Geron Restructuring Sours Investors As Company Bets On Cancer

The pioneering U.S. biotech will look to partner its five human embryonic stem cell research programs while focusing entirely on two mid-stage cancer assets.

Geron Corp. is returning to a business focus outlined in the prospectus for its 1996 initial public offering, but its Nov. 14 decision to exit the human embryonic stem cell (hESC) field ultimately may result in the U.S. being surpassed by another nation as the leader in this groundbreaking area of biomedical research.

In a Nov. 15 investor call, recently appointed CEO John Scarlett made clear that Geron’s decision to attempt to partner its hESC program and narrow its focus to a pair of mid-stage oncology programs was based on the economic reality facing a clinical-stage biotech. The Menlo Park, Calif.-based firm’s decision should be seen only as a business decision, and not a commentary on the potential of stem cell therapeutic development, he said.

“This decision to focus exclusively on our cancer programs was made after a strategic review of the costs, timelines and clinical manufacturing and regulatory complexities associated with all of our research and clinical-stage assets,” Scarlett said.

Prior to joining Geron in September, Scarlett had been CEO of Proteolix Inc., overseeing its $276 million acquisition in 2009 by Onyx Pharmaceuticals Inc. (Also see "Onyx Sees Blockbuster In Oncology Drug Carflizomib, Buys Proteolix To Get It" - Pink Sheet, 12 Oct, 2009.).

Spinal Cord Trial The First To Test hESC Therapy In Humans

Controversial from a bioethical standpoint, hESC research in the U.S. has faced numerous stops and starts. Geron, however, became the first U.S. firm approved to run a clinical trial of a stem-cell based therapeutic in 2009, and shortly thereafter initiated a Phase I trial of GRNOPC1, oligodendrocyte progenitor cells, in spinal cord injury (Also see "Geron Gets Green Light To Test Embryonic Stem Cell Therapy On Humans" - Pink Sheet, 26 Jan, 2009.).

Geron has dosed four patients, out of a planned enrollment of eight, in its Phase I trial and says the agent has been well tolerated with no severe adverse events reported. GRNOPC1 has shown no sign of improving the patients’ condition, but Scarlett said the Phase I trial was not intended to produce any such signals, just safety data. Geron will stop enrolling the trial but will continue to follow the four patients and update FDA on their progress.

“When we looked at the financial consequences of the relatively slow nature of development for such an early-stage program like OPC1 and other stem cell therapy, the timeframes for meaningful value inflections on that side of our business would occur substantially further in the future than the value inflection points for our oncology products,” Scarlett said. “These assessments of how we plan to maximize value for our shareholders also happen to coincide with a moment in time when big pharma and big biotech companies are increasingly hungry for first-in-class cancer products. Putting our money and resources behind building the future of the company on our oncology assets was a business decision.”

In an interview, Rodman & Renshaw Senior Biotechnology Analyst Reni Benjamin, PhD, projected that it might take another decade before a hESC-based therapy reaches market, a timeframe that may have been out of Geron’s reach on its own. Its two main cancer programs – imetelstat, in Phase II in four oncologic indications, and GRN1005, about to enter Phase II in brain metastases – are much closer to potentially reaching market.

Geron expects to end 2011 with about $150 million cash on hand and believes it has bandwidth to produce top-line data from all six planned Phase II trials for the two cancer assets during the 2012-2013 time period. Eliminating stem cell-related R&D costs should save the company about $25 million a year for the next several years, CFO David Greenwood told the call.

Negative Initial Response From Investors

As of Nov. 16, investor response to Geron’s course correction has been negative – the stock tumbled $0.45 to $1.75 per share in heavy trading between the NASDAQ close on Nov. 14 and opening the following day. The share price declined another 8% to $1.61 during the day Nov. 16.

“Investors in general, as seen by the stock reaction, were surprised and, frankly, the majority that we’ve talked to were disappointed,” Benjamin said. “Many of them invested in Geron primarily for its regenerative medicine programs.”

He suggested investors’ reactions have been tied much more to stem cell developments than anything pertaining to Geron’s oncology program. The stock saw a significant increase after President Obama lifted an executive moratorium on hESC research in 2009, he noted.

Market analysts’ responses have been mixed, with Benjamin suggesting that Geron is significantly undervalued at present due to its cash on hand and the potential of its two cancer programs. J.P, Morgan analyst Cory Kasimov sent mixed signals, opining that the new focus would be good for Geron “in the long run,” but downgrading its shares from “neutral” to “overweight.”

“In the near-to-intermediate term, we are concerned that the potential lack of strong [shareholder] support (which had been driven by the company’s cutting edge cell therapies) could leave shares range-bound until the cancer pipeline can demonstrate proof-of-concept (POC),” he wrote Nov. 16. “Given that the POC data points will not begin to read out until about 12-18 months from today, we suspect investor apathy could be a hurdle for the stock in 2012.”

WBB Securities analyst Stephen Brozak, suggesting Geron’s decision was driven partly by an inability to find development partners for the hESC program, said divestment of the program could have “highly significant national ramifications.” Geron’s exit will leave Advanced Cell Technology Inc., focused on the use of stem cell therapy in macular degeneration, as the only U.S. biotech in clinical development with a hESC program.

“One nation, in particular, could conceivably benefit from Geron’s decision to “partner” its stem cell programs,” Brozak said in a Nov. 16 note. “Of concern, and with national considerations, China and/or a Chinese company, could acquire the huge Geron patent estate paying a significant premium, thereby controlling the centerpiece of the Geron embryonic stem cell know-how and Geron embryonic stem cell technology” (Also see "Beijing Firm Launches Clinical Trial On Stem Cell Treatment For Diabetes" - Scrip, 20 Aug, 2010.).

During the call, Scarlett noted that “all partnership options are open. We’re discussing our cell therapy programs with various potential partners.” He declined to be more specific, but later told a questioner that talks are ongoing with “global companies.”

Geron, which will lay off 66 workers, about 38% of its full headcount, but retain a core group of stem cell employees to facilitate the asset transfer through second-quarter 2012, has a top priority of getting economic terms that recognize the investment it has put into hESC advancement over the years, Scarlett added.

“What we want is for these programs to go forward,” he said. “The ideal circumstance would be for a partner who would have the resources – financial, technical, mechanical and scientific – to acquire the rights to the programs to drive them forward, and of course for us to be able to negotiate economics that would substantially benefit our shareholders,” he said.

Brozak places an estimated technology value of $800 million on the entire company, with the embryonic stem cell holdings accounting for about $320 million of that. In addition to OPC1, Geron has four preclinical hESC programs – cardiomyocytes (GRNCM1) for heart disease, pancreatic islet cells (GRNIC1) for diabetes, dendritic cells (GRNVAC2) as an immunotherapeutic, and chondrocytes (GRNCHND1) for cartilage repair.

Top-Line Data For Two Cancer Candidates Expected In 2012-2013

Geron now will emphasize imetelstat, a telomerase inhibitor in Phase II trials in non-small cell lung cancer, breast cancer, essential thrombocythemia and multiple myeloma. It expects top-line data from each trial by the end of 2012.

JPM’s Kasimov noted that imetelstat is the most advanced drug candidate against the telomerase pathway. Telomerase is an enzyme necessary for the indefinite replicative capacity of many cancers and cancer stem cells, Geron says.

GRN1005, set to enter a pair of Phase II trials in brain metastases arising from NSCLC and from breast cancer, was in-licensed from Angiochem Inc. for $35 million upfront last year (Also see "Deals Of The Week: Cephalon/Mesoblast; GSK/MeiRui; Geron/Angiochem…" - Pink Sheet, 13 Dec, 2010.). Top-line data from those two trials are expected by mid-2013.

A peptide-drug conjugate designed to deliver the chemotherapeutic paclitaxel across the blood/brain barrier, ‘1005 works by delivering a peptide, Angiopep-2, via the lipoprotein receptor-related protein (LRP) pathway.

Kasimov projects that ‘1005 may offer more upside potential than imetelstat. “If Phase II data substantiate the compelling efficacy seen in Phase I, management may consider an accelerated regulatory path,” he wrote in a Nov. 14 note. “We suspect this drug could still offer a faster regulatory pathway than imetelstat. In our view, GRN1005 is an undervalued asset and has the potential to be an important future driver.”

While Geron’s investors initially are unenthused about the company’s change in direction, Rodman & Renshaw’s Benjamin said the company’s oncology assets currently are undervalued.

“For long-term investors who look at oncology companies and like to bet on novel assets, such as a telomerase inhibitor, [this is an opportunity to] to buy low and sell high,” he said. “This suddenly has come into a market cap range that is probably undervalued for those oncology assets, [investors] just need a longer-term horizon to recognize some of that value.”