After Rising 500%, What Did You Expect?

The deal didn't look too bad. It certainly wouldn't have merited a 6% decline in the stock under normal circumstances. But these aren't exactly normal times with Targacept (NASDAQ:TRGT), up more than 500% this year. In the end, investors got it right.

The development-stage drugmaker licensed its lead product, depression treatment TC-5214, to AstraZeneca (NYSE:AZN) yesterday. All told, Targacept could get $1.24 billion in regulatory and sales milestones, including a guaranteed $200 million up front. Targacept will have to pay 20% of the development costs and will get "significant stepped double-digit royalties on net sales." Without knowing what the actual rate is, it's hard to know exactly how much Targacept gave up, but that $200 million is certainly substantial. It'll go a long way toward developing the rest of the company's pipeline, as well as paying for its share of the drug's clinical trials.

TC-5214 can be used in combination with current treatments, since it treats depression via a different method than current serotonin reuptake inhibitors (SSRIs) -- drugs like Pfizer's (NYSE:PFE) Zoloft, Forest Labs' (NYSE:FRX) Lexapro, and GlaxoSmithKline's (NYSE:GSK) Paxil. With more than 60% of patients not responding to their first SSRI, there's a substantial market for a drug that can increase these drugs' effectiveness. And as an add-on therapy, TC-5214 won't have to compete directly against cheap generics of SSRIs like Eli Lilly's (NYSE:LLY) Prozac.

But getting on the market is still a ways away. With phase 3 trials not expected to begin until the middle of next year, the duo won't be filing for approval with the Food & Drug Administration until 2012. That's a long time to wait, and there's still a lot that can potentially go wrong.

Targacept likely fell on the news because investors had overpriced it, hoping for a buyout -- tsk, tsk. At a market cap greater than $600 million, Targacept looks fairly priced, considering the long, cash-burning road ahead of it.