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Geron Corporation: A Sober Assessment

By George Budwell – Sep 11, 2018 at 4:00AM

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Geron may be reaching a top. Here's why.

On Dec. 4, 2017, I authored the first of what would turn out to be many articles highlighting Geron Corporation's (GERN -2.77%) rather compelling risk-to-reward ratio for potential investors. At the time, the stock was trading under $1.90 a share. 

Not long afterwards, I would go on to add Geron to my personal biotech portfolio. The core reason was that this stock appeared to me to be grossly undervalued at the time -- that is, relative to imetelstat's healthy commercial prospects in the high-value blood cancer space. The drug's clinical program, after all, was being handled by none other than Johnson & Johnson (JNJ 0.99%) and the blood cancer market is among the fastest growing in all of healthcare.

A boy in a gray shirt and wearing glasses appearing to be shocked and excited while looking at a tablet.

Image source: Getty Images.

And as luck would have it, this pick turned out to be a big winner for me. Since my first bullish article on Geron nearly 10 months ago, the stock has appreciated by a handsome 220% as I write this. But with J&J set to update investors on its vast pharmaceutical business in less than two days, I think it's high time for another critical assessment, one that's decidedly more sober than the ones being floated on social media at the moment.

Is Geron's stock still a buy?

Like most of my fellow shareholders, I found J&J's recent job posting naming imetelstat in the description to be a reassuring sign that a positive continuation decision is forthcoming. However, I do not agree with some of the more optimistic souls out there that a positive continuation decision will be a major market-moving event for Geron. Here's why.

Imetelstat -- contrary to a growing belief among some bulls on social media -- is probably more than two full years away from being approved. The first leg of the IMerge trial evaluating imetelstat in patients with the devastating bone marrow disorder myelodysplastic syndromes was never designed to permit a regulatory filing. And the same can be said for the drug's other trial for advanced myelofibrosis known as IMbark.

The point is that the most likely outcome is J&J advancing imetelstat into one or more registration worthy trials, upon picking up the drug's option. And that doesn't bode well for Geron's near-term valuation. 

As I've mentioned before, imetelstat's net present valuation for its first two lead indications combined is somewhere around $1.5 billion. Geron's market cap is now north of $1.1 billion. Geron's market cap, therefore, may have trouble topping the $1.5 billion mark without being acquired by its partner. J&J, after all, will retain the lion's share of imetelstat's revenue, if approved.

So, what about a buyout? I personally don't think a buyout is in the cards anytime soon. Because additional late-stage studies will probably be necessary, Geron would have to be willing to sell out at a marked discount, relative to the drug's commercial potential, to get a deal done at this point. With an aging CEO at the helm, Geron might choose to go this path, but a deal won't be shareholder-friendly at this stage of development.   

What's next?

As everyone knows, J&J must hand down a decision on imetelstat's clinical program before Sept. 30. Although I do think the chances of a negative outcome are dwindling by the day, I also happen to think that this stock is nearing a top.

To be frank, this recent run-up is almost certainly being driven by speculators looking for a quick buck. As a direct consequence, this stock could easily slip back to the $5 level if J&J announces nothing more than a continuation of imetelstat's clinical development.  

That's the harsh reality of clinical-stage biotech stocks in this day and age of instant gratification. I'd caution against buying at these levels, unless you're willing to hold this stock for an extended period of time. 

George Budwell owns shares of Geron and Johnson & Johnson. The Motley Fool owns shares of Johnson & Johnson and has the following options: short October 2018 $135 calls on Johnson & Johnson. The Motley Fool has a disclosure policy.

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