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In 2007, Carl Icahn bought 5.2 million shares of Telik (OTCQB:TELK) stock. Icahn said he acquired the position believing the shares were undervalued. Icahn reportedly purchased the shares between $7 and $17 per share. By early 2009, Icahn sold his stake in the company for under $1 per share.

Welcome to Telik, Inc.,and the world of micro-cap stock volatility. The Palo Alto, California,-based clinical-stage drug development company is engaged in the discovery and development of small molecule drugs to treat cancer. Its lead drug product candidate in clinical development is Telintra.

Telintra

Telintra (ezatiostat hydrochloride) is among the first therapeutic products in a novel class of small-molecule drug candidates that inhibit the enzyme glutathione S-transferase P1-1 for the treatment of malignancies, including myelodysplastic syndromes (NYSE:MDS) and hematologic diseases characterized by cytopenias (deficiency or lack of cellular elements in the circulating blood). Telintra may induce apoptosis, or cellular death, in leukemia cells and cause differentiation and proliferation of normal bone marrow blood cell precursors, leading to an increase in platelets, red cells and white cells.

A Phase 2 clinical trial found that extended dosing of Telintra improves blood cell counts and reduces dependence on red blood cell transfusions in patients with lower-risk myelodysplastic syndromes.

In April 2012, researchers announced the results from a Phase 1 clinical trial that suggested that the combination of Telintra and Celgene's Revlimid (lenalidomide) may be effective and safe in lower-risk MDS patients. Their findings were published in the Journal of Hematology and Oncology.

MDS are a group of conditions that occur when the blood-forming cells in the bone marrow are damaged. This damage leads to low numbers of one or more type of blood cells. MDS becomes more common with age. It is estimated that MDS affects approximately 300,000 people worldwide. According to the American Cancer Society, 10,000 to 20,000 new cases of MDS are diagnosed each year in the United States, with survival rates ranging from six months to six years. MDS patients often require blood transfusions to manage their disease.

GlobalData estimates that the international MDS market was valued at $652.6m in 2010 and forecasts it to grow at a compound annual growth rate (OTCPK:CAGR) of 12.2% to reach $1.5 billion by 2017. This growth forecast is primarily attributed to those drugs currently approved reaching their "peak sales during the forecast period and secondarily due to a strong pipeline."

GlobalData researchers found the current market is strong, but there is a high unmet need, which "implies that the market is not well served by the current products in terms of efficacy and safety, and that there is high potential for new entrants."

There are three drugs that the US Food and Drug Administration (FDA) has approved to treat MDS. Celgene's Vidaza (azacitidine), Astex Pharmaceuticals' (NASDAQ:ASTX) and Eisai's Dacogen (decitabine) and Celgene's Revlimid (lenalidomide).
 MDS therapies are largely chemotherapeutic agents that are given intravenously, although Revlimid is an oral tablet. Telik has developed both oral and intravenous versions of Telintra.

Telintra is currently in a Phase 2 trial evaluating the drug in patients with Revlimid refractory or resistant deletion 5q MDS, and a Phase 2b trial testing Telintra in patients with transfusion dependent, non deletion 5q MDS.

Telcyta

Telik's other clinical stage drug is Telcyta (canfosfamide HCl, TLK286). Telcyta is a small molecule cancer drug product candidate designed to activate in cancer cells. Telcyta binds to GST P1-1, an enzyme that is elevated in ovarian, lung, colorectal, breast, and other non-small cell cancers.

Telcyta has been evaluated in multiple Phase 1, 2 and 3 clinical trials. In December 2006, the company announced disappointing results from two ovarian cancer and one lung cancer trial during the American Society of Clinical Oncologists (OTC:ASCO) annual meeting.

On June 4, 2007, the FDA ordered Telik to stop all clinical trials of Telcyta after the agency learned that women with advanced ovarian cancer who were in the Telcyta arm of the study were dying over five months sooner than those patients using the FDA approved drugs doxorubicine or topetecan. Telik also stopped another study testing Telcyta with lung cancer patients when it was found that those patients taking Telcyta lived a median time of 4.6 months, compared with 6.1 months for those who took another drug, AstraZeneca's (NYSE:AZN) Iressa (gefitinib). Telik's stock price dropped by over 70% as a result.

Telik received a significant amount of bad press because company executives allegedly knew the outcome of the Telcyta clinical trials in December 2006, but waited for months before publicly disclosing the poor results from the trials. The Street's Adam Feuerstein called it "one of the most serious ethical breaches of clinical trial research that I've ever come across in biotech."

"Anticipating significant shareholder backlash and harsh challenge to management credibility, we believe Telik will drown in negative publicity pending FDA review of Telcyta clinical data," Wachovia Securities analyst George Farmer said in a note. Wachovia downgraded the stock to "Market Perform" from "Outperform."

In mid-June, the FDA replaced the full clinical hold of Telcyta trials with a partial hold. During the partial hold, patients who were enrolled in the trials could continue to receive study treatments, including Telcyta in combination with chemotherapy, subject to the FDA's re-consenting procedures. Telik worked closely with the FDA in its review of Telcyta. In October, the FDA removed the partial hold, but required that Telik conduct additional studies of Telcyta to complete clinical development.

Shareholders filed class action litigation alleging that Telik violated the Securities Exchange Act of 1934 and the Securities Act of 1933 by making false and misleading statements claiming that Telcyta was safe and effective, and that the company was on track to obtain FDA approval for Telcyta as a therapy for ovarian cancer and lung cancer.

The complaint also alleged that "unbeknownst to the investing public, subjects in the Telcyta trials were dying at alarming rates and doctors were pulling other subjects out early, compromising the data being gathered. As a result of defendants' false and misleading statements and omissions, Telik's stock traded at inflated levels, trading as high as $29.04 per share by April 2004. The Company sold over $322 million worth of Telik stock in the offerings."

The shareholders also claimed that after Telik announced that Telcyta had failed in three arms of its final clinical testing and produced unreliable data in two of the three trials, Telik's stock fell from over $16 per share to below $5 per share. The company's stock price dropped by another 20% on June 4, 2007, following disclosure that the ovarian cancer arm of the Telcyta trials had failed, and then nearly 30% to $3.42 per share on June 5, 2007, after Telik disclosed that the FDA had ordered the company to immediately stop all Telcyta clinical trials due to the fatalities that occurred in the trial.

In January 2008, the shareholders and Telik reached an agreement to settle the claims. The settlement was to be funded primarily by proceeds from insurance. In October 2008, the court entered a final judgment approving a $5 million cash settlement.

Telik claims that Telcyta has shown clinical activity in advanced ovarian, non-small cell lung, colon and breast cancers. However, additional costly studies must be completed before the drug can be submitted to the FDA. Telik is pursuing corporate partners to assist the company in the further development of Telcyta.

Despite all the negative press surrounding Telcyta, in May 2010, Telik initiated a single site, investigator-led study at a single site evaluating Telcyta in patients with refractory or relapsed mantle cell lymphoma, diffuse large B cell lymphoma, and multiple myeloma. Recently, the company decided to terminate the study to focus on the development of Telintra.

Although Telik's success depends in large part on the company's ability to continue clinical development of Telintra and Telcyta, Telik's pipeline has several preclinical drugs.

Preclinical Drug Pipeline

Using their proprietary technology, target-related affinity profiling (TRAP) platform, Telik scientists found that TLK60404 inhibits both Aurora kinase and VEGFR kinase. Aurora kinase is a signaling enzyme required for cancer cell division, while vascular endothelial growth factor ((VEGF)) plays a key role in tumor blood vessel formation, which is necessary to provide an adequate supply of nutrients for a tumor to grow. In August 2008, Telik scientists found the lead compounds of Telik's first dual inhibitor program demonstrated anticancer activity in preclinical models of human colon cancer and human leukemia. Telik is conducting the required preclinical safety studies that, if successful, may support the potential filing of an investigational new drug (NYSE:IND) application with the FDA.

TLK6035 is another preclinical candidate in Telik's pipeline. TLK6035 is a novel, potent small molecule inhibitor of cell division. TLK6035 inhibits the formation of microtubules that are necessary for cancer cell growth leading to persistent cancer cell block and subsequent cell death at the G2/M phase of the cell cycle. This compound demonstrates potent broad-spectrum anticancer activity against a number of human cancer cells. This compound also displays oral efficacy in multiple, standard preclinical models of cancer. TLK60357 is currently being evaluated in preclinical safety studies.

Telik is also assessing TLK60596. This compound is a small-molecule dual inhibitor of VEGFR1 and VEGFR2 kinase. VEGFR1/2 kinases are known to mediate the formation of new blood vessels in human cancers which enables them to grow. Telik researchers claim TLK60596 significantly reduced tumor growth in animal models of human colon cancer. The company is conducting further preclinical assessment of TLK60596.

All of Telik's product candidates were discovered using the company's proprietary technology, Target-Related Affinity Profiling (TRAP).

Target-Related Affinity Profiling (TRAP)

In traditional small molecule screening, as many as two million compounds may be tested in order to identify the few that interact selectively with a disease-related protein target. Telik scientists have created a database of profiles for tens of thousands of compounds making it possible to achieve similar results by screening as few as 200 computationally selected compounds. Sophisticated computational tools are used to search this database and identify drug candidates. In 2003, Telik announced a collaboration with Roche to utilize Telik's TRAP to identify drug candidates that were active against a pharmaceutical target selected by Roche.

Finances

On November 9, 2012, Telik reported a net loss of $1.9 million, or $0.78 per share, for the third quarter ended September 30, 2012, compared with a net loss of $2.8 million, or $1.58 per share for the comparable period in 2011 (adjusted for the 1-for-30 reverse split of the company's common stock effected on March 30, 2012),

Total operating costs and expenses were $1.9 million, compared with $2.9 million in the third quarter of 2011. Operating expenses in the 2012 third quarter included stock-based compensation expense of approximately $0.1 million. Operating expenses were approximately 34% lower in the third quarter of 2012 compared with the same period in 2011, primarily due to lower headcount, corporate and stock-based compensation expenses.

For the nine months ended September 30, 2012, Telik reported a net loss of $6.2 million, or $3.07 per share, compared with a net loss of $9.5 million, or $5.30 per share, for the same period in 2011.

Total operating expenses for the first nine months of 2012 were $6.2 million, compared with $9.6 million for the same period in 2011. Operating expenses in the first nine months of 2012 included approximately $0.6 million in stock-based compensation expense.

Telik reported that the company reduced operating expenses by approximately 35% in the first nine months of 2012 compared with the same period in 2011. This reduction was primarily due to lower headcount, reduced clinical trial expenses, and decreased corporate and stock-based compensation expenses.

At September 30, 2012, Telik had $6.6 million in cash, cash equivalents and investments including restricted investments, compared to $11.7 million at December 31, 2011.

Conclusion: Sell

Although Telik has done a good job reducing expenses, the company is burning cash fast. Telik needs to raise money. As of September 2012, Telik had an accumulated deficit of $546.5 million.

In order to meet its current cash requirements beyond the first quarter of 2013, Telik must raise additional funds. The company is exploring different options, such as equity or debt financing, in-licensing opportunities, corporate partnerships, and research grants from non-profit organizations. Telek raised $1.2 million through an At Market Issuance Sales Agreement in the second quarter of 2012. Raising additional capital by issuing securities may cause dilution to existing stockholders. Collaboration and licensing arrangements with other pharmaceutical or biotech companies could also cause dilution or require Telik to relinquish rights to the company's technologies or product candidates. It is difficult to see how Telik will continue to find financing for an extended period when their lead product, Telintra, is in Phase 2 trials and many years away from becoming a marketable product.

The Telcyta scandal severely damaged Telik's reputation. Telik may have difficulty establishing partnerships with other pharmaceutical and biotech companies. The bigger the company, the more likely they are to be highly protective of their brand and conscious of the importance of corporate reputation management. Telik has been portrayed as the company that put profits before cancer victims. Few companies want to be associated in any way with that scenario as any part of their corporate image or identity. Pharmaceutical companies spend millions of dollars every year marketing themselves as the exact opposite, as companies who are compassionate, caring, benevolent, always putting the patient first.

The pharmaceutical and biotechnology industries are extremely competitive. While Telintra may show promise as an MDS therapy, several pharmaceutical giants are developing drugs that could compete with Telintra. All of these companies have substantially more resources than tiny Telik with its 4.60M market cap (NYSE:MC).

The pharma giants who have MDS-related drugs in development include Johnson & Johnson's (NYSE:JNJ) Janssen Biotech. Johnson & Johnson has a 194.24B MC. Other companies developing MDS therapies include Pfizer (NYSE:PFE) with an MC of 188.19B, Roche/Genentech (RHHBY.OB) with a 167.95B MC, Novartis (NYSE:NVS) with a 150.72B MC, Merck (NYSE:MRK) with a MC of 135.68B, Eli Lilly (NYSE:LLY) with a 55.57B MC, BioMarin Pharmaceuticals (NASDAQ:BMRN) with a 5.81B MC, Array BioPharma (NASDAQ:ARRY) with a 346.78M MC, and Cell Therapeutics (NASDAQ:CTIC) with a 71.44M MC. More than 200 clinical trials are currently being conducted for MDS-related therapies.

It is doubtful that any company would have any interest in trying to revive Telcyta. There are questions about the drug's safety and efficacy. Not only would Telcyta face major marketing challenges, but finding patients willing to experiment with the drug in clinical trials could also prove formidable.

Perhaps the best hope for Telik is its Target-Related Affinity Profiling (TRAP) technology that has broad scale viability, and could be marketed to both large and small pharmaceutical and biotech companies.

All investments involve risk, but investing in micro-cap companies like Telik is especially risky. These stocks are often extremely volatile, may be illiquid, and are subject to manipulation. The Security and Exchange Commission (SEC) has a significant amount of information about the dangers of investing in micro-cap companies and penny stocks. You can find it here.

If Carl Icahn lost millions in Telik, you could too.

Source: Is Telik A Good Buy After Increasing 24% In One Day?