You can succeed despite your stumbles

By Bill Fleckenstein

Two seemingly disparate companies can join together to drive home a singular lesson about the role of chance. Acting as "guest lecturers" this week will be a couple of companies that I care about: Pan American Silver, of which I am a director, and Nastech Pharmaceutical, which makes formulations of delivery for drugs.

Now, to lay out the geological-biological connection: In the current issue of Gold Stock Analyst, John Doody included a write-up of Pan American's (PAAS, news, msgs) early November Mexican mine tour (with 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 two of Pan American's mines, and (b) to share lessons I have learned, as a director of Pan American, that are applicable to Nastech Pharmaceutical (NSTK, news, msgs).

Payment delayed, not denied

Nastech announced last week that Procter & Gamble (PG, news, msgs) had decided to restructure a payment it had planned to make in mid-December for the nasal spray of 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.

This affects Nastech in the short run, since it will be paid only as the product moves forward in trials. But in the long run, I don't think it changes the outlook for -- or impact from -- PTH1-34, other than the probable delay of nine to 12 months in payments.

Finite woe, future glow

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 that caused its stock to drop 15.6% immediately after the announcement.

However, there are a host of data points that we are soon to see regarding the appetite depressant PYY, intranasal insulin (whose positive preliminary results were reported last Wednesday), intranasal diabetes drug Byetta and a new clinical trial and potential developments in gene-silencing RNAi -- any of which could be positive, though obviously there's no guarantee of that.

Meanwhile, some folks have suggested that this is three strikes for Nastech, meaning the fact that it took PYY back from Merck, the fact that osteoporosis drug Calcitonin is stuck at the Food and Drug Administration and now this.

I don't see it that way. We won't know whether 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 Nastech. But that, too, is still an open question. As for last week's news, it might be a strike against Nastech, or it might not be. We just don't know for sure.

Shafted

That is how life goes sometimes. I know. As a director of Pan American Silver, I've had firsthand experience with 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, Pan American Silver 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. Pan American negotiated loans for bringing its Russian Dukat property into production and obtained an export decree (something that no one else had done at the time), as well as all the necessary permits. Then, at an auction, as Pan American was buying the mill -- which was the last step in the process and the last asset we needed -- it was essentially stolen from us by friends of the new regime of Russian President Vladimir Putin.

Sweet are the uses of adversity

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, we were careful not to commit the money until every last loophole for the Russian government to trip us up had been closed off. None of us thought that at auction, we might lose a mill (of value only to us) in what amounted to the Russians end-running and basically taking the property away from us. In addition, there have been a few other bits of just plain bad luck over the years. Yet, here we are, doing pretty well despite 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. I added to my Nastech position last week, for what it's worth.

At the time of publication, Fleckenstein owned shares of Nastech and Pan American Silver.