Player Avatar zzlangerhans (99.85) Submitted: 11/9/2011 3:19:08 PM : Outperform Start Price: $7.88 TRGT Score: -70.41

Disclaimer: Yesterday I took a major CAPS kick to the teeth when the company reported that the RENAISSANCE 3 phase III trial of TC-5214 for major depression did not meet its primary endpoint. Not only did I green thumb Targacept, but I identified it in May as a GBMB portfolio buy at 20 after it had declined from peaks near 30 over a few months. Fortunately, my skepticism over the current paradoxical strength in the broad markets caused me to place a virtual moratorium on long investments until the debt crisis in Europe has resolved. Therefore I sustained no real money losses when the share price went into the dumper.I've long held the view that when you advise buying a stock and you end up being completely wrong, you should sit down and shut up. This is apparently a rare concept in the financial media and on blog sites like Seeking Alpha. However, CAPS is a game and I'm going to continue to play Targacept in the game, and when I rate stocks I always write a pitch. So if you believe, like I do, in the integrity of fading away quietly then read no further.Targacept conveniently dished the bad news only a week after reporting their third quarter financial results. So we know that the company has 271M in cash, 2M in long term debt, and an uptick in quarterly burn to 9M. Meanwhile, the market cap at the close Tuesday was 254M. Yes, that's 15M below the net liquid asset balance. Now, it's not unusual for weak biotechs to be valued below cash - see Insmed and Adventrx - but there are important differences with respect to Targacept.First is the sheer quantity of the cash. Insmed has 85M to back a market cap of 80M. Adventrx has 38M to back a market cap of 26M. Targacept has a whopping 271M in cash. Even if they maintain the higher 9M burn they have enough cash for seven and a half years of operations. TC-5214 may have brought a lot of pain today, but let's not forget it brought in 200M from Astra Zeneca in January 2010 and powered an 80M dilutive financing in May 2011.The second issue is future prospects. Adventrx has two busted me-too cancer drugs and a cheaply-acquired moonshot for sickle cell. Insmed has a phase III antibiotic on FDA clinical hold for a cancer signal in animal studies. Investors could be forgiven for thinking that these companies will simply use up their cash fruitlessly a la Myrexis. Targacept, on the other hand, has four drugs besides TC-5214 in advanced clinical trials. The most promising of these, AZD3480, is already in a phase IIb trial in Alzheimer's being run by Astra Zeneca. Phase II trials of TC-6987 in asthma and diabetes will be completed in H1 2012. And furthermore, it's important to remember that RENAISSANCE 3 was only one of four phase III efficacy trials of TC-5214 in progress. The remaining trials will provide topline data in H1 2012.I think it would be foolhardy to ascribe much value to TC-5214, and the stock could suffer further if Astra Zeneca declines to pick up an option on AZD1446 for Alzheimer's later this year. But I've looked at this situation closely and everything about it is saying over-reaction. For some reason it reminds me of the pummeling Intermune took after the FDA rejected pirfenidone in May 2010. We know how that story turned out. Anyone could be excused for giving speculative stocks like baby pharmas a wide berth given the current imbalance between the markets and the real global economic situation. But if you're looking for something in the sector that has a good chance of bouncing back regardless of the economic headwinds, Targacept may be for you.

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Member Avatar zzlangerhans (99.85) Submitted: 11/10/2011 4:39:45 PM
Recs: 1

Bought 1900 shares for the GBMB account today at 7.35.

Member Avatar zzlangerhans (99.85) Submitted: 12/20/2011 10:42:38 AM
Recs: 5

Not that big of a surprise. TC-5214 is dead. That leaves AZD3480, TC-6987, AZD1446, TC-5619, and 271M in cash and long-term investments. At a share price of 5.61 the market cap today is 187M. I bought another 2100 shares at 5.61 for a total of 4000 shares at an average cost basis of 6.44. Not really where I wanted to be at this point, but I can live with it.

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