Bypass These Pitfalls to (Major) Profits in Bioscience

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Anyone who's very familiar with the bioscience/pharmaceutical sector will tell you investing in experimental drugs can be an object lesson in volatility.

As the drugs progress toward FDA approval or denial, the stock prices of the companies backing them can be in for the same volatile ride.

A stock's surge or decline is often premised on general assumptions about the likelihood of FDA approval.

But within specific bioscience sectors, that likelihood varies... widely.

That's why I wanted to navigate through some types of drugs that generate a lot of enthusiasm but often crash before delivery.

That way you can avoid some of the downside risk of this often lucrative market...

The Gauntlet That Few Make It Through

First, every new medication has to pass through a regulatory gauntlet that includes at least three phases of clinical testing for safety and effectiveness, each more exacting than the one before.

Then it goes through a final review by the FDA, which starts with the acceptance or rejection of a New Drug Application (NDA) and may include prescreening by one of 33 advisory committees, as well as a final assessment by the FDA Center for Evaluation and Research (CDER).

That final assessment includes data from both animal and human studies, information on how the drug will be manufactured and marketed, and a draft of how the drug will be labeled. From there, the FDA will issue either an approval or a complete response letter (CRL), detailing why the drug was denied approval.

The odds aren't good. New drugs take an average of eight years to get through the clinical trial process, and only one in five survives to the finish line.

In the meantime, even the hint of good or bad medical news can send a stock soaring or crashing - and all of this plays out against a background of financial catalysts and market forces that have their own heft and sway.

As an investor, you need to have ways to mitigate your risk, and as far as I'm concerned, unless you're a short seller, that begins by knowing where not to put your money.

These High Flyers Usually Crash

There are certain types of drugs that generate exorbitant enthusiasm as they work their way toward various regulatory milestones, driving share price into the stratosphere. Unfortunately, they often end up falling short of their medical goals, they fall by the wayside, and stock value drops like a rock.

I'm talking about drugs intended to cure nasty, complex, treatment-resistant diseases that we don't really understand, but that frighten the hell out of us: cancer, Alzheimer's, and inflammatory bowel disease come first to mind.

When we say cancer, we may be referring to any of more than 100 distinct diseases, most of which are still poorly understood. What they all have in common is that they can spread uncontrollably before they're ever diagnosed, and trying to kill them at that point is like trying to wipe out every ant in a large colony with a hammer. A drug that can extend the life of cancer patients by a couple of months is considered a major success. But keep this in mind: According to the National Cancer Institute, only 1 in 20 cancer drugs that begin clinical trials ends up with final FDA approval.

We've poured hundreds of millions of dollars into Alzheimer's research in the past 30 years, and we still don't really know what causes it. Some people think it's the result of a protein called beta amyloid building up in the brain. Others think it's caused by inflammation or another protein called Tau. Whatever the cause, over all that time the FDA has approved exactly five drugs to treat the disease, and none of them work all the way. A medication that could simply delay onset of the disease by three years would be considered one of the great medical breakthroughs of all time, but we don't seem to be close to goal yet.

Inflammatory bowel disease (IBD) is a catchall name for colitis and Crohn's disease. It's probably caused by a complex interplay of genetics, environmental variables, and bacteria that live in the gut. We have some medications that can palliate the symptoms, but ultimately, we can't cure it, and really can't even stop its progression.

So yes, a drug that succeeds in treating any of these illnesses would be a huge win not only for patients, but for investors as well. And when the market smells a whiff of success in the air, even during phased clinical studies, the prices often go wild.

But here's the problem: While those studies are going on, there is no way to predict their outcome.

For more tractable illnesses, like skin infections or vascular disease, preliminary data may be fairly predictive of final phase 2 results. And in turn, those results can give you a reasonably good picture of what the phase 3 data are going to look like. (Don't invest in phase 1 drugs. Phase 1 trials give no information about effectiveness.)

But with complex illnesses like the three mentioned above, again and again I've seen investors lured in to buying shares by early positive results from one study, only to go down in flames after a data release from a later one.

Why? Patients can look very good early in treatment, then suddenly devolve. Or drugs that seem to do well compared to placebo in phase 2 trials don't do nearly as well when compared to current-standard-of-care treatments in phase 3. Or in going from smaller to larger patient populations, major side effects may start showing up. Or what looks like a positive result, such as tumor shrinkage, may turn out to be meaningless in terms of extending a patient's life.

The Payoff

One big way to limit your risk up front in biotech investing is to avoid drugs still going through clinical studies to treat highly resistant diseases. But let me emphasize that I'm talking about a specific period in the gauntlet.

Once final data is in from phase 3 trials, the picture changes. You then have real evidence to evaluate. Despite the odds against any cancer drug making it through the gauntlet, every year some do, and they pay off big.

For example, in early 2012, Pharmayclics (Nasdaq: PCYC) was selling for about $25 per share. Now, after approval of its drug to treat a rare cancer called mantle cell lymphoma (MCL), the price is up to $137...

With over 30 years' experience writing about the latest developments in health, medicine, and related technologies, Ernie Tremblay has gained "insider" access to the world's top doctors, professors, and researchers. He's worked with Nobel-caliber doctors such as Yale's Karel Liem, Columbia's George Gaylord Simpson, and Harvard's William S. Beck, to name a few.

Ernie's edited hundreds of books on science, microbiology, and groundbreaking medical therapies for top publishers like Harper Collins, Penguin Putnam, and Prentice Hall. He's also co-authored and ghostwritten numerous books on everything from Alzheimer's to rheumatology.

Best of all, he's developed knowledge of the inner workings of the FDA drug approval process and knows precisely when a drug or technology is about to "pop" and its company's stock rocket upward in price. So stay tuned; you'll be hearing from Ernie a lot more now...

About the Author

Ernie Tremblay has over 20 years' experience studying and writing about the latest developments in health, medicine, and related technologies. He understands the FDA approval process, the "hard science" behind these drugs, and the market demand for them, better than almost anyone else on earth. He has mastered the complex dynamics that determine whether a new drug will be a breakthrough winner - or just another casualty of the FDA approval process.

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