Nastech Pharmaceutical Company Inc.

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Nastech Pharmaceutical Company Inc.

3450 Monte Villa Parkway
Bothell, Washington 98021
U.S.A.
Telephone: (425) 908-3600
Fax: (425) 908-3650
Web site: http://www.nastech.com

Public Company
Incorporated: 1983
Employees: 106
Sales: $7.4 million (2005)
Stock Exchanges: NASDAQ
Ticker Symbol: NSTK
NAIC: 325412 Pharmaceutical Preparation Manufacturing

Nastech Pharmaceutical Company Inc. is a survivor. Founded on Long Island in the early 1980s and now based in Bothell, Washington, Nastech has rarely turned a profit and has lost far more money than it has ever taken in. It mostly focuses on intranasal drug delivery technology, adapting prescription drugs already available in oral or injectable forms, as well as developing new drugs to take advantage of the delivery method. Nastech has seen two of its products reach the market, Stadol (used for the relief of moderate to severe acute pain) and Nascobal (a vitamin B12 gel), but an obesity-fighting drug in clinical trials seeking Food and Drug Administration (FDA) approval has raised the company's profile, elevating Nastech from penny stock status to Wall Street darling. Other drugs in the pipeline include painkiller Morphine Gluconate; Calcitonin, used to treat osteoporosis; and a drug for erectile dysfunction, which the company hopes will offer competition to Pfizer's Viagra. In addition to nasal drug delivery, Nastech has become involved in tight junction biology, researching the way therapeutic drugs are passed from cell to cell, and RNA interference, a way to turn off the production of a protein in a cell to slow the spread of influenza and other respiratory diseases. Nastech is a public company listed on the NASDAQ.

1983 FORMATION COINCIDING WITH INCREASING INTEREST IN NASAL DELIVERY TECHNOLOGY

Using the nasal passages as a conduit for drug delivery gained interest with pharmaceutical researchers in the early 1980s. Sandoz Pharmaceuticals had introduced a nasally applied drug in 1957 to help nursing women with the flow of breast milk, and a few other applications followed, in addition to the common nasal sprays used to alleviate sinus conditions and treat head colds. The allure of nasally administered prescription drugs, although not the ideal delivery method for every drug, was manifold. First, the nose offers an abundant blood supply, allowing drug molecules to be absorbed into the bloodstream in as little as three minutes. The nasal delivery of some drugs could replace painful syringes. It was also well suited to replace some oral drugs, which were partially destroyed by enzymes or acids in the stomach before effectively entering the bloodstream. Moreover, holders of a drug patent could extend the usual 17-year life of the patent by developing a new way to deliver it. One of the medical researchers working in this field was Anwar A. Hussain, a professor of pharmaceuticals at the University of Kentucky Research Foundation. In March 1983 Nastech Pharmaceutical Company Inc. was incorporated in New York, and in June of that year it licensed seven patents from Hussain and the University of Kentucky Research Foundation for the nasal dosage of 21 pharmaceuticals.

Nastech's founders were Drs. Jeffrey Wenig and Martin J. Feldman, both of Long Island. Born and raised in New York City, Wenig earned a doctorate in pharmacology from New York University. He worked at a Long Island pharmaceutical, Endo Laboratories, before dabbling in politics. He made an unsuccessful bid to run for the New York State Assembly, then served on the pesticide board at Huntington, New York, before becoming the town's Environmental Protection Commissioner. He became Nastech's first chief executive officer. Feldman, a dentist born in Brooklyn, shared Wenig's interest in local politics, serving eight years in the Suffolk County Legislature. He was also an inveterate entrepreneur, although he never stopped practicing dentistry. During his undergraduate days in the 1950s, Feldman sold 78-rpm records, and after launching his dental practice in the 1960s managed a rock 'n' roll band, albeit with no success.

Nastech received funding from a dozen investors, many of them politicians recruited by Feldman. They paid 1/1,000th of a penny per share. Nastech then received FDA approval on five drugs to begin clinical testing on humans: a motion sickness medicine; an antinausea preparation; propranol, used to alleviate migraines and angina; Progesterine; and vitamin B-12. The company next went public in March 1984 at one penny a share and ground-floor shareholders began cashing out. Nastech's underwriter recommended that the company engage a public relations director, prompting Wenig to hire Michael Patterson, a former spokesperson for the Long Island Lighting Co. as well as a former press secretary to former New York Governor Hugh Carey. Patterson succeeded in interesting a wide swath of the media to take notice of Nastech, the only company solely dedicated to nasal delivery technology, which some of the larger pharmaceuticals were also actively pursuing. As a result, the company drummed up interest with investors, making the case that tiny Nastech was sitting on a gold mine. Articles appeared in magazines such as Time, U.S. News & World Report, Fortune, Forbes, and area newspapers, including Long Island's Newsday, the New York Times, and the Daily News. Wenig also made guest appearances on the Financial News Network and New York television stations.

Due in large measure to this attention, Nastech's stock increased to 48 cents a share, a major surge if you were an early backer who received one million shares for every ten dollars invested. According to filings with the Securities and Exchange Commission (SEC), between 1985 and 1988 Weinig sold more than 24 million shares, priced at two to 20 cents a share. In 1986 alone, Feldman sold 1.4 million shares at ten to 32 cents a share.

After the first three years of existence, Nastech had no products to sell and had lost $1 million, but Wenig continued to exude confidence. "We're certainly not years away from our first product," he told Newsday in 1986. "I think the potential rewards are mind-boggling. I have every hope we will be a much larger company." It was around this time that Feldman left the company. According to Newsday, "Friends of Dr. Feldman who insisted on anonymity said the founders had a falling out, largely because Dr. Feldman believed the stock was overly promoted and the two men had differing philosophies on how the company should proceed. An account executive of the F.S.G. Financial Services Group in Melville, Kirk Cronk, said, 'When Dr. Feldman left, a lot of people in his following also started selling, and that started to bring the stock down.'"

In the summer of 1988 Nastech agreed to sell $250,000 worth of B-12 gel doses for use in Pakistan, but it was no closer to gaining FDA approval to sell B-12 or any other drugs in the United States. The hype over the company faded, it was delisted from the NAS-DAQ because it could not meet minimum asset and equity requirements, and the stock was relegated to over-the-counter status. In an attempt to make the stock somewhat more appealing, Nastech engineered a 1-to-200 reverse stock split in January 1990, a move that raised the price to the 25 cent range.

COMPANY PERSPECTIVES

Nastech Pharmaceutical Company Inc. is an emerging pharmaceutical company dedicated to the development and commercialization of unique products to treat diseases in areas where our innovations will have the greatest impact on improving human health.

COFOUNDERS' DEATHS IN 1991

As the 1990s opened, Nastech was just looking to hang on until it received FDA approval for a drug and could begin to bring in some much needed cash. Then, in the spring of 1991 it suffered a setback when Wenig died from a heart attack at the age of 54. Ironically, the 58-year-old Feldman had died of a heart attack the previous month. Wenig's son, just 25 years old, stepped in as chairman, while Senior Research Scientist Vincent Romeo took over as president and chief executive officer in August 1991. Romeo held a doctorate from St. John's University, where he taught pharmacology and remained on the faculty while heading Nastech.

Nastech's first product to receive FDA approval was Stadol, a migraine headache pain reliever, introduced in 1992 by Bristol-Myers Squibb, the company's licensee partner. At this stage in its history, Nastech licensed early stage products to marketing partners, who then invested their own money to finalize clinical trials. The partners also were required to assume the risk of regulatory approvals. The product generated sales of $15.9 million in the first year, resulting in royalties of $856,000 for Nastech. By keeping overhead low, the company was able to turn a profit of $208,000 in 1994 and another $119,000 in 1996, a year in which sales of Stadol reached $112.3 million.

In the autumn of 1996 Nastech introduced its second product, Nascobal, a vitamin B12 intranasal gel for vitamin B12 deficiency therapy. Schwarz Pharma served as a marketing partner for the product. At this stage the company changed its strategy, opting to now take the products in its pipeline to later stages of development. It was a riskier approach, requiring greater outlays of cash for research and development to the detriment of the balance sheet, but it also held out the possibility of greater long-term rewards. With no significant debt and more than $24 million in the bank, the company was well positioned to pursue this new strategy.

To ramp up its research and development effort, Nastech began constructing a new 28,000-square-foot research facility, which opened in 1999. The company was beginning to make progress in building a pipeline of new products when it suffered another setback. In May 2000, Romeo died at the age of 43, succumbing to leukemia, a disease he appeared to have overcome some nine years earlier. A three-person executive committee briefly took over at Nastech until an interim CEO could step in while the company looked for a permanent replacement. In August 2000 Nastech settled on its man, Dr. Steven C. Quay, who ran a one-person Seattle area company, Atossa HealthCare, Inc. Nastech acquired Atossa and Quay moved to Long Island to serve as Nastech's president, CEO, and chairman.

Quay was a well-respected research scientist and a seasoned executive. He was a graduate of the University of Michigan Medical School, where he received a master's and doctorate in Biological Chemistry in 1974 and 1975, followed by an M.D. in 1977. After postgraduate work at the Massachusetts Institute of Technology and a residency at the Massachusetts General Hospital, Harvard Medical School he became a faculty member at Stanford University School of Medicine. Even as he was teaching from 1980 to 1986, Quay began making a move to biotechnology. In 1984 he founded Salutar, Inc., which developed agents for magnetic resonance imaging, a field in which he would author more than 100 scientific papers. He received 24 patents in the field and also invented a pair of pharmaceuticals that gained FDA approval. Quay then founded Sonus Pharmaceuticals, Inc. in 1991 to expand the use of ultrasound testing technology. He served as chief executive until 1999, when he formed Atossa to develop women's health technologies, in particular a diagnostic test to assess the risk of breast cancer. It used a small pump to extract liquid through the nipple to test for the presence of cancer cells. It was while researching the mechanism for the pump that Quay first became aware of Nastech, whose nasal pumps relied on similar mechanics.

KEY DATES

1983:: The company is founded on Long Island.
1984:: An initial public offering of stock is made.
1992:: The first product is introduced.
1997:: The second product is released.
2000:: Atossa HealthCare, Inc. is acquired.
2002:: Headquarters are moved to Bothell, Washington.

When Quay took charge of Nastech, he changed its approach, and soon moved its headquarters to Bothell, Washington, focusing on projects that offered high potential. "It's just as difficult to get a product through the FDA for a $50 million market as a billion-dollar market," he told Newsday. "You might as well grab for billion-dollar markets." According to Newsday, "Nastech has zeroed in on 10 compounds that can be given only by injection, that are generating more than a billion dollars each in annual revenue and that are marketed by at least two companies. Nastech's approach is to adapt a drug for nasal delivery and persuade one of the competing manufacturers to partner with Nastech for competitive reasons." The strategy worked, as Nastech was able to attract partners for three drugs. In February 2002 it reached a milestone agreement with Pharmacia Corp. to develop a Viagra-like product, using the drug apomorphine, that could be delivered by nose. The pump could be placed on a night table, where it could be used spontaneously, and by rapidly entering the bloodstream through nasal membranes could have the desired effect within 15 or 20 minutes.

MERCK DEVELOPMENT DEAL IN 2004

The sex-aid product and Quay's revamped business model caught the attention of investors, who gave Nastech a second look after having written off its chances 15 years earlier. It was still a highly speculative stock, one that investment managers were hesitant to buy for clients, but many were willing to buy it for themselves. They would become even more interested in 2004 when Nastech reached a deal with Merck & Co. to develop an experimental nasal spray treatment, PYY3-36 (PYY), for obesity. The Wall Street Journal estimated that the market of a successful product could be worth as much as $100 billion a year. One fund manager told the publication, "Obesity is like a lottery ticket, because if it really works and it's safe, it's off to the races."

Of course, there was no guarantee Nastech would develop a successful obesity drug, and in 2006 Merck was not satisfied with the early clinical results. Nastech disagreed, reacquired the rights to the drug, and elected to put its own money into the development of PYY. On other fronts in 2006, Nastech reached an agreement with Procter & Gamble Pharmaceuticals to commercialize a nasal spray treatment for osteoporosis, a deal that could garner Nastech significantly more than $500 million. Nastech also launched an RNAi therapeutics program to target influenza and respiratory diseases, an area bolstered by the acquisition of RNAi technology from Galenea Corp. of Cambridge, Massachusetts. RNAi, or RNA interference, is a method for turning off the production of a protein, which researchers hoped to use to ward off influenza or slow its spread. Not only was Nastech interested in developing therapies using the technology, RNAi could be used as a research tool in its study of "tight junctions," conduits for drug delivery between cells. Tight junction biology was of particular importance to Nastech because it involved the way nasal tissue worked.

Although Nastech lost $32.2 million in 2005 on sales of $7.4 million, most of that shortfall was due to a major increase in research and development spending, more than $30 million. The company still had nearly $60 million in the bank and appeared to be finally positioning itself for success after nearly a quarter-century of endeavor.