "complete remission" are genuinely exciting, prompting a stronger investor reaction.

Another factor driving excitement over Agios' results is the presence of a genetic biomarker for the cancer. For a number of years the FDA has been encouraging researchers to submit drug applications that include strong companion biomarkers. Those biomarkers can be used for identifying patients most likely to benefit from therapy, to monitor success or failure of treatment, to track disease progression, or to serve as a surrogate endpoint marker for treatment response.

Strong efficacy in combination with a solid biomarker makes Agios' drug a significantly more interesting prospect. But just because the market is excited doesn't mean you need to get excited. There's a good chance that the market has overreacted to Agios' news and underreacted to Immunomedics's news.

Early trials are exactly that -- early, and any results, no matter how exciting, should be considered strictly provisional, until later, larger trials can confirm them. A show of efficacy in a trial of 8 patients is little more than a twinkle in the company's eye in terms of clinical maturity. Investors who pay a higher price for Agios stock on phase 1 results have that much more to lose if the drug doesn't come through in phase 2 and phase 3.

Fail early, fail fast
To evaluate success or failure of a phase 1 trial for investment purposes, use the same criteria that the companies themselves use. Big pharma's number one mantra is "Fail early, fail fast." In order to minimize the high costs of drug discovery and development, companies look early and often for reasons to fail or wash out a drug, and by the time a phase 1 trial is initiated, a drug has already passed numerous tests in preclinical studies. So the key question to ask at the end of a phase 1 trial is whether there's any justification to fail the drug at that point. If not, that's great news, and suggests it's worthwhile to stay invested in that drug for the next stage of development.

The number one reason a drug would fail in phase 1 would be poor safety results, such as a high number of adverse events or severe adverse events. Large numbers of patients washing out of the study because they can't tolerate the drug would be another cause for concern. Lastly, phase 1 studies are frequently used to evaluate pharmacokinetic and pharmacodynamic behavior of a drug. That can be critical if there's any question about the dosing method for the drug or its bioavailability in the body.

Rather than looking for early signs of blockbuster potential, investors should be primarily watching for a lack of negatives in phase 1. Drugs that show early blockbuster potential are attractive, but lead to greater risk if phase 2 or 3 studies don't pan out.