DEFINITION of 'Phase 2'

The second phase of clinical trials or studies for an experimental new drug, in which the focus of the drug is on its effectiveness. Phase 2 trials typically involve hundreds of patients who have the disease or condition that the drug candidate seeks to treat. The main objective of Phase 2 trials is to obtain data on whether the drug actually works in treating a disease or indication, which is generally achieved through controlled trials that are closely monitored, while safety and side-effects also continue to be studied. Phase 2 studies also aim to establish the most effective dosage for the drug, and the optimum delivery method. Phase 2 trials usually form the biggest stumbling block in the development of a new drug.

BREAKING DOWN 'Phase 2'

Phase 2 trials are typically constructed as double blind, randomized, placebo controlled studies. This means that some of the patients enrolled in the study will receive the drug candidate, while others will receive a placebo (or a different drug). The assignment is done on a random basis and neither the participant nor the clinical investigator knows whether the participant will be receiving the drug or the placebo. This randomness and anonymity is rigorously enforced to prevent bias in the studies.

Phase 2 trials are considered successful when analysis of the data from enrolled participants reveals that the experimental drug works in treating the disease or indication. Patients who have received the experimental drug should have better clinical outcomes on a statistically significant basis than those who received the placebo (or the alternative drug). If Phase 2 trials are successful, the drug proceeds to Phase 3 studies.  

Phase 2 studies only commence if Phase 1 studies do not reveal unduly high toxicity or other safety risks of the experimental drug. While up to a third of drugs in Phase 1 studies do not progress to the Phase 2 stage because they are not safe enough, the odds of a drug progressing from Phase 2 to Phase 3 trials are even lower, about 32% to 39%.

Because of the relatively low rate of success at the Phase 2 stage, market reaction to a successful Phase 2 outcome is generally rewarded with significant stock price appreciation for the company developing the drug. The degree of stock appreciation depends on a number of factors including: the prevailing environment for equities in general and healthcare stocks in particular, the disease or indication that the drug aims to treat, the strength of the Phase 2 results, and price movement in the stock prior to the release of Phase 2 results.

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