Nothing About Targacept's Fundamental Story Has Changed, But It Is 30% Cheaper

| About: Catalyst Inc. (CBIO)

Targacept (TRGT) sold off as much as 30% on the announcement that AstraZeneca (NYSE:AZN) was not going to file TC-5214 for regulatory approval. For any investor who does their homework, this announcement should not have come as a surprise. Even AstraZeneca had previously written off much of the drug's value after it did not meet its primary endpoints in previous Phase 3 studies. On that announcement on December 20th, Targacept shares hit a 52 week low of $4.92. However, from that announcement until now, the shares had rallied back to the $7.50 level on the strength of Targacept's neuronal nicotine receptor based pipeline and several bullish events.

First, on January 5th 2012, AstraZeneca announced its decision to proceed with a phase 2 trial for ADZ1446 in the treatment of Alzheimer's disease. AstraZeneca owns the right to and is responsible for the funding of any trials, but would owe royalties to Targacept. ADZ1446 is a strong complement to Targacept's ADZ3480, which is currently in Phase 2b Alzheimer's trials.

A second major positive for Targacept is its strong cash position. In conjunction with their Q4 report, Targacept announced a cash position of $249.3 million dollars, enough to maintain operations through at least the end of 2014.

Their cash, as well as their research partnership with AstraZeneca, gives Targacept the luxury of multiple trials for multiple drugs in multiple indications. This provides Targacept with a luxury that many biotechs do not have, namely, time.

Additionally, it makes Targacept a strong play on valuation. Currently the company's share price is below the value of cash on hand (see Stephen Simpson's article from January 12th). This likely played a major role in the third positive, a 6,000,000 share investment from value investor Seth Klarman's Baupost Group.

For informed investors, who shouldn't have expected anything out of TC-5214, nothing about Targacept's fundamental story has changed from yesterday. But now you can buy it 30% cheaper. Depending on your risk profile and trading strategies, look to play Targacept for a short term bounce as rationality returns, or scoop it up for the long haul.

Disclosure: I am long (TRGT).