Phase 2 trials occupy an interesting place in a clinical development plan. Theoretically, phase 2 is just the next step after phase 1, advancing a drug to tests of efficacy after safety and tolerability are established.

Phase 2 is generally when a drug demonstrates efficacy, so the market's expectations can be very high in anticipation of results. At the same time, phase 2 trials are run on smaller groups of patients, so statistical interpretation can be tricky; many phase 2 trials are designed as smaller, pilot versions of phase 3 trials, so the results not only pertain to the potential success of the drug, but may be interpreted as an assessment of the trial design.

A phase of uncertainty
's (NASDAQ: ECYT) phase 2b results for vintafolide, reported in March, are a good example of how ambiguous phase 2 results can be. The company tested its drug in combination with docetaxel compared to docetaxel alone in non-small cell lung cancer. The trial showed a 25% reduction in risk of death for the group receiving vintafolide and met its endpoint of showing improvement in progression-free survival.

The market responded with enthusiasm, driving Endocyte's stock price up nearly double overnight following the release of the trial results and a positive opinion from Europe's Committee for Medicinal Products for Human Use recommending market authorization for ovarian cancer.

However, there are still a lot of missing pieces in the vintafolide story. As is the case in quite a lot of cancer trials, the company chose progression-free survival as its endpoint. Progression-free survival is quicker and easier to evaluate than overall survival, which, ironically, takes longer the more successful the drug is. However, progression-free survival is controversial as a stand-in for overall survival, and the FDA has strongly signaled it won't be supporting cancer drugs without proven overall survival benefits. 

This means that the phase 3 trial will have a different design, and some complicated augury must be carried out to guess how that will turn out. When interpreting phase 2 results, it is important to ask whether the trial could be replicated exactly as designed for phase 3, with a larger number of patients, or whether a new design or new endpoints are necessary. Company management will usually address that question in its communications with investors.

In addition, shares of Endocyte dropped more than 60% recently after a phase 3 trial for vintafolide for the treatment of platinum-resistant ovarian cancer was stopped for futility after interim analysis. It remains to be seen how the drug performs for the non-small cell lung cancer indication in future trials.

Look for validation
Phase 2 can also provide the first solid validation of a drug's design and mechanism. Amgen's (AMGN -0.21%) phase 2 results for romosozumab in postmenopausal women with osteoporosis is a good example of a trial that confirms a drug mechanism. The study showed that with twelve months of treatment with romosozumab, bone mineral density at the lumbar spine and femoral neck relative to the control group was significantly increased. Amgen also found that bone mineral density at the lumbar spine and hip were significantly greater than for a group receiving romosozumab than for a group treated with Merck's Fosamax and Eli Lilly's Forteo.

Since the drug is designed to reduce fractures by increasing bone density, it's an important and reassuring piece of news to learn that the drug does indeed increase bone density. The company will also eventually seek to connect the remaining dots and show that that increase in bone density leads to a reduction in fractures, but the early mechanism confirmation is a strong thumbs up on the drug from an investment point of view.

Another feature of the romosozumab story is that the phase II trial was randomized, double-blinded, and placebo controlled. That is generally the standard for phase III trials, but phase II trials are often not blinded or placebo controlled for various reasons. Open-label trials can be very important, and give valuable information, but there's an extra level of confidence in a phase II trial that is carried out to the highest scientific standard of validity.

Safety first
Although Phase I trials are designed to establish safety of a drug, the safety question comes up over and over again in subsequent trials, and even post-market studies. That's because safety is important, and Phase II studies are still a place where safety problems can emerge, and can even overshadow strong efficacy results—with good reason.

Take for example Intercept Pharmaceuticals (ICPT), which has gained over 726% in the last twelve months, driven by a series of positive events in development of obeticholic acid (OCA), a candidate in primary biliary cirrhosis and nonalcoholic steatoheptitis (NASH). Although OCA showed strong efficacy in a Phase III trial , with nearly half of patients achieving reductions in the liver biomarker ALP of 15 percent from baseline, some safety concerns from a Phase II trial overshadowed that good news.

 The company reported that in a Phase II study in NASH, there were some cardiovascular severe adverse effects in seven patients. Even though the details are vague, that information triggered a steep decline in the stock's value.

ICPT Chart

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Phase 2 occupies an intermediate stage in clinical development of a drug, and interpretation of results for investment purposes depends on the specific purpose and design of the trial. An early, phase 1 "proof of concept" trial should be viewed much like a phase 1, in that it is very speculative and indicates only whether further studies are warranted. In contrast, a large, randomized, double-blinded, placebo-controlled phase 2 trial with a positive result can be strongly suggestive of phase 3 success, or in some cases those results may directly support registration.