Everybody's Getting High on Pharmos, But The Stampede Is No Hint to Hold

"Everything is in the eye of the beholder" is the truest thing ever said. Take a look, if you will, at what happened to Pharmos Corp. (PARS) on Tuesday.

After ending Monday at $1.50, it started Tuesday's session at $2.13, a 42% gain. It achieved this thanks to the approximately half a million hands, five times the average for this stock, that made a grab for shares as the session got underway. The reason for the stampede were the announcements by news agencies and the company itself, about the results of the latest trial of its marijuana-derived product, cannabinor, for the alleviation of post-operative pain.

The intravenously-administered drug was given to around 100 male dental surgery patients who had undergone tooth extractions. The patients were divided into groups, each of which was given the drug in different dosages. Pharmos said that the lowest dose of cannabinor (12 mg) produced a "statistically significant decrease in pain." The company said that the trial, which was conducted at University College London, had produced "an unexpected pattern of results," and that it would continue to explore possible explanations. Dr. Stephen A. Cooper, one of the world's leading experts in dental extractions, commented that "overall, there appears to be sufficient signal to warrant testing of cannabinor in chronic pain. It is also particularly noteworthy that even at relatively high doses there was no evidence of a dose-related increase in adverse events."

I don't know whether this announcement warranted Tuesday's 42% increase, but coming in the aftermath of the dexanabinol debacle in the summer of 2005, it is most certainly an encouraging development. The stock plummeted 60% back then, Pharmos was sued, and the disappointment even led to a management shake-up. One might have thought that investors would be more cautious this time round, after the experience with dexanabinol. After all, Pharmos said that it would continue to explore other options and that it would continue to develop marijuana-based compounds, so investors following the company were certainly aware that there would not be any dramatic developments in the foreseeable future.

Even the "success" of the trial earlier this week shouldn't have caused such momentum, since even if it had been found to be effective in all the dosages given, this is still only the initial stage of the Phase II trial, and after what happened with the lamented dexanabinol, why would anyone be in a rush? But the facts on the ground speak for themselves and investors have made a stampede for the stock that they so ardently loved to hate not so long ago, as if nothing had happened. Of course, it could very well be different investors this time around, but whoever they were, they didn't pile into the stock on the basis of their profound understanding of the development of marijuana-based drugs. Does anyone really believe that the investors, who were clamoring for Pharmos shares an hour and a half after the announcement was released, actually understood anything about this?

3.9 million Pharmos shares changed hands in Tuesday's session, at the end of which the stock closed up "only"19.3%. During the next few days, we will see who has the upper hand, last Tuesday's sellers or buyers. I am betting on the sellers, but aside from that, how should one act in instances like this? The thing to do is learn from the old timers - each person should decide for himself what price he would be willing to pay, if any, for Pharmos's dreams. With this in mind, I myself picked up 5,000 shares at an average price of $2 and upward, and have locked them away in the safe along with all the other dreams. At present, I have no plans to buy any more if the stock price falls to $1, or sell if it rises to $4.

Disclosure: Author is long PARS.

PARS 1-yr chart:

Published originally by Globes [online], Israel business news - www.globes.co.il
© Copyright of Globes Publisher Itonut (1983) Ltd. 2006. Republished on Seeking Alpha with full permission.