Owners of small-cap biotech Axonyx (NASDAQ:AXYX) woke up to terrible news Monday morning. The company announced that its potential Alzheimer's treatment, Phenserine, failed to show statistically significant benefits in its phase 3 study. Wall Street's reaction was predictably swift and brutal; the stock was down more than 60% in early trading on Monday.

While both the 10mg and 15mg trial arms showed encouraging trends in efficacy after 26 weeks of treatment, a better-than-expected result in the placebo group rendered those trends statistically unconvincing. As such, the drug would have virtually no chance of approval at this point.

Although biotech stocks almost always react poorly in the wake of clinical disappointments, Axonyx was a high-risk play that was more vulnerable than many other biotechs. As I had highlighted in an earlier piece, Axonyx has no other drugs in clinical trials today. This left the company disproportionately vulnerable to any delays or disappointments in Phenserine.

It is difficult to say what the future now holds for Phenserine. The company has a second trial ongoing to evaluate the drug's ability to lower beta-amyloid precursor protein, which may lead to a slower progression of the disease.

The company could also elect to redo the disappointing phase 3 study with the hope that a new trial would show statistical efficacy. It is also possible that the company could reconfigure the dosage in the hope that a higher-dose version of Phenserine would prove safe and efficacious.

Either decision would be risky, and the odds of success would likely not be particularly high. Considering that the company had about $88 million in cash at the end of September, management now needs to be very careful with how it allocates this scarce resource.

Now that the bad news has come home to roost, what of the future for Axonyx? Although the company is keeping a stiff upper lip toward Phenserine, investors should not expect this drug to ever make it through to FDA approval and should treat it as only a possible "bonus" for the future. While the company does have an additional compound that it hopes to put into clinical trials in 2005, as well as other preclinical compounds that may hold promise, those drugs wouldn't be on the market until 2012 at the earliest.

As of the time of this writing, the stock trades at $1.80. While the company has not yet reported December quarter results, I would take a guess that the company will show roughly $80 million or so of cash left on the balance sheet -- about $1.50 per share. While that may yet be life after death for Axonyx shareholders, anyone who buys these shares on the basis of paying "only" $0.30 per share for the technology value of the company needs to realize that they are gambling, not investing. Sometimes gambles pay off, but more often than not they don't.

Fool contributor Stephen Simpson, CFA, has no ownership interest in any stocks mentioned.