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Biotech Roundup: Nastech's Osteoporosis Drug, Merck's Settlement...

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Watch for falling knives on both Nastech and Merck...

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Nastech

Nastech (NSTK) had its nasal spray osteoporosis drug tossed back in its lap by Proctor & Gamble's (PG) pharmaceuticals division. Nastech immediately announced its intention to do another round of Phase II trials, ostensibly supported by unnamed "experts". Let me translate this for you:

NSTK: "Nastech will immediately advance PTH1-34 Nasal Spray into a Phase 2 clinical study."
Translation: With so many questions about its obesity drug and a string of other product setbacks, it is cheaper for Nastech to run a Phase II trial than it is to take the market cap hit for canceling the program.

NSTK: "Academic experts in both nasal delivery and osteoporosis who were given the opportunity to review the data under confidentiality all came to the same conclusion: A Phase 2 efficacy study with bone mineral density as the endpoint is the appropriate next step in clinical development."
Translation: Note the release does not say these unnamed experts thought the drug would work. This Phase II trial will put money into the pockets of these experts and another publication notch in their academic belt.

NSTK: "These studies, in addition to the non-clinical work completed, demonstrate that Nastech's patented nasal spray formulation delivers teriparatide to the patient's blood, causes a response in bone turnover markers and was well-tolerated. Nastech believes that these data support the continued development of the product."
Translation: The drug gets to where it is supposed, but the patient outcome data shows nothing important happens after that.

NSTK: "P&G dropped the drug because the development timeline no longer matches up with the patent expiration of Merck's (MRK) Fosamax."
Translation: Let's hear from P&G about why they tossed the drug back to Nastech (from the WSJ Health Blog – As P&G "reviewed the most recent set of data, we just didn't see the necessary level of efficacy that we expected to see. The economics of the program do not warrant further investment from P&G." – P&G spokesman Tom Milikin

Careful with this one, folks…


Merck settles

So Merck (MRK), defying the opinions of most legal analysts, decides to dispose of the legal cases against it all in one swoop. They'll dispose of 27,000 filed cases for $4.85 bln by setting up a claimant system to pay for actual claims for stroke and heart attack victims. Since Merck won most of the cases it has fought, the most often asked question is 'why'?

$179,629. Put another way, simple math.

$179,629 is the average amount put into the payout fund for each of the current 27,000 outstanding plaintiffs. Legal fees and the risk of the occasional larger decision, like the $253 mln verdict in the first case, make this approach a no-brainer. While Merck would likely have won most of the cases, its legal fees for any one case would have approached that figure. Toss in the certain fact it would lose a few for much more than $179,000 and you get the easy decision.

So is Merck a buy here? If you've been reading along with me for a while now, you can probably guess the answer. I wouldn't tell someone to avoid Merck for a trade if you think you have some sort of technical or herd mentality edge here, but all of pharma is still broken. The company has not acquired or partnered enough development-stage pipeline drugs to make up for the patent expiration hole in their P&Ls.

The FDA is increasingly averse to approving drugs. The blockbuster drugs habitating most big pharma pipelines are the most likely to see problems at the FDA. Between this development and the patent expiration issues, pharma is still sick.

I happen to think Merck has (a share of) one of the best drugs in the all-important cardiology space – Vytorin. It shares this drug with Schering-Plough (SGP). It also has a share of the other drug I really like in this space, Zetia. Despite having two really good drugs in the space, Merck is still fighting the stiff headwinds from the expiration of Zocor. The looming expiration of Lipitor, arguably the best drug in the lipid-lowering class, will only make things worse.

So if you're going to rush out and play in Merck on this news, please realize this is still a herd play. Make sure you don't get trampled on the exit when the inevitable bad news comes this sector's way.


Tesco grocery concept

I'll admit that outside of Fast Money and Mike Huckman's healthcare pieces, I don't watch much financial television. The exception is mornings when I'm traveling as I usually turn it on in the hotel room. This past week I caught the PR campaign from the UK's Tesco (TESO) for its new Fresh & Easy grocery concept.

And no, this has nothing to do with biotech…

The ultimate utility of this concept store might be lost among folks who live in the more established communities on the East Coast. But for those of us city dwellers out West where the cry from City Hall is "We must increase density," this is a winner concept.

Briefly, the Feds mandated a while back that all urban centers must plan for growth. Local interpretations of these rules have caused dramatic density increases in close-in urban single-family neighborhoods. One of the most common infill concepts is the "mixed use" development, where street-level retail is topped by apartments or condos.

In many urban neighborhoods, this mixed-use concept has been an utter failure. The rents for the retail spaces are high and the spaces are small. They are most often vacant or filled by a succession of unsuccessful small businesses. Turnover is astonishing.

One of the "green" supporting ideas behind mixed use is by locating retail closer to residential, it gets people out of their cars. I like to call this the "Manhattanization" of urban neighborhoods (don't get me started on how lame the execution of this idea is outside of Manhattan). The problem is that the West's consumer predilection for monster grocery stores kills one of the most obvious uses for these ground-floor retail places – neighborhood grocers.

The Fresh & Easy stores are about 10,000 square feet. For perspective, within 10 miles of my home in north Seattle there are about 8 mixed-use developments in the planning stages whose ground-floor retail could accommodate these stores. For neighborhoods dominated by busy urban professionals, the demographic you see in most urban single-family neighborhoods these days, the model of pre-prepared food and basic staples is a real winner in my view.

I'm a biotech guy who knows little about the grocery business. Margins are notoriously tight and there is a great deal that can go wrong when purposefully rolling out a line of business that is very tied to shifting consumer tastes and demands. However, I'm heavily involved in land use issues in my neighborhood and I know from my research the challenges we are facing with Growth Management Act urban density infill here in Seattle are replicated in every big city – particularly those outside the northeast.

I know that it would take me about 10 minutes to sell a group of skeptical neighbors on the idea of one of these things anchoring almost every one of the 8 mixed-use developments in my area. I cannot think of any other business concept I can say that about. I can see neighborhood opposition to any particular development being eased if one of these stores was the ground-floor retail anchor. Perhaps only those who've also 'done time' on neighborhood-level growth issues can appreciate how unusual that would be.

That makes Tesco's rollout of these stores worth watching.
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