Professor Mike Lord Discusses Targacept's Future in Business Journal of the Triad

Investors anxious for hints about Targacept’s direction
Reposted from Triad Business Journal

Wild share price swings may seem more the norm than the exception these days, but investors in struggling biotech firm Targacept Inc.

Targacept shares closed June 12 at $4.29, two cents higher than on June 5, the day after founding CEO Don deBethizy announced his sudden resignation from the firm. Shares dipped to $4.16 on June 7 before drifting back up.

Winston-Salem-based Targacept has had little to say since announcing deBethizy’s resignation and the creation of the “Office of the Chairman” on June 4. The company is currently being led by board Chairman Mark Skaletsky and a team of senior executives.

They are searching for a CEO and guiding strategic direction, resource allocation and pipeline development in the meantime, but have made no public comments other than to praise deBethizy’s contributions on his way out.

But others have been speculating about what direction the company will take in the wake of the high-profile failure of its most advanced drug candidate known as TC-5214, which made it all the way to Phase 3 clinical trials as a potential treatment for depression. Targacept’s share price has fallen from about $7.50 per share since March, and the company has laid off 65 people, about half its work force.

One reason Targacept’s share price hasn’t fallen further despite the management turmoil and uncertainty is some basic investor math: Targacept was still sitting on about $176.6 million in cash in its most recent quarter, or about $5.29 for each outstanding share. Not even counting the value of assets or other drugs in development, that’s well above what shares currently cost.

But the uncertainty may be keeping the price from moving higher. The company has essentially three strategic options: keep plugging along, sell to another firm or to give up and cash out investors.

Before his departure but in the wake of the TC-5214 failure, deBethizy seemed to favor the first option. He talked of retooling the company’s pipeline and focus and seeking out new partnerships and areas of research.

Some wary investors, including in online trader message boards, are urging the company to liquidate its assets and distribute its mountain of cash to shareholders. That’s probably the worst possible outcome for Winston-Salem, since there would be nothing left of its most prominent biotech corporate citizen.

But as tempting as it might seem to skittish investors, it would be neither a cheap nor easy out for the company, said Professor Mike Lord of the Wake Forest University Schools of Business.

“There are a lot of details that make that sort of theoretical possibility harder in practice — employment agreements, supplier contracts, partnerships and so on,” he said. “It’s not as easy as just looking at cash value.”

With the share price so low, a buyout by another firm is also a possibility. That could work out well or badly for Winston-Salem, Lord said, depending on what the buyer wanted to do with the company and where it would do it.

But Joe Kronner, who as president of JFK Consulting Group in Winston-Salem is active in the biotech community, would get nervous at word of a sale. Targacept has always had to answer questions from investors and partners about why it is located in the Triad rather than the better-known Research Triangle or elsewhere, and as CEO, deBethizy was always emphatic in his enthusiasm for the Piedmont Triad Research Park and the city.

“Don was probably the biggest reason (Targacept) is here,” he said. “He fought hard to keep it here, so (a sale under new leadership) has to be a concern for the community.”