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Targacept's Stock Falls on Failed Depression Drug

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A deal struck more than two years ago with partner AstraZeneca held the promise of more than $1 billion in incentive payments. The problem is the drug doesn't work.

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There's a reason the money announced in collaborations between big pharmaceutical companies and clinical-stage biotechs is called bio bucks.

Targacept (TRGT) is dropping by more than one-quarter Tuesday morning after falling 60% in November 2011 on failure of an experimental depression drug. After a poor study outcome for the drug in November, additional results announced today confirmed that the drug doesn't work.

Partner AstraZeneca (AZN), which once offered to pay up to $1.2 billion to the biotech, will not be pursuing market approval for the drug, known as TC-5214, because the product didn't prove to be effective in studies. The companies were testing the drug as an add-on treatment for patients with major depressive disorder (also known as clinical depression). They had planned on filing for US approval later this year.

When Targacept struck a development deal with AstraZeneca in December 2009, investors had already bid up the stock. The development deal provided an even headier catalyst. Targacept was paid $200 million upfront after the partnership was signed. The biotech was eligible for another $540 million if regulatory and sales goals were met and another $500 million if additional sales milestones were achieved.

The reality: A $1.2 billion deal really became a $200 million agreement and was a big flop.

A little more than a year ago, Targacept shares traded above $29. They've dropped by more than two-thirds over the past several months. The stock fell more than 25% Tuesday to $5.52.

Investors shouldn't have been surprised by today's news. The question is, what does Targacept do going forward?

"We have been carefully scrutinizing all aspects of our business to prepare for this contingency," CEO Donald deBethizy said in a statement.

The company will announce its future plans at the end of April, he said, noting the company has more than $225 million in cash.

Targacept is in the early and middle stages of testing treatments for Alzheimer's disease, schizophrenia, attention deficit hyperactivity disorder, asthma, and diabetes.

Of course, grand failures usually require a lot of trust building before investors climb back on board. Targacept has a lot of work to do.

Twitter: @brettchase

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No positions in stocks mentioned.
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