The biotech sector tends to attract investors who are interested in exciting new medical advances and drawn to big profits.
There are lots of ways to invest in the sector. Some investors prefer the comfort of big profitable biotechs that have various product offerings and deep pipelines, like Gilead Sciences (Nasdaq: GILD).
Others would rather take a chance on a small biotech stock that could be a home run.
Either way, there’s no sector that moves as much or as quickly as biotech.
Consider Five Prime Therapeutics. In November 2020, the stock was trading at around $5… but then it jumped 349% in one day thanks to positive Phase 2 data for its cancer drug bemarituzumab.
Then, just a few months later, the stock spiked another 78% in one day on news it was being acquired by Amgen.
All in all, Five Prime soared 605% in less than five months.
Five Prime is a perfect illustration of why Phase 2 clinical trials are my sweet spot in the biotech sector.
In case you aren’t familiar with them, here’s a brief rundown of the various phases of clinical trials:
- Phase 1: A small trial of healthy volunteers. The drug is studied to understand how it works in the human body.
(Cancer drugs are an exception in that they are not given to healthy volunteers because they are typically too toxic. Instead, they are given to cancer patients.)
- Phase 2: A midsized trial with more patients. Safety and efficacy are analyzed.
- Phase 3: A large trial where an optimal dose is studied for safety and efficacy. The data from this trial is what is submitted to regulatory agencies for approval.
You’d be shocked by how many people are involved in the clinical trial process.
Certainly, brilliant scientists create the drugs and vaccines, but it takes an army of people to develop and market a successful drug – from the doctors overseeing the trial to the phlebotomists drawing blood to the nurses examining the volunteers to the case managers keeping careful track of records to the other staff making sure patients have all of the information they need.
And that’s just in Phase 2. There’s a lot more work that needs to be done after Phase 2 before the drug crosses the finish line and gets to market.
But data from Phase 2 trials is usually the first real indication that a drug may be safe and effective.
Now, not all drugs cross the finish line. Roughly half of all drugs with a successful Phase 2 trial fail in Phase 3. But Phase 2 is the first time you can realistically begin to think the company may have something worthwhile.
For that reason, stocks can spike on strong Phase 2 data, especially smaller stocks. And early investors in the company will often sell some of their positions so as not to risk a failure in Phase 3.
So when investing in biotech, I like to find small cap and midcap stocks with upcoming Phase 2 data that can act as a big catalyst for a price move.
That gives me the best chance of getting in before a big jump in the near future.