Targacept Might Be One Company To Stay Away From - For Now

| About: Catalyst Inc. (CBIO)

Those of you who follow my articles on a regular basis know I am mostly a positive guy who bets on companies to succeed -- not fail. However, over time this has garnered for me the dubious title of "pumper." There are many stocks out there in the small cap biopharma segment I believe investors should stay away from -- in my opinion of course.

Targacept (TRGT) pps: $4.85. Market cap: $162.14M.

Targacept engages in the discovery, design, and development of neuronal nicotinic receptors (NNR) therapeutics for the treatment of diseases and disorders of the nervous system. Its products include TC-5214, a nicotinic channel modulator, which is in Phase III clinical trials as an adjunct treatment for depressive disorder; and in Phase IIb clinical trial for switch monotherapy in patients with depressive disorder. The company's small molecule products include TC-5619, which is under two separate Phase II clinical trials to treat negative symptoms and cognitive dysfunction in schizophrenia, inattentive-predominant attention deficit/hyperactivity disorder, and Alzheimer's disease; AZD3480, a product under Phase IIb clinical trials for the treatment of mild to moderate Alzheimer's disease; AZD1446 for treatment of Alzheimer's disease; TC-6987 under Phase II clinical trials to treat asthma and type 2 diabetes; and TC-6499 for the treatment for gastrointestinal disorders.

The first thing I notice from above is TC-5214 (mecamylamine), which had a total failure in its 3rd and final phase III study adjunct treatment for depressive disorder.

The drugs the company designs and engineers selectively target the NNRs (Neuronal Nicotinic Receptors). TC-5214 compound previously failed two short-term Phase III clinical trials in 2011, with no real difference between placebo group patients and the drug arm.

The failure of TC-5214 led to the formal termination of the company's partnership with AstraZeneca (AZN) on the compound. Termination of TC-5214 program does not totally end the relationship between Targacept and AstraZeneca. The companies are moving ahead together on another drug candidate AZD1446, an experimental Alzheimer's disease treatment. Late last year, AstraZeneca announced it would finance and conduct phase 2 studies on AZD1446.

It's difficult to prove endpoints in some disease trials more than others. That is why I need a real compelling reason to buy small companies that experiment in this area. Targacept is a company dealing with diseases such as Schizophrenia and Alzheimer's Disease. I certainly would like to see more progress made in these areas, but, these are examples of diseases that are very tough to prove endpoints on versus a placebo. The placebo effect can be strong on diseases such as this that rely on the human mind which can be coaxed into feeling better with the hope that what you are taking will help you. Another thing that concerns me regarding small companies working in this area is when huge companies are shutting down drugs for the same diseases. For example, earlier this year Pfizer (PFE), Johnson & Johnson (JNJ), and Elan (ELN) Pharmaceuticals shut down their late stage trial of the Alzheimer's drug, Bapineuzumab. In addition, Eli Lilly (LLY) is in advanced studies for its attempt at an effective Alzheimer's drug. So, not only did a very successful group of companies recently shut down their drug for it, but Targacept still has to compete with at least one giant in the industry.

Investors should consider that if Targacept's lead platform compound TC-5214 was a failure for its intended purpose, what confidence is there for its other drugs based on the same platform to treat subjective type mental disorder ailments? I consider these types of drugs very risky at best when it comes to finding real success in a full phase III study designed in accordance with FDA guidelines. Many of these companies seek out other countries besides the United States to engage in phase II type studies which more often times than not, show positive results, only to have its phase III results show negative results in the United States.

On September 5th, 2012, Targacept announced that it plans to pursue development of TC-5214 as a treatment for overactive bladder (OAB). Based on TC-5214's unique pharmacokinetic profile, an analysis of data from a completed clinical program and findings from additional preclinical studies, the company plans to initiate a Phase 2b study of TC-5214 in the first half of 2013.

So, now they want to go from a drug designed to help treat depression, which failed, to a drug designed to treat OAB?

From the announcement link above, we read the following:

Completed clinical studies in approximately 2,400 subjects have resulted in a well-established safety and tolerability profile for TC-5214. Targacept's analysis of data from that program, as well as additional preclinical studies, has revealed physiological findings believed to be consistent with marketed treatments for overactive bladder. In addition, prior studies have shown that over 90% of TC-5214 is eliminated unchanged through the bladder, supporting use of a low dose and creating the potential to minimize unwanted systemic effects.

The concerns I have with this are somewhat in line with what Adam Feuerstein, a well known biotech writer for thestreet.com pointed out when he took a close examination of Biosante (BPAX) in an article dated June 6th, 2012:

Biosante's plan to start two, new phase III clinical trials of Libigel for female sexual dysfunction has very little to do with medicine or improving the lives of women. What it's really about is greed and the legal but unconscionable transfer of cash from investors into the pockets of BioSante executives. Libigel, a low-dose testosterone gel, has already proven to be an expensive placebo following the failure of two, large phase III studies completed last December. The studies demonstrated quite convincingly that Libigel does not improve the sex lives of post-menopausal women compared to a placebo.

Adam further stated:

Chief executive Stephen Simes makes $500,000 per year in salary -- a princely sum considering under his watch, BioSante has flushed tens of millions of dollars down the toilet. The company's stock price trades at an all-time low.

By taking a mulligan on Libigel and pushing ahead foolishly with another set of clinical trials, BioSante is merely guaranteeing that its executive team, led by Simes, will continue to collect massive paychecks for the next five years or so.

I agree 100% with Adam here concerning Biosante. While the recent news might seem positive, in my opinion it's nothing more than a ploy designed to keep Biosante executives on the job. Furthermore, I tried to warn investors in an article I wrote in February of this year that Biosante was likely to engage in toxic financing which would result in a reverse split, causing massive shareholder loss of equity. Unfortunately for Biosante long investors, my prediction proved to be correct.

Targacept Key Executives



Mr. Alan A. Musso CPA, C.M.A., 50
Chief Financial Officer, Principal Accounting Officer, Sr. VP of Fin. & Admin., Treasurer and Assistant Sec.



Mr. Jeffrey P. Brennan , 54
Chief Bus. Officer and Sr. VP of Bus. & Commercial Devel.



Mr. Peter A. Zorn Esq., 42
Sr. VP Legal Affairs, Gen. Counsel and Sec.



Dr. J. Donald deBethizy Ph.D., 61
Special Advisor



Dr. Merouane Bencherif M.D., Ph.D., 57
Sr. VP of Preclinical Research



Amounts are as of Dec 30, 2011 and compensation values are for the last fiscal year ending on that date. Pay is salary, bonuses, etc.Exercised is the value of options exercised during the fiscal year.

Currency in USD.

The above represents a decent amount of salary to be lost, if Targacept's platform continues to show failure. As Feurestein points out with Biosante correctly in my opinion, continuing its libigel product ensures the company executives continue to receive their salaries. This is not to say Targacept executives have the same motive, but it's something worth considering in my strong opinion -- if Targacept fails as a company, the above executives lose their pay.

To be fair, everything I have pointed out here doesn't necessarily mean Targacept will fail, nor does it mean again, that the company executives are using this as a ploy to keep their jobs, as Feuerstein suggests concerning Biosante. However, investors should take into consideration every realistic possibility on the table before deciding to invest their hard earned money. Bear cases are good to consider for balance in each and every company.

It's possible that Targacept may indeed find success with its shift of focus towards the OAB market. As pointed out above, the company still has a partnership agreement with AstraZeneca for another drug. Unfortunately, this drug uses the same platform that has already had 3 failures -- something I find too strong to ignore.

I do not think investors should be betting on this one now -- there is just too much risk in my strong opinion moving forward. I think investors need to wait for any phase III data from this company to show positive results, before going long here. If the company can show this, then I can certainly change my opinion. For now, I am staying away.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Disclaimer: This article is intended for informational and entertainment use only, and should not be construed as professional investment advice. They are my opinions only. Trading stocks is risky -- always be sure to know and understand your risk tolerance. You can incur substantial financial losses in any trade or investment. Always do your own due diligence before buying and selling any stock, and/or consult with a licensed financial adviser.

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