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Nastech Pharma and Pan American Silver: Tricky Business

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The important takeaway: Mining and bringing drugs to market are complicated, tricky businesses.

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The Geology-Biology Connection


I'd like to take a look at two companies I care about, Pan American Silver (PAAS) and Nastech Pharmaceutical (NSTK). In the most recent issue of "Gold Stock Analyst," John Doody included a write-up of Pan American's early-November Mexican mine tour. (Parenthetically, it has a picture of yours truly holding a 50-pound bar of silver.) I bring up the story because (a) it provides an in-depth background on a couple of Pan American's mines, and (b) to share lessons I have learned, as a director of Pan American, that are applicable to Nastech.

Payment Delayed, Not Denied

Monday night, Nastech announced that Proctor & Gamble (PG) had decided to restructure a payment which it had planned to make in mid-December for the osteoporosis drug PTH1-34. It appears that P&G signed a contract tied to a calendar date, rather than (as is usually the case) to certain milestones. Then, as P&G pursued the previously planned biomarker trial, it came back to Nastech, saying it would rather tie the payments to an additional Phase II trial it wants Nastech to run, and ultimately to Phase III trials. Obviously, P&G had a reason for wanting to do this, and Nastech agreed, though I don't know exactly what transpired.

While this impacts Nastech in the short run (since it stands to obtain payments as the product moves forward in trials), in the long run I don't think it changes the outlook for/impact from PTH1-34 at all. From a receiving-cash standpoint, it's a delay of probably 9 to 12 months.

Finite Woe, Future Glow

In any event, though this is not a pleasant development, it's not the end of the world either. Had the payments originally been tied to more standard milestones, Nastech might be exactly where it now is. But because the company was given a certain date when it was to have received the payments, and it informed folks of that expectation, it's a disappointment. However, there are a host of data points that we are soon to see, regarding PYY, IN Insulin, IN Byetta, a new clinical trial, and potential developments in RNAi -- any of which could be positive (though obviously there's no guaranty of that).

Meanwhile, some folks have suggested that this is three strikes for Nastech, meaning the fact that it took PYY back from Merck (MRK), the fact that Calcitonin is stuck at the FDA, and now this. I don't see it that way. We won't know whether or not PYY/Merck was a strike until the PYY Phase I data are released by Nastech. If the results are good, then it was a strike, but against Merck, not Nastech. As for Calcitonin, it's a technicality that was unforeseeable on the part of the Nastech. But that, too, is still an open question. As for last night's news, it might be a strike against Nastech, or it might not be. We just don't know for sure. That is how life goes sometimes.

Shafted

I know. As a director of Pan American Silver, I've had firsthand experience of rough treatment. Here is a company that many readers are familiar with, and which the market generally holds in high regard. What lots of folks may not remember is that, through no fault of its own, PAAS was badly wounded by bad luck and Russian "justice." Here's what happened:

Management was able to accomplish the impossible during the late-1990s bear market in metals and the Russian ruble collapse -- which was to negotiate loans for bringing its Russian Dukat property into production. PAAS obtained export decrees (something that no one else had done at the time), as well as all the necessary permits. Then, at an auction, as PAAS was buying the mill (which was the last step in the process, and the last asset the company needed), it was essentially stolen from PAAS by friends of the new regime manned by Putin.

There was really nothing the company could have done differently, other than choose not to be in Russia in the first place. But given the potential of the property, and the low cost, it was an idea that had to be pursued. And, PAAS was careful not to commit the money until every last loophole for the Russian government to trip it up had been closed off. None of the board members thought that at auction, the company might lose a mill (of value only to us) -- which amounted to the Russians end-running and basically taking the property away from PAAS. But that's what happened. In addition, there have been a few other bits of just plain bad luck over the years. Yet here we are, and PAAS is doing pretty well despite adversity.

"Sweet Are the Uses of Adversity"

The important takeaway: Mining and bringing drugs to market are complicated, tricky businesses. There are going to be stumbles and, occasionally, near-death experiences. That's just the way it is. There are no unencumbered roads to success. I offer this up as a bit of perspective, as folks contemplate future investment opportunities. As for Nastech, I think that this is a good opportunity for folks to evaluate whether or not it holds interest for them. I added to my Nastech position yesterday, for what it's worth.
Positions in NSTK, PAAS

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