Pain Therapeutics (NASDAQ:PTIE) hurt its investors by dropping over 30% last week after reporting results of its Phase II trial of Oxytrex, a new formulation of the painkiller oxycodone.

The rationale behind the new drug is simple. Two of the main drawbacks with oxycodone and other similar opiates are that patients become tolerant, needing ever-increasing doses to relieve pain, and opiates are also addictive. So, researchers at Pain Therapeutics have included an ingredient (naltrexone) that interferes with these negative aspects. Both of these ingredients as separate medicines already have Food and Drug Administration (FDA) approval, so the main hurdle for Pain Therapeutics is to show that Oxytrex really does help solve the problems of tolerance.

It seemed investors were underwhelmed by the data Pain Therapeutics presented last week, slicing the stock from over $7 to under $5. This reaction surprised me, as the study appeared to meet the relevant clinical endpoints. The patients on one version of Oxytrex had a statistically significant improvement in pain relief even after only three weeks of daily taking the pills, while the oxycodone group showed clear signs of increased pain because they were becoming tolerant to the dose.

Perhaps one cause for disappointment was that other side effects (nausea, headaches, and anxiety) were practically the same in the version of Oxytrex that showed the best analgesic properties. These side effects were somewhat reduced in the second version of Oxytrex used in the trial, but this version showed no significant improvement in pain relief over oxycodone.

Earnings were released last Tuesday, and showed typical results for an early-stage biotechnology company, meaning little revenue and a lot of losses. The company burned through $6 million in the third quarter, and $14.9 million year-to-date. It still has $83.2 million in the bank (cash and securities), slightly over four years' worth of operating expenses at the current burn rate.

The chronic pain market is worth $5 billion, with Purdue Pharma's Oxycontin, the drug Oxytrex is gunning for, boasting sales of over $1 billion.

Pain Therapeutics also has an ultra low-dose version of naltrexone entering Phase III trials for irritable bowel syndrome, which is another multibillion-dollar market. Currently, only Novartis' (NYSE:NVS) Zelnorm and GlaxoSmithKline's (NYSE:GSK) Lotronex are FDA-approved for IBS, but only in women, whereas Pain Therapeutics' product has shown positive results in both men and women.

Additionally, Lotronex came back on the market in 2002. Glaxo withdrew it in 2000 after a rash of serious complications appeared in some patients. Zelnorm works in a similar fashion to Lotronex (albeit for IBS with constipation, as opposed to Lotronex's indication for IBS with diarrhea), so doctors might be gun-shy about prescribing it. Naltrexone has been FDA-approved at much higher doses for nearly 20 years for other indications, so there is little chance for new negative side effects to suddenly appear.

Considering Pain Therapeutics is sporting a market cap in the $150 million range with half of that in cash and securities, but has two products in Phase III trials, investors might consider the potential for long-term gain after short-term pain.

David Nierengarten, Ph.D., works with a biotechnology venture capital fund. He often contributes to Fool.com and is an active member of the TMF Community as DavidMN. He owns shares of GlaxoSmithKline. He appreciates your comments at davidnierengarten@mac.com and on the Biotechnology discussion board.