Targacept Finds Catalyst to Stop Its Bleeding

While not only not unexpected, but indeed inevitable, the news that Targacept is merging with Catalyst Biosciences (not to be confused–although it undoubtedly has been and will be–with Catalyst Pharmaceutical Partners) is an insipid and pathetic end to a story that once looked like a made-for-Hollywood epic success. Targacept was of course the RJ Reynolds spin-off, an attempt to take nicotine pharmacology out of the cancer ward, and stave off eons of tobacco-induced bad karma by turning it to the pursuit of medical advances (and profits). Targacept signed major deals with Astra Zeneca and GSK, and had what looked like, on the basis of Phase II trials, promising nicotinic candidates for both depression and cognition in schizophrenia. In January 2010, we wrote: “No CNS company had a better, more substantive 2009 than did Targacept.” It turned out that, while no one had a better year, Targacept’s was a lot less substantial than it had initially appeared.

Just a year later, in January 2011, when Targacept’s market cap was $800 million, NIR sounded a cautionary note: “Beyond waiting on TC-5214 and TC-5619, the biggest unanswered question for Targacept is–What will they do with that $268 million in cash? ….the next step in Targacept’s maturation may be a broadening of their portfolio beyond the mechanism upon which they were founded and have flourished. It may well be time that they diversify, hopefully expanding within the CNS area.”

That diversification beyond nicotinics never happened, and larger-scale, better-designed trials for both TC-5214 and TC-5619 eventually confirmed that Hint of Concept does not equal Proof of Concept. Fitting the nicotinic shoe to the gastrointestinal foot did not work either, the long slow exsanguination of their once-impressive cash position continued, and Targacept’s market cap shrank to $90 million. This brought Targacept to this ignominious end: Its shareholders will receive $20 million in cash, $37 million in convertible notes, and 35% of the combined company, which will have Catalyst management developing Catalyst’s products for hemophilia and complement-based disorders. If shareholders choose to convert their notes into stock, they will end up with 49% of the company.

There are several teaching moments to be distilled from this sad saga; this is a preliminary sample:
a. Having all of one’s corporate eggs in a single mechanistic basket is overly risky–and if there is cash to execute a rational diversification, that is an insurance policy that should be purchased.
b. Make sure that a lead compound does not have a major biochemical Achilles Heel.
c. Take care to choose the right endpoint (negative symptoms in schizophrenia are not the choice anyone else made) and the right population in terms of geography.
d. Relevant to point C: Do not run depression trials in India–and if this advice is ignored, it is preferable to be straightforward in disclosing the vulnerabilities of such a trial.
e. Again, HOC≠POC.

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