Understanding Drug Development and Approval Process

By Duncan Ferris


New drugs and treatments have to undergo a long process of development, clinical trials and FDA approvals before they can start bringing in revenue for pharma and biotech companies.

Clinical trial laboratory work by gloved hands doctor.
Photo by CDC on Unsplash

Investing in pharmaceutical or biotech stocks means you’re likely to bump into the opaque drug development and approval process at some point.

That exciting start-up you’re researching might still be in the preclinical stage. The pharma giant you’ve backed might be touting a ground-breaking new treatment it has in development.

But the language used by these companies to describe their research and update investors on this process can be confusing. 

What hoops do these product candidates have to make it through before they can become revenue earners for their company? What do treatments need to achieve to make it to market? What on earth is a primary endpoint?

This guide will take you through the process step-by-step and give you some extra information.

Drug Development Timeline

Discovery and Development

Discovery can come from many different sources. Maybe new technology has opened up a new way of dealing with problematic conditions. Sometimes existing treatments are found to be unexpectedly effective against a variety of illnesses. Discoveries can be made about a virus or disease’s vulnerabilities.

Whatever the root, early testing can often involve hundreds or even thousands of possible treatments, with this huge amount being quickly whittled down in this preliminary stage. Once a promising candidate has been found, it’s time to put it through its paces.

Pre-Clinical Research

This stage of development largely includes small-scale lab-based testing to determine the toxicity and necessary dosing of a treatment candidate. Researchers will use this stage to approximate how a treatment will affect the human body by seeking to obtain information about absorption, distribution, metabolization and excretion.

Clinical Research

This section of development is where the treatment is first tested in human subjects. The timeline here is as follows:

  • Phase 1 – Smaller scale study to determine the safety and required dosage of the treatment. Lasts several months, with 70% of treatments passing.

  • Phase 2 – A study to determine a treatment’s efficacy and side effects which involves several hundred patients suffering from the condition. Can take as long as two years to complete, with around a third of treatments moving on to the next stage.

  • Phase 3 – This stage sees as many as 3,000 participants being involved in an evaluation of efficacy and adverse reactions, which can take up to four years. Around a quarter of treatments pass this stage.

As you can see, many treatment candidates fall by the wayside during this process, which is also extremely time-consuming.

Depending on the treatment being studied, enrolment in these trials can be challenging. Some treatments for common conditions might have a huge pool of people to volunteer for testing, but companies creating treatments for more niche illnesses or diseases might struggle to find enough patients to enrol.

FDA Review

After the completion of clinical trials, a company can send an application which includes the entire history of the drug to the FDA. According to the FDA, this application must include:

  • Proposed labelling

  • Safety updates

  • Drug abuse information

  • Patent information

  • All studies, data and analysis

  • Institutional review board compliance information

  • Directions for use

Upon receipt of the application, an FDA review team will take 6-10 months to decide whether to approve the new treatment. This team, which determines whether a treatment is safe and effective for its intended use, is made up of expert pharmacologists, statisticians, medical officers and more.

Sometimes, applications are turned down, but others are of course approved or offered a list of issues which need to be resolved before approval can be granted.

It’s also important to note that FDA approval merely clears new treatments for use in the US. Other jurisdictions have their own regulators and agencies which pharma companies must gain approval from.

FDA Safety Monitoring

Following commercialization, the FDA can continue to be involved in a drug’s lifecycle in several ways. A company might wish to make supplemental applications for small changes to the approved product, or the FDA regulator might want to inspect a drug’s manufacturing operations.

In short, the FDA’s involvement does not end at approval!

When Drug Development Goes Wrong

The drug development process can be a tumultuous time for businesses, so it’s worth examining an example of what can go wrong.

Recent weeks have seen the wheels come off at Intercept Pharmaceuticals (NASDAQ: ICPT) as the company’s fatty liver disease treatment has struggled to find a way past the FDA.

The company’s share price has fallen by more than 50% over the last month, with reviewers questioning whether the patient benefits offered by Intercept’s obeticholic acid are significant enough to make up for the treatment’s risks.

The business is still waiting until 22 June to hear whether the treatment will receive approval, but a conference call from CEO Jerry Durso on Monday indicated that the business is ready to step away from the project and pivot to focus on its only approved treatment, Ocaliva.

This is not the outcome Intercept or its investors will have been hoping for, but this is a key risk associated with the development and approval process. It’s also important to note that failure at the final hurdle and subsequent lack of alternative treatment candidates is a very dangerous combination for a company’s share price.

Drug Development Key Terms

Now that we’ve examined the process in full and taken a quick look at a case study, here are some key terms you might see in updates about the drug development and approval process are:

  • In vivo – Testing on animals.

  • In vitro – Lab-based testing.

  • Ex vivo – Testing on human or animal cells.

  • Primary endpoint – The main value or question that a study is seeking to answer.

  • Secondary endpoint – Additional measurements which can provide supporting information.

  • Investigational New Drug Application (IND) – An application submitted to the FDA before clinical trials can commence.

  • New Drug Application (NDA) – An application to bring a treatment to market following clinical trials.

  • Abbreviated New Drug Application (ANDA) – An application regarding a generic drug product, which contains the same chemical substance as an already-approved treatment.

  • Orphan drug designation – A status offered to treatments which prevent, diagnose or treat a rare disease or condition. Being granted the designation can qualify a company for incentives like tax credits and market exclusivity.

  • Accelerated approval – A faster approval pathway for promising therapies that treat a serious or life-threatening condition and appear to offer benefits over existing treatments.

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Author: Duncan Ferris

This article does not provide any financial advice and is not a recommendation to deal in any securities or product. Investments may fall in value and an investor may lose some or all of their investment. Past performance is not an indicator of future performance.

Duncan Ferris does not hold any position in the stock(s) and/or financial instrument(s) mentioned in the above article.

Duncan Ferris has not been paid to produce this piece by the company or companies mentioned above.

Digitonic Ltd, the owner of ValueTheMarkets.com, does not hold a position or positions in the stock(s) and/or financial instrument(s) mentioned in the above article.

Digitonic Ltd, the owner of ValueTheMarkets.com, has not been paid for the production of this piece by the company or companies mentioned above.

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