Klarman Buys a 16.92% Stake in Targacept $TRGT

Seth Klarman, the manager of the Baupost Group, bought a 16.92% stake in Targacept (TRGT) on December 9. Klarman purchased 5,649,678 shares in the small clinical-stage pharmaceutical company.

TRGT develops NNR Therapeutics, a new class of drugs that treat central nervous systems diseases and disorders. Recently, TRGT announced its TC-5214 drug, which was designed to be an adjunct therapy to antidepressants when major depressive disorder is treatment-resistant, was no more effective than placebo in its Phase 3 clinical trials.

TC-5214 was designed in partnership with Astrazeneca (AZN) and had been in development since December 2009. While TRGT does have eight other drugs in development, TC-5214 was also the only one of TRGT’s drugs in Phase 3 trials.

After the news, its share price fell 60%, going from $19.12 at close on November 7 to close at $7.61 on November 8. On December 9, when Klarman purchased his shares, TRGT ranged from $7.50 a share to $7.92 a share. TRGT’s outlook may seem bleak but analysts say not. They have ascribed the stock a one-year target estimate of $11.50 and its financial seem solid – it has grown revenue each year since 2007 and has over $213 million in cash on its balance sheet. It looks like he could be using a “cigar butt” approach – buying a low-quality company for a low price. “Warren evolved through three stages,” explained Klarman in an interview with Charlie Rose in November. “He evolved from buying cigar butts and getting the last few puffs for free, to buying great businesses at really cheap prices, to buying and holding great companies at so-so prices… I’m still in phase 1. We’re still buying cigar butts.”