Geron Corporation (NASDAQ:GERN) represents the ultimate Hail Mary pass in many ways at this point, but one well worth a deeper look. If you aren’t familiar with this story, here is a brief rundown.
GERN was partnered up with JNJ’s Janssen for a development process with large milestone payments linked to GERN’s stand-out – and in many ways, one-hit-wonder – drug, Imetelstat, a telomerase inhibitor for the treatment of hematologic myeloid malignancies. But, in September of last year, the deal wasn’t extended at Janssen’s discretion, based on core data in the Imetelstat phase 2 that weren’t tracking well enough to constitute continued investment, according to the Janssen strategy team.
Geron Corporation (NASDAQ:GERN) shares went off a cliff in a day, losing about 73% of their value in 24 hours. It was a devastating turn of events for GERN shareholders, many of whom remain attached to the promise of the stock, and possibly for good reason, if patience and liquidity can outlast the specter of dilution.
The Ghost of Christmas Past
What defines the stock at this point is the lack of continuation with the JNJ CLA deal, and Geron management’s failure to provide a basis for understanding that event in terms other than an absence of demonstrable promise in IMBark data trends, which really occurred several months later, in December of last year, at the ASH conference.
At this stage, it’s truly absurd to suggest that imetelstat is a scientific failure. However, in order to make it anything other than a financial failure, it will take tremendous new capital investment to ever get it to market. That was why Janssen was involved in the first place.
As it stands, Geron clearly lacks the financial fuel to power the train the rest of the way to market. That means the company will either have to give up or dramatically mortgage the future value of imetelstat. In other words, the value proposition for any given share of GERN stock is a bet on the company’s ability to dilute gracefully.
The process of maximizing the efficiency of a dilutive financing path is about convincing large capital holders to compete over terms for accessing a slice of the future pie. And that, in turn, is about the narrative around proof points to augment the perception of that future value.
All of this leads us back to how the ASH event was conducted. Why was the JNJ CLA pulled? Was it because the IMBark data was tracking toward irredeemably bad? From all accounts, it doesn’t appear so. In fact, the idea that, if provided with proper funding, imetelstat may yet make it market is far from unrealistic.
But, the reality of the situation is that the drug is at least 4 years away from any putative approval, and the company will be well out of capital well before that time. To make matters worse, the cost of dilution will likely rise because competitors on a prospective market share basis (Acceleron’s luspatercept, for example) are already beginning to appear, which draws good terms away from new funding deals by virtue of opportunity cost for that very same capital.
That said, the above is the story of why such a massively promising technology is sitting in a chart that looks like GERN’s. The market has been pricing in the costs associated with a toxic dilution of shares now for the past 9 months. None of this should come as a surprise for GERN shareholders, who may yet have the last laugh.
