Stages Of New Drug Development – Investing in Biotech Companies

In order to bring a new drug to market, there are several stages of new drug development starting with discovery and development, research, and FDA approval. As it refers to investing in stocks, or in biopharmaceutical companies, the main catalysts are Phase 1, Phase 2, Phase 3 and FDA approval (PDUFA). Those are the catalyst I look for to invest, scalp, or swing trade a stock. Sure we can say it’s going up to a phase 2 result, but do you really know what that means for the company stock? Hopefully these stages of new drug development will provide you with more information as to the meaning and implication of these catalyst, and give you an idea on how to investigate and invest in biopharmaceutical stocks.

Just as a side note, I normally don’t like to hold through a catalyst date. I also take into account the company’s cash on hand as many biotech companies like to do offerings to raise cash after their stock has climbed from results. This is not to say that I never hold through a catalyst, as some biotech offer great returns if they have positive results.

According to the FDA there are 5 steps when developing a new drug for market use:

Stages Of New Drug Development – Discovery and Development:

In this stage of new drug development many compounds may be candidates to treat health conditions, but after laboratory testing maybe only a few will be promising enough for further study. Once researchers have identified a promising drug for development, they will experiment in order to gather information on how the drug is absorbed, distributed, metabolized and excreted, it’s potential benefits, get an idea on dosages, how best to administer the drug, possible side effects, how it interacts with other drugs, and it’s effectiveness compared to similar drugs or treatments already in the market.

Stages Of New Drug Development – Preclinical Research:

Prior to testing a new drug on humans, researchers must have sufficient information as to the potential harm and/or toxicity of the compounds.
Preclinical research include:

  • In Vitro: considered to be “test-tube” experiments performed with microorganisms, cells, and biological molecules, normally tested in petri dishes, tubes or flasks.


  • In Vivo: studies performed on animals, living organisms, plants and in some cases, humans.

Preclinical research studies look to find information on dosing, and toxicity levels. At this point a decision is made whether to proceed to clinical research. Because the expense associated with clinical trials, the research must have sufficient information as to the possible positive and negative effects of the new drug.

Stages Of New Drug Development – Clinical Research:

Preclinical trials do answer some questions about the drug, but in order to gather more information on the how the drug will take effect in humans, clinical research is needed. Clinical research is the studies or trials on humans.

Prior to starting clinical trials, researchers must have a study plan and follow certain study protocols. Researchers must determine:

  • Who qualifies to participate (selection criteria)
  • How many people will be part of the study
  • How long the study will last
  • Whether there will be a control group and other ways to limit research bias
  • How the drug will be given to patients and at what dosage
  • What assessments will be conducted, when, and what data will be collected
  • How the data will be reviewed and analyzed

Clinical trials follow a typical series from early, small-scale, Phase 1 studies to late-stage, large scale, Phase 3 studies.

Stages Of New Drug Development – Phase 1:

Phase 1 clinical trials are normally conducted on approximately 20-80 human volunteers of which some might have the disease or condition the new drug is targeting. This phase is the initial introduction of a drug or therapy. Phase 1 is generally looking for safety and dosage, and not so much for the efficacy of the new drug. Researchers closely monitor how the new interacts in the human body and adjust dosing to evaluate how much can be tolerated and side effects. Before moving on to phase 2 studies, researches gather information as to how the body handled the drug at different doses, side effects as associated with dosage, and some information as to how best to administer the new drug to maximize results and limit side effects.
About 70% of new drugs move onto the next phase and only about 10% to 15% of Phase 1 drug candidates make it to market.

Stages Of New Drug Development – Phase 2:

Phase II clinical trials evaluate the efficacy of new drugs, the safety of said treatments and dosage specifications. In this phase researchers administer the drug to a group of patients with the disease or condition for which the drug is being developed. Normally involving a few hundred patient. Safety remains a big focus of phase 2 clinical trials, with short term side effects being closely monitored. An increasing emphasis will begin to be placed on whether or not a drug is working as expected and if it’s improving the condition or not. Phase 2 trials will also establish dosage information, as to which performed most optimally. If the experimental drug continues to look promising it’ll move onto phase 3 clinical trials.
Approximately 33% of drugs move to the next phase.

Stages Of New Drug Development -Phase 3:

This is the final phase to new experimental drugs. The drugs that progress to Phase 3 are definitively tested for effectiveness in the treatment or cure of a specific condition, this is where efficacy also plays a big role. These trials are often randomized, meaning that trial participants can receive the experimental drug, a placebo, or another drug considered to be the current standard. In these clinical trials neither the researcher nor the patient know what drug was issued.
Phase 3 trials are normally conducted on hundreds or even thousands of participants, are the lengthiest trials, and normally account for about 40% of a company’s total R&D expense.
Approximately 25-30% of drugs move to the next phase.

Even though rare, at any point during clinical trials the Center for Drug Evaluation and Research (CDER) can impose a clinical hold on if the study is unsafe or if the trial design is deficient in meeting its objectives.

Stages Of New Drug Development (NDA) – New Drug Application:

The NDA application is the vehicle through which drug sponsors formally propose that the FDA approve a new pharmaceutical drug for sale in the U.S.
The goals of the NDA are to provide enough information to permit FDA reviewer to reach the following key decisions:

  • Whether the drug is safe and effective in its proposed use(s), and whether the benefits of the drug outweigh the risks.
  • Whether the drug’s proposed labeling (package insert) is appropriate, and what it should contain.
  • Whether the methods used in manufacturing the drug and the controls used to maintain the drug’s quality are adequate to preserve the drug’s identity, strength, quality, and purity.

The NDA can be tens of thousands of pages containing all the research and safety data examined during all the prior steps. When an NDA is submitted, the FDA has 60 days to decide whether to file it for review, or reject the application because some required information is missing. If the NDA is accepted, in accordance with the Prescription Drug User Fee Act, the FDA will respond within 10 months, at which point the FDA is expected to make a decision. The FDA can, and sometimes does, postpone a decision or even provide their results early; just not very common.

Just because a drug reaches the NDA stage, it doesn’t mean it’s going to be marketed in the US, in actuality only about 80% of drugs that have reached this level are marketed in the US. This stage of the drug development does not do much for investors, as most of the highlights were within the successive phase in clinical trails.

Stages Of New Drug Development – PDUFA date and decision:

Generally the FDA has three choice, Approve, Deny (very rare) or issue a Complete Response Letter (CRL) requesting more information. If the FDA requires more information they will make suggestion as to what is preventing the drug from being approved, sometime this could include running additional studies or alter their manufacturing process (delays are not good for stock prices).

Stages Of New Drug Development- Phase 4:

There is a phase 4, after the drug is approved the FDA can require the drug developers provide long lasting effects of the drug, as safety is the FDA’s main concern.

Development of a new drug through all these phases can take 10-15 years, and cost tens of millions of dollars.

Stages of New Drug Development
Stages of New Drug Development

Dow Theory

In general, the Dow Theory states that individual stock tend to relate to their indexes. For example, most biopharmaceutical stocks will act in relation to the biophamacautical index (IBB).

There are a few other things, such as:

  1. The Price discounts everything
  2. The Market has three trends
  3. Trends have three phases
  4. The averages must confirm each other
  5. Volume must confirm the trend
  6. A Trend is assumed to be in effect until it has given definite signals that is has reversed

1) The price discounts everything:

  • All known information that can be known has already been factored in.
  • The only remaining influence on the stock price is human emotion.

2) The three trends:

  • Primary:
  • Major Trends
  • Extensive up or down movements
  • Usually 1 year or more
  • Usually results in a move (up or down) of 20% or more
  • Secondary
  • Reactions during a primary trend
  • Shorter term (usually weeks or a few months)
  • Constitute 3-110% of the major trend
  • Minor
  • Small moves
  • Days, or up to 2-3 weeks
  • Can be 30-100% of the intermediate level move

3) Trends have phases:


Public Participation


4) Averages must confirm each other

The two Dow averages must agree (Transportation and Industrial)

5) Volume must confirm the trend

Strong volume indicates strong trend, weak volume indicates a weak trend.

6) A Trend is assumed to be in effect until it has given definite signals that is has reversed

Trend reversals in primary trends can be confused with secondary trends. The Dow theory advocates caution, insisting that reversal be confirmed.

Rules before buying a stock

There are rules you must follow before buying a stock, well not real rules, but more like a guideline for good trading habits.

1. What is the market saying
2. Good chart pattern
3. Good volume
4. Don’t chase
5. Set limit, stick to it
6. Add “Stop Loss Trailer” asap, stick to it
7. Start with 1/2 position
8. Don’t overbuy
9. Take profit, “trim and trail

1. What is the market saying:
Is the overall market and the index heading down or up? Many stocks will trend with it’s index, keep a close eye and make sure the overall market trend and index is heading in the right direction for you. This also means; Do Your Homework! You must know the stock, it’s financials, trends, and any upcoming catalysts that might make others want to buy the stock.

2. Good chart pattern:
What are the charts telling you? Does it look like a good play, or does the chart say not wait a little while? What are the trends of this stock, what is the support and resistance levels.

3. Good volume:
Is there enough volume to get in and out when you want and won’t get stuck? Is there enough liquidity? Remember if you get in, hold and the volume dries up, you are stuck or have to loose more than anticipated.

4. Don’t chase:
Don’t chase a stock that is climbing, it’s too late you missed your entry point. Either wait until it comes back to your entry or move on. You don’t want to chase and buy high thinking it’s going to go higher, then it drops on you.

5. Set limit, stick to it:
What is your buy limit, sell limit, and stop loss limit? You must when you want to get in and when you want to get out along with setting a stop loss in case your plan didn’t work the way you thought it would work.

6. Add “Stop Loss Trailer” asap, stick to it:
Make sure you have a stop loss and stop trailer so you can minimize your losses and maximize your gains. Gains can become losses if you don’t move your stop loss up when you are in profit.

7. Start with 1/2 position:
Start out buying half what you anticipate buying, once the movement is what you anticipated then you can complete your purchase. If you buy the full amount you are looking to invest, then you can’t add if it comes lower into your range, or worst, you can lose mare that what you wanted because the trade didn’t go in the direction you anticipated. Kinda like touching the water with your toes before you jump in.

8. Don’t overbuy:
You should not have more than 20% of your portfolio in any one particular stock. Your portfolio should always be diversified to limit your exposure.

9. Take profit, trim and trail:
Once you reached your profit goals for a stock, take half of the table and let other half run. This is called “Trim and Trail”, you are trimming your quantity and letting the rest trail to continue with the profit trends. This way you are taking your profits and allowing the other half to either continue making profit or if the value drops, you were able to maximize and secure some profit. You will be surprised how often stock run after they hit your goals. But this is a business, take your profits.

No need to explain, don’t force a trade, don’t chase, if it doesn’t look like what you want, then find another stock or wait until it looks right for you.