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Development-stage biotech Targacept (NASDAQ:TRGT) may have once had a bright future and a nearly $30 share price, but those days are long past. With yet another clinical disappointment, it seems fair to ask whether Targacept's entire research direction is fundamentally flawed and whether the company can use the capital it has left to find a new path … or if shareholders would be better served by the company simply closing up shop and returning the cash.

Another Disappointment In TC-5619

Targacept announced another setback with its TC-5619 neuronal nicotinic receptor program with another Phase II failure in attention deficit/hyperactivity disorder (NASDAQ:ADHD). While an earlier Phase II study of TC-5619 in ADHD failed, management believed it saw a clinically relevant signal that the drug worked better in inattentive-predominant ADHD (a subtype of ADHD) and it launched another 150-patient study.

Unfortunately, this study looks like an unmitigated failure. The company's press release was short on details, but it did state that TC-5619 not only failed to improve results after four weeks, but that the placebo patients consistently improved more than the TC-5619 dose groups. In retrospect, AstraZeneca's (NYSE:AZN) (a company that can be fairly called desperate for new drugs) decision to pass on partnering this drug looks like a wise one.

Not Much Hope In The Pipeline

It is also unfortunate that Targacept's ongoing programs do not seem especially promising at this point.

The company has an ongoing Phase IIb study of TC-5619 in residual symptoms of schizophrenia (also sometimes called negative symptoms). While negative symptoms like blunt affect and anhedonia are not addressed well by approved drugs like Bristol-Myers' (NYSE:BMY) Abilify or Lilly's (NYSE:LLY) Zyprexa, they also seem to be more challenging to assess in clinical trials.

What's more, of the study's 450 patients, the majority have been enrolled in Eastern Europe. This is a significant risk factor given the history of trials conducted in Eastern Europe showing very strong Phase II results that cannot be replicated in later North American studies. Consequently, I think it would be dangerous for investors to get too excited about the potential of this drug at this point in time.

The company should have Phase II data from a study of TC-1734/AZD3480 in Alzheimers (partnered with AstraZeneca) in 2013, but I wouldn't get my hopes up here either. First, there's the dismal record of industry-wide Alzheimers success (roughly 3% according to recent data from FierceBiotech). Then there's the fact that the first study of this drug was "inconclusive". Last and not least, this trial too is drawing heavily on patients in Eastern Europe and carries all of those attendant risks.

Beyond this is a potential Phase II program for TC-5619 in overactive bladder and a couple of "TBD" programs. Although an effective overactive bladder drug could probably be marketed into a multi-hundred million dollar drug, there's been a great deal more scrutiny of these drugs since Pfizer's (NYSE:PFE) Detrol, and the real potential may be more like Warner Chilcott's (NASDAQ:WCRX) Enablex, which grossed about $170 million in 2011.

Can The Company Attract A Quality Leader​?

As the company mentioned in Tuesday's press release, there will be further layoffs at the company in the wake of this disappointment. What's more, the company is largely just sitting tight until it hires a new CEO.

I will be curious to see who the company can attract to take over. The company exited the second quarter with over $200 million in cash and investments and should end the year somewhere in the neighborhood of $175 million, or over $5 per share in cash. That's a respectable sum of money, but as mentioned, the company's pipeline is not encouraging and it may well be the case that Targacept's fundamental research approach with neuronal nicotonic receptors is fatally flawed. If that's the case, $5 a share is likely not going to be enough cash to fix what really ails the company.

The Bottom Line

With the stock trading at around $4.30 as of this writing, the market seems to be predicting that the company is going to continue to fritter away cash on dead-end clinical programs. Given the history of the biotech sector and nearly endless examples of companies casting around for any last-ditch hope, that's not an unreasonable assumption. The worst-case scenario, then, would be the company continuing to pursue clinical studies for marginal programs and/or trying to buy in some other long-shot/low-price program.

If Targacept can find a new CEO who believes in this platform (and happens to be right in doing so) and if TC-5619 shows efficacy in that Phase II schizophrenia study, I suppose there's still significant upside in the stock. I don't believe the likelihood of success is very high, though, and while the stock may be trading under its cash value, Targacept is only for investors looking for the longest of long shots today.

Source: Targacept Looking Like A Dead End