Having seen small biotech stocks (Dov Pharma and Interneuron to name two) that showed promising Phase 2 results in treatments for depression which ended up failing after the drugs advanced into Phase 3, I was somewhat skeptical of Targacept's (TRGT) rapid rise from $4 to $20 over the summer caused by the company's announcement that its Phase 2b results of TC-4214 showed highly significant results when combined with Celexa in treating depression.
My thought was that a two point or even a three point improvement in either the HAMD or MADRS depression rating scale over placebo might not look so impressive when the drug goes into much larger Phase 3 studies and the results tend to be more modest .
However, last Thursday night the company presented data that were eye popping to say the least. TC-4214 showed a 6 point improvement in the HAM-D ratings scale and a 7.5 point improvement in the MADRS scale . To put that into perspective, the current leading augmented depression drug Abifly showed only a 2.5 point or so improvement in the ratings scales. Another amazing data point from the presentation was that the drug more than doubled the remission rates compared to placebo (40% to 18%). Safety was also very clean as there was only one adverse event in the trial which most likely was not due to the drug, and overall adverse events were only slightly higher than placebo with the most frequent being headache and constipation.
The data is so spectacular that even if the Phase 3 trial data is only 3/4 as good as the Phase 2 were, the drug will still be a huge improvement over any available therapy.
To get a sense of how big the opportunity is we only need to look at Abifly, which despite only showing a 2.4 point improvement over placebo is growing very rapidly. Sales, which had been flat with its original label of schizophrenia alone, have really taken off since the drug was approved for depression. Recent sales trends have grown 30% in the US since approval. A billion dollars in depression sales is possible for Abifly next year.
Considering that even with more moderate data in the phase 3 trials for TC-4214 the drug can be twice as effective as Abifly TC-4214 will easily be a billion dollar plus drug just in the US alone, if Targacept can find the right partner to market the drug.
Speaking of possible partners, the company has stated publicly that they intend to start Phase 3 trials by next spring, and I believe the most likely scenario is that they sign a partnership with a major pharmaceutical company before then. The list of companies who have experience in the depression field is quite long and include the like of Pfizer (PFE), Eli Lilly (LLY), Forest Labs (FRX), Glaxo (GSK) among others. I think any one of them would be very interested in getting hold of a drug with over a billion dollars in peak revenue potential.
Another interesting aspect of the Targacept story is that they have other potential blockbusters in the pipeline as well. The company has a partnership with Astra Zeneca (AZN) for two drugs one is in Phase 2 for ADHD which could enter Phase 3 next year. The other is for Alzheimer's and is in Phase 1 trials. A partnership with Glaxo is in the pre clinical stage but a promising drug for smoking cessation could enter the clinic in the near future.
Despite the run up over the last few months, Targacept's market cap is only a little over $500 million. Considering that the company will probably be able to get somewhere around $200 million up front for a partnership, and the potential for TC-4214 to do well over $1 billion a year in sales (I'm guessing at a royalty rate somewhere between 20-25%), then the stock looks extremely cheap even at these levels.
The stock went up to $23 and change on Friday after the data as released and has now pulled back to $21 which is only a point over the price it was trading at before the release of the Phase 2b data. This was somewhat bewildering, until I saw the filing last night that the company's largest holder BVF sold about 30% of their holdings after the data was released. The sale of about 600 thousand shares seems to have accounted for most of the selling over the last couple of days. The filing last night though ,means that BVF is done selling.
There is very solid support around the $20 level where it has sat for the last few weeks . I expect the stock to move nicely higher as we head towards the end of the year and closer to a potential partnership agreement with a major pharmaceutical company.
DIsclosure: Long TRGT