Professor Mike Lord says Second Alzheimer’s Drug Compound Offers Promise for Targacept

A question of worth for Targacept
Reposted from Winston-Salem Journal | by Richard Craver

In the biotechnology industry, highs and lows are to be expected, and not overly or overtly feared, analysts say.

That is why many view Targacept Inc.'s recent Phase 3 clinical-trial failures with its most promising drug compound for major depressive disorder — TC-5214 — as disappointing, but certainly not the end of the company.

They cite not only the potential TC-5214 still holds, but also Targacept's remaining research pipeline that includes Alzheimer's disease, adult attention deficit hyperactivity disorder, asthma, diabetes and other inflammatory diseases.

However, Seeking Alpha analyst Stephen Simpson recently asked: "Is worthless really a fair assessment of Targacept?"

Simpson based that question on the fact that Targacept, which closed Thursday at $6.23 a share, is considered by investors as worth less than the cash it has on hand, which analysts say is the equivalent of $7 a share.

The company has said it has enough funding to last through 2014 — an eternity for the biotechnology sector.

Targacept is an anchor tenant in Piedmont Triad Research Park in downtown Winston-Salem with 150 employees. The company develops drugs based on its understanding of nicotinic receptors to treat diseases of the central nervous system.

"Although investors have definitely had to weather some major disappointments here, and the true value of the company's neuronal nicotinic-receptor technology is very much in doubt, it's not often that the normally too-optimistic world of biotech says that a company would be better off shutting off the lights and passing out the cash," Simpson said.

"The Street has soured on this stock to the point where it believes management will only destroy value by pursuing additional studies."

Targacept's share price is down 80 percent from a record high of $30.42 on March 3, and down nearly since 70 percent since its first failed clinical trial with TC-5214 was announced Nov. 8.

Simpson said the main reason for the share price plunge is there was significant optimism that Targacept and partner AstraZeneca "had a potential blockbuster on their hands with a very new approach to treating major depression."

But with failures in the first two of four Phase 3 trials with TC-5214, Simpson said, "any success in these remaining studies would confuse the heck out of scientists and biostatisticians and require at least another pivotal study."

Targacept expects to release those findings of the third and fourth trials in the first half of this year.

Other analysts, while noting the TC-5214 setbacks, are not ready to write off Targacept.

They note Targacept's other promising drug compounds.

AstraZeneca recently approved proceeding with a clinical trial for a second promising compound for Alzheimer's, which Simpson said is "one of the Holy Grails of biotechnology."

Alan Carr, an analyst with Needham & Co., a research company, said AstraZeneca's decision that the second Alzheimer's drug compound is worth pursuing is encouraging "since it appears to be making funding decisions on a compound-by-compound basis."

"It is a vote of confidence in the breadth and depth of Targacept's research pipeline. With most of its research still in the early stages, it's not clear which could be the next leap forward for Targacept."

Michael Lord, an associate professor of management at Wake Forest University, said he also is encouraged by AstraZeneca's decision.

"There's such a shortage of effective therapies for Alzheimer's, and the need is so huge and growing," Lord said. "Even a modestly effective drug could do a whole lot of good, and do well in the process."

Although Simpson said research failures with Alzheimer's "has chewed up many biotechs and only a handful of drugs have made it to approval, it is a multibillion-dollar opportunity for an effective drug."

Simpson said there's reason for optimism given that AstraZeneca, amid its own corporate and research retrenching, remains actively involved with Targacept.

"Given the dismal history of clinical drug development in schizophrenia and Alzheimer's, it's hard to be optimistic about any of those opportunities" by Targacept, Simpson said.

"That said, a long-shot is not the same as no shot, and Targacept at least bears watching until data on TC-5619 are available.

"If schizophrenia and Alzheimer's indications work out, the stock is a multibagger from today's price, while more clinical failure (coupled with cash consumption) will push this close to worthless."