If you have any comments, questions, or thoughts on this article or on anything to do on biotechnology or medical technology feel free to email me at prugg@tradingmarkets.com.

The fundamental key to any trading strategy is knowing when to take a position in a stock -- and knowing when to abdicate that position.  Unfortunately, most companies never help you in perfecting this basic strategy, except of course those in the biotechnology sector. This is what I love about investing in biotech companies, among other things, and this is what separates them from the rest of the pack. 

There is an inherent presence influencing the life of every biotechnology company and this presence is called the Food and Drug Administration, the FDA. As an investor in the biotech industry, I thank the FDA for being there because its guidance and timelines allow me to plan my trading strategies. No other industry has such a unique entity watching over its individual companies the way the FDA does for the biotechnology industry.  

In this two-part lesson, I hope to show you how, as a trader, you can take advantage of the FDA’s influence on individual companies. I will also provide insight as to how the FDA thinks when it is deciding the fate of a new drug application, and guide you around FDA new drug decisions. To me, the FDA provides the roadmap to trade biotech companies. However, it is up to me to correctly interpret the legend of that map before committing to any trade. With this lesson, and my next, I will help you understand how this map is put together and how to use it to maximize your trading strategies. 

First Stop: Investigational New Drug Application (IND)

Any biotechnology company with a potential new drug starts the entire process in the laboratory. It takes several years for a company to produce or identify a new compound in the lab and continue through preclinical testing in animals. Once the testing has been completed, often the company will publicize the animal data at a scientific meeting. Even at this early stage of the drug development process, investors can take advantage of this opportunity by knowing the dates of the key scientific meetings that grab investors' attention.   

For instance, the American Association for Cancer Research (AACR) is the showcase meeting in April for the presentation of raw scientific data in the field of cancer research. Positive preclinical data presented at this meeting on a potentially new cancer-fighting drug will move a company’s stock price, despite the fact that human clinical trials are several years from completion. Most of the time, the abstracts for the papers being presented at this and other meetings arrive in physicians’ offices a month before the meeting. Interestingly enough, many of the companies presenting, especially at the major cancer meetings in April and May will make their move four to six weeks before the start of the meeting. 

Any drug showing efficacy against cancer cells in a test tube, lab animal or human being, will get a reaction from investors. It will get a reaction because the cancer market is the top prize market for new drugs and because people react to the word "cancer" -- in the financial markets and in the physician’s office.

Once a company has put together convincing preclinical animal data, it will approach the FDA and file for permission to begin human clinical trials.  This asking for permission takes the form of an Investigational New Drug Application, or IND. This represents the first hurdle for a company to negotiate along the road to ultimate FDA approval. Most company filings for IND applications occur several months after data was presented at a major medical meeting. The company usually hopes to build upon the momentum from the meeting as it approaches the FDA for the first time. If an IND is granted, it allows the company to begin human clinical Phase I trials. Approximately 85% of INDs will get approved by the FDA and often the news causes a short-term gain for the stock, particularly if the targeted disease market is large. However, at this point the company still has a long way to go before presenting its new drug to the FDA for approval and as an investor, I do not get too excited about the acceptance of an IND application.

Clinical Trial Phase

Once Phase I data is obtained, a company then will begin a Phase II study to actually look at whether their new drug is effective against the targeted disease. Often companies will present positive Phase II data at clinical medical meetings because their presentation will add momentum to the stock price. Again, as an investor you can take advantage of the timing of these meetings by researching the companies doing the presenting.  When I look at the results of Phase II clinical trials, particularly those testing cancer drugs, I want to see clear-cut results in the new drug’s ability to decrease the tumor burden and increase patient survival. Many times, the new cancer drugs being tested are aimed at those patients with advanced disease. If Phase II clinical trials hint at increasing survival in this type of patient population, then this may be an indication of good things to come for investors in the all-important Phase III trials.

The next step a new drug needs to go through before it gets the privilege of coming before the FDA is the final stage of human clinical testing.  Phase III clinical trials are carried out to show that the new drug is more effective and safer than the current treatment available. This is where the money is for most companies. Convincing Phase III clinical trials are absolutely necessary for a company to be successful in lobbying the FDA for approval of a new drug. Most companies today must carry out two, large-scale (1,000 patients or more), double blind Phase III clinical trials that show the new drug’s effectiveness and safety in a large population of patients, before getting a date with the FDA.  

Be leery of a small patient number in presented Phase III clinical trials, because the FDA will take notice when it is time to vote. Small-number trials usually result in the FDA wanting more data, a request that stocks do not react well to. In addition, make sure the company’s Phase III data supports the endpoint of the clinical trial. Otherwise, the FDA will reject the drug if the data is not supportive, despite the company’s claim that the drug is effective. The endpoint is stated at the beginning of the trial in the protocol to the FDA. 

Convincing positive Phase III trial results will undoubtedly move a company’s stock price, and this move is compounded if the drug being tested falls into a high-profile market such as cancer or diabetes. The move by a stock will be even greater if the new drug is aimed at a virgin disease market, one where there are currently no effective treatments. I consider the following diseases as virgin markets and huge opportunities for companies:  spinal cord trauma, irritable bowel disease, systemic lupus, hepatitis, AIDS, stomach and pancreatic cancer, and blood product substitutes. 

Just a quick note regarding Phase IV clinical trials. A Phase IV clinical trial is carried out after a drug has been approved. This type of trial revisits safety and monitors reported side effects, once the drug has been used by thousands of patients. Phase IV trials usually offer investors no opportunity to take advantage of stock price movements and have no substantial influence on the stock price of a company. Unless, of course the data collected leads to a drug recall.

Again, the showcases most companies use to present their data are the major medical meetings throughout the year. For cancer drugs, these meetings include the American Association For Cancer Research (AACR) in April and the American Society of Clinical Oncology (ASCO) in May.  For diabetes drugs, the American Diabetes Association meeting in June is the premier showcase for Phase III trial data. For heart-disease drugs, the American Heart Association (AHA) meeting in November is very high-profile for the presentation of Phase III clinical data, as well as the meeting of the American College of Cardiology in March.

New Drug Application (NDA): Inching Closer to the FDA

Once a company has presented convincing data from two large-scale Phase III trials on the efficacy and safety of their new drug, then it's time to approach the FDA. The vehicle used by companies when approaching the FDA for approval is the New Drug Application or NDA. The filing of a NDA starts the process toward a final date with the FDA advisory board. It has become a pattern to watch companies present positive Phase III data on a new drug at a major medical meeting and then, one to two months later, file for a new drug application with the FDA. This approach is truly a one-two punch for investors and provides two opportunities for traders to be active.  

Often investors do reward the company with the filing of a new drug application, particularly if the new drug targets a large market. Two recent examples of this involve ImClone Systems (IMCL | Quote | Chart | News | PowerRating) and Icos Corporation (ICOS | Quote | Chart | News | PowerRating). Both companies announced the filing of new drug applications on June 28, 2001.  ImClone Systems filed just over one month after presenting its data at the biggest cancer meeting of the year, on behalf of its new monoclonal antibody drug C225 to treat metastatic colorectal cancer. The stock was up 5% for the day. 

Icos filed less than one month after presenting data at the year's largest meeting of urologists. It filed on behalf of its new drug to treat impotence and rose close to 7% for the day.

Now, filing for a new drug application with FDA doesn’t necessarily guarantee acceptance. The FDA will ultimately approve approximately 85% of new drug applications for clinical use. In addition, the FDA usually takes at least one year to evaluate the application data and decide whether or not to approve the drug. There is one exception to this timetable and that involves the “fast track” designation. After an initial review of the new drug application, the FDA may conclude that the new drug being presented can serve an unmet medical need if it does get approved. New drugs with potential to treat patients who have no effective alternative, such as those with metastatic pancreatic cancer or Lupus, can be given “fast track” status. 

A fast-track designation for a new drug means the FDA will shorten its application process to six months, and facilitate the process toward potential approval with what is known as a “rolling NDA.” A rolling NDA allows the company the luxury to submit portions of the Phase III clinical data as it becomes available, and not have to wait for the entire trial to end before submitting the supporting data. The designation does not guarantee approval. However, investors do like it. This was clearly evident when the FDA granted fast-track status to MGI Pharma’s (MOGN | Quote | Chart | News | PowerRating) new drug to treat pancreatic cancer refractory to current chemotherapy on June 28. The stock rose 14% on the announcement. 

One final FDA designation that investors do reward is when a new drug is designated as “orphan status.” The orphan status is given to drugs designed to treat rare medical diseases, and conveys seven years of market exclusivity if the FDA does approve it. The exclusivity granted does severely limit the future competition the drug may experience. The classic example of this is Biogen’s (BGEN | Quote | Chart | News | PowerRating) main revenue-producing drug to treat multiple sclerosis. 

Final Thoughts

The road to getting a new drug approved is an arduous one at best, and the FDA has laid down the ground rules for all companies. It does offer several stops along the way as opportunities for investors to take advantage of potential movement in stock prices. I have tried to show you where these stops are and the opportunities they present to investors. In Part II, I will focus on the biggest prize of all, the FDA approval meeting date, and will provide insight as to what to look for in stock price movement leading up to this meeting.

Good luck.   

Paul

I have been investing/trading in medical and biotechnology stocks for years. The one common theme is that this is a high risk/reward endeavor. When you are correct, many times you are richly rewarded. When you are wrong, you can be badly punished. Please keep this in mind and hedge/protect yourself appropriately when trading/investing in these stocks.

For The Best Trading Books, Video Courses and Software To Improve Your Trading Click Here