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At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." The pinstripe-and-wingtip crowd is entitled to its opinions, but we have some pretty sharp stock pickers down here on Main Street, too. And we're not always impressed with how Wall Street does its job.
So perhaps we shouldn't be giving virtual ink to "news" of analyst upgrades and downgrades. And we wouldn't -- if that were all we were doing. Fortunately, in "This Just In," we don't simply tell you what the analysts said. We also show you whether they know what they're talking about.
Geron gives up
It's official: The stem-cell revolution is dead ... at least for Geron (Nasdaq: GERN ) . As you've probably heard by now, the company whose name was once synonymous with the term "embryonic stem-cell research" announced Tuesday that it's abandoning the field to rivals Cytori Therapeutics (Nasdaq: CYTX ) , StemCells, and Aastrom (Nasdaq: ASTM ) . Henceforth, Geron's switching its focus to more promising ideas such as cancer drugs imetelstat and GRN1005, from which it hopes to eventually earn a profit.
Now, I happen to be in favor of companies earning profits. Wall Street, however, was not amused by Geron's announcement. Hearing the news yesterday, both JPMorgan and WBB Securities decided to downgrade the stock. Granted, JP only dropped the stock down to "neutral," while WBB ratcheted it back to just "speculative buy" -- but in illustration of just how far hopes have fallen for this stock, WBB's price target on Geron has now shrunk from $18 to ... $6. (And no, that's not a typo.)
"Evacuate? In our moment of triumph?"
And I have to admit, Geron's decision to abandon the field it pioneered does seem to come at a strange time. I mean, it was only a few months ago that Swedish researchers breathed new life into the stem-cell industry with their creation of an artificial trachea grown from stem cells implanted on a synthetic framework -- and then successfully implanted the new organ in the patient, and saved his life from cancer.
Success stories like this one have Big Pharma names such as GlaxoSmithKline (NYSE: GSK ) and Pfizer (NYSE: PFE ) piling into the stem-cell industry, joining PerkinElmer (NYSE: PKI ) in the field that Geron began. And it's now, when everyone seems to be agreeing that Geron is on to something, that the company decides to change its business model?
Curiouser and curiouser
I mean, sure, Geron's been burning cash like mad in an effort to make a go of this business -- nearly $58 million over the past year alone, up 28% from 2010's cash-burn rate. But that's not exactly news. We've known forever that this stock was a total crapshoot, and one that would burn cash and dilute investors with follow-on share issuances for years before it stood any chance of making a profit.
Still, the company had $142 million in the bank at last report, and negligible debt -- plenty of cash to keep trying for another year or three. It seems strange that Geron would choose now to suddenly throw in the towel to fiscal reality and cry "Uncle!"
I also can't help noticing that Aastrom, Cytori, and StemCells all appear to be in even worse financial shape than Geron is. At its current rate of cash burn, StemCells looks likely to burn through its cash reserves before a year is out. Aastrom, a few months after that, with Cytori not very far behind. And alone in the industry, Cytori is also burdened with a sizeable slug of debt.
When you get right down to it, I can't say I disagree with the analysts downgrading Geron this week. In fact, if I've any objection to the call at all, it's to wonder why these analysts were so bullish on Geron for so long and didn't realize their mistake sooner.
I only hope they don't repeat the error with Geron's rivals. I only hope they don't cost any more investors any more money.
Not all start-ups are doomed to wind down. Not all small caps go broke. If you want to avoid the pain Geron's shareholders are feeling today, read the Fool's new -- and free! -- report titled "Too Small to Fail: Two Small Caps the Government Won't Let Go Broke."