After the market closed on Tuesday, Northfield Laboratories (NASDAQ:NFLD) announced disappointing preliminary results for its phase 3 trial assessing the safety and effectiveness of PolyHeme, an experimental red blood cell substitute. The death rate in one of the populations tested slightly exceeded the defined threshold that would indicate PolyHeme's effectiveness. After-hours traders were not in the holiday spirit upon discovering the study's findings; they slashed shares more than 50%.

PolyHeme is an oxygen-carrying solution designed for the treatment of life-threatening blood loss. The potential benefits of a hemoglobin-based oxygen carrier (HBOC) are endless, whether for military combat or civilian disaster relief. Northfield has been working with the military since 1969 to find a viable blood substitute, and while we'd all like such an effort to succeed, it seems Northfield now has more hurdles to clear to win the FDA's approval.

The second of two populations tested in the study was more successful, with death rates remaining within the acceptable limit, and the population in the failed trial included protocol violations related to patient eligibility and treatment regimen. Meanwhile, PolyHeme's safety analysis was promising; it revealed no statistically significant difference between the PolyHeme group and the control group.

After acknowledging the complexity of the study, Dr. Steven A. Gould, Northfield's CEO, noted: "We continue to move forward toward submission of a Biologics License Application [BLA] and will review the data and submit it to the FDA once we receive the final results. We believe that there is an unmet medical need for a hemoglobin-based oxygen-carrying red blood cell substitute, and that PolyHeme is that product."

Northfield is not the only company to run into steep barriers in bringing such an innovative product to market. Biopure (NASDAQ:BPUR) faces a similar plight. Its comparable product, Hemopure, has won approval for use in surgical patients in South Africa. However, the FDA has requested that the company perform additional studies to resolve safety and effectiveness issues. The company has routinely grappled with solvency and Nasdaq-listing compliance issues, although it recently announced an equity offering that should net the company $16.6 million.

As for Northfield, the company has about $62.4 million in shareholder equity and $58 million in cash and marketable securities. The company used $25 million in cash for its operating activities in FY 2006, and another $8.2 million for operating activities in the first-quarter of its FY 2007. Given this trend, it is apparent that the company will need to resort to an additional equity offering in the foreseeable future. Although transfused blood represents a very large market in the U.S., the volatility experienced by Northfield's stock price this week should serve as reminder of the inherent risk associated with developmental-stage companies.

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Fool contributor Billy Fisher does not own shares of any of the companies mentioned.