- What goes up comes down. It skyrocketed over 100% from an open of $1.47 closing at $2.98 just below the intraday high of $3.04 on Friday, Jan. 11, on the initial rumor and subsequent news of the company's newer clinical product Telintra's receiving orphan drug designation from the FDA. Therefore, it is overvalued. It has since come back to earth to about $2.00 on Tuesday morning. Any further surges are likely to suffer likewise.
- It is cash strapped. Orphan drug designation does not mean approval. The company has enough money for operating costs only for another quarter or so. This makes it difficult (as it discloses most plainly in its 2012Q3 10Q SEC filing) for it to be an ongoing concern. If the company is to raise cash by selling more shares that would be dilutive, and each share one buys today will own less of the company tomorrow. In the absence of other compensating situations, equity issue depresses stock prices.
- The company's good will assets are null or negative. It has burned up hundreds of millions of dollars over the 25 year history, with no product currently on the market. Its past lead product failed to get FDA approval after Phase III trials. There was a plaintiff lawsuit alleging the dissemination of false and misleading information on the part of Telik, and one of the named defendants is still the Chairman, CEO and President. The phase III trial of that drug was to some extent stopped by the FDA. Loss of value over time had reduced share value to about a thousandth of what it was at its peak in 2004. There was a reverse split 30:1 at the end of March 2012.
- The company still has much work ahead to bring a product to market. It needs to design Phase III trials and then the results should warrant FDA approval. Short of that, the Orphan drug status does very little.
- Patent Expiration. The company, in its SEC filings, acknowledges potential risks to the value of intellectual property such as patents . In addition, the patent for Telintra expires in 2013. That for Telcyta expires in 2013 in the US and 2014 internationally. In the US there are mechanisms to extend patent protection for product being brought to market, but not internationally unless marketing approval precedes expiration of patent. Extension of international patent does not seem possible for either compound. This limits revenue potential in regard to Telintra as a drug, even if it gets approval in the US and internationally.
These are all significant points, but they overlook one important fact: even with the doubling on Friday, Telik is grossly underpriced relative to comparable biotech companies in the US. I will address this after responding to the above observations.
Here is the long case for TELK.
- With the right settings things that go up do stay up and very soon the market will realize that Telik's prospects are real. The surge in price was in part due TELK's very low float of 2.4M shares. It did double in a 3 hour afternoon session. These shares have been in slow decline in the past two years from highs near $40 (based on reverse split prices) to the current levels. The fall in share price should be attributed to the decline in prospects. The Orphan Drug Status is really a lifeline from the FDA to the company. It has real prospects again. In fact there was a surge already a month ago that brought prices to Friday's levels following the publication of the results from the study, "Oral Ezatiostat HCl (Telintra), a Glutathione Analog Prodrug GSTP1-1 Inhibitor, for Treatment of Patients with Myeloid Growth Factor-Resistant Idiopathic Chronic Neutropenia [ICN]" at the at the 54th Annual Meeting of the American Society of Hematology. This is in fact a different indication from myelodysplastic syndrome [MDS] for which Telintra has been given Orphan Drug designation.
- There are reasonable options to address the cash need, as long as the company has prospects. The low cash status is very real, but not without remedy. Even if the company is to recapitalize by issuing equity, the market cap is so low that there is still good value in the shares. The company has a shelf registration to issue shares at market up to $7 million each time to raise a maximum of $25M. It has already raised $2.1M of this (see 2012 3Q 10Q). But consider this: raising 7 million at $5/sh issues only a fifth of the # of shares it takes to do it at $1/sh. As the price appreciates the company should have good opportunities to raise badly needed funds in a less dilutive way. In addition to the option of raising cash by issuing stock, the Orphan Drug Act makes provision for grants for clinical studies. The company is singlemindedly focused on use of Telintra for MDS at this point. So the announcement on Friday is also relevant for the cash situation.
- Real assets compensate for any lack of Good Will. There seem to have been very unusual things connected with Phase III studies for the earlier standard bearer, Telcyta. However, if one reads the settlement document of the shareholder lawsuit, the plaintiff lead counsel in fact argues to exonerate the company's officers who were defendants. There must be enough investors out there who were not TELK shareholders in the past who will look at the current value of the company and consider it a good prospect. Telik's TRAP® (Target-Related Affinity Profiling), its "proprietary drug discovery platform technology," appears to be a significant asset as long as the company is a going concern. Also, one must not discount the value of 25 years of biotech experience.
- Investors weigh the risks of clinical trial failure all the time. It is possible that Telintra will fail to get approval. This is true about any clinical product under development. Also, challenges in regard to getting through Phase III are real. However, if that uncertainty kept investors away, there would be no clinical stage companies that are publicly traded. We will draw attention to this more below. We should compare the valuation of TELK with other companies with products in similar stages of clinical development. The question is whether the risk involved in investing in it now is worth the potential reward. The fact that the FDA already looked at existing data and made the orphan drug decision is positive.
- Orphan drug status even outdoes the possible extension of patent in the U.S. As the company's announcement notes, "Orphan designation grants potential US market exclusivity to a drug for the treatment of a specified condition for a period of seven years following FDA marketing approval." The European Union also has an orphan drug program, which gives full "ten years of protection from market competition with similar medicines with similar indications once they are approved." It is not clear what the company's plans are in the international direction.
TELK is attractive because it is grossly undervalued considering its potential. In the chart below we compare TELK with its market peers and compare product status and assets against market capitalization. The first column with numerals shows Cash on Hand, the next, each company's market capitalization, and the far right column shows how many times as expensive as TELK each company is.
# Products in Trials
Cash $M *
Market Cap $M*
Mkt Cap / TELK's
oncology, drug discovery
1 Phase 2, orphan drug designation; (1 Phase 3);
Cardium Therapeutics (CXM)
angiogenic GF (DNA)
clinical trial in Russia; could not enroll enough in US
Immunocellular Therapeutics (IMUC)
immune based therapy for cancer
1 phase 2;
3 prods. in Phase 2
antifungal, anticancer, antibetalactamase
1 Phase 1/2 (anti-cancer);
small molecule therapy for muscle
2 Phase 2;
1 Phase3; 3 Phase 1;
Oncogenex Pharma (OGXI)
1 Phase 3; 1 Phase 2;
oncology, Psoriasis, etc.
1 Phase 1 (onc.); 1 Phase 2/3 (Psoriasis), 3 preclinical
1 Phase 2
Threshold Pharma. (THLD)
1 in Phase 3 and Phase 1 trials
*All the data are from public sources. The figures are from most recent reported quarter, or adjusted for subsequently reported capitalization.
You can see from the above that the next cheapest company on this list is 5 times as expensive as TELK after Friday's double, and has less market potential than TELK, in my opinion. And Geron, even after its multiple plunges following the discontinuation of programs and clinical trials, still is 40 times as expensive as TELK. If one were to subtract out its cash on hand from the market cap, it is still 20 times as expensive. From a crass comparison, TELK price could appreciate 5-20 times from where it was at the end of Friday to catch up with the valuation of comparable companies.
The Orphan Drug designation is also important from a value point of view. In general orphan drugs are sold at a much higher price than most other drugs. Therefore this ought to be part of the consideration in assessing the value of the company. Orphan drugs that treat diseases with 100,000-200,000 patient population range from $25,000-100,000/yr whereas ultra-orphan drugs have annual price per patient ranging from $200,000-400,000.
Myelodysplastic Syndrome [MDS], for which TELK's Telintra has received orphan drug designation, is not one specific disease but a group of disorders (see cancer.net). According to the oncologist approved information at cancer.net, "Approximately 12,000 people in the United States are diagnosed with MDS each year. About 80% to 90% of people who develop MDS are older than 60 years of age." Since the disorders do not all have the same underlying reason, not all treatments are equally effective for all (new therapies such as stem cell treatment are not yet standard treatments and involve full or partial destruction of the patient bone marrow prior to stem cell treatment, and "Allogeneic stem cell transplant can have serious, even fatal, side effects and so is rarely used in elderly patients."
What Telik has done actually goes a step further. They have correlated the gene defect which Telintra addresses with its effectiveness, so that the part of the MDS sufferers who this therapy will help can be identified and targeted for treatment.
In short, all development stage biotech company shares present some degree of risk in investment. TELK at present is significantly undervalued relative to its cohorts. TELK at the present valuation is more than just a buy; it may be an aggressive buy.