Geron: Still Standing

| About: Geron Corporation (GERN)
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Sometimes you can get it totally wrong and still have it right. Last time I wrote about Geron (NASDAQ:GERN), I said by January 1, 2013, the stock would either be "heading O.B. (Zero Bid/Out of Business) or doubling, minimum. There is no in-between." Since then, the stock has bounced around a bit but is mostly right back where it started, trading just a little bit ahead of where I wrote about it in October, as of market close on February 6.

At the time, I wrote Geron had three important near-term catalysts, and if any of them played out the company would survive and perhaps even flourish. It's been a mixed bag on those catalysts, but there's been enough good to make the case worth hanging in for longs (like myself), and I think 2013 will still be a pivotal year for the company, one that should end with it either on its way to a Phase III trial at a much higher share price or as the latest acquisition by a Big Pharma company.

Reviewing the Story

As I detailed in previous articles, Geron has been a frustrating company to own since coming public 20 years ago. Once the 600-pound gorilla in the embryonic stem cell space, the company finally punted on that program in late 2011, leaving it a one-trick pony in the oncology space, where it was seeking to develop two main types of drugs. It's a good one trick, as the company's proprietary intellectual property is based on Nobel Prize-winning science, but it's still been a frustrating ride. As a significant shareholder, I have been infuriated many times and would be one of the first to walk away if these catalysts hadn't played out well. Many did not, but there's enough here to keep me in the game.

Catalyst Updates

The day after my prior article was released, Biotime (NYSEMKT:BTX) disclosed its desire to acquire Geron's HESC assets. Since then, the company appears to be proceeding with the transaction. It's a bit of a complicated deal involving a new entity, a lot of stock, and some warrants, but it should go through by this September and can't hurt in shoring up Geron's cash position, which is generally pretty solid.

Then there's the bad news: Geron's GRN 1005 program, involving treating brain cancer through a peptide conjugate that was supposed to cross the unbridgeable brain-blood barrier, was a dud. The Phase II trial results were not promising, and the company discontinued the program, cut 43 jobs, and parted ways with its CFO. Not exactly promising news for investors, and the stock tanked 23% the next day.

The good news? The company knocked it out of the park on its other key set of trials, for hematologic cancers. In testing for its main home-grown drug, Imetelstat, the company found a 100% response rate in its Phase II trial in patients with essential thrombocythemia (NYSE:ET), and saw all of the patients who were eligible to stay in the program opt to stay in. Preliminary data from another Phase II trial, on multiple myeloma, also have shown very positive signs, as published here. This is the breakthrough the company needed to show that it can, finally, bring a drug to market. And on top of that, in picking through the wreckage of the company's solid tumor trials, the company has found that Imetelstat had meaningful impact on a subset of the patient group (involving patients with short telomeres), meaning there's still signs of life in that avenue.

The Upshot

What does this mean for the company? First, in terms of the near-term trading, the stock hasn't taken off like I thought it would with these positive results. And that's a story of investors being burned too many times with Geron and not being willing to trust the company. What I keep hearing from other fund managers and institutional investors is that they'd prefer to jump in and ride the shares from, say, $3 to $6 and miss the initial move than jump in at $1.54 and hope it gets to $3. So there's an understandable sense of hesitation in the investment community.

As stated previously, I've been as angry as anybody about Geron's performance over recent years, and if I didn't see any upside, I would be gone. But these results, especially in the hematologic cancer trials, are keeping me in for several reasons:

- This is a huge opportunity for Imetelstat. The success in treating patients who had no success with all other available therapies, and who were essentially hopeless cases, is nothing short of remarkable. While the trials focused on ET and Multiple Myeloma, the results inform potential treatments in many other blood cancers, including leukemia. This is, in the long run, a huge market, in the >$10B range. So there's opportunity here.

- The company's cash position is solid enough to keep it going should it proceed to Phase III trials. Geron's plan as I understand it is to go at it alone domestically, at least with the hematologic cancer trials, and to possibly sell off the foreign rights after Phase III. The company has roughly $90M-100M in cash, not accounting for the assorted equity/assets related to the stem cell assets deal, and is expecting a burn rate of about $27M including non-recurring costs. That should have the company in business through 2015. Should the company get further along the process to Phase III trials (which I wouldn't expect before 2014), the share price is likely to appreciate, making secondary offerings an easier pill to swallow.

- Given the company's recent change in management and the board, particularly CEO John "Chip" Scarlett (who came on in late 2011), I expect the most likely outcome is the company is acquired by a major pharmaceutical company. Scarlett's track record is one of streamlining companies and selling them off to bigger names. We've seen the same approach here, with the jettisoning of the stem cell program and the focus on the oncology program. Given a market climate where Big Pharma companies are searching for new drugs and growth avenues to supplement their eroding pipelines and have started buying companies still in or freshly out of Phase II trials at significant multiples. Geron looms as an increasingly attractive target given its recent trial success, small market capitalization and strong cash position.

What to Watch For

In the medium term, I'm expecting the company to get bought out by the end of 2013. I have a target price of $3.50/share, which works out to a roughly $475M market cap, including the $90-100M or so of cash. That's a price of about $375M to get Nobel Prize-winning IP that has shown staggering results in high level trials for a huge blood cancer market. If a buyout doesn't materialize, the company has the cash and scientific goods to reach Phase III and appreciate in share value.

In the near term, technical analysis indicates the company is likely to hit a golden cross around February 15th. The last time this happened, in August following a Seeking Alpha article, which helped boost the stock, the shares took off on a 50% run in a month. Geron then announced poor results with the solid tumors trial, sending the stock crashing through and past a death cross. With the company due to release updates on its trials in the coming months, there should be enough fundamental grist for the stock mill to push the shares up as well.

Anybody who's followed this stock knows this has been a bumpy and mostly fruitless ride for shareholders. It's no fun getting burnt, and there's no guarantee it won't happen again; I know that as well as anyone. For all that, Geron finally seems to be turning the corner on its trials and its long-awaited promise to bring a drug to market. My feeling is that it will never fully deliver on that promise, but not because of its own failure; I just think a much bigger fish is going to swallow up Geron, finally bringing some satisfaction to the long-suffering shareholders.

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.