Geron Corporation (NASDAQ:GERN)is a small-cap biotech company that could be gearing up for a monstrous move northward within the next two months. Why? Geron is co-developing a potential megablockbuster blood cancer drug called imetelstat with pharma titan Johnson & Johnson (NYSE:JNJ).
Under the duo's 2014 licensing agreement, J&J has been conducting two midstage clinical trials to evaluate imetelstat in the life-threatening blood cancers known as advanced myelofibrosis, or MF (IMbark), and myelodysplastic syndromes, or MDS (IMerge). By the end of this September, though, this nearly four-year-long collaboration will come down to a simple yea or nay decision by J&J. Here are three solid reasons J&J appears intent on picking up imetelstat's option soon.
During Geron's second-quarter conference call last week, CEO Dr. John Scarlett noted that if the Joint Steering Committee (JSC) -- the panel responsible for overseeing imetelstat's ongoing clinical studies -- deemed the drug's emerging data unworthy of further development, then this event would be disclosed prior to J&J's forthcoming continuation decision. On its face, this statement seems somewhat like standard boilerplate, but a deeper dive reveals a profound fact.
First, J&J subsidiary Janssen -- the unit actually handling imetelstat's trials -- initiated IMbark's protocol-specified primary analysis in late April of this year. The point is that it doesn't take a full three months to run a data analysis for a single-arm trial with only 107 participants. Therefore, J&J almost certainly has a decent estimate of the drug's median overall survival projection in MF at this point, as well as a quantitative assessment of its safety profile in this indication. The JSC has nevertheless seen fit to permit this trial continue all the way to completion.
Perhaps even more telling is the fact is that the expanded portion of IMerge fully enrolled a whopping five months ago and this second trial has also never been halted by the JSC. As a reminder, J&J decided to enroll an additional 25 patients in IMerge that were naive to treatment with both lenalidomide and hypomethylating agents and that also lacked a genetic mutation known as del(5q).
Why is this timeline for IMerge's expanded patient population telling? To understand this issue in full, we need to discuss some critical details about the study's design.
Specifically, IMerge's primary endpoint is the percentage of patients that are red blood cell transfusion-independent for at least eight consecutive weeks during the study period. As the last clinical update showed that the median time to transfusion-independence in the overall study population was only eight weeks, we can therefore assume, with a fair degree of confidence, that J&J now has a significant chunk of these data analyzed as well. In short, imetelstat's clinical profile in this expanded patient population should be a known quantity -- at least in the broad sense -- at this point.
Of course, J&J might be holding out to see how many patients in IMerge's expanded patient population progress to 24 weeks of transfusion-independence before making a final decision on this collaboration. But the fact remains that the JSC hasn't halted this second trial for futility or safety reasons, either.
The big reveal here is that imetelstat's clinical profile has apparently been convincing enough to warrant unimpeded development by the JSC. That's not a surefire win by any means, but we do know that imetelstat has passed through several key clinical milestones without being nixed for futility.
Capital allocation hints
A deeper dive into Geron's balance sheet also reveals some interesting and perhaps telling trends. If Geron was expecting J&J to walk away from this collaboration within the next two months, I think it's reasonable to assume that management would prepare for this unfortunate event by moving all of the company's funds into highly liquid assets such as cash or current marketable securities (equities that can be sold immediately or within a reasonable time frame). That way, the company could make this painful adjustment as fast as possible.
Nevertheless, Geron has continued to stash cash away in long-term vehicles marked on the balance sheet as non-current marketable securities. While the specifics aren't entirely clear, the point is that non-current marketable securities are generally required to be held for no less than a year's time and sometimes up to a minimum of two years. Interestingly, Geron has plowed roughly $6 million into non-current marketable securities for a grand total of $20.2 million since the start of this year.
Although $20 million might not sound like a lot of money for a publicly traded biotech, the fact of that matter is that this sum is a sizable portion of the company's total current assets right now. Moreover, Geron's share price will almost certainly nose-dive if J&J hands back imetelstat's rights, which would obviously hurt the company's ability to raise capital going forward.
Geron's management is therefore taking a rather big risk with this bold capital allocation strategy. If J&J stays the course, this long-term capital allocation strategy will probably never be called into question. But if things go south, Geron could end up scrambling to find money wherever it can to remain a going concern. Long-term investing vehicles, in that case, would likely prove to be a costly mistake. And that's why you almost never see non-current marketable securities listed on a clinical-stage biotech's balance sheet.
A dead giveaway?
One of the worst mistakes biotechs with limited revenue streams can make is not raising enough capital while they still have the chance to do so. Time and again, I've watched biotech companies roll out small to medium-sized secondary offerings or shelf registrations in order to boost the confidence of their shareholder base in a newly approved product or a promising clinical candidate. Then things fall apart and the company is forced to raise money at depressed share price levels, putting even more pressure on its stock.
Geron may -- or may not -- be committing this cardinal sign right now. Since the start of the year, Geron has been steadily tapping the public markets for capital to strengthen its balance sheet. At the end of the second quarter, for instance, the biotech exited the three-month period with $181.4 million in cash and marketable securities, thanks to net cash proceeds of approximately $87 million from the sales of common stock. That amount is respectable, mind you, but it's far and away not enough to carry the company to the finish line if J&J bolts.
As such, I was fully expecting the company to continue selling shares all the way until J&J handed down its decision. Make hay while the sun is shining, right? But no. Geron's management announced in the last quarterly conference call that "we do not expect to raise additional capital ahead of Janssen's decision." Deciding to suspend further capital raises until J&J's decision is either a brilliant move designed to spare shareholders from more dilution, or a tragic mistake that would compound the unforced error of stashing cash away in long-term-oriented investing vehicles.
Given the hefty consequences of such a move, my take is that Geron's management must be exceptionally optimistic about imetelstat's chances of getting picked up by one of the world's best drug developers.
Trying to read the tea leaves on imetelstat's fate may not be a great idea. There are numerous moving parts that outsiders are not privy to in terms of both imetelstat's clinical development and Geron's capital allocation strategy that could lead to some serious errors after all.
That being said, I happen to think that a coherent picture is starting to emerge. Janssen seems to have figured out how to maximize imetelstat's risk-to-reward ratio in advanced MF and MDS, despite some early missteps in both cases. The drug has thus taken far longer to develop than many anticipated, but the time appears to be well-spent. Geron, in turn, appears to be preparing for a positive continuation decision based on both its recent capital allocation strategy and decision to turn off its common stock sales agreement during the very last leg of this rather long-winded marathon.
The caveat here is that I'm assuming that all actors in this game are behaving rationally -- and again, that may not be the case. Janssen may not mind wasting time and money on a futile drug. Geron may be making financial decisions without any particular goal in mind. Stranger things have happened in biotech. So I'm not willing to rule these alternative possibilities out altogether.
Being the eternal optimist, however, I suspect that J&J and Geron are both attempting to maximize their gains and minimize their losses here. Under that model, I believe the only rational conclusion is that the odds now favor a positive outcome this late in the game. That's why I've held onto to my shares in Geron and continue to add more leading up to this potentially game-changing moment in the company's history.