By January 1, 2013, Geron (NASDAQ:GERN) should be heading O.B. (Zero Bid/Out of Business) or doubling, minimum. There is no in-between.
As I wrote in a previous article, Geron has been something of a nightmare for shareholders in the past, and 2012 has largely been worse. However, Geron has three critical catalysts expected by the end of this quarter -- two Phase II's releasing final data, and an interim report on a third. If any or all of these reports are promising, the company is saved.
The bear case:
There are many, proven reasons to bet against Geron. Shorting into any strength would have been profitable for at least the past 10 years. Every time the shares have rallied, they have subsequently collapsed. Most recently, in August 2012, the shares had rallied roughly 70% for the year. On Friday September 7, the shares reached a new 52-week high. In typical Geron fashion, the next trading session brought a fresh historic low when it shut down one of its trials early.
Geron's prior history of overpromising and underdelivering has devolved into a pattern of "kicking the can down the road," then blindsiding investors with nauseating news. As a long-suffering Geron shareholder, I have often felt like Charlie Brown giving Lucy one more chance to deliver, only to have her yank the football away at the last moment, yet again.
Geron has been referred to as a very expensive science experiment. Since going public nearly 20 years ago, it has never managed to have a profitable year or get a product into phase III, much less to market. It has been very successful at burning through hundreds of millions of dollars, discarding promising therapies, infuriating investors and enriching its executives. Geron's Board has a disturbing (and perhaps legally actionable) history of awarding bonuses to executives who deserve salary reductions, at best. Last December -- at the end of a year in which 500 million dollars in market cap vanished -- 40% of the staff was laid off and the company lost 75 million dollars, several executives including Melissa Kelly Behrs and Dr. Stephen Kelsey, were awarded "performance bonuses." Similarly, Chairman of the Board Hoyoung Huh has done nothing positive since his arrival at Geron, yet he managed to "earn" nearly a million dollars last year alone. Bottom line -- Geron's Board is a complete disgrace, and if 2012 ends as badly for shareholders as 2011, with "bonuses" awarded? Expect lawsuits.
Another valid bear argument is the company's apparent lack of transparency. Geron made the wildly unpopular and widely criticized decision last November to pull out of the stem cell field. CEO John Scarlett said at the time: "By narrowing our focus to the oncology therapeutic area, we anticipate having sufficient financial resources to reach these important near-term value inflection points for shareholders without the necessity of raising additional capital."
In January 2012 at a JPMorgan (NYSE:JPM) conference, Scarlett said: "[Geron] hired Stifel Nicolaus & Co. (NYSE:SF) to sell its embryonic stem cell therapy." He also claimed that "Geron is actively talking to interested parties." Since then? Nothing. When Scarlett is asked, as he often is, about any progress or updates regarding the decision or discussions with "interested parties," he declines to respond, citing Reg FD concerns.
Recently, GE Healthcare announced an expansion of a collaboration with Geron. Several news organizations picked up the story, but Geron was conspicuously silent on the issue. When I inquired of its Investor Relations department, I was told: "A press release was not issued by Geron because stem cells are no longer the focus of our core business." This curiously opaque posture, particularly in light of the share price at historic lows, is also very troubling.
Another potential red flag is the recent ATM (At The Market) agreement. It appears to be at odds with previous statements made by management. Specifically, Geron has repeatedly stated the reason for the stem cell shutdown was: "By narrowing our focus to the oncology therapeutic area, we anticipate having sufficient financial resources ...without the necessity of raising additional capital. This would not be possible if we continue to fund the stem cell programs at the current levels."
The bull case:
Yes, Geron's Imetelstat in solid tumors appears to be a failure, but there are two other Imetelstat Phase II studies in hematologic cancers, the results of which are expected to be released this quarter. There have been many examples of drugs that failed in one indication, but were successful in another. If Imetelstat definitively succeeds in either or both of these studies? Home run. Particularly with such low expectations in place, as evidenced by the current share price.
Geron also has two other ongoing phase II's for GRN1005, which has the ability to cross the blood brain barrier, a heretofore difficult problem to solve. We are expected to see interim results on both safety and efficacy from one of these phase II studies on December 7, 2012 at CTRC-AACR.
If any of these three near-term catalysts show outstanding results? Geron survives, and even flourishes. If all three are spectacular? Geron will be a double-digit stock next year, or perhaps it will be acquired. Geron's recent hiring of two new board members and a vice president of technical operations may indicate the company is anticipating positive results in these trials.
It's foolish to underestimate a well-capitalized, micro cap biotech in the 11th hour before potentially Nobel Prize-winning phase II results are released. Almost no one seems to be expecting anything positive from Geron, and this could work to shareholders' advantage in the event incontrovertibly positive results are released.
The bull case for the recent ATM? ATMs can be beneficial because they can't be "gamed" due to their orderly flow into the trading stream. Also, they're an inexpensive way for the company to raise money (without excessive fees to investment banks). Possibly, Geron expects good news from one or more of the phase II's, and will use the ATM to raise cash into the strength when the results are released. It may also indicate the company is confident in one or more of the remaining trials, and is raising money to go it alone into a phase III. As CFO Graham Cooper said in the most recent conference call: "...solid tumor trials tend to be larger, more expensive Phase III programs. And with current resources, I think it's not realistic to expect that we would launch down the path of the Phase III program without a partner. On the other hand, hem -- malignancies hem programs can be more cost-effective, can be run on smaller trials and are within the grasp of a smaller company with more limited resources."
Management: I like Chip Scarlett a lot, both personally and professionally. As a CEO, he has a solid history of rolling up his sleeves, streamlining biotechs and positioning them to grow or be acquired at significantly higher prices. Scarlett inherited much of Geron's dreadful board and a few of the overcompensated executives who remain. If anyone can turn Geron around, it's Scarlett.
Fundamentals: Geron should end the year with roughly $85 million in cash, excluding the $50 million dollar ATM. Back of the envelope numbers put the company's cash position around $135 million going into 2013, with zero debt and a reduced burn rate of around $35 million a year.
None of this matters if the results of the remaining trials are bad. If so, the company should be dissolved. If the results of one or more are good? All is forgiven, and the shares should end the year in the $3s, minimum. Place your bets. More will be revealed, very soon.