Fat Profits?

Nastech Pharmaceutical's (Nasdaq: NSTK  ) announcement yesterday that Merck (NYSE: MRK  ) has signed on to develop an experimental drug for obesity, Peptide YY3-36 Nasal Spray (PYY3-36), is a major coup. Investors evidently agree, since the stock closed out the trading session up 70%. But let's not get ahead of ourselves.

There is little doubt that PYY3-36 could be a blockbuster drug. Anyone who has picked up a newspaper or turned on a television in the past year or so is aware of the U.S.'s so-called "obesity epidemic." A drug that effectively addresses this problem is sure to enjoy huge sales.

In addition, Merck's decision to jump on board the development train for PYY3-36 at this early stage is an encouraging sign. The drug is only in phase 1 testing, meaning it has a long way to go before it finds its way into the hands of the general public. If Merck already thinks this treatment is worth funding, then it must have some compelling reasons.

However, it's important to remember that Merck has made bets that haven't panned out in the past. Also, while the full details of the agreement aren't clear, it looks like Nastech will receive just $5 million initially, followed by substantially more if (and that's a big if considering the odds involved in drug development) trials are successful.

In the final analysis, while securing a licensing arrangement with a major pharmaceutical company is great, it's no guarantor of a medicine's success. Nastech still has to prove PYY3-36 is safe and effective, and that will take time.

Merck is a Motley Fool Income Investor recommendation. Take a free, no-obligation trial to learn more about the companies that will pay you to hold them.

Fool contributor Brian Gorman is a freelance writer in Chicago. He does not own shares of any companies mentioned in this article.