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) - Get Report

, 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).

Studies Under Way

To understand traumatic brain injury, think about someone who has been involved in a serious car accident. There might not be any penetrating trauma to the skull, but the violent force of the accident can cause injury to the brain, which in turn can cause permanent cognitive or physical disability. Simply put, someone who suffers from TBI is not able to function normally.

"I've been waiting for 10 years for a neuroprotectant to work in TBI, and dexanabinol has the best shot so far," says Harry Tracy, who runs the

NeuroInvestment

newsletter focusing on central nervous system therapeutics. (He's long Pharmos shares.)

Tracy likes dexanabinol's chances because the drug has three mechanisms of action to protect the brain from damage, whereas most of the previous drug failures only worked one way. Tracy also thinks Pharmos was smart about designing the current phase III study to minimize risks, learning from the mistakes other companies made.

The phase III study enrolled 867 patients who have the potential for moderate to severe TBI from accidents and who received dexanabinol within six hours of incurring the trauma. One group of patients was given dexanabinol intravenously as part of their overall treatment, the other a placebo. After six months, all patients will be assessed for TBI with a clinical measure known as the Glasgow Outcome Scale, a measure of physical and mental fitness after brain injury. Pharmos hopes to show that patients given dexanabinol exhibit a statistically significant reduction in TBI compared with placebo patients.

Pharmos is also testing dexanabinol to prevent cognitive problems associated with heart surgery. A phase II study in this indication is also under way, with results expected by the end of the year. While positive results in this study will be good news for Pharmos, the big event is the end-of -2004 results from the larger and more important phase III TBI study.

This is another of those all-or-nothing clinical events that high-risk-loving biotech investors crave.

Please note that due to factors including low market capitalization and/or insufficient public float, we consider Pharmos to be a small-cap stock. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.

Adam Feuerstein writes regularly for RealMoney.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to

adam.feuerstein@thestreet.com.