Pharmos Journeys to Center of the Mind

Can marijuana -- or at least a derivative of the drug -- protect your brain?

It sounds crazy, but this is the medical question, in very simplistic terms, being explored by Pharmos(PARS), a small drugmaker with dual headquarters in Iselin, N.J., and Israel. Pharmos is developing a drug that is synthesized from cannabinoid compounds (in other words, a chemical cousin of marijuana) that aims to protect the brain in patients suffering from severe head injuries.

Difficult Treatment Field

The Pharmos drug is called dexanabinol, and it's being tested in a large phase III study involving more than 800 patients who are at risk of moderate to traumatic brain damage resulting from accidents. Pharmos is expected to announce results from this study before the end of the year. If the study is successful, it could lead to dexanabinol being filed with the Food and Drug Administration in the second half of 2005.

Rodman & Renshaw biotech analyst Elemer Piros estimates that about 600,000 people worldwide suffer from traumatic brain injury, or TBI, that requires hospitalization (and therefore would be candidates for dexanabinol). Assuming 33% market penetration and pricing in the range of $5,000 per course of therapy, the worldwide market potential for dexanabinol is worth about $1 billion.

Pharmos shares closed Friday at $3.63, which equates to a market capitalization of $341 million and an enterprise value of approximately $286 million.

Of course, there is a catch. TBI has been a drug graveyard. Scores of companies, including Pfizer(PFE), have tried and failed to develop an effective TBI drug. While Pharmos has tried to learn from these past failures to design a study with better odds of success, the pending release of data from the dexanabinol phase III study is a classic, high-risk biotech event.

Piros pegs the odds of success for the study at only 55%, mainly because of all the past failures. Still, he rates the stock market outperform (his firm has a banking relationship with Pharmos).