Investors have their doubts about Geron Corp.'s (NASDAQ:GERN) lead drug candidate, imetelstat, but that didn't keep the company's shares from soaring earlier this year following news that Johnson & Johnson (NYSE:JNJ) will decide whether to continue co-developing imetelstat soon. A decision from J&J is expected before the end of the Q3 2018, and regardless of what the Goliath biopharma decides to do, it could have massive implications for investors. Should you be buying Geron Corp.'s stock now?

A bit of background

Johnson & Johnson is teamed up with Geron Corp. on imetelstat's use in hematologic myeloid malignancies, including myelofibrosis, a life-threatening disease affecting tens of thousands of patients in the U.S. alone.

A man in a suit biting his fingernail.


J&J paid Geron Corp. $35 million upfront and it committed to equally share in imetelstat's development costs when it licensed it; however, J&J's license includes an option to walk away from imetelstat if it's unhappy with the drug's performance in phase 2 trials.

An approval in myelofibrosis could generate hundreds of millions in sales for the companies because there's a big unmet need for new treatment alternatives; however, early-stage imetelstat trial results have called into question its efficacy.

J&J previously ditched a low-dose arm of imetelstat in one study after an interim look at data disappointed. Furthermore, data reported so far on imetelstat suggests it may not reduce spleen volume by as much as Jakafi, the standard of care currently used in these patients. Because Jakafi's approval was based on a reduction in spleen volume, some investors argue that imetelstat's inability to best it could derail it, unless of course, trials show that imetelstat extends overall survival. 

Steps in the right direction

Despite those concerns, J&J hasn't given up on imetelstat yet, and that could suggest that the data it's seen so far is good enough for it to continue working with Geron Corp. on it.

That thinking was supported by news earlier this year that after reviewing study data in March, J&J decided to enroll an extension study that will allow long-term treatment and follow-up of imetelstat patients.

Investors were also encouraged by imetelstat data earlier this year from an ongoing trial in patients with low- to intermediate-risk myelodysplastic syndromes who've failed to respond to prior treatment with an erythropoiesis-stimulating agent. 

Specifically, that data showed that 54% of patients achieved blood transfusion independence lasting at least 8 weeks, and 31% achieved 24 weeks of transfusion independence. Last August, J&J decided to enroll 20 more patients who haven't been treated with Revlimid or a hypomethylating agent (HMA) and who don't have a deletion 5q chromosomal abnormality in this study, and the 20th patient was enrolled in that study cohort in February. It's certainly possible that J&J's willingness to expand the study shows it hopes that, at a minimum, it can develop imetelstat for us in at least some patients.

Optimism has also been boosted recently by J&J's decision to include listing imetelstat in its investor presentations as a top drug in its pipeline, a move the company might not have made if it was leaning against going forward with Geron Corp. on this drug.

What's at stake

If J&J continues working with it on imetelstat, then Geron Corp. can exercise co-development and commercialization rights that allow it to make more money on the drug if it's ever approved by regulators.

If Geron Corp. exercises these rights, it will be on the hook for 20% of any additional development costs, but it will receive a $65 million milestone payment, plus up to $820 million in development, regulatory, and sales-based milestones. Additionally, it can collect royalties on any eventual sales that are in the high teens to low 20% range, depending on sales, if imetelstat wins approval.

If Geron Corp. decides against exercising these rights, then it will pocket a $135 million milestone, plus it can receive up to $765 million in development, regulatory, and sales milestones. In this scenario, its royalties on any eventual sales would be in the low double-digit to mid-double-digit percentages.

Alternatively, if J&J decides against continuing to develop imetelstat, then Geron Corp. gets left empty-handed. Yes, it will regain 100% of the rights to imetelstat, but it's unlikely that it would easily find another development partner if J&J balks. If it's forced to go it alone on imetelstat, it would be an expensive proposition that could erase its $103 million in cash pretty quickly.

Impatiently awaiting the news

The binary nature of J&J's decision on Geron Corp.'s future makes Geron Corp. a very risky stock. 

Short-sellers have been happy to bet against the company's success, but a surging share price earlier this year did lead to many of them covering their positions. Recently, they've begun shorting the company again, though, which suggests that there's still plenty of pessimism associated with the upcoming decision.

GERN Short Interest Chart

GERN Short Interest data by YCharts.

If short-sellers are proven wrong, and J&J goes forward with imetelstat, it would undeniably be a big catalyst for Geron Corp. Initially, imetelstat would probably get an OK for use in patients that no longer respond to Jakafi, and that's a pretty big market. According to Geron Corp., the 5-year discontinuation rate for Jakafi is 75%. Given that Jakafi sales were $1.54 billion in 2017, I don't think it's a stretch to think that an imetelstat success puts it in a position to capture peak sales in the hundreds of millions annually, or more. 

Nevertheless, the uncertainty around J&J's decision makes me think this stock is simply too risky to recommend to anyone. Unquestionably, this is an interesting story worth watching, but I'll be doing it from the sidelines.

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.