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Investing in biotechnology takes what the Romantic poet William Wordsworth called a "suspension of disbelief."

We are initiating coverage on biotech Telik (OTCQB:TELK) with a hold rating.

Telik is currently in Phase III trials for Telcyta, a drug that aims to become a first line treatment for ovarian - and possibly -- lung cancer. Telik's 2nd drug is Telintra, also promising. Telintra (for myelodyplastic syndrome), if approved, could compete on equal footing with Celgene's (NASDAQ:CELG) Revlamid. Celgene's stock soared 144% in 2005 because of Revlamid-related hype.

With no products (or sales) on the market, Telik is a highly speculative play on the need for new ovarian cancer-attacking compounds. The doctors we spoke to agree that the disease (a $1B market) is in dire need of new therapies. Telik could hold the key -- but we won't know it for another couple of years. In the meantime, Genentech's (DNA) powerhouse drug Avastin will most likely continue to reap market share.

A rough ride to profitability it will be -- Telik has about $200M in cash on hand. At its current burn rate, it has a little over 2 (2.2 to 2.4) years to duke it out and hopefully commercialize/monetize its solutions. To make matters worse, if Telik is successful, it'll be boxing with Genentech in the oncology ring. In other words, don't be surprised if the bell rings and Telik is spitting out its own teeth into a styrofoam cup. If Telik were to break on through to the other side, it'd become prime, grade A acquisition meat -- its current marketing/sales force leaves much to be desired, so it really has no choice but to saddle up with a Big Boy.

In sum, while Telik won't be EBITDA positive for a couple of years, the potential is definitely there. You don't need to take it from us to understand Telik's possibility. Just ask Carl Icahn, who suspended disbelief a long time ago -- the billionaire financier owns 1.6M shares in the company.


TELK 1-yr Chart

Source: Telik Like It Is (TELK)