Once left for dead after reshaping its product portfolio and abandoning its pursuit of stem cell therapeutics, Geron (GERN +3.64%) has returned with a vengeance in recent months and is up nearly 200% this year.
That's quite a pop for a company with only one compound in the pipeline. What's behind the stock's climb back to relevance? Is it sustainable for investors? Here are two reasons for Geron's rebound and what to look forward to in coming quarters.
Leaving stem cells behind
Geron successfully completed the sale of its stem cell assets at the beginning of October to BioTime (NYSEMKT: BTX) and its subsidiary Asterias Biotherapeutics. The company was granted 6.5 million shares of Asterias Series A common stock, which it will distribute to its own shareholders on a pro-rata basis. Asterias will then grant shareholders warrants of BioTime on a pro-rata basis. It may sound confusing, but that's how it has to work based on the current business structure of the three companies.
Should investors be excited to receive Series A common stock? Probably not. After all, there's a reason why Geron discontinued its programs and the market cheered the divestment. Take a look at the company's advice:
Although Asterias plans to arrange for the trading of the Asterias Series A common stock on the OTC Bulletin Board upon the completion of the Series A Distribution, there is no existing public market for the Asterias Series A common stock, nor may one ever develop. Geron stockholders are cautioned that any value that Geron stockholders may ascribe to the Asterias Series A common stock or the related BioTime Warrants is highly speculative.
Why is the divestment good news in the first place? Stem cells may hold a lot of promise for transforming medicine, but they are still a risky, unproven, and speculative investment for companies and shareholders. Larger pharmaceutical companies are mostly steering clear of the therapeutic area because there are too many unanswered questions and better returns to be had elsewhere. For instance, will current biologic regulations fit the commercialization of stem cells? What are the best ways to gauge effectiveness in clinical trials, or even design trials? Will regulatory agencies balk at recommending stem cell therapies?
Selling the assets makes Geron a more focused company with smaller expenses. The improved financial flexibility should allow it to better capitalize on future opportunities -- another net positive for investors. At the end of the day, the market is happy that the company captured any value for its stem cell technology.
The rise of imetelstat
Any company that overhauls its development strategy and identity had better have a really great alternative. Luckily, the market seems to believe that Geron can ride imetelstat to a great future. The molecule is a first-in-class telomerase inhibitor that is currently being evaluated in hematologic tumors after failing a phase 2 trial in breast cancer (solid tumors). Geron is sponsoring a phase 2 trial in essential thrombocythemia, while the Mayo Clinic is sponsoring a phase 2 trial in multiple myeloma.
How does the drug work, and why is it so promising? Telomeres are important buffer molecules during cell division, which get shorter with each subsequent division, gradually lose their effectiveness, and ultimately cause cells to die -- a natural process. Cancer cells can create telomerase, an enzyme that replaces telomeres, which leads to uncontrollable cell division. Not surprisingly, many cancers are associated with shorter telomeres and higher telomerase activity compared to normal cells.
It makes plenty of sense to target telomerase to treat cancer, but an inhibitor has never proven to be effective or specific enough to bind to the enzyme in the complex chemical reactions that guide cell division. Geron seems to have found a way around that by designing a novel oligonucleotide, or short DNA sequence, that is protected from degradation in the cell and has a high affinity for telomerase. In fact, imetelstat is the only telomerase inhibitor to ever enter a clinical trial.
Foolish bottom line
Geron is becoming a more efficient and focused company under CEO John Scarlett (although he is making an outrageous $450 per hour). However, there's still quite some time before imetelstat progresses all the way through the pipeline. I can see the potential, and if it works the company's platform could be worth a lot more than $500 million. I'm just not sure I'm willing to take the plunge and bet the house on imetelstat at these prices. If it fails in hematologic tumors, Geron would become a biotech company without a product portfolio or pipeline. Not my type of investment.
