One-Day Wonder : Fat Chance
September 27, 2004
By Lawrence Carrel
Snack-loving Americans shelled out $42.2 billion last year on weight-loss aids ranging from low-cal soft drinks to fad diets and expensive soy shakes, according to Marketdata Enterprises, a Tampa, Fla., research group. And that's not including the fortune spent on liposuction and gastric bypasses.
Given the available alternatives and the attendant risks, what might the market be for a nasal spray that helps users skip a meal by imitating a naturally occurring appetite-suppressing hormone?
Buyers of Nastech Pharmaceutical (NSTK) dreamt big dreams Monday, boosting the fledgling stock a giddy 70% after Merck (MRK) agreed to co-develop its experimental obesity treatment. Shares of Merck inched up 1% to $44.46.
"The timing of this deal is much earlier than what we expected. We thought the search for a partner wouldn't come until after the Phase II studies," says Caroline Stewart, an analyst at New York investment bank Jesup & Lamont. "It validates Nastech's nasal delivery technology, which we think is revolutionary, and provides needed cash without dilution to shareholders."
Drug giant Merck will pay Nastech $5 million up-front to jointly develop the Peptide YY 3-36 Nasal Spray (PYY). Nastech stands to earn up to $131 million based on development and approval milestones, and an additional $210 million if the drug hits certain sales goals.
This is a significant amount of money for a company burning through $30 million of cash a year. With a $16.3 million cash balance as of June 30, Nastech was under the gun to acquire new financing by the end of the year. Mission accomplished.
"This was a purposeful amount," says Steven Quay, Nastech's chairman and chief executive. He says the $131 million in projected payments by Merck should see Nastech through the next four years, the amount of time he expects it will take to get the drug approved by the Food and Drug Administration.
Merck will finance research studies and the quest for a regulatory approval, while Nastech will manufacture the spray as a contractor to Merck. In addition to the milestone payments, Merck will reimburse Nastech's manufacturing development costs. Nastech will have an option to co-promote the product in the U.S. Additional financial terms were not disclosed.
For the second quarter, Nastech posted a net loss of $7.5 million, or 62 cents a share, on revenue of $45,000.
Peptide YY, a naturally occurring hormone, is produced after a meal by special cells in the gut, triggering that feeling of satiety, or fullness, that tells us not to order a second dessert.
According to a study published in the New England Journal of Medicine last year, obese and nonobese subjects given a 90-minute intravenous infusion of PYY consumed on average 30% fewer calories during a lunch offered two hours later. Also, all subjects experienced a significant decrease in their cumulative 24-hour caloric intake.
However, because PYY is a protein, it's a large molecule unsuitable for a typical nasal spray. Initial studies focused on delivering it by injection.
Nastech's innovation is its nasal spray. Most nasal sprays can only deliver drugs under a molecular weight of 200, says CEO Quay, whereas Nastech's spray can deliver larger molecules, such as PYY, which has a molecular weight of approximately 4,000. Preliminary trials have proven the spray can deliver PYY into the bloodstream.
"A high percentage of what we put in the dose gets into the bloodstream," says Quay. "Injection to peak levels can happen in just 25 minutes, and we are giving an amount nine times as large as what the body produces after a meal. So this should tell you that you are full even longer."
Safety and efficacy have yet to be studied. However, should the spray prove effective, its potential could be monumental.
It's estimated that 64.5% of all American adults are overweight and 30.5% are obese. With 400,000 deaths a year in the U.S. attributable to poor diet and physical inactivity, obesity is currently the second-leading cause of preventable death in the country after smoking.
The only two FDA-approved obesity drugs now on the market are Roche's Xenical and Abbott's (ABT) Meridia. Both are only modestly effective and have many side effects.
"The obesity market is huge, so if this does work, it could be a $1 billion drug," says Quynh Pham, an analyst at investment bank Delafield Hambrecht. "Xenical, when it was at its peak generated, in excess of $700 million in revenues. But we don't know if PYY works. You'll need long-term extensive trials. You're not talking about it being approved until about 2009."
Both Pham and Jesup's Stewart say the Merck pact validates the nasal delivery technology for PYY as well as other drugs. CEO Quay says Nastech is currently marketing the advance to other potential collaborators.
In a separate announcement Monday, Nastech said it acquired exclusive world-wide rights to PYY patent applications from privately held British company Thiakis. Specific terms of the agreement were not disclosed, but Thiakis received an equity investment from Nastech, and it could collect license fees, milestone payments and patent-based royalties.
The lone Nastech drug to have made it on the market so far is Nascobal, a nasal gel for vitamin B12 deficiencies. However, product revenues for the first six months of the year were only $120,000. Its osteoporosis drug, Calcitonin, is currently being evaluated for approval by the FDA.
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"The obesity market is a holy-grail area for drugs," says Jesup's Stewart. "It's a multibillion market that is underserved by the current available therapies. In addition, Nastech licensed some more PYY patents, and it's my understanding that Nastech has the only issued patent claim that relates PYY to satiety. We expect the announcement of partnerships and progress of other pipeline products to be a driver for the stock. Other news events that may boost the shares in the near-term include the securing of a partnership for the Calcitonin product, which we expect to occur by year-end, and the results from the Phase I study of nasal parathyroid hormone." (Neither Stewart nor Pham owns shares of Nastech Pharmaceutical; neither Jesup & Lamont nor Delafield Hambrecht has an investment-banking relationship with the company.)
Source:www.smartmoney.com
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