High Risk/ High reward in Biotech.
This is a meant to be a brief primer to biotech investing and/or trading. Biotech is both a risky and rewarding endeavor. I would strongly advise not investing anything you cannot afford to lose and to seek the advise of a financial counsel prior to investing or trading or any kind.
There is information that has to be known in order to tread these deadly seas. There are processes and systems in which all small cap (and any for that matter), need to follow in order to bring a drug to market. The phases which are involved are Pre-Clinical Trials, Phase 1, Phase 2, Phase 3 and finally FDA (for US markets) approval.
These trials are the first and foremost for any drug which is sought to be at market. The purpose of these trials is to test primarily SAFETY of the drug. This is usually done in a controlled environment on animals (rats, primates etc.) Once the company is satisfied with safety results they will file an IND ("Investigational New Drug Application". This process can take 3 - 5 years.
This trial begins only when the FDA approves the IND, which is them basically saying it is ok to be TESTED on humans in trials. This is not a guarantee there will be safety issues later. Usually Phase 1 trials are small and test the SAFETY only in the patients of the trial, and can last 1-2 years.
When a company is satisfied with the data from Phase 1, they will initiate more trials to test for EFFICACY. Which is generally how well the drug is at its task. There are more people tested in these trials and some companies will do multiple Phase 2 (Phase 2b etc) in order to prove the drugs effectiveness (EFFICACY). This phase can last 1-3 years again and the company must seek FDA approval to begin Phase 3.
Quite often before commencing a Phase 3 trial a company will see a SPA ("Special Protocol Assessment") with the FDA. This can enhance the chances of an FDA approval , but not guarantee it. A phase 3 trial is large, involved and can host multiple sites (even worldwide). This is the last chance to prove EFFICACY and SAFETY of the drug in question. At this time if all other trials were successfully (and the drug market is large) expect a run up in share prices.
Once the drug has proven itself in Phase 3, the company will ultimately seek FDA approval. The FDA is the final decision of whether or not a drug gets to market. The company submits all its data of all the trials, pays a fee (can be expensive for small Co's) , this is called filing an NDA with the FDA. Or filing a NEW DRUG APPLICATION. The FDA has 60 days to accept the REVIEW of the drug, not the actual drug yet. Once accepted they can take 1 or more years to APPROVE the drug. The date of the drug approval would be called the PDUFA ("Prescription Drug User Fee Act") this was created to expedite the process for a fee (can shorten the FDA approval to 6-12 months),
The timing and entry of trading and investing in biotech is everything. If you buy in Phase 1 , expect to wait and possibly face multiple company cash problems along the way. If you should get in before phase 3, you may have a shorter ride but the risk is still there. Do not BUY & HOLD biotech stocks its far too risky, know when to buy and sell.