Optimism that Johnson & Johnson (NYSE:JNJ) will choose to continue developing its lead drug sent Geron Corp.'s (NASDAQ:GERN) stock soaring recently. However, there are some reasons investors ought to tamp down their enthusiasm. Can Geron Corp.'s imetelstat overcome obstacles and reshape how doctors treat a billion-dollar indication?

In this episode of The Motley Fool's Industry Focus: Healthcare, analyst Kristine Harjes is joined by Todd Campbell to discuss what's at stake for Geron and its investors. Also, the two weigh in on bad news that recently caused AbbVie Inc.'s (NYSE:ABBV) shares to tumble. Is AbbVie's stock now a bargain-bin buy?

A full transcript follows the video.

This video was recorded on March 28, 2018.

Kristine Harjes: Welcome to Industry Focus, the podcast that dives into a different sector of the stock market every day. Today is March 28th, and this is the Healthcare edition of the show. I'm your host, Kristine Harjes, and I have healthcare specialist Todd Campbell on the line. Welcome to the show, Todd!

Todd Campbell: Hi, Kristine! Happy Wednesday!

Harjes: Happy Wednesday to you, too! We are starting off today's show with a listener email. Isaac wrote to us from Wausau, Wisconsin. I hope I'm saying that correctly. He's a shareholder in Geron, ticker symbol GERN, one of the most volatile companies I have dug into in a while. Which is partnered, ironically, with one of the most stable, Johnson & Johnson. The two have been working on developing a drug called Imetelstat, and a recent surge in optimism has made Geron the best-performing biotech stock so far this year. Todd, what has investors so excited?

Campbell: We have a very, very big binary event that's coming up very quickly for Geron. And we're going to get into all the details behind that. But I think it's kind of coming down to, will this company finally get to the finish line after 20-plus years of existence as a clinical-stage biotech? And it's really going to hinge a lot on a decision that's going to be made in the third quarter by Johnson & Johnson on that lead drug, Imetelstat.

Harjes: Exactly. Geron has been working with Johnson & Johnson on the drug since 2014. Currently, development costs are split 50-50 between the two, and Johnson & Johnson is paying Geron some additional milestones as the drug progresses. It has looked fairly promising so far in the clinic. Particularly recently, Geron's CEO made some statements on their most recent conference call that implied that this drug could be an enormous advancement.

Campbell: I'm sure listeners are going to be on both sides of this, this is a very divisive story, in a way. The background here on this drug, it isn't necessarily a homerun that this thing is going to deliver on the efficacy and safety front, in my opinion, Kristine. There are some dose-limiting toxicities associated with the drug that influenced the dose that was used in the Phase II trial that we're talking about today. There was a clinical trial hold that was put on this drug back in 2014, it was being researched in three different hematological cancers. A clinical hold was put on there for, as the FDA described it, over concerns regarding the reversibility of liver toxicity. 

That clinical trial hold was lifted later that year in 2014. But, those trials never restarted. Instead, what ended up happening was, Johnson & Johnson stepped in after the hold just lifted and said, we'll share 50-50 development costs, we'll cut a deal, we'll give you a little bit of money up front and potentially a lot of money on the back end if we decide to take this drug all the way, and let's focus our clinical research instead on myelofibrosis, a disease where there's not many treatment options and there's very poor prognosis. So, in theory, the bar is a little bit lower when it comes to the safety end of things.

And I think the excitement for this drug is, the only medicine out there right now, Kristine, if you can't have a bone marrow transplant, the only medicine out there is Jakafi, which is made by Incyte, it's a billion-dollar drug. The knock against Jakafi is, it just treats the symptoms. It doesn't treat the cause of the disease. And the thinking here is, this drug will be different, this drug will actually help to reduce the fibrosis that occurs in the bone marrow and causes red blood cells to have to be produced in the spleen and liver.

Harjes: Exactly. Right now, there's a 75% discontinuation rate for Jakafi after five years. Post-discontinuation median overall survival is just 7-16 months. So, the hope here is, this drug could provide a second line of therapy after patients have already failed on Jakafi. Currently, it's being studied in a Phase II trial, so about 100 patients who have already failed Jakafi. This is a fairly large and burdensome disease. There are 3,000 patients that are diagnosed in the U.S. annually, but as you mentioned, Todd, it is a very important disease to be looking into because it has such a poor prognosis. 

You mentioned earlier that there were some safety concerns with this drug in prior studies and other indications. I do want to add onto that that there was actually a little bit of a safety concern scare in October of 2017, when the FDA put out an information request related to this drug's risk-to-reward ratio in these advanced myelofibrosis patients. This led to an enormous rise in the short interest in Geron, which is people that are betting against the stock. I think that short interest is a large part of the reason why recently we've seen enormous volatility in the share price.

Campbell: Yeah. Just to tease that out a little bit, I think we're looking at this and we're seeing, we have this huge decision that's going to be made by Johnson & Johnson related to the outcomes in this IMbark trial. You would think, if this was a completely great drug that had no problems, J&J would already have signed off on that continuance. It wants to wait until it has all the overall survival data in hand from this Phase II trial before it makes its decision. 

I think one of the things that got people excited, Kristine, on Geron's conference call with investors, was the fact that the overall survival data should mature enough in the second quarter, where a decision from Johnson & Johnson will be made in the third quarter. And I think a lot of people looked at a decision by Johnson & Johnson in March to amend the trial and allow for the extension phase, to continue to evaluate patients who were already in it, as a bullish indicator. But, anything can happen here with the overall survival.

I mentioned that the knock against Jakafi is that it treats the symptoms and not the disease. That being said, studies have shown that it does improve overall survival. And you and I have talked about this on the show before, overall survival is the gold standard, that what you want to be able to deliver to really win the marketplace. And Jakafi delivers on that, the overall survival in the compared one study was some five years, it was a 1.5-2 year improvement over patients who didn't receive Jakafi. So, you have a drug that does extend overall survival already on the marketplace. 

So then, you look at the "do no harm." Can this new drug secure an FDA approval if it, one, doesn't show really big improvements in spleen volume. That was something that they based the Jakafi approval on, was the reduction in spleen volume. We've seen spleen volume reduction in Imetelstat's trial, but it hasn't been to the same degree as we saw with Jakafi, and actually not to the same degree either as a competing drug that is making its way to the FDA from Celgene (NASDAQ:CELG). So, there are some question marks here that make the J&J decision a really big uncertainty, a really big binary event. And that does make this an incredibly risky stock.

Harjes: I completely agree. For me, there are three main question marks when I'm looking at this. First thing, Johnson & Johnson has so much money, they could have just bought this company full out if they really wanted to. So, their reluctance to do so makes me also want to hedge my bet when it comes to this company. 

Second thing, if we dig into the details of the study itself and what CEO John Scarlett was saying on that conference call that we've been talking about, he points out that they don't yet have median overall survival for the patient pool after 19 months of the trial, which is kind of a good thing. That would seem to imply that the final number for median overall survival would be longer than 19 months. But, the thing is, there's no control arm in this study. Scarlett is comparing the real-world overall survival to the numbers that you're seeing in this trial. And the number that he comes up with for real-world is seven months. And that's a little bit questionable. I give a lot of credit to Stat News, which is one of my favorite biotech sites out there, for picking apart at this, because they raised the point that that seven-month figure is from the original 430 patient group receiving Jakafi as the first line of therapy. The vast majority of those patients didn't receive anything else, presumably because they weren't healthy enough to receive a second line. But those who did receive another line of therapy, whether it was another round of Jakafi or another drug, had median survival of 22 months. So, whether or not Scarlett's comp is legitimate is very dependent on the baseline disease characteristics of the patient pool, meaning, how sick were they? So, which real-world patient pool is actually the most appropriate comparison? And right now, we just don't have that information.

So, combine that with my third question mark, which is that we don't have enough data, either, about the primary endpoints of this trial. Which, as you mentioned earlier, Todd, are actually that shrinking of enlarged spleens and reducing of disease symptoms. We talk a lot about overall survival, but that's only a secondary endpoint, and it's actually listed as the fifth secondary endpoint. 

So, given that the last patient dosed in this trial started treatment in October 2016, I feel like we should have better and more robust data about the primary endpoints of the trial by now, but we don't. And when you press the companies for more information, they've been reluctant to give it.

Campbell: I suppose, in fairness, just to give Geron's argument and some of the arguments of bulls who support the company, they're arguing that you're not going to see the same level of spleen reduction because they're dealing with really, really tough-to-treat cases in their trial. These are patients who are resistant, intolerant, now, to Jakafi. They're theoretically in the later stages of their disease. So, that's one argument. 

The other argument would be, this is potentially a disease-modifying drug, so the question mark would be -- let's say the safety is clean. And let's say that we did see that 35% of patients have a reduction in spleen volume. We can work with that. It's not as good as the some 50% that we've seen for Celgene's Fedratinib trials or Jakafi, but we can work with that. If it reverses fibrosis, then potentially now you have a drug that can, I don't want to call it a functional cure, but it moves the needle significantly for these patients. And you're talking about life expectancy be measured in years for these patients. So, it will be very interesting to see how this data reads out, because if the data is good, I think it could be transformational. It could also be transformational for the company, because if the data is good and J&J continues it, Geron is going to get a pile of money from Johnson & Johnson.

Harjes: Absolutely. When it all comes down to it, this is a stock that, if all goes well, has tremendous upside. But it's so binary, because they don't have anything else that they're working on. It really just comes down to what happens with this one drug. If it fails, they only have about $100 million in cash and investments sitting on their balance sheet, which isn't quite enough to really make something of the company if this fails.

Wrapping up with what Isaac's question was really asking about, was whether this company is a threat to Celgene. He's already a shareholder. He's considering either buying more shares of Geron or looking at initiating a stake in Celgene. And he kind of put it as an either/ or decision, but I don't want to take the question quite like that, just because I don't think these stocks are comparable, because Imetelstat so clearly defines the future for Geron in a binary all-or-nothing way, whereas Celgene, we've previously described it as an ETF within a single stock just because they have so much going on and so many partnerships across so many indications that they are a much safer way to expose yourself to the biotech industry. But, all that being said, Todd, what are your thoughts on how Geron might potentially change the course of Celgene's future?

Campbell: The first thing I want to say is, I've said this before on the show, diversify, diversify, diversify. Keep that in the back of your mind. Diversify, diversify, diversify. What's really at stake here, or, I think what the listener might be asking is, Celgene made a big purchase earlier this year of Impact Bio to get its hands on a drug called Fedratinib, easy for me to say. That was a drug that was developed by Sanofi for myelofibrosis. Positive Phase II trials showing an improvement in symptom scores and a reduction in spleen volume. Celgene plant on filing for FDA approval of that drug by the middle of this year. So, potentially, that could get on the market by, let's say, early next year, Fedratinib could.

In trials, it did well in both the naive patients and also in Jakafi resistant and intolerant patients. So, to your point, you have Celgene, which is this Goliath -- I love that, the ETF of biotech. So many different hands from so many different companies and so many different drugs in its pipeline. This is just one of those drugs. Imetelstat, if this drug does well in its clinical trials, I don't know how this will shake out with use, you could end up with Jakafi being first line, Fedratinib being second like, and Imetelstat being third line. I don't know how that's going to shake out. We just don't know. So, diversify, diversify, diversify. I really would resist chasing the run-up in Geron's shares right now. I want to see this data. There will be plenty of time to make money. You won't catch, obviously, a massive move, but at least you'll have a lot less risk by waiting.

Harjes: Wise words, Todd. Wise words. Moving onto the second half of our show today, we wanted to talk a little bit about AbbVie. Last time we covered this biotech was after their earnings report. I believe the show date was February 7th, and this drug called Rova-T received just a quick little mention from us. And yet, some news about Rova-T was recently enough to send this $150 billion market cap company down 13% in a single day. That's a drop of $23 billion in market cap.

Campbell: I think investors were pricing AbbVie for perfection. I would call Rova-T one of the three horsemen that could drive future growth. It's part of their strategy to expand themselves or diversify themselves away from Humira, their top-selling autoimmune disease drug, into oncology. You may remember years ago, they bought Pharmacyclics to get their hands on Imbruvica. Rova-T was another drug that they acquired around the same time, with the idea of being able to use that drug to target solid tumor cancers. Expectations have been high for the drug -- as a matter of fact, so high that management was hopeful that a really strong showing in small cell lung cancer would allow it to file for accelerated approval after its Phase 2 trials. Data that came out, recently, however, as you alluded to, wasn't that great. And as a result, they're walking back that idea, and instead they're going to wait for Phase III data to come out.

Harjes: Yeah. So, when they announced the results on March 22nd for this Phase II trial, they said that the drug shrank tumors in 16% of patients, which is roughly in line with chemotherapy historical data. Meanwhile, people were hoping to see something more like a 40% response rate. And, on top of that, about one-third of patients developed fluid in their lungs, which is a pretty problematic side effect. On top of that, another potential negative for why this drug is not necessarily going to displace others in the indication is that it would require testing for its target, which is called DLL3. This is a protein that's found on the surface of about 80% of cancer cells in small cell lung cancer patients. So, when you're comparing this drug to something that's already on the market, like Keytruda or Opdivo, that don't require this additional testing, overall I just don't think there's a lot of optimism left for this drug. Meanwhile, it's not like they're discontinuing the drug. But, I think expectations for it were a lot higher than they are now.

Campbell: There's been some back and forth. It seems like every time they present data on it, everybody goes, "Oh, that's not very good." And sure enough, excitement starts to build and build and build over time for it. Things are made to be seen. I think there's still a big opportunity for this drug in small cell lung cancer, and that's because, if you look at, we talked about bars being set high or low, if you look at late-line small cell lung cancer, Kristine, very limited treatment options. As a matter of fact, if you look at the five-year survival rate, it drops off markedly as you advance in stages in this indication. As a matter of fact, you get to Stage IV small cell lung cancer, I think you're talking a 2-3% five-year survival rate. There's obviously a big need here for new treatment alternatives. 

Now, to your point, the data we've seen so far certainly doesn't mean this is going to revolutionize patient treatment. However, it may become an additional tool in the toolbox. I think it's wise for investors to temper their enthusiasm. Management had indicated previously that they think Rova-T can be a $4-5 billion a year drug in peak sales. I don't know where they're going to come up with that number. But I think there's still the possibility of this being a significant drug that could contribute revenue as soon as maybe 2021, depending on when those Phase III trials read out.

Harjes: Yeah. Even if you look at those numbers, $4-5 billion peak annual sales per year, even if you believe them and you think this news will cause the drug from having those potential numbers dropping down to zero because now they might scrap it, I don't see how that justifies a drop of $23 billion in market cap in a single day. Does it make their acquisition of Stemcentrx, which was a $5.8 billion acquisition, seem a little bit less prudent? Maybe. But now I'm looking at this stock, and it's a lot cheaper than it used to be, particularly when you consider that they have a dividend yield that's just under 4%, which for a biotech is fantastic.

Campbell: Yeah, and they had a patent decision late last year that gave them a little bit more breathing room on Humira's patent protection. We've talked in the past that Humira contributes 65% of sales. It's the best-selling drug in the world, about $18 billion a year in revenue from that one drug alone. And it looks like now it won't have to face off against biosimilars until about 2023. So, there's a few years here where AbbVie can advance other drugs to market that may be able to take some of the heat off of it when biosimilars start to eat away at Humira's market share. 

This Rova-T was just one of those three drugs that I spend a lot of time looking at. The other ones are Upadacitinib, which is easy for me to say, and Risankizumab -- God, I hate these words. Both of those drugs are theoretically multibillion dollar drugs for autoimmune disease that should have FDA fillings for approval submitted this year. So, there's a lot going on here that could still help boost AbbVie's sales and drive its long-term returns. Like you said, it's a lot cheaper now, too. I think 11X next year's forward earnings estimates, that's pretty reasonable.

Harjes: Yeah. I think the conclusion here is, if you were bullish on AbbVie, this could provide quite an attractive entry point. Todd, thank you so much as always for being here with me today! As usual, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. This show is produced by Austin Morgan. For Todd Campbell, I'm Kristine Harjes. Thanks for listening and Fool on!

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.