How Geron's Horrible Year Is a Great Reminder to Investors

Disappointing news that Johnson & Johnson (JNJ -0.69%) decided to walk away from a collaboration with Geron Corp. (GERN 2.29%) on the latter's only drug, imetelstat, has sent Geron's shares reeling and cast doubt on its future.

In this clip from Industry Focus: Healthcare, host Shannon Jones is joined by Motley Fool contributor Todd Campbell to dissect what happened to help investors avoid companies with similar risks.

A full transcript follows the video.

This video was recorded on Oct. 31, 2018.

Shannon Jones: I want to start off with the first one. I like to call this one the zombie stock. That company is called Geron Corporation, ticker GERN. Todd, this company has been around for almost 30 years, believe it or not. It's really been hoping to drag its lifeless zombie body across the finish line, getting from small biotech to commercially profitable biotech, and it has really been limping its way to that.

I was looking today at the stock. It had its heyday back in the early 2000s. At one point, the stock was actually trading over $60 a share. Today, that share price is $1.53, believe it or not. Todd, I'm starting to think that maybe this might be the end of the road for Geron. What do you think?

Todd Campbell: It does not look good. This is a super scary stock. It has to be one of the most frustrating stocks for investors who had a lot of high hopes that Imetelstat, their drug for myelofibrosis, myelodysplastic syndrome, would pan out. Unfortunately, they were developing that drug with Johnson & Johnson. Johnson & Johnson had an opt-out clause in their license agreement that would allow them to give their rights back to Geron if they didn't like what they saw in the Phase II data. And sure enough, that's what happened. J&J crunched the numbers, looked at it, looked at the developing competitive landscape in the indications and decided, "Yep, we're not willing to hand over all of these hundreds of millions of dollars in milestones, pay for all of these development costs, to be able to get this Imetelstat across the finish line."

Now, that leaves Geron in a really tight spot. They need to figure out, "We just lost our licensing partner. We don't have a ton of cash on the books. And now, we're going to have to conduct these expensive Phase III trials on our own. How the heck are we going to do that?" That's obviously the big reason why this has been one of the worst stock performers this year. And sadly, Shannon, I don't think there's a lot of hope left for a reawakening of this stock, at least until 2020, when maybe, maybe, if they can find the cash somewhere to keep going, they might have some additional data they can share with us that gets investors excited.

Jones: What's so disappointing about this stock is, there was tremendous optimism heading into many of these trials. In myelofibrosis that you mentioned, the early data really seemed to suggest that the drug could actually reverse the effects of myelofibrosis, which is basically a type of cancer that turns the bone marrow into scar tissue. There was a lot of optimism with that. And it certainly would have given Geron's Imetelstat drug a leg up commercially when you compare it to Incyte's Jakafi. Jakafi does not do that, and JAK inhibitors don't do that. So, this could have been a really interesting play, could have easily been a frontrunner in that space. Even on the other indication, MDS, myelodysplastic syndrome, a cancer-like disease of the bone marrow, results were also encouraging there, initially. Patients treated with the drug at one point actually became blood transfusion-free. They didn't have to continuously go for blood transfusions. But over time, you actually started to see these patients relapse. That meant basically that the treatment didn't have that durable effect that they were hoping there. On both fronts, very disappointing. We know that for MDS, they are going to proceed with Phase III. A lot of hope lost, though, I think, for myelofibrosis. A lot of big question marks there. But they were a lot of red flags along the way, too, Todd.

Campbell: Yeah. Creaky doors, dark hallways, voices telling you maybe you should leave the building. [laughs] "Why are you going into this dark room?" If we can take away any lessons that we can apply to our future investments in biotech, it would be to always be a little bit cautious when you've got, for lack of a better term, a one trick pony, one drug in development. 90% of clinical trials fail. The odds are set against you.

I would also say that another one of the warning signs to learn from was the fact that J&J had to discard, early on, a low dose version of Imetelstat or one of the low-dose cohorts because of a lack of efficacy. Maybe that was hinting that there could be some problems beyond that.

And the last warning side might have been the fact that J&J really didn't risk a lot to license this drug. They only paid $35 million upfront. It was all back end, loaded with milestones after they would have had agreed to take this thing into Phase III. So, maybe avoid small, upfront, back end loaded deals.

Jones: Very important lessons there. Even, there was some writing on the wall when you saw the company raise about $84 million in the second quarter of this year. A lot of investors were already beginning to suspect that J&J wasn't going to move forward because Geron was actually set to receive $65 million in a milestone payment. Of course, all of that was dependent on whether or not they would proceed. So, I think the writing was on the wall when you saw the company do that financing round earlier this year.

I think the take-home message, it's certainly troubling, frightening for Geron investors, but even more so for the patients. Todd, as you know, Jakafi is the lone winner out there, but it doesn't work for everyone, and it doesn't work all that well for very long.

Campbell: 75% discontinuation rate for Jakafi within five years. A major and important need for new drug therapies. Geron's derailing of its drug is bad news and disappointing for patients who are eager to find new options.

Jones: Exactly. I think the company ended with about $183 million in cash on its books. It's obviously going to need to either find a new partner and get some money or continue to try to raise funds. I think it's going to be really hard based on where they're at and what the data is showing currently. Certainly something to keep your eye on, if Geron can continue for maybe another 30 years. I don't think so, but certainly something to watch.