Investor's Guide To Clinical Trials: Phase Success Rates For Introductory Pipeline Analysis

Includes: GILD
by: SA Editor Brandy Betz


Investors new to biotech and pharma stocks can get a quick overview of a company's pipeline health with phase success rates.

A leading biotech trade group has broken down success rates by phase and indication to help craft an overview.

Case study of Gilead Sciences shows the potential for this method -- and the devil in the details.

Interested in becoming a pharma or biotech investor? Choosing the best companies for your portfolio can involve some of the same basic financial ratios and comparisons required for any industry. But you also need to do pipeline evaluations for these types of healthcare companies. Pipeline evaluations involve looking at the number of drugs in each phase of the approval process. There is some general data that can help you make a back of the envelope estimate on each drug's chance of approval without having to delve into the details of the clinical trials.

Later in this series, I will delve into how to understand the details on ongoing trials and provide guidance for reading reported trial results. This is meant as more of a quick guide that can help you get a general gut feeling for a company's pipeline at a glance. You should not use this guide to form the backbone of your biotech investment decision.

Quick Overview of the Drug Trial Phases

The development process involves three key phases followed by a regulatory approval process. If a drug or device makes it through all three phases and the approval process, the company will likely have a path to marketing and revenues. What happens in each phase?

(Image source: Alliance, PDF link)

Focus your attention on Phase II and Phase III projects. The earliest phase has too few participants for the results to mean much and companies seldom report detailed data for earlier stages. Phase III trials will have the most patients and data and can provide the best idea about a drug's chances of approval. Note that one drug can appear in multiple phases at the same time if a company is pursuing different indications, or treatment purposes, for the same drug. Evaluate each indication separately.

Probability of Success Lowers at Phase II

What are the chances that a drug will make it all the way from Phase I to approval? Biotechnology trade association group BIO published topical research: Clinical Development Success Rates 2006 - 2015 (PDF link.) Here's a snippet from the Introduction section that shows how BIO came up with the data:

This study aimed to measure clinical development success rates to strengthen benchmarking metrics for drug development. To measure success rates for investigational drugs, we analyzed individual drug program phase transitions from January 1, 2006 to December 31, 2015. For the ten years studied, 9,985 transitions in the Biomedtracker database were analyzed. A phase transition is the movement out of a clinical phase - for example, advancing from Phase I to Phase II development, or being suspended after completion of Phase I development.

These transitions occurred in 7,455 clinical drug development programs, across 1,103 companies (both large and small), making this the largest study of its kind. With this broad set of data, we aimed to capture the diversity in drug development across levels of novelty, molecular modalities, and disease indications.

Only company-sponsored, FDA registration-enabling development programs were considered; investigator-sponsored studies were excluded from this analysis…

Individual Phase transition success rates were determined by dividing the number that advanced to the next phase by the total number advanced and suspended. This "advanced and suspended" number is often referred to as "n" in this report, and should be taken into account when drawing conclusions from the success rate results.

One of the key measures of success used in this report is the Likelihood of Approval (LOA) from Phase I. This LOA success rate is simply a multiplication of all four Phases success rates, a compounded probability calculation. For example, if each phase had a 50% chance of success, then the LOA from Phase I would be 0.5 x 0.5 x 0.5 x 0.5 = 6.25%.

The success probability of a drug making it from one stage to the next shows how quickly the field narrows as only 63.2% of drugs make it from Phase I to Phase II but the larger participant group and narrowed focus drops the success rate of Phase II drugs down to about 31%. The drugs that do make it to Phase III have a 58.1% chance of making it on to the NDA / BLA approval process. These numbers again show why you want to put more of your investment focus on those latter two stages.

(Image source: BIO report, PDF link)

Indications Matter

I mentioned above the need to evaluate the same drug for each indication as though the indications represented different drugs. Different indications have different likelihoods of approval especially when you move to a more complicated treatment area like oncology.

BIO's report breaks down the Phase III success rates of drugs according to indication and oncology comes in at the bottom with 40%:

(Image source: BIO report, PDF link)

The report further breaks down the success rates by several narrowed oncology indications and I encourage curious investors to read the report to read the detailed information. For this general overview, we will stick with the broader oncology success rate.

Case Study: Gilead's Pipeline

I recently wrote an earnings report overview on Gilead Sciences (NASDAQ: GILD) that came as the Hepatitis C or HCV franchise loses a bit of steam. Gilead Sciences current marketable drugs fall mostly into the HCV and HIV treatment categories but the company has some pipeline contenders that are important for the company's future earnings. Investors are closely watching for trial data on these drugs.

Here's an overview of the company's development pipeline. A comprehensive pipeline evaluation requires a much deeper dive than this provides but this quick glance can help provide a foothold for investors completely new to the sector.

Gilead breaks its pipeline into sections according to indication: HIV / AIDS, Liver Diseases, Hematology / Oncology, Inflammation / Respiratory, and Other.

(Image source: All Gilead pipeline images from the company's website)

Ignore that early stage drug at the bottom ad you have one late-stage HIV / AIDS drug and one for PrEP, or pre-exposure prophylaxis, which is a type of drug taken by high risk individuals to lower the chances of getting HIV. Use the BIO indication graph above and these both have about a 71% chance of approval in the late stage.

There's one drug up for approval already and one in Phase III for the treatment of NASH, or nonalcoholic steatohepatitis, which is a type of fatty liver disease that causes inflammation and organ damage. Refer again to BIO's Phase III success by indication graph and gastroenterology drugs have about a 61% chance of making it out of that phase alive.

The BIO report contains a similar graph for Phase II success rates and gastroentology treatments have about a 36% chance of making it through to the final stage.

Phase II oncology drugs have about a 25% chance of making it on to the last phase. The general oncology Phase III success rate is 40%.

The inflammation / respiratory segment has more of a mixed bag of indications and thus of success probabilities. In Phase III, the same drug is up for three indications: Crohn's and ulcerative colitis both fall under the gastro indication at 61% while rheumatoid arthritis is autoimmune and 62%.

The Phase II contenders feature indications in autoimmune (32%) and respiratory (29%).

The lone member of the Other segment is a Phase II treatment for Ebola and the mid-stage success probability for infectious diseases is 43%.

What's the Verdict on Gilead's Pipeline?

Two late-stage HIV drugs look likely for approval with over 70% chance of making it to the regulatory stage. Three mid-stage oncology drugs only have about a 25% chance of making it on to the next phase so while you can keep an eye out for data, the odds aren't great for those drugs. The late-stage oncology drugs have a better chance but this is still an indication where you really want to do a deeper dive into the data before you make any bets on specific drugs.

The mid-stage Inflammation and Respiratory drugs have very low chances of survival so, again, look for what data becomes available from trials but don't be surprised to see drugs getting scrapped. The later-stage drugs have a better chance at approval than oncology but a bit less of a chance than the HIV drugs. If you were going to blindly bet on two segments, HIV and those late-stage Inflammation / Respiratory drugs would be the top choices.

The Liver Diseases segment looks strong due to the higher success rates for gastro but the actual leading indication, NASH, shows why the devil is still in the details with a pipeline analysis.

Devil in the Details

This guide, again, is meant to help form a back of the envelope idea of where a company's pipeline stands before you start making the deeper dives into evaluating the potential market for each drug and reading trial results to find out whether a specific drug looks likely to win approval and a sizeable market share due to some distinct treatment potential.

The BIO chart, for example, would give the GS-4997 late-stage entry for the NASH indication a 61% chance of success in that phase. But there currently aren't any treatments for NASH and untreated diseases are that way because the development and approval process has yet to turn out a safe and effective solution. Gilead could end up with the first approved NASH drug, which would prove wildly profitable, but the drug could also flunk out in the final stages. Tricky situations like this are why overviews are great starting points but not the best backbone for an investment decision.

Final Thoughts

New to investing in healthcare? Use the BIO success rates as a guide to give you a quick overview of what drugs or segments look the most likely to succeed. You can then use that narrowed view to start diving deeper into potential market sizes and into the trial data reporting for specific drugs.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.