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Seth Klarman Buys 16.92% Stake in Targacept (TRGT) After Stock Drops 60%

December 12, 2011 | About:
Holly LaFon

Holly LaFon

262 followers
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), 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) 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.


Rating: 3.2/5 (26 votes)

Comments

kfh227
Kfh227 premium member - 2 years ago
Definitely looks like a cigar butt. made my eyes perk up though. This is a big holding.
vgm
Vgm - 2 years ago
Klarman did a not dissimilar thing with PDL BioPharma (PDLI), which he still holds, which was part of a spinoff from a larger biotech. His analysis was based on purely financial grounds, not on a drug pipeline. He found a large mispricing, on the basis of which he bought.

Guessing the outcome of an antidepressive (or any CNS drug) clinical trial is fraught with difficulty and uncertainty. So, my guess is that his analysis is again purely financial, perhaps similar to what is presented here, and that a positive clinical outcome is discounted in his calculations.

The upside from a successful clinical outcome would be huge of course.
kfh227
Kfh227 premium member - 2 years ago
Klarman is a tough cookie. His circle of competance is much different than mine.I don't see the rational behind this one. Burning cash though so I don't really get it.
kfh227
Kfh227 premium member - 2 years ago
Fwiw: prem watsa is easy. Usually a poorly hidden catalyst that wall st is blind to for some reason
ramands123
Ramands123 - 2 years ago


To the "GURUFOCUS AUTHOR" of this artical -

"Please for god sake avoid flashy headings like this" This is extremly mis-leading. This is just a very small investment for Seth Klarman. Its 1.5 % of his portfolio.

It might be 16 % of share oustanding but as far as Seth Klarman is concerend its a very small investment.

Your flashy heading gives an impresssion that its very significant investment. Headings like these can cuase lot of money for investors if they don't check the details.
vgm
Vgm - 2 years ago
Ramands, with all due respect if, as you write "Headings like these can cause lot of money for investors if they don't check the details.", then these are not investors you are referring to! How could anyone dash off and buy based on a headline? Ridiculous.

It's clear that this is a small percentage of Klarman's portfolio, but it's still very interesting that such a careful value investor should purchase such a significant percentage of a company after it plummets. There just has to be a solid rationale. We should be trying to discover what it is.

An individual investor can do very well with small cap companies, if properly researched.
ramands123
Ramands123 - 2 years ago
Well ideally your are right Vgm, investors should not trade on headlines but reality is lot of people do. Investors do rediculous things all the times. Even the best ones.

And for some guru's like Seth Klarman , people do copy thier moves without doing detailled analysis.Again not ideal but its the reality.

Anyways point is gurufocus should carefully title the subject and don't make it seem completely opposite of reality. Reality in this case is that it is a very insignificant stake for Seth and title implies a huge stake from him.

My only objective is to make the process better so in future authors are more carefull.

rgosalia
Rgosalia - 2 years ago
Coat tailing Seth Klarman even if it's based on financial analysis is one of the most dangerous things to do in my opinion. I am a member of VIC and I have read analysis on many biotech / pharma ideas that Baupost is invested in. I speculate that these are written up by either Baupost analysts or someone who is intimately familiar with the biotech industry. When I read these write ups, I am pretty convinced that this space is completely inaccessible to someone like me. I encourage you to read the PDLI one - I think you will agree with me http://bit.ly/slM8N3 (You need a guest account). Any comments?

- Rishi

ramands123
Ramands123 - 2 years ago


Rishi , unfortunatly i am unable to access the link. I have never invested in Bio myself but i do remember in one of the interviews Warren Buffet said that he would prefer buying bio tech as basket because its difficult to predict what drug will get approved and patents. He said one will do fine if you buy basket. And thats probally what Seth Klarman is doing. Basket of undervalued Pharma's.
vgm
Vgm - 2 years ago
Rishi, thanks.

I have not gone to the site on your link, but have heard Klarman give an in-depth analysis of the evolution of PDLI as a spin-off of its parent, and the investment case in a lecture. It was in fact very logical and not at all difficult to understand. That's not to say it was easy. I have a pharma/biotech background. The video and related video lectures (I think to HBS) were available on YouTube until a few months ago.
LwC
LwC - 2 years ago
Hi Ramands123,

While some may share your opinion about the heading of this article, I couldn't disagree with you more. After all, it appears to be factual: it discloses that Baupost bought a significant share of the company; and it points out that the share price dropped a significant amount (on one trading day, as revealed in the article.) How is stating those two facts "flashy"? And for you to argue that the title is "completely opposite of reality" is IMO unreal. Just what is in the title that is not real? The amount of the investment? The amount of the share decline?

I also disagree with your assertion that "its (sic) a very small investment" for Baupost. AFAIK 1.5% of Baupost's capital is something like $500 million. I dare say that's a significant amount of money, period. Considering that Klarman has clearly stated many times that he prefers to keep cash if he can't find an acceptable investment, for him to deploy that amount of money in this company IMO is not a small investment. Now if he deployed, say, $500,000 into the shares of that company I would certainly agree with you.

While I'm sensitive to your concern about people who "invest" their money based only on headlines, whether it's GuruFocus or Cramer or CNBC or any source for that matter, IMO it's not the responsibility of GuruFocus or its contributors to worry about them. As you stated "Investors do rediculous (sic) things all the times", and so it goes. Being critical of what appears to be a factual headline out of concern for the fools of the world IMO is not constructive.

IMO if you want to be critical of GuruFocus article headings there are much better targets, for example most of the headings that have "Buffett" in them. Or how about the heading a little while ago that asserted that Graham would have invested in some company that was covered by the article. LOL. I mean, the man's been dead for 45 years. Was the author channeling Graham's spirit or something? How could the author be so arrogant to pretend to know what Graham would invest in today?

rgosalia
Rgosalia - 2 years ago
Ramands123, you need to be a guest member to read the write ups on VIC (45 day delay).

Vgm, here is another one from VIC (Baupost doesn't have a position), but if you read it you'll see the quality of work that has gone into the write up. It is unbelievably detailed even for someone who understands the industry. For an outsider like me this is completely inaccessible. Basically the conclusion I came out with when I read this is that if I were to be active in this space, I would be patsy who knows and understands the least. IMHO - simple financial analysis is not just enough for this space.

- Rishi

itznuthin1
Itznuthin1 - 2 years ago


Seems like a solid buy to me. Company has a solid balance sheet. Lots of cash. They failed the first trial but still have 2 or 3 more tries at it. The phase 3 data acts as potential catalysts for share appreciation. Looks like Klarman made a small bet. Not a large investment. Neat little science. Drugs made to get those nerve signals firing rapidly again. Spinoff from Reynolds American. I think these guys push this phase 3 drug through. Shares rocket and we look back and wonder what Klarman saw in this position which is simply a oversold company with a strong upcoming catalyst for share appreciation. I wouldn't be a buyer. Bio-technology is not a place of value for me. It looks like Klarman has great Bio-technology analysts.
vgm
Vgm - 2 years ago
Rishi, despite being in the business, I'd put most research-based biotech in the Munger "too difficult pile"!
JeanPierreSarti
JeanPierreSarti - 2 years ago
Note also that PDLI is a magic formula stock and has done very handsomely for me indeed.
adamcz
Adamcz - 2 years ago
I agree with those who find this field daunting. I actually find his biggest holdings much easier to understand. I had independently invested in BP and MSFT prior to Seth, but news of his huge purchases gave me added confidence to raise my bet.

I love copying Buffett, Klarman, and Berkowitz, but only when I can reverse engineer their thesis, or come up with my own that makes sense. I'll have to pass on this one.

Somebody in this thread said that this investment is 1.5% of his portfolio, but I think it's way less than that. Doesn't Baupost have $20+ billion?
clm10
Clm10 - 2 years ago
Down 25% today.

Ouch!

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