Seeking Alpha
Long/short equity, research analyst, biotech, healthcare
Profile| Send Message| ()  

Shares of Telik Inc (TELK) jumped an astounding 105% last Friday upon the announcement of the company receiving Orphan Drug Status for its flagship drug ezatiostat hydrochloride (Telintra®), indicated for the treatment of Myelondysplastic Syndrome. Myelondysplastic Syndrome (MDS) is a heterogeneous group of hematopoietic stem cell disorders characterized by ineffective hematopoiesis (blood cell production) involving one or more cell lineages (red blood cells, white blood cells or platelets). Telik's drug candidate Telintra is an inhibitor of the enzyme glutathione S-transferase P1-1, which is hypothesized to activate a second molecule called Jun kinase that induces cellular apoptosis (programmed cell death) in leukemia cells, leading to a subsequent increase in platelets, erthrocytes, and leukocytes. In a Phase II clinical trial completed in 2010, Telintra demonstrated significant multilineage hematologic improvement in patients suffering from MDS.

Telintra is currently at the tail end of another multicenter, single arm, open-label Phase 2 study for oral Telintra®. This trial is designed to assess the safety and efficacy of Telintra in patients with lenalidomide (Revlimid®) refractory or resistant, red blood cell (RBC) transfusion-dependent, Low to Intermediate-1 IPSS risk, del5q Myelodysplastic Syndrome . Data collection is expected to finish up around October 2013, so results could be available as early as the first Quarter of 2014.

MDS Epidemiology and Current Therapies

The epidemiology of MDS in the United States is poorly understood because it frequently goes undiagnosed, due in large part, to the complexity of classification criteria used in diagnosing MDS patients. Even so, high end estimates suggest that there are upwards of 20,000 new MDS cases in the United States each year, and the average cost of treatment is around $9,200 per month. Presently, there are three FDA drugs already approved for the treatment of MDA (Dacogen, Vidaza & Revlimid), and stem cell transplants are being proposed as a potential curative treatment for patients with MDS. Although Telintra's efficacy has been particularly high in Phase II trials thus far, the drug would be entering a saturated market, and faces the significant risk of stem cell transplants being the overwhelming preferred treatment.

Telik Fundamental and Technical Analysis

After the recent run-up in TELK shares, the stock is presently overbought with a relative strength index (RSI) of 74.6. Moreover, TELK is trading 30% higher than its 200 day moving average, and 98% higher than its 50 day moving average. According to analyst estimates prior to the current run-up, the short float was only at 1% of the current float (2.28M shares in the float). Thus, I imagine the miniscule amount of shorts that were in the stock have already covered at this point; so a short squeeze will not likely be a factor going forward. More problematically, the company is burning cash at a rate that would leave it bankrupt by the end of the Q2 2013. With no revenue to speak of, I would expect Telik to offer a secondary on the back of this run-up to meet their pending financial obligations for their clinical trial program.

Conclusion

Telik shares have absolutely skyrocketed on the positive news that Telintra received Orphan Drug Status from the FDA. This tremendous increase in PPS is easy to understand given the extremely low float, low short interest, and low market cap of TELK, i.e., it only took a few million dollars to move the stock in this fashion, not tens of millions. With no other viable drug candidates in the pipeline for approval in the near future, and no significant form of revenue, I believe TELK will look to the markets in the form of dilution to meet their financial needs. From a technical standpoint, TELK is definitely due for a correction in the near future, making it an excellent short candidate. That said, I would look for one more burst of enthusiasm from investors before taking a short position. In my view, TELK becomes a near perfect short candidate above $3.00 a share. In sum, I see no reason-fundamental, technical, or otherwise, why TELK should continue its upward momentum. If you were in TELK prior to the run-up on Friday, I would suggest to lock-in profits. By contrast, if you missed the run-up, there should be another chance to profit from TELK-this time on the downside.

Source: Is It Time To Go Long Or Short Telik?