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PropThink: Geron Q3 Earnings Review: Waiting Not for Godot, but for San Antonio and Atlanta

November 5, 2012 -

By Ivan Deryugin
When a biotechnology company is around 20 years after its incorporation, common wisdom would suggest that it has become a major player in the biotechnology sector, with at least one blockbuster drug on the market. Alternate scenarios include either a takeover, or, if things do not work out as planned, bankruptcy. Geron (NASDAQ:GERN), however, has defied common wisdom. Geron was founded in 1990, and in 22 years, has launched no drugs. And yet, Geron still stands, due in large part to a pipeline that still contains compelling compounds.
Setting the Stage
Over the past few months, Geron's stock price has seen a great deal of volatility, and I am partly responsible for that. On August 16, 2012, I published an article on Seeking Alpha that highlighted the opportunity in Geron. While I personally believe that my article was well-written (it did receive an editor's pick, after all), it did not contain much in the way of groundbreaking information. I did not present fresh clinical data that no one else had seen. Nor did I offer up information from inside Geron that was sourced from the usual ""people familiar with the matter."" Rather, my article highlighted the fact that this was an overlooked stock, and that with 6 different clinical trials in progress, investors who have a tolerance for risk and speculation could stand to profit from the stock if the trials go well. I provided an overview of each trial, and I outlined how investors with lower risk tolerances could utilize options to protect themselves in the event of adverse trial outcomes. The article's effect was far different than I had expected. I expected a decent amount of hits, and an interesting discussion about the risks and opportunities that an investment in Geron brings. Instead, what occurred was an almost 19% jump in Geron's stock, and my article was mentioned by Bloomberg.

I was surprised at the stock's reaction, and I had assumed that a one-day pop would be the end of the matter, and that the stock would trade in a tight range until clinical data was released. For reasons I cannot explain, the stock kept rising for several more weeks, until it peaked at $2.90 on Friday, September 7, representing a gain of 69.59% from August 15, the day before my article was published. However, on September 10, those gains were more than offset by the fact that Geron announced that it was halting the development of imetelstat in breast cancer, due to the fact that imetelstat was performing worse than the control arm. The company also stated that it was unlikely that its trials of imetelstat in lung cancer would progress to Phase III. The removal of 2 out of Geron's 6 pipeline programs caused the stock to plunge by over 50%, more than erasing the gains that my article had triggered.
My article, while bullish on Geron, contained clear warnings that this was (and is) a speculative stock, and that it is meant only for investors who are willing to lose their entire investment should the company fail to succeed in developing its drugs. Having reviewed the company's Q3 earnings, my thesis regarding Geron has not changed. For risk tolerant investors, the stock continues to offer the possibility of profits. 4 clinical trials remain, and in a month, Geron will be releasing data on 2 of them (more on that topic later). Before I get to a discussion of those events, I would first like to provide a brief overview of Geron's Q3 earnings, which were released on October 30. Unless otherwise noted, the financial statistics and management commentary I will be citing will be sourced from one of 3 places: Geron's Q3 2012earnings release, its Q3 2012 conference call, or its latest 10-Q filing.
Q3 Earnings, Investor Frustration, and Defining the Meaning of ""Unable to Comment""
Geron's posted a loss of 13 cents per share on revenues of $636,000 for Q3. Those revenues were derived from various licensing agreements that the company has in place. The company ended the quarter with $101.245 million in cash & investments, having burned $44.73 million in operating cash flow during the first 3 quarters of 2012. CFO Graham Cooper forecast that the company would end 2012 with around $90 million in cash & investments. He also stated on the call that Geron's burn rate in 2013 is likely to be lower than in 2012, due to the fact that there will be 2 fewer clinical trials to pursue (a pyrrhic victory at best). CEO Chip Scarlett also said, ""We had $107 million in cash and investments at the end of the third quarter, and we expect to end the year with approximately $90 million. We clearly need to ensure that we make the most of that resource and are therefore currently engaged in a review of all of our programs to determine how we can maximize their value in the most cost-effective manner possible. Once we've completed that review, which we intend to do before the end of this year, we will communicate the details to you."" No level of bullishness on Geron can sweep away the fact that the company is operating on a tight schedule. There is a finite amount of capital to go around, and it needs to be allocated towards the trials that are most likely to succeed.
Within the next month or so, Geron will release data from 2 of its 4 remaining trials. Interim data for GRN-1005 in brain metastases arising from breast cancer will be reported at the San Antonio Breast Cancer Symposium on December 4, with the full top-line data set to be released by the end of Q2 2013. In addition, data from the company's trial of imetelstat in essential thrombocythemia will be released at the American Society of Hematology's annual meeting in Atlanta on December 9. Investors have a month or so to wait for the next set of clinical trial data. And until December, they can contemplate the newest development in the saga of Geron: BioTime's (AMEX:BTX) proposal to acquire Geron's stem cell assets.
On October 18, BioTime disclosed its proposal to acquire Geron's stem cell assets in a complex transaction. Under the terms of the deal, Geron would sell its stem cell assets to a newly formed subsidiary of BioTime, called BioTime Acquisition Corporation (abbreviated as BAC), which would be publicly traded. For every 20 shares of Geron stock an investor owns, he or she will receive one share of BAC, as well as one warrant to purchase BioTime shares. BioTime would also transfer into BAC the following: $40 million of BioTime stock, certain stem cell assets currently owned by BioTime itself, as well as shares in BioTime's other subsidiaries. After the transaction closes, Geron's existing investors would own 21.4% of BAC, and they could increase that stake to 45% once BAC completes its capital raise, if Geron's investors exercise all of their subscription rights. Geron has acknowledged the receipt of BioTime's proposal, and has said that its board is currently reviewing it. The company was asked about the proposal on its Q3 conference call, and CEO Chip Scarlett said that he was unable to comment on the matter, because it was ""confidential."" In fact, a good deal of Geron's Q3 conference call concerned matters that the company was unable to comment on. Geron was asked if BioTime's proposal was the first offer it had received for its stem cell assets, which the company put up for sale in November 2011. CEO Chip Scarlett stated that he was unable to comment on this. Neither he nor CFO Graham Cooper could comment on the company's strategic review. And Geron company could not give investors commentary regarding its clinical trial data, which has to be held back until it is fully ready. In effect, Geron was unable to give investors or analysts information about the things that are truly relevant to them. The frustration of this was palpable on the call, and was embodied by Tony Richter, an individual investor who summed up the views of many of Geron's retail investors. Richer expressed frustration with the fact that Geron, in his view, seems unable to communicate effectively with its retail investors, and that as someone who has been holding the stock for a many years, it is frustrating to see the company in this state, unable to say much of anything about the material issues it faces.
As a Geron investor (I did not sell my shares after writing my initial article, for I believe that it is highly unethical to ""pump and dump"" any stock), I fully understand Richter's frustration. In an ideal world, Geron would be able to tell all of its investors what they truly wanted to hear. In an ideal world, CEO Chip Scarlett would detail all of the offers that Geron has received for its stem cell assets. He would tell us what his views on the company's strategic review are. And we would be able to see Geron's clinical trial data in real time, instead of having to wait for predetermined dates. But, we do not live in such a world. As a public company, securities law prevents Geron from discussing such things. The company cannot detail confidential discussions that it has had with parties interested in its stem cell assets. It cannot release clinical data at any point in time. And the company's management team cannot disclose the results of a strategic review that has not been complete. The company and its investors are at a seeming impasse. With a third of its pipeline gone, the unease regarding Geron among its investors has rarely been higher. There is a great deal of anxiety regarding the company's future. But, there is little that Geron can do to quell that anxiety. The company is barred from discussing the things that investors and analysts care most about, and that is a reality that they must accept.
I could have sold my shares in September and walked away with profits of almost 70%, and that would have been the end of it. However, I chose not to do that. And the reason is simple. This was, and is, an investment only for risk tolerant investors, who have room for speculation in their portfolios. And I consider this investment to be, at the moment, a speculative one. When I wrote my original article, I stated that Geron has the potential to change the way that cancer is treated, due to its focus on telomerase inhibition and brain tumors. I stand by that opinion. The failure of imetelstat in solid tumors has not affected the company's hematologic trials, nor has it affected the development of GRN-1005, which has the potential to create a truly effective treatment for brain metastases, something that has eluded cancer researchers and pharmaceutical companies for years, due to the blood-brain barrier and the difficulty of getting cancer medications across it. While Geron does have the potential to change the way that cancer is treated, the path ahead is an uncertain one, and this stock is not meant for all investors. But, for investors who are willing to take the risk, Geron continues to offer the opportunity for profits, with the next catalyst just a month away.
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