Anyone investing in biotech and pharma stocks knows that “clinical trials” mean “news that can move the stock.”

But understanding what they are and why they move the stock will help a trader decide which results are important and which ones are more likely to be market noise.

Clinical trials explained

Clinical trials are simply research studies trying to verify whether a treatment or medical device is safe and effective for human consumption and use. Clinical trials often determine the efficacy of a treatment for certain illnesses or groups of people.

These tests fall under the umbrella of the “clinical research” phase of a drug’s development-and-approval process. The agency behind the trials — typically the company developing the drug — looks to determine if the drug or device being tested meets its goals, and try to answer specific research questions. There are three phases to the clinical-research process, unimaginatively named Phase I, Phase II and Phase III.

Phases of the trial

Phase I clinical trials generally try to determine if the medical product is safe for human use, and the proper dosage for some specified illness. In this phase, study participants range between 20 and 100 healthy volunteers, or people with a specific disease or condition. If the treatment passes this trial, it moves on to Phase II.

The Phase II trial can range between several months and two years. Study participants can include up to several hundred patients with the condition or disease that the treatment is specified for. With that in mind, the purpose of this phase is to determine the efficacy and side effects of the treatment. Thereafter, if the treatment has positive results, it would enter Phase III.

In Phase III trials, there is further testing on the efficacy of the treatment, and there is close monitoring for adverse reactions. This phase can take anywhere from one to four years, and involves testing on 300 to 3,000 volunteers who have the disease or condition.

Typically, positive results from clinical trials boost the stock, while bad news drops it.

Here’s an example from when Array BioPharma (ARRY) announced top-line results from Part 2 of the Phase 3 COLUMBUS study evaluating binimetinib, a MEK inhibitor, and encorafenib, a BRAF inhibitor, in patients with BRAF-mutant advanced, unresectable or metastatic melanoma. The results were positive; here’s what happened with the stock.

Source: TradingView

Final thoughts

If you’re looking into biotech or pharmaceutical companies, analyze the company’s treatments, and the results of those treatments in clinical-trial studies. Understanding these concepts could potentially create trading ideas and opportunities in the health-care sector.

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  Kyle Dennis runs Kyle Dennis’ Biotech Breakouts (biotechbreakouts.com). He is an event-based trader, who prefers low-priced and small-cap biotech stocks.  

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