TRGT - Targacept

[theantilibrary]

Anyone care to comment on TRGT? At the current price of $4.90, this looks like a great cigar butt play to me.

 

As of the last 10-K (approximations):

 

Assets:

-107 million in cash

-88 million in marketable securities (short term)

-54 million in marketable securities (long term)

 

= about 249 million in cash and marketable securities (+5 million more if you count property and equipment, but we'll value this at zero for now)

 

Now, they have 84 million in total liabilities. Makes for a book value of about 165 million (4.94/share) right?

Yes, but notice that the vast majority of liabilities (61 million) is deferred revenue, consequence of AstraZeneca's upfront $200 million payment for the development of TC-5214 (the failure of which has obliterated the stock over the last 6 months).

 

Add that deferred revenue back to reach a liquidation value (as of Dec 31, 2011) of about 226 million (6.76/share). And that's assuming that the remaining pipeline (five drug candidates) is worth $0.

 

Well that was over 3 months ago, so what's the current liquidation value? When the results for the final TC-5214 phase III trials turned out to be negative and AstraZeneca and Targacept decided not to pursue a filing, deBethizy (Targacept's CEO) stated in a press release that the company still had "over $225 million in cash". That was March 20th.

 

If we subtract the non-deferred revenue portion of the liabilities from this number, we still get 202 million (225-23), or 6.04/share.

 

Buying at the current price allows one to buy the company at an approx 20% discount to their current net asset value. What's the pipeline worth? I'm not a biotech expert, I have no clue. But I do know that this strikes me as a "Head's I win big, tails I don't lose much" bet.

 

With the phase III trials for TC-5214 come to a close, it looks like the company's burn rate will fall by about 50%, from ~80 million/year to ~40 million/year. They can burn cash for about a year before you get to a net asset value that is equal to today's price. And that's assuming the pipeline is worth nothing. They already have several collaborations with AstraZeneca (which needs to add to a very weak pipeline). Perhaps they will be an acquisition target?

 

It is interesting to note that even in April of 2009 TRGT traded at or above it's liquidation value at the time (ignoring any value the drug pipeline might have), and that was before the big collaboration for TC-5214 that launched the stock.

 

Targacept intends to announce its plans by the end of April.

 

Obviously this is not the most detailed write-up, but I think this may offer a good risk/reward opportunity and wanted to get input from others.

[JAllen]

With about the best large shareholder one could have! (Klarman)

[PSDFinancier]

This looks interesting. But is it fair to add the deferred revenue back in? After all, isn't the upfront payment from AstraZeneca reflected as additional cash on TRGT's balance sheet? And wouldn't TRGT have to give that cash back to AstraZeneca, meaning that we should net it out to zero by subtracting out the deferred revenue liability?

[theantilibrary]

With about the best large shareholder one could have! (Klarman)

 

How could I forget to mention that!

[theantilibrary]

This looks interesting. But is it fair to add the deferred revenue back in? After all, isn't the upfront payment from AstraZeneca reflected as additional cash on TRGT's balance sheet? And wouldn't TRGT have to give that cash back to AstraZeneca, meaning that we should net it out to zero by subtracting out the deferred revenue liability?

 

I don't believe Targacept has to "give back" money to AstraZeneca under any circumstances... Unlike in some industries, there certainly are no guarantees in drug development so I think it was just a calculated risk AstraZeneca took based on the prospects for TC-5214.

 

From the 10-K:

 

Revenue

 

In January 2010, we received a $200.0 million upfront payment under our TC-5214 agreement with AstraZeneca, which we recorded as deferred revenue and are recognizing into revenue on a straight-line basis over the estimated development period for TC-5214 to a potential submission of an NDA to the FDA. As of December 31, 2011, $54.5 million of the upfront payment remained to be recognized into revenue.

 

(My note: That 54.5 million is the bulk of (but not all) the deferred revenue on Targacept's balance sheet)

 

I could certainly be wrong... Others are very welcome to blast holes in this idea!

[theantilibrary]

There it is. From the 10-K:

 

Revenue Recognition

 

We have historically derived a substantial portion of our revenues from our strategic alliances and collaborations and expect that we will continue to derive a substantial portion of our revenues from our collaborations with AstraZeneca over at least the next several years.

 

Our collaboration and alliance agreements contain multiple elements, including: an upfront fee, which may include an initial payment upon commencement of the contractual relationship, payment representing a common stock purchase premium or payment to secure a right for a future license; research fees for ongoing research and development; payments associated with the achievement of discovery, development, regulatory and commercial milestone events; and royalties based on specified percentages of any net product sales. In determining the accounting for collaboration and alliance agreements, we first determine whether the agreement involves a single unit of accounting or separate units of accounting for revenue recognition purposes by evaluating each deliverable under the terms of the agreement. If a deliverable has value on a standalone basis, we treat the deliverable as a separate unit of accounting. We determine how to allocate amounts received under the agreement among the separate units, based on the respective selling price of each unit, and we determine the revenue recognition applicable to each unit. If an agreement does not have multiple deliverables that have standalone value, we consider the agreement to have one unit of accounting and we determine the revenue recognition applicable to the entire agreement.

 

We defer recognition of non-refundable upfront fees and recognize them into revenue on a straight-line basis over the estimated period of our substantive performance obligations. If we do not have substantive performance obligations, we recognize non-refundable upfront fees into revenue through the date the deliverable is satisfied. The period over which we recognize the revenue may be adjusted from time to time to take into account any delays or acceleration in the development of the applicable product candidate or any extension or shortening of the applicable performance period. Any such delay or acceleration in the development of a product candidate, or extension or shortening of a performance period, would result in decreases or increases to the recognition of deferred revenue from period to period. As of December 31, 2011, all amounts that we have received from AstraZeneca are non-refundable.

 

We recognize collaboration research and development revenue from research services performed under our collaboration agreements as research is performed and related expenses are incurred.

 

We recognize revenue for non-refundable payments that are based on the achievement of discovery, development, regulatory and commercial milestone events upon achievement of the milestone event if all of the following conditions are met:

 

• there is substantive uncertainty regarding achievement of the milestone event at inception of the arrangement;

• the payment is commensurate with either our performance to achieve the milestone or with the enhancement of the value of the delivered item;

• the payment relates solely to past performance; and

• the payment is reasonable relative to all of the deliverables and payment terms within the arrangement.

 

If any of these conditions are not met, we defer recognition of the payment and recognize the payment on a straight-line basis as discussed above.

 

To the extent we are reimbursed under a collaboration or alliance agreement for specific research and development costs, such as third-party manufacturing costs for drug material, we reflect these reimbursable amounts as a component of collaboration research and development revenue and the costs associated with these reimbursable amounts as a component of research and development expenses.

 

At this price, why on earth wouldn't AstraZeneca just buy them out??

[stahleyp]

anyone else looking at the calls? They look pretty cheap in case some good news comes out on one of the drugs in the pipeline. Very speculative though.

[enoch01]

anyone else looking at the calls? They look pretty cheap in case some good news comes out on one of the drugs in the pipeline. Very speculative though.

 

Yes, very speculative.  I can't handicap the value of the pipeline, therefore I can't see any good reason to take a chance with calls.  I am long the common, though.

[rijk]

"I can't handicap the value of the pipeline, therefore I can't see any good reason to take a chance with calls."

 

that would actually be the reason for me to buy leaps in order to limit the downside.... for example with the 2014 $5 strike leaps, you would limit your max exposure to 30% compared with common.....

 

regards

rijk

[enoch01]

"I can't handicap the value of the pipeline, therefore I can't see any good reason to take a chance with calls."

 

that would actually be the reason for me to buy leaps in order to limit the downside.... for example with the 2014 $5 strike leaps, you would limit your max exposure to 30% compared with common.....

 

regards

rijk

 

I don't want to buy a lot of time value if I don't think they'll be around long.  The losses on the LEAPS get large in a hurry depending on take-out price, versus very limited downside on the common at this price.

[Mephistopheles]

I have a small position in this, but am a bit skeptical. How significant is the fact that it's trading below cash? It's not like they're going to do a buyback or pay a dividend any time in the near future. And given that it's a biotech without a drug on the market yet, it's very feasible that they won't get any results from the pipeline and end up burning through the cash, right? Also, even though Seth Klarman owns 17%, it's a miniscule position in his portfolio, so I'm not sure we can rely on that.

 

I'm not a biotech expert either, so for those of you who are, what generally happens in these cases? Is it normal for a biotech trading net of cash to be taken out? Or do they generally burn away their cash hoard until they exist no more?

[17thstcapital]

With about the best large shareholder one could have! (Klarman)

 

Looks like he punted his entire position.....

[stahleyp]

With about the best large shareholder one could have! (Klarman)

 

Looks like he punted his entire position.....

 

Yep,

 

http://www.marketfolly.com/2012/04/seth-klarmans-baupost-group-sells-out.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+MarketFolly+%28Market+Folly%29

[berkshiremystery]

Targacept reports an error in asthma study,...shares are down almost ~12% to $4.23 per share.

 

Baupost has sold off their entire stake in TRGT according to SEC files.

 

I never understood what Seth Klarman liked about Targacept.

[theantilibrary]

Certainly wish I'd waited a day to write this one up, but it still looks very cheap selling at about 65% of cash.

 

Targacept article in Barron's today:

 

http://online.barrons.com/article/SB50001424053111903835404577350180572736636.html?mod=BOL_hpp_highlight_top

[nodnub]

Baupost dances in and out of lots of small biotech, SPACs, and special situations.  I wouldn't recommend trying to ride their tailcoat on these unless you have brass balls.

 

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The obvious exception to this advice is if you are willing to out-read and out-research the rest of the world on each company so you know more about it than anyone else.