By Ivan Deryugin
Few investors that choose to invest in the biotechnology sector expect stability. Biotechnology stocks may be insulated from macroeconomic issues, but they are exposed to fundamental issues far more than any other sector. This leads to large amounts of volatility in the sector. And over the past few months, few biotechnology companies have seen more volatility than Geron (NASDAQ:GERN). I have written about Geron several times before, both on PropThink and Seeking Alpha; my first article about the company highlighted its pipeline. In hindsight, that seems like a foolish thing to write.
Geron's pipeline has shrunk to two candidates, from six in August, as a combination of poor clinical trial data and financial/strategic considerations warranted a new approach. In September, Geron announced that it was halting development of Imetelstat in solid tumors. On December 3, the company announced that it was halting the development of GRN1005 as well, leaving the company with only Imetelstat in hematologic malignancies. Geron reported new clinical data on Imetelstat in essential thrombocythemia at the American Hematological Society's annual meeting in Atlanta, last weekend, and after months of negative headlines, the company reported solid data.
Imetelstat in ET and an Expanding Market
Geron reported good Phase II data for Imetelstat in essential thrombocythemia (also known as ET) this past weekend. Of the 14 patients in the trial, 100% had a hematologic response (defined as lowered platelet counts), and the company saw an 86% molecular response rate in patients with the JAK2 V617F mutation. Professor Gabriela Baerlocher (of the University of Bern), one of the trial's principal investigators, said, "The 60% to 90% reduction in JAK2 V617F allelic burden in patients who had the molecular responses, and the rapidity with which these responses were observed, exceeded our expectations. It is also encouraging that all of the patients who were eligible to remain on imetelstat beyond a year have elected to do so." In this trial, 13 out of 14 patients (or 92.86%) saw normalized platelet count reductions, and Imetelstat doses were steadily reduced in 11 out of 13 patients. Geron also reported robust safety data for Imetelstat. Six out of seven patients who were eligible to continue taking Imetelstat chose to do so beyond one year, and the most common adverse events (non-hematological) in this trial were gastrointestinal, and Geron reported zero Grade 4 non-hematological adverse events. The most common hematological adverse event was neutropenia, which was reported in two patients.
Geron plans to continue developing Imetelstat in essential thrombocythemia, and further data are expected in 2013. Furthermore, Geron intends to expand Imetelstat's potential market, and the company announced that it has begun a study of Imetelstat in patients with myelofibrosos, and that preparations for a Phase II study are under way. The company also expects to begin a clinical trial of Imetelstat in acute myelogenous leukemias. And what about Imetelstat in multiple myeloma, the company's other listed indication for Imetelstat? Alongside the release of clinical trial data for Imetelstat in essential thrombocythemia, Geron announced that Imetelstat showed a "rapid and significant" decrease in myeloma progenitor cells in eight out of nine patients (for a response rate of 88.89%). The company also announced that several patients had delayed, but sustained clinical responses, and that full data from this trial would be announced in 2013.
In addition to the data for Imetelstat in hematologic malignancies, Geron has announced that it will be investigating the role of Imetelstat in solid tumors with short telomeres. Geron's decision to discontinue the development of Imetelstat in non-small cell lung cancer was based on an unplanned analysis that found that there was a modest (but not statistically significant) trend in progression-free survival that favored Imetelstat. While these data did not support a continued investment into Imetelstat for the treatment of non-small cell lung cancer, Geron's review of the trial's clinical data did show that a sub-group of patients that had tumors with short telomeres experienced a meaningful and statistically significant increase in progression-free survival (existing, non-clinical data have shown that tumors with short telomeres are "more sensitive to telomerase inhibition than tumor cells with longer telomeres.") Geron is working on creating an assay to measure telomere length in tumor samples (which would be required for a clinical study of the role of Imetelstat in solid tumors with short telomeres), and plans on presenting detailed scientific data on this patient sub-group in 2013.
After several months of negative headlines, Geron has now reported solid clinical data for Imetelstat, and it would seem that the company is well positioned to build out its pipeline. However, earlier this month, Geron's pipeline was reduced even further by its decision to discontinue the development of GRN1005.
A Necessary Decision: Restructuring and Management Changes
Geron's decision to discontinue GRN1005 development was made for a simple reason: the drug did not work. In its GRABM-B trial of GRN1005 in patients with brain metastases due to breast cancer, a preplanned analysis showed that there were no intra-cranial responses in the first 30 patients examined by an independent review panel. The decision to discontinue the GRABM-L trial, which targeted patients with brain metastases arising from lung cancer, was made due to an inability to enroll patients into the trial. Targeting cancers in the brain is one of the key challenges facing the biotechnology industry. The blood-brain barrier makes it extraordinarily difficult for cancer drugs to reach metastasized cancers in the brain, a fact highlighted by Geron itself in its investor presentations. And GRN1005 is now part of a growing list of drugs that have failed to break through that barrier.
Geron also announced a deep restructuring alongside the news that it was discontinuing the development of GRN1005. The company is laying off 43 out of its 107 employees (40.19% of its workforce) in an attempt to reduce its operating expenses. As part of its restructuring, Geron made some executive changes. CFO Graham Cooper has resigned, and Olivia Bloom has been appointed as the company's new CFO. She has been with Geron since 1994, and she has stayed with the company through all the changes it has gone through in those 18 years. Alongside the promotion of Olivia Bloom to CFO, Geron has also appointed Craig Parker as its head of Corporate Development. Mr. Parker's last role was the head of strategy and corporate development at Human Genome Sciences, until it was taken over by GlaxoSmithKline (NYSE:GSK). That, combined with the fact that Geron CEO Chip Scarlett has a reputation for being a dealmaker, means that investors should be on the lookout for any developments that might suggest the company is for sale.
Prior to his appointment as Geron's CEO, Mr. Scarlett was the President and CEO of Proteolix [taken over by Onyx Pharmaceuticals (NASDAQ:ONXX) in November 2009]. And before that, he served as CEO of Tercica from February 2002, until October 2008, when the company was taken over by Ipsen. Now that Geron's "dirty laundry" has been aired out (after all, the company has discontinued four out of six pipeline programs), and the company is left with just one drug candidate (that has therapeutic potential in multiple indications), it is certainly a possibility that Geron could become a takeover target. Its market capitalization is below $200 million, and with oncology a key area of focus for many biotechnology companies, Imetelstat could be of interest, especially considering that Geron owns full rights to the drug on a global basis.
Financial Position and an Options Trade
As part of its new restructuring program, Geron has announced that it expects to end 2012 with $90 million in cash and investments (the company ended Q3 2012 with $106.177 million in cash and investments). Geron is targeting for cash burn to fall to $33 million in 2013, down from $65 million in 2012. The $33 million target for 2012 includes $6 million in charges relating to the company's restructuring and discontinuation of GRN1005. Based on its projections for year-end cash and investment balances, as well as an annual burn rate of $33 million, Geron has enough capital to fund operations for at least two years, and if the company reports more positive clinical trial data regarding Imetelstat within those two years, it is highly likely that the company will use it as a catalyst for a stock sale (this tactic is commonplace within the biotechnology industry).
Many PropThink readers are likely to have little, if any qualms about investing in development-stage biotechnology companies with no options protection. But for readers and investors that are uncomfortable with such an idea, I would like to highlight several potential options trades to minimize the risk (and therefore the upside of investing in Geron). I will focus on the June 22, 2013, expiration date (at this point in time, that is as far out as Geron's options will go). Prices are accurate as of the close of trading on December 14, 2012.
Geron Options Trades
$2 Put & $3 Call
Cost of Put
Proceeds from Sale of Covered Call
Net Cost per Share
% Change Needed to Break Even
Of the four options trades we have highlighted, the $1 put trade should not be considered. It offers downside protection only past 46%, and while Geron needs to rise by only around 23% for the trade to be profitable, the risk-reward ratio is unfavorable, in my view. The $2 put trade is interesting; it caps losses at around 18% (an acceptable level for development-stage biotechnology companies), and requires a move of "just" 58.82% to be profitable. If Geron reports more solid clinical trial data for Imetelstat in essential thrombocythemia or other hematologic malignancies, it is possible for Geron to rise past $2.43 per share. More conservative investors can choose to lower their maximum potential losses to less than 15%, and lower the breakeven point by selling the $3 call. But by doing so, potential upside is capped at just under 29%. Very bullish investors should choose to utilize the $4 put. Because of how it is currently priced, potential losses are limited to less than 9%.
But Geron's share price needs to rise by almost 200% just for the trade to be profitable. While such rallies do exist in the biotechnology sector, they are rare, and only the most bullish of investors should consider utilizing the $4 put to limit their risk, as this put effectively guarantees a loss of around 9% unless Geron can rally by almost 200%. In my view, the $2 put trade is the most attractive at this point in time. Potential losses are limited to less than 18%, and Geron's shares should not have difficulty rallying to $2.43 if the company releases solid clinical trial data in the first half of 2013. I do not think that it is worthwhile to cap upside potential at around 29% to lower maximum losses by less than 4% (however, conservative investors could benefit from this trade).
Over the past few months, Geron has undergone an enormous amount of turmoil. The company's pipeline has shrunk dramatically, but so has its future cost structure. The company has enough capital to operate for at least two years, giving it ample time to release new clinical trial data, and therefore raise more capital. The data that Geron has released in the past few days regarding Imetelstat is promising, and if all goes well, 2013 should be a positive year for both Geron and its investors.
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