A much-anticipated decision from its long-term collaboration partner, Johnson & Johnson (NYSE:JNJ), didn't go the way Geron Corp. (NASDAQ:GERN) was hoping. Instead of advancing Geron's imetelstat into phase 3 trials, J&J has decided to walk away from the drug, returning all of its rights to the myelofibrosis and myelodysplastic syndromes (MDS) treatment back to Geron. The news sent Geron's shares reeling 62% on Thursday, because it raises important questions about the company's future. Here's what investors should know about J&J's decision and Geron's options from here. 

A need for new treatment options

There's a significant need for new treatment options for myelofibrosis and MDS. Both diseases are life-threatening with limited treatment options and each subjects patients to frequent blood cell transfusions that can cause additional health problems.

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A bone marrow disorder that causes blood cells to form abnormally, myelofibrosis results in extensive bone marrow scarring that causes severe anemia, an enlarged spleen, and, sometimes, acute myeloid leukemia (AML). MDS patients can also suffer from anemia because of abnormal blood cell formation, and about one-third of MDS patients develop AML.

In myelofibrosis, patients often receive frequent blood transfusions for anemia and some patients can receive stem cell transplant. Incyte's Jakafi, which inhibits the JAK gene pathway that contributes to the disease, may be used too. However, blood transfusions are costly and burdensome, few people qualify and respond to stem cell transplant, and 75% of Jakafi patients fail to respond to it or become resistant to it within five years. 

MDS patients also receive blood transfusions, and if they're healthy enough, they may qualify for stem cell transplant. Low-risk patients, who account for about 70% of MDS cases, may be treated with an erythropoiesis-stimulating agent like EPO for anemia, and patients with the del(5q) mutation can be given Celgene's Revlimid. Patients may receive chemotherapy too. Unfortunately, the benefits associated with EPO disappear over time, and only about 15% of MDS patients have the del(5q) mutation.

What was at stake for Geron

In 2014, J&J signed on to codevelop imetelstat, an inhibitor of telomerase, an enzyme that helps cells multiply and that can contribute to tumor growth.

In exchange for global codevelopment rights, J&J paid Geron Corp. $35 million in up-front cash and it agreed to split phase 1 and phase 2 development costs. J&J also secured an option to continue development of imetelstat or return its rights to Geron following its review of phase 2 trial data.

If J&J had decided to go forward with imetelstat's phase 3 development, it would've been big news for Geron. If we assume that Geron would've executed its U.S. co-commercialization rights, then J&J would've paid Geron a $65 million milestone fee and 80% of imetelstat's ongoing development costs. Additionally, J&J could have paid Geron up to $820 million in future development, regulatory, and sales-based milestones, plus royalties on any eventual sales in a range between the high teens to low 20%'s.

Unfortunately, J&J's decision to walk away leaves Geron empty-handed. 

What now?

J&J didn't provide much insight into its specific thinking. It merely said its decision was based on a "strategic portfolio evaluation and prioritization of assets." 

Geron's conference call to discuss its next steps didn't provide much color, either. Because abstracts from imetelstat's trials have been submitted for presentation at the American Society of Hematology (ASH) conference in December, most of the data that J&J relied upon to make its decision is under embargo.

Although investors don't have much trial data to parse, Geron did say that it plans to take imetelstat into phase 3 for MDS next year. The exact timing of this trial isn't clear because it could take 12 months for J&J to transfer over all of its work to Geron, but management is targeting a start in mid-2019.

Imetelstat's fate in myelofibrosis is murkier. Jakafi's approval was based on a reduction in spleen volume, and according to Geron, the primary analysis from the high-dose arm of its study showed a 10% spleen volume response rate and a symptom response rate of 32% at the 24-week mark in post-Jakafi patients. Data wasn't available for overall survival.

Those spleen and symptom response rates were shy of the trial's primary endpoints, which were 35% and 50%, respectively. Based on those results, Geron doesn't plan to pursue spleen response as a primary endpoint if it decides to conduct a phase 3 study someday. Instead, its plan would be to pursue symptom response rate and, potentially, overall survival as primary endpoints, but that depends on data from an extension trial, and that data won't be available for a while.

Is it a buy?

To pay for imetelstat's future development, Geron could replace J&J with a new collaboration partner, but it doesn't appear that's likely to happen anytime soon. Management suggested on its conference call that a deal might not be likely until phase 3 is underway, and even then, any deal it signs would likely be for ex-U.S. rights, rather than global rights. 

If it doesn't sign on a new partner, then Geron will face a significant increase to its expenses. It doesn't face a cash crunch yet, but its $183 million cash stockpile isn't likely to be enough. Management says it has enough money to get its phase 3 trial up and running, but it didn't offer up any cash burn guidance beyond that.

Overall, there are simply too many question marks about Geron's future to consider it a bargain-bin buy. Instead, I think investors should shift their focus to other investment options with less risk, at least until the full data is unveiled at ASH in December.