The Mystery Behind Drug Development
By Crystal Sengstaken, with Chandler Lutz
As investors we often hear about biotechnology stocks increasing hundreds of percent after the release of a new drug. One of the most fundamental processes a savvy investor needs to understand is what a biotech company goes though in the development of a new drug. In this article I’m going to make you an expert on the pharmaceutical development process and give you a valuable new tool in your investment toolbox.
Discovering and developing safe and effective new therapeutic drugs is a long, difficult and expensive process. The U.S. system of new drug approvals is perhaps the most rigorous in the world. It takes on average 12 years for an experimental drug to travel from the lab bench to the medicine cabinet. Only 0-2 percent of compounds that enter preclinical testing make it to human testing and of these only about 20 percent tested in humans will eventually be approved. Additionally, on average, it costs a company $359 million to get one new drug on the market.
Companies have to jump through a lot of hoops to put a drug on the market. After they have targeted a disease of interest, the first step in the process is research and development. At this stage, scientists lock themselves in labs and conduct tests on thousands of compounds. If these none of these compounds are sufficient, then the scientists will produce new ones. Throughout this process, biologists, physicists and chemists are looking for a new drug that can be more effective than those currently on the market.
Once a compound is discovered as a potential drug, the research and development doesn’t stop there. Scientists then continue to test the drug to ensure it can be mass produced in a safe and effective way.
If the drug clears the research and development phase, the company will then submit the drug into the pre-clinical testing phase. At this stage, teams of scientists use laboratory and animal testing to determine how a drug moves through the body with particular emphasis on absorption, distribution, stability and excretion. Additionally, the biotech or pharmaceutical firm conducts manufacturing tests at this point to determine the optimal way to make the drug for wide use.
If the potential drug makes it this far, and the firm still believes it can be a huge money-maker, then the firm will file an application with the FDA and begin clinical trials in humans for the drug. Clinical trials are the most publicized and talked about phase of drug development. As the drug progresses through clinical trials it becomes closer and closer to being released on the market (and in return rewarding patient shareholders).
The first phase of trials is phase I where they test the drug on 20-100 healthy volunteer patients to determine the drug’s safety and dosage ranges. This process usually takes six months to a year to complete.
If the drug passes phase I, the company submits the drug for phase II testing. Phase II involves placebo-controlled tests on 100-500 volunteers who actually have the disease that the drug is supposed to treat. In this phase some patients are given the actual drug while other patients are given a placebo, like a sugar pill for example. A placebo test determines a drug’s effectiveness against the specified ailment. Similarly to the first stage, the firm again examines the safety and dosage levels for the new medicine. The Phase II process usually lasts 6 months to a year.
The next step in the process is phase III. The tests in phase III are similar to those of phase II except they are conducted on a much larger scale. In phase III trials, the company conducts the placebo-controlled tests on 1000-5000 randomized patients through hospitals and doctors’ offices. In this part, the firm studies the drug’s effectiveness and identifies any potential side effects. This process usually lasts between one and four years.
While the phase I-III trials are happening, researchers are also testing various dosage forms, such as pill and inhaler. Additionally, scientists examine the safety of various package designs.
At this point, if the potential drug is effective and safe, then the firm will submit it to the FDA for review so that the FDA scientists begin their review process. They study all results from every trial as well as data from research in the lab to ensure that the drug is worthy of sale in the United States. This FDA review usually lasts a year and a half and about 10-15 percent of drugs get rejected by the FDA at this point.
Once the FDA gives their stamp of approval, the drug is released on the market. Just because the drug makes it onto the market doesn’t mean it’s finished with FDA review. At this step, the drug enters phase IV of the clinical trials. Through phase IV firms submit ongoing reports to the FDA to evaluate long term safety. This process can continue on for years and can cost the firm as much as $30 million. This stage of trials can also provide significant benefit to the firm beyond the sales of the drug for the specified disease. Sometimes, firms discover that a particular drug is an effective treatment for a different disease. If this occurs the firm will submit the drug again to the FDA for review.
Clearly, the process of creating a new drug is long and arduous. For the firms that are able to put drugs on the market, the rewards can be spectacular. As an investor, it is important to understand the process and the challenges a firm faces when developing a new medicine. Due to difficulty of this lengthy process, the drug development business is a very high risk high reward endeavor for firms and their shareholders.
