Newsletter Watch: Targeting Targacept
Having followed the newsletter advisory industry for some 25 years, I’ve found that often the most successful advisors are those who develop a career-long reputation and expertise within a specific sector. (Along these lines, I previously featured an article on Josh Wolfe discussing his industry-expertise in nanotechnology. See Big potential from TINY, May 11.)
Within the biotechnology sector, one clear standout among newsletter advisors is Michael Shulman, editor of the Changewave Biotech Investor. Although he generally follows larger and more diversified biotech companies, Shulman does maintain a highly speculative portfolio, which often includes small-cap issues.
Indeed, one small cap recently added to his buy list is Targacept, Inc.
(Nasdaq: TRGT). “I’ve been following the stock for quite awhile,” he says, noting that the company has just passed the one-year anniversary of its IPO.
With the caveat that this is a volatile and speculative play, Shulman says, “Although the stock has been a roller coaster over this past year, the company has made so much progress that now is the time to jump on it.”
Unlike many development stage biotechs with a short history, Targacept, he points out, is a 10-year-old company that was spun-off from Reynolds Tobacco to “commercialize compounds that were derived from some very serious research.” Shulman explains, “It’s the company’s heritage that is the key differentiator between Targacept and other biotech start-ups.”
The advisor notes, “Targacept came to life with decades of lab data, human safety data. And for a company its size with its market cap, it has a very large product pipeline. The pipeline of products is at the heart of this recommendation.”
The company, Shulman explains, has four compounds in clinical development -- with trials underway -- and three compounds that are “fairly advanced and still in the lab.” The targets for these compounds are treatments for cognitive weakness, depression and anxiety, and pain.
For the more scientifically-inclined, Shulman states, “These products are based on compounds that work with neuronal nicotinic receptor (NNR) chemistry and biology. Targacept describes these receptors as the ‘volume knobs’ of the nervous system. And Targacept's compounds target this knob as it relates to specific central nervous system functions such as memory, pain and mood.”
Shulman notes, “The depth of this technology is impressive.” He points to the fact that Targacept has more than 380 patents granted or pending worldwide. “Think about it,” he says, “four drugs in clinical trial and three more near trials with a market cap of only $170 million.”
Another factor setting Targacept apart from many biotech newcomers is what Shulman refers to as its business orientation. He states, “The company’s presentations to analysts are crystal clear. It is also tightly focused and highly productive.”
Meanwhile, as the company’s compounds move through the development pipeline, Shulman says he expects Targacept “to make more partnering deals in order to defer costs and to bring approved drugs to market.”
Despite the exciting story, Shulman emphasizes the downside risk in this situation, particularly the fact that the company is not yet reporting revenues from product sales. Further, he adds, despite the size of the pipeline, the company is not diversified.
Further, he suggests, “We may also be a little early since Targacept's drugs are in Phase II trials that will not report final data until next year. Consequently, there is a lack of short-term catalysts for the stock.”
From a safety standpoint, Shulman asserts, “There is a broad pipeline and the safety data on compounds working with NNRs goes back many decades, so I don't think safety will be an issue in these trials.” Nevertheless, he cautions, “The drugs could fail in Phase II trials.”
Overall, Shulman suggests, “Despite the challenges, if one of TRGT's drugs -- especially TC-1734 for Alzheimer's disease -- succeeds in trial, the value of this company will skyrocket as the targeting of NNRs will be validated and Targacept's value will be revised upward by the market.”
His conclusion? "The bottom line is you should buy this little guy now -- only do it carefully, using limit orders and patience,” says Shulman. “We’re not in a hurry to accumulate TRGT, but we don't want to wait too long and miss the boat.”
Steven Halpern is the founder of “TheStockAdvisors.com - Steven Halpern's Guide to Financial Newsletters,” the first website to feature a daily overview of the investment newsletter world.
