Telik: A Possible Investment, But Only After Much Consideration

| About: Telik, Inc. (TELK)

Development-stage small pharmaceuticals developing novel and promising therapies to treat cancer and other large market disease indications are among the most sought after investments for many risk averse investors who are aware of the upside potential and downside risks for which the sector is known. Successful (I refuse to use the work "lucky") choices can yield returns of many hundreds of percentages for solid candidates. Conversely, odds are against investors desiring to invest in these companies with little to no revenue with share dilution as a frequently-utilized source of funding. To illustrate the risk associated with these types of investments, I use cancer therapies as one example. Early stage cancer drugs have little chance of success with biologics having about a 15 percent chance of making it from phase 1 trials to regulatory approval, with small molecule therapies having only a 7 percent chance of success. It is this level of risk in cancer and other disease clinicals that keeps most investors away. Nonetheless, the upside is significant if data are perceived as positive and regulatory pathways are negotiated wisely as investor interest begins driving share price when catalysts approach. As I combed the smaller companies of the pharmaceutical sector for possible investment candidates, I found some trading at what I perceive to be a low valuation based on their potential in the coming months, with wise entry points utilized. Following is the first I wish to present with others coming in future articles.

Telik, Inc. (OTCQB:TELK) is a $6 million market capitalization pharmaceutical that has just begun making appreciable progress in its early stage clinicals. The company has one significant drug in various clinical stages which could be a huge share price driver if data are promising. TELINTRA® (Ezatiostat HCl, TLK199) is being developed by the company for the treatment of myelodysplastic syndrome (MDS) and other indications. MDS is characterized by an inadequate production of blood cells by patients' bone marrow. Normally, bone marrow produces stem cells that mature into healthy red blood cells, white blood cells, and platelets. However, in MDS stem cells do not mature normally, and the number of blasts (immature cells) and dysplastic (abnormally developed) cells increase, leaving less room for normal cells. The condition is diagnosed in about 10,000 patients in the U.S. annually, and affects just under 200,000 people in the U.S.

Telik released phase 2 data for TELINTRA® for Lower-Risk MDS in October of 2011. The trial evaluated TELINTRA®'s efficacy and safety in a dose escalation trial with two different dosing schedules. While both schedules proved to yield promising results, the three week regimen was more efficous with the same amount of drug dosed, but spread out over a three week span rather than two weeks. For example, in dosing schedule 1, which had a higher dose but shorter exposure time, the median response duration was 18 weeks. In dosing schedule 2, the exposure time was extended by a week for each treatment cycle, and the median response duration was 46 weeks. The trial also evaluated TELINTRA®'s effectiveness in increasing healthy red blood cells, white blood cells and platelets in patients who had received previous drugs to treat their condition (Revlimid (lenalidomide), Dacogen (decitabine), or Vidaza(azacitidine), and in those who had not previously received those drugs. Among patients who had not previously received these therapies, 28 percent achieved improved red blood cell counts after TELINTRA® therapy, with 50 percent having reduced need for blood transfusions. Among those patients previously being treated with Revlimid, Dacogen or Vidaza, the previously-Revlimid treated group had the best efficacy and safety of the three by far. In these patients, TELINTRA® was effective with 31 percent achieving improved red blood cell counts, 39 percent having reduced need for blood transfusions, and 22 percent achieving blood transfusion independence.

While Telik continues developing TELINTRA® for multiple indications, including idiopathic chronic neutropenia (ICN) in patients who fail to respond or become resistant to GCSF treatments, it is the MDS indication that will likely be the share price driver for Telik in the coming weeks. The company started the year off on a positive note with the January 11th announcement that TELINTRA® had been granted Orphan Drug designation by the FDA for the treatment of MDS. This designation entitles the company to such developmental perks as grants, tax credits related to clinical trial expenses, protocol development assistance and exemption from FDA user fees. However, the biggest long-term benefit to the designation is the 7 years of market exclusivity for the drug in treating MDS if/when the drug is FDA-approved. This increases the profitability of the drug with less competition during those 7 years. Investors immediately recognized the benefit with a huge spike in share price. Shares that closed out the trading day on January 10th at $1.45, spiked on the 11th to $3.04 and closed the day at $2.98. While nothing has changed with regard to the drug's potential for this indication and others, the share price has since settled back down to pre-announcement levels and closed out yesterday's trading at $1.38 with a market capitalization of just $6.3 million.

On January 22nd Telik announced that it had completed its End of Phase 2 meeting with the US Food and Drug Administration (FDA) for TELINTRA®'s MDS trial. In the announcement, the company noted that it had stopped further enrollment in its phase 2 trial and was now focusing on an upcoming phase 3 registration trial. Also noted in the announcement was a preliminary agreement with the FDA on the phase 3 trial design for the treatment of low to intermediate risk myelodysplastic syndrome (MDS), using red-blood-cell transfusion independence as the endpoint. On March 15th, Telik released its Q4 2012 and full-year 2012 financials and company update. As of December 31st, the company had $5 million in cash and equivalents with total costs and expenditures of 2012 of $8 million. For 2013, Telik expects its total costs to fund operations to be $5.5-$6.0 million, and this value does not take into consideration any upcoming phase 3 costs. With $3.6 million already being raised in the first two months from its At Market Issuance Sales Agreement, Telik expects to have sufficient funding to carry it into Q4 of this year. Strapped for cash in the interim, the company noted that it will need to secure funding through a corporate partnership and licensing agreement, funding from a non-profit agency, or other financing sources before it initiates its phase 3 TELINTRA® trial. Being cautious with its spending, the company seems to be focusing much of its resources on getting the phase 3 trial underway. However, it did note in its 2012 10K that it does intend to also advance "its leading preclinical oncology drug candidate" in 2013 as well.

Interested investors should closely review company's pipeline, clinical data and cash position before opening a position in Telik's common shares. While there is solid upside potential if positive news comes with regard to favorable financing, a partnership or licensing agreement, there is always risk here of unfavorable financing through dilution and warrants. I believe there is sufficient time to pick a solid entry price and advise much patience and careful consideration with an exit plan in place in the event the investment does not pan out. Also, as much as I believe people and companies can and do change, I do wish to point out the company's past with regard to a previous leading candidate for the company, TELCYTA®. The company had been developing the drug to treat ovarian and lung cancers but reported out disappointing results in 2006 and 2007. The FDA had placed full and partial clinical holds on TELCYTA® after it appeared that patients in the ovarian and lung cancer trials actually had a worse outcome than the standard of care treatment arms. While it was believed that the company knew there was an issue in 2006, results were not released until early 2007 at ASCO in which data indicated the median survival time for women in the TELCYTA® arm of the Assist-1 trial was 8.5 months with the control arm comprised of patients treated with doxorubicine or topetecan having a median survival time of 13.6 months. On June 5, 2007 the FDA ordered Telik to halt all clinical trials on TELCYTA® due to the increased deaths in women being treated for ovarian cancer. In the ensuing class action lawsuit, Telik agreed to pay $5 million to settlement members, investors who purchased Telik stock between February 19, 2004, and June 4, 2007. Due to the suit and ethics associated with investing in Telik after the TELCYTA® debacle, many investors may have an issue with trusting Telik or its management. CEO Michael Wick and Chief Medical Officer Gail Brown still run the company and are making decisions on its pipeline moving forward. Investors concerned about the team should contact the company directly and determine based on the company's comments if it is worthy of their investment dollars. While I certainly have my concerns and doubts, I can't help but believe that the company is "walking the straight and narrow" and is more likely to be open and more forthcoming with TELINTRA® than it ever was with TELCYTA®. The year ahead could be the beginning of exciting times for Telik shareholders. With financing still needed but yet a promising candidate in development, the bears and bulls could certainly keep the investment volatile and worthy not only of long-term consideration, but also of consideration for shorter-term day trading due to the possible volatility.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in OTCQB:TELK over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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