In what its CEO called the most significant transaction in the history of the company, Nastech Pharmaceutical Co. Inc. formed a potential $346 million global alliance with Merck & Co. Inc. to develop and commercialize Peptide YY 3-36 Nasal Spray (PYY) for obesity.

The company's stock (NASDAQ:NSTK) surged 70 percent Monday, or $5.41, to close at $13.15.

Under the agreement, Bothell, Wash.-based Nastech will receive an up-front cash payment of $5 million and will be eligible to receive up to $131 million in development and approval milestones, and up to $210 million in sales-related milestones, in addition to royalties.

"Merck will be primarily responsible for clinical and nonclinical studies and for regulatory approvals throughout the world," Steven Quay, Nastech chairman, president and CEO, said in a conference call. "Nastech will be responsible for all aspects of manufacturing and drug supply."

Merck will reimburse Nastech for manufacturing activities and will purchase finished product from Nastech if PYY reaches the market.

The companies will jointly develop PYY. Nastech will be responsible for all manufacturing of PYY-related product. Merck is leading and funding commercialization, but Nastech has an option to co-promote the product in the U.S.

It's an "opportunity to build pharmaceutical sales capabilities in a setting where we can learn from a master," Quay said.

"We have not talked about the financial details around the co-promote," he later told BioWorld Today. "We've just decided to leave that fairly quiet."

Prior to the agreement with Merck, Nastech announced that it gained exclusive worldwide rights to the Imperial College Innovations and Oregon Health & Science University PYY patent applications for intranasal delivery of PYY and the use of glucagon-like peptide-1 (GLP-1) used in conjunction with PYY to treat obesity, diabetes and other metabolic conditions.

Nastech acquired the patents through London-based Thiakis Ltd., a company created this year out of research conducted at Imperial College. Scientists at Imperial College in London and the Oregon Health & Science University in Portland have been using the patents in the obesity field. The agreement includes international patents covering the peripheral administration of PYY to decrease caloric intake, and the peripheral administration of PYY in conjunction with GLP-1 to promote weight loss.

As part of the agreement, Nastech made an equity investment in Thiakis. Specific financial details were undisclosed, but Thiakis is entitled to license fees, milestone payments and patent-based royalties.

The inventors of the patent applications are Stephen Bloom, a professor of metabolic medicine at Imperial College, and his colleagues at the Hammersmith Hospital in London and researchers at the Vollum Institute at Oregon Health & Science University.

In addition to those Imperial College patent applications, Merck gains rights to more than 300 of Nastech's pending patent claims and to an issued U.S. patent that Nastech licensed from Los Angeles-based Cedars-Sinai Medical Center, all related to PYY.

While Merck and Nastech initially will focus on obesity, a variety of other conditions associated with the indication could expand the market potential. Those conditions include Type II diabetes, hypertension, heart disease, osteoarthritis and cancer.

"Our focus is on the development of PYY to treat obesity," Quay said. "Significant co-morbidity are part of the overall program, but they're the dessert, not the entrée."

While Nastech did not intend to partner its PYY program until it took it through Phase II trials, Merck convinced the company of its significant expertise in the field of obesity and offered attractive terms, such as Nastech's option to co-promote.

"I can only say the decision to partner with Merck, and to do so at this early stage, turned out to be an easy one," Quay said.

PYY3-36 Nasal Spray is designed to deliver the natural, appetite-regulating hormone PYY directly to the bloodstream. Nastech has completed three Phase I trials that have shown PYY to be safe and well tolerated with evidence of reducing caloric intake, moderating appetite and demonstrating weight loss in human subjects. All adverse events were mild or moderate in severity and were resolved without treatment.

According to a study published in the Sept. 4, 2003, issue of The New England Journal of Medicine, obese and non-obese subjects given a 90-minute intravenous infusion of PYY consumed, on average, 30 percent fewer calories during a buffet lunch offered two hours after the infusion of PYY.

PYY is a naturally occurring hormone that has been implicated as a physiologic inhibitor of food intake. It is produced by specialized endocrine cells in the gut after a person eats and it is believed to trigger the feeling of fullness. Initial studies of PYY focused on delivery by injection. Nastech developed the nasal spray formulation to provide a noninvasive treatment option.

"Nobody wants to be hooked up to an IV two hours before they eat," Quay said.

Obesity is the second-leading cause of preventable death in the U.S. Nastech estimates that there are about 127 million people, or 64.5 percent of adults in the U.S., that are overweight. About 30.5 percent, or 60 million, are obese. About 400,000 deaths a year in the U.S. might be attributable to poor diet and physical inactivity.

"For perspective, that's one death each minute," Quay said.

Current therapies cost overweight patients about $1,000 a year, making the market potential for obesity therapies more than $100 billion in total.

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