Investing in biotech can be volatile during "normal" market conditions. Today's COVID-19 impacted economy amplifies that volatility and in the process, it's making good companies substantially cheaper than a few months ago. Here two biotechs, one large and one small, battle it out to win investors' hearts as they try to develop drugs for hematologic diseases and more.
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First FDA approval and another on deck
The stock of Acceleron Pharma (XLRN) gained 20% last year only to spike another 55% since the start of 2020. What's driving the stock appreciation? Acceleron and its partner Bristol Myers Squibb (BMY 0.47%) received Food and Drug Administration (FDA) approval last November for Reblozyl to treat anemia in patients with the rare disease beta thalassemia who require regular red blood cell transfusions.
The two companies have also filed for FDA approval of Reblozyl as a treatment for patients with very low-to-intermediate risk myelodysplastic syndromes (MDS) with ring sideroblasts who require regular red blood cell transfusions. A disease of the bone marrow, MDS causes the body to create poorly formed or non-functioning red blood cells. The FDA's Prescription Drug User Fee Act (PDUFA) decision deadline is quickly approaching on April 4. In December, the FDA informed Acceleron that a previously scheduled advisory meeting to discuss the drug would not be necessary. Stay tuned to see if the FDA weighs in on this or pushes out the deadline in light of the current coronavirus pandemic.
Positive clinical trial results
Acceleron's stock bolted higher in January following positive results from a phase 2 clinical trial for its second drug sotatercept as a treatment for pulmonary arterial hypertension (PAH). Think of PAH as high blood pressure in the arteries found in the lungs. The drug met the primary and secondary endpoints in the study and demonstrated synergistic benefit in those patients taking other PAH drugs.
According to Acceleron, more than 80,000 people across the U.S. and Europe live with PAH, and $4.5 billion was spent on drugs to treat it in 2018. That market continues to grow. An independent market research firm projected global sales of drugs for PAH to hit $9.3 billion in 2026.
On March 9, Acceleron reported that ACE-083, a third drug in the pipeline, failed to demonstrate benefit over placebo in patients with Charcot-Marie-Tooth disease, an inherited condition that attacks the nerves resulting in pain and a loss of muscle function. The company pulled the plug on further development, freeing up resources for Reblozyl and sotatercept.
Acceleron had $453.8 million in cash at the end of 2019. While it posted a net loss of $124.9 million, it still has the capital to operate for several years. Importantly, the 10-K states that the current cash "will be sufficient to fund our projected operating requirements until such time as we expect to receive significant royalty revenue from Reblozyl sales."
Swinging for the fences
Geron (GERN -1.88%) could easily be a 10-bagger for investors who can stomach the risks. The company's singular focus is the development of imetelstat, a novel drug for malignancies stemming from the bone marrow. Geron aims to complete enrollment in a pivotal phase 3 clinical trial by the end of 2020 with results from the trial pegged for release in 2022. If successful, Geron's stock will be worth multiples of its current price.
The prior clinical data with imetelstat provides a reasonable foundation for pursuing the phase 3 trial in lower-risk MDS. In parallel, Geron met with the FDA in December to discuss clinical trial designs for testing imetelstat in relapsed or refractory myelofibrosis patients who have already received a janus kinase (JAK) inhibitor, like Jakafi from Incyte. Myelofibrosis, a form of leukemia, scars the bone marrow resulting in anemia, reduced platelets, and enlargement of the spleen. Geron claims roughly 13,000 people in the U.S. live with myelofibrosis and there are 3,000 new cases annually.
Potential headwinds
The science may be promising, but biotech investors need to evaluate the whole company to make an informed investment decision. At Dec. 31, Geron had $159.2 million in cash. The company spent $68.5 million in 2019 and expects to spend between $70 million and $75 million in 2020. This basically gives Geron two years of operating capital.
Enrollment in the phase 3 clinical trial will likely be delayed due to COVID-19. Even big pharma companies like Eli Lilly announced pausing enrollment of on-going trials and delaying the start of new studies due to the pandemic.
Two things should result. Geron probably won't spend as much money this year. Clinical sites get paid based on patient visits and testing activities. If those aren't happening, then Geron's trial expenses will be lower. However, the expenses don't go away. They're simply pushed into the future when the trial is back up and running.
Second, Geron will need to raise additional capital. A rule of thumb for biotechs is to keep at least one year of cash in the bank. Going below that can lead to more onerous terms when it comes time to raise money.
Geron's stock price hovers just above $1. That could drift below in the coming months if the trial is delayed. Further, issuing new equity at a discount in order to fund the operations through the end of the phase 3 trial in 2022 could drop the stock by 10% to 20% easily if not more.
If the stock drops below $1 and stays there for 30 days, Nasdaq will send it a delisting notice. Don't panic. The company has 180 days to rectify it and can petition for another 180 days if it meets all other listing requirements except the stock price. To regain compliance, it will need to close above $1 for 10 consecutive days. In short, the company will have a year before Nasdaq boots it.
If the stock stays under the $1 mark, Geron may be forced to undertake a reverse stock split to get the price above $1 and regain compliance. This is like exchanging ten $1 bills for one $10 bill. In theory, the value remains the same only there are fewer shares and each is worth more. Historically, reverse stock splits trade down.
The outcome
Acceleron wins this better buy battle. Having an approved drug and capital to operate until meaningful royalties flow in from Bristol Myers Squibb gives me comfort to buy Acceleron stock. Also, the potential upside of another FDA approval for Reblozyl and an exciting new PAH drug with sotatercept makes Acceleron more attractive.
While Geron's imetelstat could be successful, and the stock trades just above cash value, I believe the risks outweigh the benefit. Geron could surprise investors by entering a strategic alliance or getting acquired. However, if it continues alone, I think the road to glory, though achievable, will be tough.
