UPDATE 2-AstraZeneca to further develop Targacept's ADHD drug

* Says partner AstraZeneca to further develop ADHD drug

* Targacept to receive $10 mln in milestone payment

* Targacept shares up 28 pct (Adds analyst's comments, updates stock movement)

By Esha Dey

BANGALORE, July 8 (Reuters) - Targacept Inc (TRGT.O) said its licensing partner AstraZeneca (AZN.L) agreed to pay $10 million in milestone payment to further develop Targacept's experimental treatment for attention deficit/hyperactivity disorder (ADHD).

U.S.-based Targacept will be eligible to get over $100 million if development, regulatory and sales milestones are achieved for the drug, the company said in a statement.

The company may get double-digit royalties on any future sales of the drug in any indication.

In May, the drug AZD3480 met the main goal of a mid-stage trial in adults with ADHD. However, the drug had earlier failed in a schizophrenia trial and an Alzheimer's disease trial, indications which AstraZeneca was originally interested in.

"The product was essentially being viewed as dead," Natixis Bleichoreder analyst Jon LeCroy said.

LeCroy, who had taken the drug out of his model after the prior failures, said he was not expecting AstraZeneca to go ahead with ADHD.

"AstraZeneca was more focused on schizophrenia and Alzheimer's, the ADHD trial was actually instituted by Targacept on their own. AstraZeneca did not originally want to do that trial," the analyst said.

LeCroy sees AZD3480 entering late-stage development in late 2010, with potential to enter the market in 2014. He kept his "buy" rating on the stock and raised his price target to $7.50 from $5.50.

AstraZeneca also confirmed plans to continue development of another drug, AZD1446, for Alzheimer's disease. Targacept will be eligible for milestone and royalty payments for AZD1446 as well, Targacept said.

AZD1446 is currently being tested in early-stage clinical trials.

Targacept also said that it was well positioned to fund its operations for at least the next two years.

Shares of Targacept were up 28 percent at $3.13 in midday trade on Nasdaq. (Editing by Pradeep Kurup, Ratul Ray Chaudhuri)