Geron: Mea Culpa

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 |  About: Geron Corporation (GERN)
by: Robert Lawton

Just over a year ago, I gave the following interview regarding Geron (NASDAQ:GERN). To be fair, the Geron I endorsed at that time was a very different company from the one which exists today. Let's review;

2/8/11: Share price $5.00

CEO Thomas Okarma abruptly resigns, replaced by "interim" CEO David Greenwood. Chairman of the Board Alexander Barkas said Greenwood would use his "30 years of dealmaking experience" to create partnerships for the company. Greenwood said:

Two to three years ago, pharmaceutical companies expressed 'curiosity' about Geron's embryonic stem cell program. That curiosity has continued to grow and evolve and today it's interest. We have [had] conversations with different companies and we will progress those conversations to talking about potential alliances.

Executive Chairman of the Board Hoyoung Huh said: "The take-home message is, we are open for partnering." To date, no "partnerships" or "alliances" have materialized.

3/9/11: Share price $5.00

Geron discloses:

Mr. Greenwood's annual salary was increased to $500,000 and he may receive a discretionary bonus at the end of the year of up to 60% of his annual salary, which will be determined by the Board and is predicated on individual and overall corporate performance during the year.

(Remember this part because it's going to really upset you later).

Gern also disclosed:

The Board approved certain compensation arrangements in connection with Hoyoung Huh's appointment as Executive Chairman of the Company, effective as of February 8, 2011. Dr. Huh will be entitled to an annual retainer of $250,000.

8/1/11: Share price $3.74

CIRM grants Geron a $25,000,000 matching funds loan to be used for the GRNOPC1 Spinal cord trial.

9/29/11: Share price $2.16

Geron names John Scarlett as CEO.

11/14/11: Share price $2.20

Geron announces it is shutting down the HESC component of the business to focus on Oncology. The company says they are looking to "partner these novel assets", 38% of workforce will be eliminated & an 8 million dollar charge taken related to the decision. Company says during the conference call the ongoing OPC1 trial costs approximately $25 million a year.

In other words, the company decided it was wiser to "seek partners for these novel assets" after shutting down the OPC1 trial, absorbing an 8 million dollar charge, laying off 38% of the staff, returning the CIRM loan and wiping away over $50 million in shareholder value overnight.

The reason? To save 17 million dollars (25-8) over the next year, half of which was guaranteed by CIRM.

Naturally, this begs the question: Wouldn't it have been smarter to negotiate "potential partnerships" from a position of strength? With the OPC1 trial ongoing, without these charges, inevitable "brain drain" and negative publicity?

The stock closed the following day at $1.75.

Greenwood said at the time:

Geron has 'discussions under way' with at least one interested company, but declined to identify it.

12/23/11: Share price $1.41

In what can only be described as a shamefully egregious violation of their responsibilities, Geron's Board awards more than $600,000 in "cash bonuses" to executives.

On the heels of the decision to shut down the first ever approved HESC trial in humans, terminate 38% of the work force, take an $8 million dollar charge, a $75 million dollar YTD net loss, a $500 million decline in market value YTD and a 70% decline in share price, Geron's BOD's "Compensation Committee" concluded "performance based" cash bonuses were appropriate.

I doubt "performance bonuses" seemed appropriate to Katie Sharify.

I suspect they seemed inappropriate to the 38% of the Geron's workforce who were laid off a month earlier in an effort to "cut costs". They certainly weren't appropriate to me, considering the company's market capitalization had declined by $496,956,600 since the beginning of the year.

2/1/12: Share price $1.99

David Greenwood, in addition to the $235,800 cash "performance bonus" he was awarded a month earlier, receives a $750,000 "severance payment and "consulting fee of $400 per hour."

So let's recap: In the past year, Geron forces(?) the resignation of CEO Dr. Thomas Okarma in a misguided effort to "develop partnerships [or] alliances" and pays him over a million dollars, plus stock options to leave quietly.

Geron elects Dr. Huh board chairman and pays him $250,000 plus stock options.

Geron installs David Greenwood as interim President & CEO (who also, bizarrely remains CFO), pays him a million dollars including a cash bonus, plus stock options for his seven months of dreadful service as CEO, during which time over $350 million in shareholder wealth vanishes.

Geron shuts down the OPC1 trial, announcing an $8 million charge to do so and, more importantly, shattering the hopes of untold numbers of spinal injury sufferers and earning incalculable ill will from both the investment and scientific communities.

Geron lays off 38% of the employees, loses over $400 million in market capitalization and realizes roughly $100 million dollars in net losses.

All that said? I remain guardedly optimistic. I have spoken with Chip Scarlett and consider him a highly capable executive and a decent man, (in sharp contrast to Greenwood). I'm hopeful a larger healthcare company recognizes the value of Geron's HESC assets and cuts a deal wherein; Geron is fairly compensated, retains some ownership and most importantly, the research and development continues.

I'm encouraged by the consolidation in the oncology space including a few recent acquisitions of early stage companies. I'm particularly comforted by the recent, sizable insider buys. Finally, I'm hopeful regarding Geron's six current phase II oncology studies, four of which are based in part on Nobel Prize winning proprietary IP. If we receive no bad news from these, I expect the shares may begin ramping up as we approach the data release. As of now, the shares are up 40% already this year. Let's hope it continues.

Disclosure: I am long GERN.