A nicotinic fit: born out of a cigarette maker's R&D, Targacept is zeroing in on a new treatment for depression that has sent its stock price soaring.

• Author: Otterbourg, Ken
• Position: COVER STORY

The downward spiral started, coincidentally, on Sept. 15, 2008, the day Lehman Brothers filed for bankruptcy protection and the U.S. economy started slipping on the sloppy mess left by risk without responsibility. For Targacept Inc., the problem had nothing to do with credit-default swaps or subprime loans. It was with a molecule known as AZD3480, a pinpoint on a pinpoint that seemed to hold exceptional promise for treating cognitive disorders and the Winston-Salem biotech company's best chance for cutting a lucrative deal with a major pharmaceutical company.

The results were in on a test of its effectiveness treating Alzheimer's disease. After the market closed that afternoon, with Wall Street's swagger melting into the summer swelter, CEO Don deBethizy had to issue a press release that contained a phrase he hated: results inconclusive. Even with a flood of other bad news, investors took note. Targacept stock fell from $8.46 to $5.88 the next day. And it kept dropping, bottoming out at $1.40 Nov. 25. Less than two weeks later, the company reported that AZD-3480 had failed to meet performance criteria as a treatment for schizophrenia. A whiff of panic wafted through the air.

Chief Financial Officer Alan Musso, normally almost annoyingly upbeat, pulled no punches: He told deBethizy the company needed to get serious about conserving cash. To bring down expenses, it didn't renew contracts of 30 temporary workers and slowed the flow of its drug-development pipeline. Then it waited. There was little choice. Targacept likes to call its approach to drug development a "shots on goal" strategy, and it had only two shots left.

Through the first half of 2009, its shares never got above $5, despite a positive result from a trial for treating attention-deficit and hyperactivity disorders. Then on July 15, it scored a hat trick when its treatment for depression delivered exceptional results in a large trial. It signed a development deal with London-based AstraZeneca PLC worth as much as $1.24 billion if the drug reaches the market, plus royalties on sales. The first payment--$200 million is already in the bank--eased the cash pinch. And its stock soared, hitting $20 in September and reaching $25 in May. By the end of June, its market cap had increased 800% in 12 months, the most among the state's largest corporations ("Top 75 Public Companies," August).

Luck played a part in the turnaround. But at its center were three key drivers: the dismantling of Big Pharma as it offloads drug development to smaller, nimbler companies, the need to find new ways to treat depression and Targacept's risky decision to push through expensive clinical trials on its own dime.

In the past, Winston-Salem's business successes have been built as much on marketing as on merchandise. Think of R.J. Reynolds Tobacco Co. and the camel. Or Hanes Corp. and its Beautymist pantyhose and Joe Namath. Even Krispy Kreme Doughnuts Inc., before the glaze melted away. Targacept is a different kind of company for a place where commercial innovation traditionally has come through the factory and the cubicle rather than the lab. To understand what Targacept does, it helps to understand the science. And to understand the science, it's useful to go back to the beginning.

During the early 20th century, some scientists experimented by dabbing a nicotine solution on the exposed muscles of animals and noting the reactions. In 1905, British physiologist John Langley reported his observations on exposing the leg muscle of a chicken to nicotine and started developing the theory behind the body's neuronal receptors, which regulate the chemicals called neurotransmitters that help control the central nervous system. Not all receptors responded to the nicotine, but those that did were called nicotinic, and that labeling has stuck to this day. Neurons can misfire, receiving too much or too little of the chemicals. Alzheimer's, for example, is linked to a drop in the production of acetylcholine, a neurotransmitter at the heart of many cognitive functions.

What would eventually become Targacept started in 1982, when Reynolds began a rigorous program to study nicotine. It assembled more than a dozen scientists, and they set to work analyzing how this chemical interacts with the brain. They wrote papers. They applied for patents on molecules they created, and they swapped information with the larger scientific community, which also was beginning to explore the workings and possibilities of nicotinic receptors as a treatment gateway. But RJR wasn't just doing research for its own sake. Its scientists also helped develop Premier, the company's ill-fated "smokeless cigarette," and its successor, Eclipse.

During the '80s, an emerging body of research suggested that smokers were less likely to develop...