Pharmos

(PARS)

said Monday that its experimental drug dexanabinol was able to only partially prevent cognitive problems in patients undergoing heart surgery in a midstage study.

However, the mixed results from this phase II study do not provide much visibility into whether dexanabinol will succeed in a larger, more important, phase III study that is expected to be completed before the end of the year. This high-risk, high-reward phase III study is designed to determine whether dexanabinol can protect accident victims at risk for traumatic brain injury, or TBI. As detailed

here, the phase III trial is one of those all-or-nothing clinical events that risk-loving biotech investors crave.

Pharmos shares lost nearly 4% Monday, closing at $3.61. With a commercial market potential of more than $1 billion, the phase III TBI study is the big event for which investors are waiting anxiously. Convincingly positive data from Monday's heart surgery study might have increased the odds of success in the TBI study, but that wasn't to be.

Monday, Pharmos said an analysis of a phase II study showed that dexanabinol patients undergoing coronary artery bypass graft surgery outperformed placebo patients three months after surgery, on the so-called Stroop Color Word test, which measures executive functions of the brain like attention control and decision-making.

But there was no statistical difference between dexanabinol patients and those taking placebo on five other computerized tests measuring cognitive function. The study failed because the primary endpoint was a composite score of all six tests. Pharmos likely will have to conduct additional phase II studies if it wants to continue development of dexanabinol in this indication.

"Six swings with only one solid hit doesn't make you Ted Williams," said Harris Nesbitt analyst Tom Shrader, assessing the mixed data coming from this study.

Shrader said his expectations for the heart surgery study were low. He's still looking toward the phase III dexanabinol study in traumatic brain injury, which is where most investor attention has been focused. Shrader has an outperform rating on Pharmos and his firm has done banking for the company.

Harry Tracy, who runs the

NeuroInvestment

newsletter, says positive results from the Stroop test do suggest that dexanabinol has some positive functional effect. But he's not confident enough to say that Monday's data portend anything for the traumatic brain injury study. Tracy is long Pharmos shares.

Dexanabinol is a drug 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. Some analysts peg the commercial market for traumatic brain injury, or TBI, at more than $1 billion. But so far, TBI has been a drug graveyard. Scores of companies, including

Pfizer

(PFE) - Get Report

, have tried and failed to develop an effective TBI drug.

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.