Targacept Considering Downsizing in Wake of Failed Drug

Targacept Considering Downsizing in Wake of Failed Drug [Winston-Salem Journal, N.C.]

From Winston-Salem Journal (NC) (March 21, 2012)

March 21--The failure of Targacept Inc.’s most promising drug compound to date is likely to deliver more body blows, analysts said Tuesday.

This time, management acknowledged that the impact could reach beyond its research portfolio and share price to affect its Winston-Salem workforce of 150.

Targacept, an anchor tenant in Piedmont Triad Research Park, announced Tuesday with licensing partner AstraZeneca PLC the failure of the final two of four Phase 3 clinical trials of its TC-5214 compound, designed to treat depression.

Failure in the clinical trials meant the compound did not achieve a meaningful difference in patients compared with a placebo. The compound failed two short-term clinical trials last year.

Investors reacted to the disappointing, but expected, news by sending Targacept’s share price down 30 percent, or $2.22, to close at $5.19.

There had been great expectations among management, as well as analysts and investors, that TC-5214 could fill a major and potentially lucrative void in the marketplace for anti-depressant drugs. Targacept said in October 2009 that the compound did three times better on a prominent rating scale for depression than Abilify, the only add-on medication currently in the marketplace.

The company needed two successful Phase 3 trial results to pursue Food and Drug Administration approval of the compound.

Targacept has added about 35 employees in the past 18 months, some in anticipation of commercializing TC-5214.

Don deBethizy, the company’s chief executive and president, said officials have been "downside planning" since announcing the first failed trial result in November.

"We have been carefully scrutinizing all aspects of our business to prepare for this contingency, and we will announce our plans by the end of April," deBethizy said.

A biotechnology company focused on pharmaceutical discoveries typically has five to seven years to show success, analysts say. Targacept spun off from R.J. Reynolds Tobacco Co. in 2000.

Despite the failure of TC-5214 for major depressive disorder, deBethizy remains optimistic because Targacept "has built a deep and diverse clinical pipeline." The company’s compounds target Alzheimer’s disease, Parkinson’s disease, schizophrenia and inflammatory conditions.

"With multiple therapeutics in Phase 2 development in areas of large medical need and commercial opportunity and over $225 million in cash, we are well-positioned for future success," deBethizy said.

Still, deBethizy cautioned "that we have to focus our capital on research that can create shareholder value. It’s our reality."

That includes putting more emphasis on drug compounds not targeting the brain and slowing down research expenses.

Local officials expressed hope that Targacept will find research success with other compounds.

"I am sure Don and his staff are working on alternatives to keep the company healthy," Winston-Salem Mayor Allen Joines said. "As to the reputation of the research park, I believe most people understand that medical and drug research is a lengthy process that sometimes does not produce the results that were hoped for."

Ketan Desai, a contributor for Seeking Alpha, a website focused on stock market analysis, said the company "did the right thing in pulling the plug on TC-5214."

"Targacept’s portfolio is diverse enough that pursuing a compound with increasingly limited upside is not its best use of resources," Desai said.

Desai expects that Targacept, like most biotech companies with a Phase 3 trial failure, will have job cuts even as it shuffles some employees to other promising compounds.

AstraZeneca has taken a major hit with the failure of the TC-5214 Phase 3 trials. It provided Targacept with a $200 million licensing payment. AstraZeneca said Tuesday that it would take an asset-impairment charge of $50 million, meaning it will essentially write off that amount of the investment in TC-5214.

Targacept’s share price rose dramatically from $2.44 on July 8, 2009, to a high of $30.42 in 2011 because TC-5214 took on the perception as a "slam dunk" drug and investment bet.

The $225 million cash cushion and the other drug compounds have kept Targacept’s share price from going into more of a freefall. Still, Desai said he expects that Targacept’s share price "will languish until it can have a successful Phase 3 trial result."

Adam Feuerstein, a senior columnist for The Street.com, was one of the analysts who raved in 2009 about Targacept’s initial research success with TC-5214.

But after the first failed Phase 3 trial, Feuerstein expressed doubts about trusting clinical data collected in India because companies tend to struggle to replicate results in the United States or Europe.

Feuerstein said Tuesday that the big challenge for Targacept is reviving investor confidence, since the other compounds are based on the same neuronal nicotinic receptor research.

"It’s another sign of how challenging it is to make a breakthrough in medical categories such as depression and schizophrenia," Feuerstein said.

"Targacept, from this point forward, becomes a show-me story for Wall Street."

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(c)2012 Winston-Salem Journal (Winston Salem, N.C.)

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Posted: March 2012


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