Going Down A Path Others Have Largely Ignored

By Alan Horowitz

Nicotine has a bad rep, but what it targets, neuronal nicotinic receptors (NNRs), holds considerable potential as therapeutic targets — at least, that is the hope of Targacept. The business model of Winston-Salem, NC-based Targacept Inc. is to find novel compounds that selectively target specific NNRs.

This is not surprising, given that the company is a spin-off of RJ Reynolds Tobacco Company (RJR). RJR, of course, was interested in learning more about nicotine and its receptors because nicotine is a primary chemical component of tobacco. To do so, it set up a research team, which was eventually led by J. Donald deBethizy, Ph.D. Today, he is Targacept’s CEO.

According to Targacept, compounds that selectively modulate the activity of specific NNRs have the potential to treat a variety of medical issues and diseases, including depression and anxiety, attention deficit/hyperactivity disorder, Alzheimer’s disease and other dementias, cognitive dysfunction in schizophrenia and other disorders marked by cognitive impairment, smoking cessation, pain, obesity, addiction, Parkinson’s disease, and inflammation.

Despite the potential therapeutic application of NNRs, nicotine’s negative image limited the number of companies interested in researching them. “Historically, the reason that big pharmaceutical companies hadn’t looked into this receptor as a target for treating disease to any great extent was because there was a lot of toxicity associated with the target, mostly represented by nicotine,” says deBethizy. “Nicotine produces nausea in nonsmokers, increases heart rate and blood pressure, and is addictive. These side effects have discouraged people from developing it. And, there was a lack of knowledge around the beneficial effects related to the receptor system and how to target it.”

In the early 1990s RJR’s research team “transitioned into a pharmaceutical opportunity,” says deBethizy. By 1997, it was a wholly owned subsidiary of RJR called Targacept, a name created from the company’s modus operandi of targeting receptors. RJR isn’t focused on being a venture capitalist, so it wanted to spin off Targacept — or close it down. An outside consultant helped Targacept organize its R&D and devise a plan to create value by finding a partner to develop an Alzheimer’s pharmaceutical.

Targacept tried to sell big pharma on the benefits of partnering with it. RJR was looking for a large pharmaceutical company to validate Targacept’s viability. “Targacept’s survival within RJR hinged on our ability to deliver a deal,” says deBethizy.

A Close Call
A deal with Johnson & Johnson fell through at the last minute in March of 1998. RJR’s patience was running out, and deBethizy convinced RJR’s CEO, Andy Schindler, to give him until the end of the year to find a new partner and close a deal. By the following fall, three prospective partners had been identified. DeBethizy recalls, “The Targacept team knew that if we did not accomplish a deal by year-end, Targacept as we knew it was finished at RJR.” Two of the potential three partners eventually dropped out, but one stayed on, Rhone-Poulenc Rorer (RPR), now sanofi-aventis. “We were left with RPR as the only viable prospective partner. We closed the deal at midnight on Dec. 30, 1998, averting the demise of Targacept by 24 hours,” says deBethizy.

Since then, the company has been able to raise a considerable amount of money, $571 million to be exact. From private sources, the company raised $123 million. Another $122 million came from the public markets (it went public in 2006). Then, there were partnership deals, including $281 million from AstraZeneca and $45 million from GlaxoSmithKline. RJR’s ownership slice of Targacept today is about 3.5%.

Growth Strategy, Part 1: Sufficient Capital
Having sufficient funds is one leg of deBethizy’s three-part growth strategy. “By raising significant amounts of capital from investors and by monetizing portions of our portfolio with big pharma, we have been able to secure an extraordinary amount of capital and leverage the substantial resources and expertise of large pharmaceutical organizations, while maintaining a nice portion of the downstream opportunity in programs that we have partnered,” he says.

How does a biotech get sufficient funds? “Deliver on your goals and commitments so you earn the right to additional investor capital and maintain credibility going forward,” says deBethizy. He also advises biotech executives to raise more capital than they think they will need, as it is difficult to predict which programs will be successful, and make sure they develop enough opportunities to be able to strategically partner a portion of the portfolio and maintain full ownership of other programs.

His reasoning: Raising capital through partnerships with big pharma in lieu of selling stock avoids diluting current shareholders. But, if one “over-focuses” the product portfolio too soon, the company can be left without multiple opportunities, which can make it difficult to overcome a high failure rate. Two ways to access capital without selling stock are to monetize with big pharma and/or obtain grants from foundations or government agencies. Targacept has brought capital in through both mechanisms.

Growth Strategy, Part 2: Shots On Goal
The second part of his growth strategy is — to use a favorite deBethizy phrase — to have plenty of “shots on goal.” This refers to having a multitude of possibilities in the pipeline because the chances any one compound will prove to be a winner is small — very small. Targacept’s discovery platform of targeting NNRs, says deBethizy, “permits us to identify and patent compounds and progress them through a well-defined process that biotech investors and pharmaceutical companies can value.” He goes on to note that by having multiple compounds in various stages of development, the company has been able to create shareholder value and opportunities to monetize certain programs. “All of this collectively mitigates the risk of failure of any one project,” he says.

Growth Strategy, Part 3: Capital Efficiency
The third part of deBethizy’s growth strategy is capital efficiency. Having ample shots on goal has little value if one lacks the capital to develop these opportunities. Attracting sufficient capital is important, but so is the efficient use of that capital. “Risk capital has been very expensive since the crash of the NASDAQ/dot-com era [2000]. We realized we needed to be very efficient with the hard-to-get capital in order to leverage that capital on as many shots on goal as possible,” says deBethizy.

He goes on to note that large pharmaceutical companies do a lot of work in parallel before they know whether a molecule will be successful in patients or before they know it will pass some toxicology hurdle in preclinical assessment. Targacept’s strategy is to try to time what’s essential for each value inflection point in the development history of a molecule. “We try to see if there are some things we can do to slow down spending a bit and do some research catch-up, rather than spending the money ahead of these key value inflection points.”

An example of this is recognizing that many compounds will fall out early when preclinical safety assessment in animals is being conducted. “You want to do just enough to get through that process to know you have a viable molecule,” says deBethizy, “but you don’t want to start developing your Phase 3 process for synthesizing the compound because you are a long ways away from Phase 3 clinical trials.”

This is in contrast to the approach of large companies, which often do a lot of parallel processing so they are able to move fast when they hit a compound with considerable potential. deBethizy does note that his slower, capital-efficient approach requires there be a reasonable patent life left on the compound.

Implementing Capital Efficiency
Transitioning from the small quantities of the chemical required for the discovery efforts to the larger quantities required for regulatory-based preclinical and clinical studies is an area where staged spending can result in a more efficient use of capital, comments deBethizy. In addition, the clinical trial designs in Phase 1 and Phase 2 trials can reduce the capital required to determine if a compound is well-tolerated in humans and if it shows signs of efficacy worth further investment. Value inflection points exist all along the development path from preclinical to clinical and include:

• proof of principle in a preclinical model of the disease or disorder (i.e. enhancement of memory in rodents using the radial arm maze is a good indication that a compound could work in memory disorders)
• filing an IND (investigational new drug) with the FDA to start Phase 1 clinical trials
• completion of Phase 1 clinical trials with evidence of safety and tolerability in healthy, normal volunteers
•  indications of efficacy using surrogate markers in Phase 1
• evidence of efficacy in patients in a Phase 2 clinical trial

When Good Is Good Enough
Targacept, says deBethizy, has the ability to discover lots of novel compounds and will discontinue them quickly if they don’t meet certain criteria of in vitro activity and safety signals. However, once it commits to a promising molecule, it does not abandon the molecule because it is not the perfect prospective drug.

Says deBethizy, “The axiom we use is ‘don’t let the best be the enemy of the good.’” Champions within the discovery group can get very excited about the next best compound, he notes. As data is collected on more advanced compounds, the “perfectness” of these compounds gets eroded with the reality of the data. An earlier-stage compound still looks “perfect” because very little data has been generated on this “perfectly promising” new compound.

“Keeping people focused on the value of a good compound that has made reasonable progress in development is a key feature to developing a success-seeking culture for drug development,” says deBethizy. “It is my impression that big pharma has had a tendency to react to new data that diminishes the value of a promising drug by killing the program because there are many more drugs to come. This was often called the ‘fail fast’ model. This approach can — and has — resulted in failed pipelines.”

deBethizy has made believers of some independent observers. Alan Carr, an analyst at Needham & Company, says of Targacept: “They have some pretty good prospects now with depression drugs and some other drugs. Having three drugs and six indications in proof of concept — that’s a big advantage for a small biotech company. The company is not a one-trick pony. They have several ‘shots on goal,’ which is a big advantage.”

In a recent research report, Brett Holley, an analyst with Oppenheimer & Co., wrote positively about Targacept’s drug TC-5214, which is furthest along in development and targets depression. It is entering Phase 3 development. Holley writes that the drug’s tolerability profile “has been exceptionally clean in trials to date” and that “we believe the Phase 3 trials are very likely to be successful.”

From Cars To Science Management

A car buff from an early age, Targacept CEO J. Donald deBethizy says his big ambition in high school was to become a car mechanic. His father and grandfather were house painters. But, when he graduated high school, he got a job with a boss who was attending the nearby University of Maryland. This boss convinced deBethizy to enter the university and join his fraternity. deBethizy did both and ended up with a degree in biology.

He then worked as a lab technician for a young Ph.D. deBethizy figured he could do this guy’s job and started working towards a Ph.D. After earning the degree, he worked as a scientist, but liked working with people and making things happen, which led him into management.

In conclusion, deBethizy says, “I approach business as an optimist and pragmatist. We believe we have the opportunity to develop superior treatments to complex diseases where current medications are wholly inadequate.”