Can Nastech Bounce Back From Weakness?
Nastech has no credibility at the moment, so how can we determine if we can believe it?
There's an old Wall Street expression that you get to become an expert on your mistakes. When a position that you take works out, you not only make money but also don't have to spend much time thinking about it. When the opposite occurs, you not only lose money but spend a great deal of time figuring out what to do next. Obviously, I have been about as wrong on Nastech (NSTK) as I have ever been on anything.
Having said that, I still need to formulate a plan as to what to do, so with what I learned from yesterday's informative conference call, I can now offer my thoughts: First of all, one of the reasons I became involved was because Nastech wasn't a single-product company, but rather a company that had four or five ways to win. Yet, since Proctor & Gamble (PG) gave the PTH drug back to it, the stock has been treated as though PTH was the only compound that Nastech has in the pipeline. Its market cap has been crushed to around $125 million.
When Nastech had its first P&G stumble a year ago, I was concerned that perhaps the delivery mechanism might not work, and that if P&G gave the drug back, people would conclude just that. However, over that time it's been clear to me -- from the insulin data Nastech provided and PYY -- that the company's delivery mechanism does work.
As for PTH, the delivery mechanism that Nastech uses may work, but we still don't exactly know what the issues are. Perhaps we will as the company reveals the data to be used by the panel of experts it plans to retain in order to help it decide what to do next. It is conceivable that the problems could just as easily be with the peculiarities of PTH and marker data, rather than Nastech's delivery excipient. Still, we are where we are.
In any case, folks who are bearish on Nastech, who will believe that the delivery mechanism doesn't work, may have made money being short NSTK for the wrong reason, while those of us who've been making that argument have lost money.
So, where does that leave us? There is PYY, which is in the clinic. We'll know about that over the course of the next couple quarters, I would guess, although the official data won't be released until the third quarter of next year. We will know the results of the insulin trials sometime in the first quarter of 2008. On the conference call, Rick Constantino, the person in charge of Nastech's intranasal division, made specific note of the fact that more insulin gets in the system via nasal rather than did the pulmonary effort, Exubera. The reason why that product was pulled, I believe, was due to pulmonary concerns and complications of the oversized delivery mechanism itself. However, it does not mean that intranasal is not viable.
As for PTH, the company will convene a panel of experts, some of whom I would guess looked at the data for P&G. Nastech will get some new outside experts and decide what to do next. I've heard it said that the only reason Nastech is doing this is to save face, which is absurd. Nastech has a board of directors that did not come from management, and if you look at its members, you'll see that at least a handful are serious outsiders, who won't run a program simply to save face. If they think PTH has no chance of going forward, they won't waste the company's resources on it. They'll just move on, which is what they would have done with PYY as well. As for Nastech's autism compound carbetocin, it's way too early too tell. The results will come in next year. Besides, it's a longshot anyway.
Now on to RNAi, which is potentially Nastech's most important program. Until now, the company has been very quiet about what it is doing, as it's been trying to secure its patent estate. Yesterday Nastech told us that it has work around for the Alnylam/Isis patents, which use Risc, because NSTK uses Dicer, which it licenses from the City of Hope for almost the entire genome.
Nastech's patents also circumvent the patents of Sirna (acquired by Merck), in that Nastech's patents use three strands instead of two. Its name for that is meroduplex, hence the name for its subsidiary MDRNA. Not only does its approach get around the patent estates of Alnylam and Sirna. But due to its methodology, Nastech claims that its approach also enhances the ability to deliver RNAi, which is the biggest impediment in the delivery effort.
Now, the company has no credibility at the moment, so how can we determine if we can believe it? Maybe we can't, but they have an army of scientists that came from serious places to work on Nastech's RNAi program. Not least of which is Jim McSwiggon, whose name was on over two-thirds of Sirna patents. This is not just the CEO, Steve Quay, standing up and saying we can do this. I suspect that in the not too distant future, patents will hit that will verify its claims. Of course, what we need to see, for the company to have any real credibility, is a contact with a major pharmaceutical company, or a publication in a scientific journal. I think that if either of those were to occur, the valuations for Nastech would change overnight.
The two competitors in RNAi have valuations of $1 billion-plus each. So if you believe that Nastech was capable of attaining the valuation of say 12% of those companies, that would be $250 million. If you assume, consequently, that when Nastech does the spinoff of RNAi it kept half, that would render a valuation of $125 million, or roughly today's market cap. You'd then have all the upside of an increasing RNAi valuation, plus PYY, plus insulin, for zero. In other words, PYY could be a bust, insulin could be a bust, and PTH could be a bust, yet you still might not lose (and could win big) from yesterday's valuation level. Of course, all of that presupposes that MDRNA is a serious contender, which is not guaranteed.
This is a bit like the situation we saw recently with Dendreon (DNDN), although that was much more binary and a little more lopsided. But I believe that if anything good happens to the company, even something as trivial as calcitonin finally getting approved, the stock could have serious upside from here.
However, as noted, I have been completely wrong on this subject. And given that, my own rules will not let me take any meaningful risk hen I've been this wrong on any subject. What I've done, however, in response to the conference call, which I thought was the most informative the company has held thus far, was to buy some $5 calls. That way, I know how much I can lose if I'm wrong yet again.
If we get to the early part of next year and nothing good has happened, it might be time to finally pull the plug. But I've decided to stick it out for a while longer. (Having said that, the best response usually when confronted with a problem like this is to sell a portion of your holdings as soon as possible. Those who did get out at $10 now enjoy the luxury of not having their hand forced. Folks should file that away for future use on other subjects.)
For what it's worth, I have seen management criticized for what happened with P&G, in that it didn't see it coming. In this particular case, I don't blame management, nor do I think they were dishonest with any of us, as some have suggested -- though I would say that no objective observer could describe Nastech as particularly well-managed. Anyone who cares should listen to the call and make up their own mind, but in sum, that's how I plan to deal with this promising, yet horribly problematic situation called Nastech. Lastly, anyone involved should expect volatility as tax loss selling will create downside pressure through year-end, even if good news is forthcoming
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