For long term investors in GERN the roller coaster ride has been exhausting. At times it seems that we’ve been made to suffer biblically with this investment. The good news has been that the company’s sole drug candidate (Imetelstat) continues to show extreme promise in un-served and underserved patient populations for certain hematological cancers. The bad news is that current funds will not get it to the finish line.
If you’re not familiar with Imetelstat and Geron then this isn’t the article to bring you up to speed. There are many other and better authors who have tackled that task and I encourage readers to seek them out here on Seeking Alpha. The purpose of this article is to address where the intersection of money and science exists in the future.
Yesterday (8/1/19) we got an update from Geron management in the form of a 2Q conference call. While nothing has changed from a guidance standpoint, there was a bombshell revelation that the company used some of their currently registered At The Market offering to raise cash at what can only be considered and abysmally low valuation.
With $162.3 million on hand at the end of the second quarter it would appear that sometime between the annual shareholder meeting and the end of the quarter management felt that it needed to raise about $2.6 million by selling 1,893,091 shares of stock. The timing of this raise seems to indicate that management was not particularly proud of doing this, as the timing avoided them having to face shareholders with the news in person.
Furthermore, and based on current guidance, there seems to have been no legitimate reason to raise such a paltry sum at these low prices and with such adequate reserves on hand. The only solution this author could arrive at was that management does not see any significant catalysts on the horizon that would present a better opportunity to raise capital.
As has already been telegraphed, the start of the pending Phase 3 in MDS went from being planned for ‘mid-year’ to ‘August’, and now to ‘later this month’. It would appear that the fine game of semantic wordplay is alive and well at Geron and is helping them cover a slipping timeline. That alone would not be of much concern but we were told at the annual shareholder meeting that there would be no mid-trial updates about progress, pushing any catalyst from that trial potentially several years down the road.
The next expected catalyst would have been some form of submission to ASH 2019 as it has been the company’s modus operandi for several years to use ASH to release data. However, after the recent EHA conference discussing Imetelstat in MF and MDS I noticed that there was a recurring phrase that has been recently missing from management’s discourse. In the past it was common to hear that additional or new data would be presented at an upcoming medical conference. Lately, we’ve heard no such assertion from management. Perhaps there isn’t anything to discuss in MDS and the MF analysis of real world data simply consists of that which has already been presented at EHA.
If that is true, then investors are looking at a dearth of catalysts until the announced end of Phase 2 IMBARK meeting with the FDA for MF. That meeting is proposed to happen at the end of the first quarter in 2020, but if past is prelude to future, the meeting will likely be pushed into the second quarter. The mere occurrence of this meeting does not mean that there will be an announcement to follow. It is possible (nay, likely) that Geron may receive guidance from the FDA that it is not at liberty to announce.
So if there is no major bump from the start of the Phase 3 MDS trial (and I don’t see why there would be) then the remaining catalysts seem questionable. If Geron doesn’t have anything to submit to ASH, then the next thing on the schedule is the FDA meeting, which may also not produce actionable intelligence on the share price for the average investor.
The worst nightmare for those choosing to be short this stock is a black swan event such as an ex-US partner agreement, but even that seems unlikely until some form of U.S. approval for Imetelstat. The EMA is not likely to look favorably on real world data in MF to the same extent that the FDA is, and therefore until the readout from IMERGE in MDS such a partnership will not be ‘fully valued’ which Geron’s CEO has said is a requirement to make such a deal.
With all of that occurring in the background, management has gone on a spending spree racking up $80-$85 million in anticipated 2019 expenses. That makes sense in light of the fact that they have chosen to operate from offices in California and New Jersey simultaneously. With over 10,000 sq feet of office space in California and anticipating only two dozen non-research employees to work there, that is wasteful spending in the extreme. Furthermore investors are saddled with the additional expense of paying for travel for the CEO whose primary residence is in Texas.
So the question remains; is investor capital being deployed efficiently? Half of the company’s roster will be research staff by the end of 2019, and management has been hiring many key personnel to oversee manufacturing. All of these expenses cut into the available reserve but none are allocated to marketing staff. That fact underscores that while management is concerned with making Imetelstat it isn’t particularly worried about being able to sell it. It almost appears that they are preparing to run trials indefinitely.
And because of all these factors, I believe that management has put in place a plan to steadily dilute the market with shares of GERN until all of the remaining $57 million has been raised, regardless of the share price. Based on the huge short interest in GERN that continues to accumulate it would appear that short sellers are confident that any uptick in interest in the stock will see a response by management to dilute which will keep a short squeeze from happening. After all, if management thought selling new shares at $1.37 (average) was a fair price, why should anyone else believe this stock is capable of going higher?
Disclosure: I am/we are long GERN.
Additional disclosure: While I am still long GERN I am disappointed that management is telegraphing that they think diluting at such low levels is acceptable.