Between a Rock and a Hard Place: Telik Needs Cash Bad

Telik, Inc. (NASDAQ:TELK) announced last Friday that the FDA granted its lead candidate, ezatiostat HCL (Telintra), orphan drug designation for the treatment of myelodysplastic syndrome (MDS), sending the stock soaring. Shares climbed 100% to $3.00 over the course of the trading session, but on Monday have been in a partial reversal, down 20% to $2.40 at the noon mark. While the large swing over the last two sessions is largely a result of above-average involvement in a minutely-traded stock, the company’s dire financial situation suggests that Telik will be raising capital imminently, and the stock’s move south has yet to run its full course.

Limited options point to a dilutive, discounted raise. As of its third quarter financial report, Telik had just $6.4M in cash, equivalents, and investments, burned roughly $2M quarterly, and by the company’s own estimations will need to seek capital through an equity financing or partnership, “in order to meet its current cash requirements beyond the first quarter of 2013.” Telik has an At the Market Issuance Sales Agreement in place, allowing the company to sell an additional $5M in stock on the open market, but with less than 165,000 shares traded on the average day, we don’t expect the company has been minting meaningful amounts of new shares -- or raising meaningful amounts of cash. Telik has limited negotiating power with such a weak balance sheet, and corporate partners will be waiting on the sidelines until mid-stage data for Telintra (not due until late 2013), or at least an improved capital position. That means an equity raise for Telik, and with an increasingly poor stock performance in 2012 (down 42% TTM), finding interested investors will most likely require a significant discount to market and generous warrant coverage. It’s an ugly situation for the company, but we imagine that with the stock’s recent performance, management is out in force seeking capital. And for shareholders, that means dilution is imminent; even after Monday’s partial retracing, TELK may be due for further losses in the near-term.