Welcome to the first "biotech mailbag" column. I get a lot of great reader email and feedback, which I try hard to answer directly. But often, there are questions asked or issues raised that could benefit a wider audience.

So consider this new regular column -- weekly, I hope, so keep the email flowing -- a chance to ask me questions about biotech or take me to task for something I wrote. I'll pick the best of the mail and address it here. Now, off to the mailbag.

Elemer Piros, a research analyst at Rodman & Renshaw, is more bullish on Neurochem ( NRMX) and its Alzheimer's drug Alzhemed than I was in my column this week. While he agrees that the ongoing Alzhemed phase III study is high-risk, he is more optimistic that results will be positive. Specifically, Piros says I neglected an issue with the study that girds his confidence.

Piros writes that my column failed to "observe that these patients were on memory enhancers (80% on Aricept) on average for 20 months before they entered this 18-month study. You ignore the possibility that most of these patients were probably declining when they entered the study, and fail to reconcile this with the observation that 36% of the total (latest blinded analysis) has improved on average at the end of the 18 month experiment." (Piros has a market outperform rating on Neurochem, and his firm has done banking for the company in the past 12 months.)

Piros raises a good point. Patients entering the Alzhemed phase III study were already on a memory-boosting drug. Piros (and Neurochem) believe that these patients were losing cognitive function before they started taking Alzhemed, so the apparent fact that a portion of patients are improving or stable after 18 months on Alzhemed is evidence that the drug is working.

I would counter Piros' argument, however, with some recent published data showing that Alzheimer's patients taking memory enhancers do not lose cognitive function that quickly. In fact, some patients improve.

A 2005 French study followed 498 Alzheimer's patients taking memory enhancers for one year. At the end of that time period, patients had a mean deterioration in their cognitive function of 2.4 points on the ADAS-cog scale. But the variability in that measure was plus or minus 3.74 points, which means some patients actually improved their cognitive function. The study's researchers concluded that drug and non-drug treatments for Alzheimer's "resulted in stability or improvement of the condition in 63.4 percent of patients at 1 year."

Recall, Neurochem claims that the latest blinded data from its phase III Alzhemed study show 41% of mild Alzheimer's patients had improved or stable cognition after 18 months taking Alzhemed and other memory enhancers.

But in light of the French data showing stability or improvement in 63% of patients taking memory enhancers alone at 12 months, the evidence of Alzhemed's efficacy doesn't look as convincing.

My email inbox filled quickly with comments about my bearish column on Northfield Labs ( NFLD) and its blood substitute Polyheme. Most of the email was from the folks whom I now call (with affection) the "Polyhematomas" for their undiminished faith in Northfield, despite its huge setback in December. Naturally, they aren't happy with me.

Several readers did ask if there were any other companies out there developing blood substitutes. And if so, what did I think of them? Well, the list isn't very long, but it includes Synthetic Blood International ( SYBD.OB), Alliance Pharmaceuticals ( ALLP.OB) and Sangart. The first two are penny stocks trading on the bulletin boards; the latter is a private company.

Synthetic Blood's blood substitute is called Oxycyte. It differs from Polyheme in that it's made from oxygen-carrying perfluorocarbons (PFCs), not recycled blood or blood components. Synthetic Blood claims that Oxycyte can carry 5 times more oxygen than normal hemoglobin.

The company recently completed a very small study in patients with traumatic brain injuries. The data are interesting, seemingly positive, but Synthetic Blood will have to do a lot more testing with Oxycyte before investors should get interested. And be wary of any company trying to develop a treatment for traumatic brain injury; many others have tried and all have failed. I should also mention that Synthetic Blood is running out of money. As of its last filing, Oct. 31, 2006, the company had $102,000 in cash and cash equivalents. That's thousands, not millions.

Alliance Pharmaceuticals has been trying to develop its PFC-based blood substitute, Oxygent, for years. Lately, it seems to be gaining some traction in Europe, where it's trying to get a phase II trial up and running. Again, investors should tread lightly.

The most interesting blood substitute company out there -- albeit a privately held one -- is Sangart, mainly because of its founder, Dr. Robert Winslow, a well-respected expert in the field. (Winslow's work with blood subs goes back 30 years and includes a stint heading the U.S. Army's research efforts.) Sangart's product, Hemospan, is derived from human hemoglobin, like Northfield's Polyheme, but is engineered to avoid the pitfalls that have caused first-generation blood substitutes to fail. Hemospan has been used in some phase II studies in Europe and Sangart is making efforts to start a phase III trial there.

Responding to my "biotech homework" column , reader G.C. asks:

Wondering if there is a relatively quick way to estimate the potential market for these drugs? It may not be worth the time to perform the medical analysis on the findings if the potential market is too small. Or can we assume that any cancer drug will have a sufficient potential market?

I wish there was an easy answer to G.C.'s question, but there isn't. Getting access to sell-side research is probably the quickest path to learning about the commercial potential for any biotech company and the drug it's developing. If that's not possible, you can do a rough calculation yourself.

The National Cancer Institute maintains a statistics page that provides information on the number of people diagnosed with, or who die from, cancer annually. Drug pricing is a trickier variable, but as a ballpark estimate, targeted, biologic drugs (a.k.a. "biotech cancer drugs") can cost between $2,000 and $10,000 per month. (You can see why cancer is such a big focus for biotech companies.)

Another reader, R.T. (he's an M.D. and Ph.D), comments on the same column:

The homework you are describing is clearly what a diligent scientist should do for comparing the efficacy of different treatments. As you point out, this may not be easy even for scientists and may take time, as available data may be contradictory, insufficient or even wrong. Conclusions might be hard to draw even after data have been published in top medical journals. That is science. It just take a lot of time to reach definitive answers.

So, I think this kind of "homework" is clearly impractical when it comes to deciding where to put your money, especially if you are screening a few hundred biotech companies, their products and their press releases. As a scientist and private investor in the biotech world, I prefer to follow the "expectation" potential of new products rather than their proved efficacy and, of course, technical indications of buying/selling pressures.

Thanks for the feedback, R.T. The method I described to dig into biotech research is certainly not the only way, and it may not be the best way for everyone. I know biotech investors who don't know an antibody from an atom but rely on charts to do their buying and selling.

Bottom line: Go with whatever works for you. But of course, please keep reading here.

Please note that due to factors including low market capitalization and/or insufficient public float, we consider Northfield Laboratories, Synthetic Blood International and Alliance Pharmaceutical to be small-cap stocks. 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. Feuerstein appreciates your feedback; click here to send him an email.