Professor Mike Lord says Baupost's Purchase of Targacept Stock is a Vote of Confidence

Boston hedge-fund group becomes largest Targacept stockholder
Reposted from Winston-Salem Journal | by Richard Craver

A Boston hedge-fund group has made a bold statement about its belief in Targacept Inc.’s research by becoming the biotechnology company’s largest shareholder with its first stock buy.

The Baupost Group LLC and three affiliates said in a regulatory filing Tuesday that they have bought 5.65 million shares of Targacept for a 16.9 percent ownership stake. The stock was purchased before Dec. 1.

Baupost, founded in 1982, is an employee-owned hedge-fund sponsor, primarily providing its services to pooled investment vehicles. A Baupost spokeswoman said it is the company’s policy not to comment on its investments.

Heather Savelle, a Targacept spokeswoman, confirmed that Baupost is now the company’s largest shareholder, surpassing the 15.7 percent stake owned by entities affiliated with New Enterprise Associates Inc. of Timonium, Md.

Targacept’s share price has been on a roller-coaster ride over the past 2½ years. It rose dramatically from $2.44 on July 8, 2009, to a recent high of $30.42 because its TC-5214 drug compound for major depressive disorder took on the perception as a “slam dunk” drug and investment bet. AstraZeneca already has provided Targacept with a $200 million licensing payment.

However, Targacept’s share price plunged 60 percent on Nov. 8 after it reported a disappointing clinical-trial result with TC-5214. The compound failed to achieve a meaningful difference with 295 European patients compared with a placebo in a Phase 3 clinical trial aimed at determining whether it could be an add-on treatment to existing anti-depressants.

The first Phase 3 study result on TC-5214 had been eagerly awaited since October 2009. That is when the company said the compound did three times better on a prominent rating scale for depression than Abilify, the only add-on medication currently in the marketplace for major depressive disorder.

Since the Nov. 8 announcement, the share price has traded in the $6.89 to $7.79 range. That means Baupost’s investment was likely worth somewhere in the range of $38.9 million to $44 million.

Analysts said Baupost likely has confidence in Don deBethizy, Targacept’s chief executive, when he said Targacept still has a good chance of getting a hit on two of its remaining three clinical trials. Results for those trials, some with a longer time frame, are due in the first half of 2012.

That kind of performance would likely be enough to gain the Food and Drug Administration’s approval of the compound.

However, some analysts not only question whether TC-5214 can move forward, but also cast doubt on Targacept’s clinical-trial procedures as they downgraded the stock.

Michael Lord, an associate professor of management at Wake Forest University, said Baupost’s purchase is likely a combination of “a bit of bargain buying and a vote of confidence.”

“It’s important to remember these are sophisticated professional investors,” Lord said. “They have a broad portfolio of investments overall, and they have many tools at their disposal that your average individual investor does not.

“Targacept has more than just one drug candidate, and its success relies on more than just the results of one test, so it has many chances to hit at least some solid singles, and maybe even a home run.”

“Apparently, these investors are willing and can afford to take the risks, and have judged Targacept to be a bet worth taking at this time,” Lord said.