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Seth Klarman Gives Up Targacept; Sold Out

April 10, 2012 | About:
GuruFocus

GuruFocus

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Renowned value investor Seth Klarman sold out his position in biopharmaceutical company Targacept (TRGT) at a loss of at least 30%. Apparently he gave it up on Targacept. His selling price is around $4.9 a share. Today Targacept dropped another 10% and was traded around $4.4 a share on the news that it has revised top-line results from its exploratory Phase 2 clinical study of TC-6987 for asthma.

Seth Klarman bought a 16.92% of stake in biotech Targacept (TRGT) after its stock price dropped 60% following a drug trial fail. His purchase price was around $7.26. Then it suffered a few more big drops. This price chart of its stock reminds us of what Peter Lynch famously said: Don’t try to catch a falling knife.

But Seth Klarman is not like most of us. We don’t need to repeat his achievements or his book here. He bought the stock as a “cigar butt investment,” meaning poor companies at very low prices. Our columnist Matt Blecker has done a detailed analysis on Targacept. He concluded that the company would have $8 per share of net cash by the year end, which means that the stock is even cheaper than it looks now. We will appreciate if he can give us an update.

If we look at the balance sheet of Targcept, as of Dec. 31, 2011 it has $195 million of cash, and total liability of $84 million. With 33.38 million shares outstanding, the stock has per share net cash of $3.3 a share, which is more than 75% of the stock price. The stock does look cheap.

If we look further, the company burns around $20 million of cash each quarter. That is certainly a worrying sign. Is that why Seth Klarman gave it up?

For details of what Seth Klarman has bought, please check out Seth Klarman’s portfolio.

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Comments

tonysf
Tonysf - 2 years ago


I am still puzzled by Seth Klaman's purchase of TRGT. Where is the margin of safty for a biotech company with products in clinical trails?
Matt Blecker
Matt Blecker - 2 years ago
After the poor, final results from TC-5214 on March 20th, I decided to hold Targacept, at least until after I was able to perform another thorough analysis. I had an exchange with another poster around that day, and stated that I intended to hold, as I also am reluctant to sell into panic.

Upon further review, I decided to sell Monday the 26th based on the fact that the expected value from other milestone and royalty revenue was insignificant. At the price I sold, roughly $5.35 per share, it represents the approximate liquidation value at the end of 2012. Although I took roughly a 17% loss at my sale price and there may be some upside in the future, I felt I made the right decision given the risks involved after such a bad outcome from the TC-5214 level 3 trials.

To answer your question tonysf, the margin of safety was based on the fact that at the purchase price of $6-7 per share, the company was selling below liquidation value, had at least enough cash and securities to operate for 3 years plus, and would have likely seen more milestone revenue from just one successful trial of TC-5214. By making this a smaller piece of a portfolio and selling when appropriate, the risks were minimized, even given the worst possible outcome.

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