BOSTON (TheStreet) -- This week's Biotech Stock Mailbag opens with a question about the strong performance of small-cap stocks in what has otherwise been a down week.

I'm not aware of an investment link between Arena Pharmaceuticals (ARNA) - Get Report and Netflix (NFLX) - Get Report . What we are seeing in the past week, however, is relative strength in small-cap biotech stocks, including stocks like Arena with high short interest. This trend is counter-intuitive. If investors are taking money out of the market because of concerns about the global economy, interest rates and Ebola, then riskier, small-cap biotech stocks should not be a safe haven. Yet, here's what the SPDR S&P Biotech ETF (a good proxy for small-cap biotech stocks) looks like in the past five days compared against the iShares Nasdaq Biotech ETF, it big-cap weighted competitor:

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Arena, MannKind (MNKD) - Get Report and Curis (CRIS) - Get Report -- representative of small-cap biotechs underperforming this year -- are having a great week.

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What we're seeing this week is short-covering in small-cap biotech stocks. Bigger macro funds hurt by the steep slide in the market overall are taking profits and raising cash where they can. How long the unwinding of the small-cap biotech bear trade lasts is anyone's guess, but I do believe that's what's going on this week. Also remember that stocks that move higher due to short-covering need buyers to step in to make the gains stick. For a lot of risky biotech stocks, fundamentally driven demand is hard to find. 

"BioDude" asks:

Adam, could you perhaps address in your Mailbag what seems at least to me a case of irrational exuberance regarding Avanir Pharmaceuticals (AVNR) ? I just don't get the basis for an extra $1 billion in market cap for a dubious sounding Phase II trial of cough syrup. The company quickly raised money on the news, not surprisingly.

I agree with you. Avanir presented detailed data from the phase II study of AVP-923 in Alzheimer's-related agitation this week. The 1.2-point reduction (placebo adjusted) in the agitation/aggression scale at 10 weeks appears modest to me. The result favoring AVP-923 over placebo was highly statistically significant because Avanir greatly overpowered the study. The question of AVP-923's effectiveness at reducing agitation in Alzheimer's patients will be debated for a long time because Avanir has yet to start the two phase III studies required to move the drug forward. 

Mention Alzheimer's and investors get excited because there are so few effective treatments for the disease or related conditions like agitation. Sell-side analysts are quick to forecast $1 billion-plus in peak sales for AVP-923 based on the results from a small phase II study. They overemphasize the relevance of a small reduction in agitation scores while downplaying potential safety issues like dizziness and falls. That's what sell-siders do, and Avanir benefits because it will be a long time before we see any validating clinical data from the phase III studies. 

Daniel J. writes:

I understand your position on Ohr Pharmaceuticals (OHRP) , but don't you think it is a win for the company that the Food and Drug Administration agreed on the protocol for what I consider a very low bar (3 line improvement.) If they duplicate the interim phase II results (I know, small sample size but it still had a statistically significant P Value) then it is a win. What am I missing? Is it your position that you expect them to fail to improve vision by 3 lines?

I wrote a

strongly worded opinion about Ohr's Squalamine eye drop in June

 when the interim results from a phase II study were announced. Let's be clear: The interim analysis failed. Squalamine was unable to reduce the frequency of Lucentis injections compared to placebo in patients with wet age-related macular degeneration. Ohr wants investors to ignore the study's primary endpoint and focus instead on a "positive" secondary endpoint -- improvement in visual acuity (a reading gain of three lines or 15 letters on a standard eye chart) for squalamine over placebo. When the primary endpoint of a study fails, all other endpoints become exploratory only, so it's unrealistic to place much confidence in Ohr's conclusion about Squalamine's ability to improve visual acuity. A larger phase III study is unlikely to turn out any better than the phase II study. 

One more red flag: Ohr announced the interim results from the phase II Squalamine study in June, representing half of the patients enrolled treated for nine months. Where is the final analysis encompassing all the patients enrolled? And why was visual acuity assessed at nine months, when it's more conventionally measured at 12 months? What do the visual acuity data look like out to 12 months? I find it odd -- and concerning -- that Ohr met with FDA to hammer out a design for phase III studies based in interim data from a small phase II study. Ohr claims FDA "agreed with" a nine-month visual acuity endpoint for the phase III studies, instead of the standard 12-month time period, but the company doesn't have a Special Protocol Assessment (SPA) which could have codified the FDA's support. Instead, we only get Ohr's side of the story because FDA can't comment publicly.

CytoSorbents' (CTSO) - Get Report lead product is an external filter designed to remove excess cytokines from blood. In a healthy person, cytokines are proteins which help regulate immune response. But when someone suffers severe trauma or a raging infection, the release of cytokines can get out of control, leading to unchecked cellular inflammation, organ damage and even death. Sepsis is the classic -- and often fatal -- example of a cytokine "storm." CytoSorbents believes its device, CytoSorb, removes excess cytokines from the blood of patients suffering from sepsis or other diseases, leading to improved treatment outcome, even prolonged survival. 

Unfortunately, clinical data compiled to date don't back CytoSorbents' claims about the benefit of treatment with the CytoSorb filter. The device does appear to remove inflammatory cytokines from blood but patients don't live any longer. In the only randomized clinical trial I can find (poster available on the company's Web site), the 28-day and 60-day mortality was the same for sepsis patients undergoing cytokine removal with Cytosorb compared to control sepsis patients. The mortality data actually trended against CytoSorb. The study also excluded a significant number of enrolled and treated patients from the analysis for questionable reasons. Additional details from the study, none very promising, are included in the company's most recent 10-K. You should read it.

European regulators granted CytoSorbents clearance to sell CytoSorb under a "CE Mark" designation because the device is safe to use. Without clinical data demonstrating a benefit from cytokine removal, however, the company isn't likely to generate meaningful revenue. Delcath Systems (DCTH) and Cytori Therapeutics (CYTX) have also tried to market medical devices in Europe under CE Marks, without success because doctors aren't convinced the devices do anything. 

CytoSorbent can't sell CytoSorb in the U.S. without submitting the device for review and approval by the FDA. For that, the company needs to run a successful clinical trial, which it hasn't done. 

Steve A. writes:

How you feeling today about taking a CHANCE on DANCE's Inhaled Insulin product. Better than Mannkind's? Think they knew they were a loser. You can write your article now about DANCE cancelling their IPO, we all know why, it's called AFREEZA!!

MannKind's inhaled insulin product is called Afrezza, not Afreeza. Steve is correct about one thing: Dance Biopharm did withdraw plans to go public this week. Like MannKind, Dance is developing a device allowing diabetics to inhale insulin through the lungs. The approaches differ in that Dance's device vaporizes liquid insulin into a mist while MannKind's Afrezza uses dry insulin powder

Steve believes Dance's plans for an initial public offering were thwarted by the success of MannKind. Investors are so enamored with MannKind's Afrezza that there is no need for a competing inhaled insulin device. I say the total lack of investor confidence in MannKind and Afrezza's future prevented Dance from finding enough investor interest in its IPO.

Take a look at MannKind's stock performance since Afrezza was approved in late June and tell me who's right:

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Adam Feuerstein writes regularly for TheStreet. In keeping with company editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet. He also doesn't invest in hedge funds or other private investment partnerships. Feuerstein appreciates your feedback;

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