Geron (GERN 1.91%) and Incyte (INCY +0.04%) live at opposite ends of the biotech spectrum. One company has no approved drug despite its best efforts. The other owns a drug garnering multiple approvals from the Food and Drug Administration (FDA). One biotech earns de minimis revenue and scrapes by through continually raising money to fund operations. The other boasts sales of more than $1.6 billion. Biotech investors can learn lessons from the divergent trajectories these companies endured.
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Geron has yet to deliver an approved drug despite nearly 30 years focused on an area of biology called telomeres and telomerase. Telomeres are protective caps on DNA, and each time a cell divides, the telomeres get shorter. Eventually, the telomeres become critically short, preventing cell division and causing cell death. Telomerase, a naturally occurring enzyme, prevents telomeres from shrinking, thus allowing the cells to continue dividing.
Nearly two decades after its founding, three of Geron's academic collaborators won the Nobel Prize in 2009 for research on telomerase and its involvement in cancer, which validated the company's efforts. In 90% of biopsies across a broad range of cancers, telomerase levels were elevated. This makes sense since cancer cells are known to rapidly divide. Inhibiting telomerase could then be an attractive intervention.
Last year, Geron embarked on a three-year pivotal trial for its lead telomerase inhibitor called imetelstat. Geron's market cap currently sits at $270 million, even with $159 million in cash on the balance sheet.
Meanwhile, Incyte's valuation swelled to $20 billion but lost $2 billion in value overnight last week. The success stems from Jakafi, an approved drug for treating intermediate and high-risk myelofibrosis, polycythemia vera, and, most recently, steroid-refractory graft-versus-host disease (GVHD). Myelofibrosis and polycythemia vera are rare blood cancers. GVHD occurs when a bone marrow transplant goes awry and the donated bone marrow or stem cells begin attacking the body. Incyte expects revenue from Jakafi to exceed $1.65 billion in 2019. However, reducing the dependence on Jakafi remains a key concern for investors.
Being big does not mean being infallible
On the heels of Jakafi's May 2019 approval to treat steroid-refractory GVHD -- itacitinib -- a potentially more selective, next-generation version of Jakafi, seemed like a solid candidate for other types of GVHD. Incyte unveiled on Jan. 2 that itacitinib failed to meet the primary endpoint in the phase 3 clinical trial. Patients with acute GVHD receiving itacitinib fared no better than those receiving placebo.
Investors quickly wiped out approximately $2 billion or 10% of the market cap in after-hours trading following the news. Little hope remains for the drug in GVHD, although the company plans to continue with a pivotal trial in chronic GVHD.
Investors have long criticized Incyte for its pipeline. Itacitinib, touted as a potential blockbuster, served as much-needed diversification to the company's dependence on Jakafi. Now, it looks more like Incyte's former cancer drug called epacadostat. A previous blockbuster-in-the-making, the epacadostat program flopped in early 2018. Investors fled the stock, lopping off approximately 25% of the company's valuation.
Geron faces headwinds
Janssen Biotech, a subsidiary of Johnson & Johnson (JNJ 0.29%), pulled the plug at the end of 2018 on a potential $935 million partnership for Geron's lead drug imetelstat. Geron's stock cratered nearly 70% on the news.
When big pharma returns a drug, it's generally not a good thing. It demonstrates the pharma company saw greater value in other drug candidates. However, in some instances, it can work out for the smaller biotech. For instance, Reata Pharmaceuticals successfully regained rights to several drugs from AbbVie just before positive clinical trial data last year. Reata's stock more than doubled from $80 to north of $200 since then. Geron's stock has suffered this past year and needs positive results before it can make yet another comeback. In the long run, full ownership of the imetelstat could be valuable too.
Putting aside the science, Geron faces timing and funding issues. It began a pivotal phase 3 trial with imetelstat in the blood cancer myelodysplastic syndrome (MDS) last year. Data will not be available until mid-2022 -- a three-year undertaking.
Geron also plans to test imetelstat in relapsed or refractory myelofibrosis patients who have received prior treatment with Incyte's Jakafi. On Dec. 18, Geron announced that it met with the FDA to discuss the pivotal trial design. Two comments in the press release stood out.
First, Geron said it "plans to submit several Phase 3 trial design proposals in relapsed/refractory MF and to have further discussions with the FDA regarding potential regulatory approval pathways." I interpret this as no clear buy-in from the FDA as to what patient population needs to be treated and which outcomes to measure. Alternatively, Geron may be exploring a smaller trial that it can more readily afford. This could involve limiting the trial to one or more subgroups of the patient population.
Second, Geron is giving itself wiggle room to not run the myelofibrosis trial at all. The press release's last sentence reads:
"Subsequent to these additional discussions with the FDA, and after considering the timing and resources required, as well as other clinical development opportunities for imetelstat, Geron will make a decision regarding potential late-stage development of imetelstat in relapsed/refractory MF."
That's not much conviction by management and the Board. But, let's not be too critical. It may, actually, be prudent.
Here's why: In the last earnings report, management noted that operating expenses for 2019 will be $80 million to $85 million but include one time charges of $20 million to $25 million due to reacquiring imetelstat. Let's assume operating expenses continue at $65 million annually. Geron expects top-line results from the pivotal trial in MDS in mid-2022. Geron will need to spend roughly $160 million to get to those pivotal results. At Sept. 30, 2019, the company had $159.3 million. Let's not forget this does not include the contemplated phase 3 trial in myelofibrosis.
Do you see the problem? Biotech companies generally try to avoid dipping below one year of cash in the bank. Below that mark, investors, like hedge funds, require more onerous terms in order to provide financing.
Geron has an "At-The-Market" (ATM) offering in place that allows it to raise up to $100 million on a continuous basis by selling stock into the market. It raised $38.4 million between 2018 and 2019 using this method. It also raised from $47.7 million between 2015 and 2018 using a separate ATM.
What does it all mean? Geron will continue to raise money, either through the ATM or more traditional financing methods. Both can weigh on the stock, preventing it from appreciating.
What do analysts say?
Five research analysts gave Geron a buy rating with price targets ranging from $3 to $5. That's roughly a two to four-fold return from its current $1.30 price. However, take price targets with caution. Investment banks jockey for position to lead or join a syndicate to raise capital for companies. Positive research can help win over the management and boards of directors of these capital-intensive biotech companies. And we know Geron needs more money.
Analysts had mixed reactions to Incyte's trial failure. Cantor Fitzgerald and Mizuho lowered price targets to $65 and $79, respectively. Goldman Sachs maintained its buy rating but lowered its price target from $122 to $107. Likewise, Oppenheimer kept its outperform rating and $96 target.
Geron has a greater risk-reward profile that can propel the stock in either direction. Unfortunately, I believe the time and money required will keep Geron's stock depressed unless another partner emerges. Maybe Incyte will step up to partner with Geron on imetelstat for patients that already received Jakafi. That would allow both drugs to leverage Incyte's expertise in the myelofibrosis market.
While Incyte faces its own pipeline challenges, its billions in revenue cover up these blemishes. It can weather the current failed phase 3 trial and focus on its additional pipeline candidates, making it the winner of this battle. Risk tolerant investors can capitalize on the recent stock price drop to acquire shares at a discount.
