Geron Pushes Higher on GE Healthcare Alliance

Includes: GE, GERN
by: Beacon Asset Managers

Geron Corp. (NASDAQ:GERN) yesterday traded strongly higher after announcing a collaboration with GE Healthcare to develop and commercialize evaluation technologies from human embryonic stem cells (hESCs). The multi-year collaboration is designed to assist in the discovery of new drugs, their ongoing development and toxicity screening.

The news had shares of Geron soaring up to 22 percent on heavy volume in morning trading, as the collaboration brings another level of legitimacy to Geron’s stem cell program, which has long been clouded by the controversial nature of hESCs.

In January, Geron became the first-ever company to receive U.S. Food and Drug Administration approval to begin clinical testing of hESC therapies on humans. The Phase I trial, which is expected to begin this summer, is designed to test the safety of using stem cells to repair spinal cord damage; however, efficacy will also be examined (please see our June 12, 2009 article on Seeking Alpha).

Under the terms of the agreement, Geron grants GE Healthcare, a $17 billion unit of General Electric Co. (NYSE:GE), an exclusive license to use its extensive intellectual property portfolio covering the growth and differentiation of hESCs, along with a sublicense under Geron’s right to the foundational hESC patents held by the Wisconsin Alumni Research Foundation. Scientists from both companies will work together to develop products, and GE Healthcare will fund the research and development, as well as the costs of manufacturing, sales and distribution of all products developed under the agreement.

New intellectual property rights arising from the alliance will be shared, with GE Healthcare receiving the rights for the development of drug discovery technologies, and Geron receiving rights for cell therapy applications. The companies expect the first products from the venture to be available in early 2010, “with a pipeline of products to follow.”

According to Geron’s press release, a primary goal of the collaboration is to reduce drug development costs and reduce the incidence of potential toxicity in human clinical trials, through earlier detection of toxicity problems. Cells developed from hESCs are similar to their counterparts in the human body, and can be successfully used to predict many pharmacological characteristics of a drug candidate. “Up to three quarters of toxicity problems are not detected until preclinical or later stages of drug development and this significantly increases the cost of developing new drugs.” The companies’ collaboration “aims to develop cellular assay products derived from hESCs that could be used in early in vitro screening of drug candidates.”

We believe that this unexpected announcement will be followed by other positive surprises in the coming months as Geron advances its stem cell and telomerase programs. With more than 14 million shares sold short, or more than 16 percent of the float, positive news flows should push the stock price back to its 2003 highs of more than $15.

This latest news also highlights the potential for Geron to be taken over by a bigger player, as GE Healthcare has a history of taking over high-growth, small to mid-size medical technology companies that it has collaborated with, most recently the U.K.-based Whatman plc, a global supplier of medical filtration products and technologies.

In our opinion any potential take over price should be well in excess of the current share price of about $8.

We will continue to monitor this new alliance and keep you posted on any further developments with this exciting company and its positive long-term growth prospects.

Disclosure: Long GERN