Geron: A Changed Company With Significant Potential

| About: Geron Corporation (GERN)

I have been an investor in Geron (NASDAQ:GERN) since 1998. It is the one stock out of my current 40-equities-trading-set that I trade out of conviction, and not based on technical or fundamental analysis. My obsession with the company was never due to its human embryonic stem cell (hESC) research. I was, and still am, convinced that of the many novel and ground-breaking concepts under investigation, the Telomerase inhibition concept has one of the better chances for curing select cancers. hESCs were Geron's icing on the cake, but never the actual feast. As a matter of fact, more than a decade ago (during hESC prohibition years) Geron's management should have recognized the compelling business case for focusing more on cancer and less on stem cells.

In this article I will discuss the reasons I believe that Geron has finally, and successfully, gone through a fundamental change to become a viable and well-focused company. I hope you will agree with my conclusion that, for the first time in its history, Geron is on a path that can lead to actually delivering innovative cancer treatments, and hence significant investor returns.

From the science point of view, you must have read the many news articles relating to the abstract of Dr. Tefferi's presentation in the upcoming American Society of Hematology (ASH) annual meeting. The presentation is scheduled for Dec. 9, at 4:30-6:00 p.m. As for the abstract itself, which you can access here, reading the "results" and "conclusion" sections is quite intriguing. Noting that medical scientific publication is a very serious business, and a researcher's reputation is all one owns in that field, here you have 12 researchers presenting a result, concluding that:

The current study signifies the potential value of telomerase-based treatment strategies in MF and identifies imetelstat as an active drug in that regard. The observed morphologic and molecular remissions confirm selective anti-clonal activity, which has thus far eluded other drugs in MF, including JAK inhibitors. The association between response and spliceosome mutations suggests a broader application for the drug in myeloid malignancies.

They base that conclusion on four complete responses (read it, no residual disease) and one case of partial response, out of a sample of 18. In my opinion, this is a very significant piece of information -- one that should not be discounted. In any case, the results will be subjected to further scrutiny in a few weeks' time, once the full paper is presented and dissected by the whole medical community.

This development comes on the heels of the essential thrombocythemia (ET) study, which has already shown quite promising results. In that study, the conclusion was as follows:

Treatment in 18 ET patients who had previously failed or were intolerant to conventional therapies resulted in 100% hematologic responses (88.9% CR)

You can check earlier conference presentations at the company's webpage on Imetelstat presentations.

Having said that, what got lost in the headlines is the significance of telomerase in this year's ASH meeting. In particular, a search for abstracts on the subject of "telomerase" leads to 30 articles, with researchers from a variety of prestigious medical schools. If you do the search on the ASH website, you will find titles such as "Inhibition Of Telomerase Is a Novel and Effective Therapy In MLL-Rearranged Acute Myeloid Leukemia (AML)." This only goes to confirm my conviction that telomerase inhibition, of which Imetelstat is a first of its kind, has the potential to cure many cancers. This leads to my next focus point.

On the management front, during most of its history, the company was run by a different CEO and financial decisions made by a different CFO than the current executives. Examining the earnings press release and analyzing recent actions, it becomes clear that we are dealing with a changed company. Where the change is most prominent is in that Geron's management has finally realized that they are neither Pfizer (NYSE:PFE) nor Merck (NYSE:MRK). That is, running a small science company without well-focused objectives is not a viable option. What this lack of focus had inevitably led to in the past was the frequent and opportunistic refinancing through stock issuance, which diluted investment in the company. This was needed, as prior management rationalized, to support the high burn rate.

What management then missed was that Geron had too many parallel research lines. In effect, the refinancing was needed to finance the diversified research establishment that flourished within the organization, and not to become a profitable business -- as investors were hoping. In retrospect, it may have done scientific research, and possibly humanity, enormous good that Geron continued its focus on hESC. Yet, as an investor, I could not see the business sense in operating against the negative regulatory and social atmosphere prevalent during the previous U.S. presidential administration, which culminated into the unfortunate prohibition on hESC research.

The surprise news from a few months ago, that Geron was to divest the stem-cell business, should have been welcome news from a business point of view. The latter news about the discontinuance of telomerase brain cancer trials, despite promising initial results, further suggested that the current management is quite focused on running a viable business, and is trying to avoid prior mistakes of depleting funds by supporting full-blown fundamental research with multiple medical trials.

From the point of view of equity investors, it will always boil down to funding and finances. On this front, the latest quarterly results offer an interesting insight into funding needs. The company burned through $8.3 million as a net loss this quarter and $29.1 million for the first nine months this year. At this rate -- and here it is a forward-looking extrapolation of recent data -- Geron should burn through a $37 million loss for this year. This is in comparison with a net yearly loss of $111.4 million in 2010, $96.9 in 2011, and $68.9 in 2012. With around $67 million in cash and investments, as reported at the end of this third quarter, the company seems to have enough cash for almost eight quarters -- or two years -- given the current burn rate.

The event most feared by small-cap investors, which is stock issuance and hence investment dilution, should not reasonably happen for a few quarters. By then, the company should have meaningful results from the study it is initiating in early 2014 to actually command better valuation from any potential investor. As a matter of fact, alliance with a Big Pharma player should be just as lucrative once the latest results are confirmed. Finally, to generate another two-years' worth of funding at this rate and at current stock price, the company does not need to dilute the stock by more than 10% -- a far cry from the serious dilution investors have experienced in the past.

To conclude the financial discussion, Geron has a very promising approach -- as demonstrated by the above-mentioned medical Phase II trials -- to dealing with three different blood diseases: AML, ET, and MF. The American Cancer Society lists the new cases of AML as 14,590 annually, while the NIH lists the prevalence of ET and MF as 38-57/100,000 and 4-6/100,000, respectively. Considering that MF's symptom-relieving medicine -- Jakafi from Incyte (NASDAQ:INCY) -- costs $84,000 per patient per year, it is easy to see the multi-billion dollar potential for Imetelstat. Further, Imetelstat should reasonably be eligible for the FDA's new priority review program, hence shortening the usual approval time.

As such, I believe we all should be very pleased with the developments of this week, regardless of how the market interprets or spins Dr. Tefferi's results. For the first time in 15 years, I believe that Geron has turned from a "random gold prospector" into a real company seriously attempting to run a real and quite promising business. As an investor, this presents a significant investment opportunity worthy of serious consideration.

Disclosure: I am long GERN. 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.