Renowned investor Seth Klarman is portfolio manager of the Baupost Group, which has averaged returns of nearly 20% since inception in 1983, and loves cheap stocks. He also wrote “Margin of Safety,” a value investing classic. On December 9, Klarman bought 5,649,678 shares of Targacept Inc. (TRGT, Financial), according to GuruFocus Real Time Picks. Targacept is a small, clinical-stage biopharmaceutical company that discovers and develops NNR Therapeutics, a new class of drugs for the treatment of central nervous system diseases and disorders.
Targacept has a broad 52-week price range of $30.47 to $6.88. Its stock chart shows a sudden drop of 60% on November 8. The same day, Targacept announced that its Phase 3 clinical trial of TC-5214, what could be a breakthrough adjunct therapy to antidepressants in patients with treatment-resistant major depressive disorder, failed to have a meaningful effect compared to placebo. Targacept began working on developing and commercializing the drug in partnership with Astrazeneca (AZN, Financial) in December 2009. It is the only of its drugs to be in Phase 3, the stage prior to reaching the market. Eight others are at various stages in its pipeline.
There was considerable hope for the drug initially, when in July 2009 it achieved positive top-line results from a Phase 2b clinical trial as an add-on treatment for major depressive disorder in subjects who didn’t respond to antidepressants (citalopram) alone.
In the announcement for the Phase 2b trial, Dr. Madhukar H. Trivedi, who is helping develop the drug, said, "The magnitude and consistency of the effect of TC-5214 seen in this trial could represent a major breakthrough for patients with depression. It is particularly compelling that the superiority of TC-5214 as augmentation to citalopram over citalopram alone was first seen after only two weeks and grew steadily over the trial's last six weeks, culminating in remission for twice as many subjects in the TC-5214 group."
The company’s president and CEO, Don deBethizy, has said that although the most recent trial was unsuccessful, the drug still has two more to go, according to the Winton-Salem Journal. The results of the next two trials of TC-5214 come out in the first half of 2012.
The company appears quite cheap compared to its financial results. It has grown revenue each year since 2007, though earnings were negative each of those years except 2010, when it made $11 million. It has plenty of cash on its balance sheet though – over $213 million, helped by a common stock offering in March. With its small market cap of $253 million, its enterprise value is only about $40 million. Its long-term liabilities and debt equal just over $4 million, and it has a P/S ratio of 2.95. Mark Stejbach, the company’s chief commercial officer, told the Winston-Salem Journal that the $31.4 million it raised in its stock offering is “enough to take us through 2011 and into 2012.”
Klarman may be using the “cigar butt” approach to Targacept – buying a low-quality company at a really low price. In his November 2011 interview with Charlie Rose, Klarman said, “Warren evolved through three stages. He evolved from buying cigar butts and getting the last few puffs for free, to buying great businesses at really cheap prices, to buying and holding great companies at so-so prices… I’m still in phase 1. We’re still buying cigar butts.”
For more stocks recently purchased by Gurus, go to GuruFocus’ Real Time Picks.
Targacept has a broad 52-week price range of $30.47 to $6.88. Its stock chart shows a sudden drop of 60% on November 8. The same day, Targacept announced that its Phase 3 clinical trial of TC-5214, what could be a breakthrough adjunct therapy to antidepressants in patients with treatment-resistant major depressive disorder, failed to have a meaningful effect compared to placebo. Targacept began working on developing and commercializing the drug in partnership with Astrazeneca (AZN, Financial) in December 2009. It is the only of its drugs to be in Phase 3, the stage prior to reaching the market. Eight others are at various stages in its pipeline.
There was considerable hope for the drug initially, when in July 2009 it achieved positive top-line results from a Phase 2b clinical trial as an add-on treatment for major depressive disorder in subjects who didn’t respond to antidepressants (citalopram) alone.
In the announcement for the Phase 2b trial, Dr. Madhukar H. Trivedi, who is helping develop the drug, said, "The magnitude and consistency of the effect of TC-5214 seen in this trial could represent a major breakthrough for patients with depression. It is particularly compelling that the superiority of TC-5214 as augmentation to citalopram over citalopram alone was first seen after only two weeks and grew steadily over the trial's last six weeks, culminating in remission for twice as many subjects in the TC-5214 group."
The company’s president and CEO, Don deBethizy, has said that although the most recent trial was unsuccessful, the drug still has two more to go, according to the Winton-Salem Journal. The results of the next two trials of TC-5214 come out in the first half of 2012.
The company appears quite cheap compared to its financial results. It has grown revenue each year since 2007, though earnings were negative each of those years except 2010, when it made $11 million. It has plenty of cash on its balance sheet though – over $213 million, helped by a common stock offering in March. With its small market cap of $253 million, its enterprise value is only about $40 million. Its long-term liabilities and debt equal just over $4 million, and it has a P/S ratio of 2.95. Mark Stejbach, the company’s chief commercial officer, told the Winston-Salem Journal that the $31.4 million it raised in its stock offering is “enough to take us through 2011 and into 2012.”
Klarman may be using the “cigar butt” approach to Targacept – buying a low-quality company at a really low price. In his November 2011 interview with Charlie Rose, Klarman said, “Warren evolved through three stages. He evolved from buying cigar butts and getting the last few puffs for free, to buying great businesses at really cheap prices, to buying and holding great companies at so-so prices… I’m still in phase 1. We’re still buying cigar butts.”
For more stocks recently purchased by Gurus, go to GuruFocus’ Real Time Picks.
