Tuesday, October 12, 2010

Geron: Buyer Beware

In recent days, shares of biopharma company Geron (GERN) have gone viral, up over 20% in a week. News of a clinical trial for an embryonic stem cell therapy aimed at spinal cord injuries has captured the imagination of investors.  History should give them pause. 

I've followed Geron off and on since the company went public.  Hoover's reports that the IPO took place on July 31, 1996 at a price of $8 a share.  2 million shares were offered, with a total of 9.7 million shares outstanding after the IPO was completed.  The result: a company with an $80 million market value and a pocket full of cash.

Today's market value of (plus or minus) $650 million might give the impression that early investors did well.  Not quite.

In its 15th year as a public company, Geron doesn't yet have a viable product.  In fact, the only thing the company has produced (in abundance) are newly minted shares.  Shares outstanding now stand at around 100 million.  Can you say DILUTION?!?

Just imagine buying shares at the IPO, holding the shares for 14 years, and realizing your stake is one-tenth the size and worth 20% less than you paid.  Do they sell a drug for depression?

One doubts that today's 12 percent gain is much consolation.

Geron is a science project.  A pure speculation and the farthest thing from an investment.  Nonetheless, investors periodically convince themselves that the company is finally on to something.  First, it was going to cure cancer by inhibiting the growth of telomerase.  Now it's stem cells and spinal cord injuries.  Both capture the imagination, but have done nothing for investors.

Operating results?  Well, in the last 8 years, the company generated $25 million in sales.  At today's price, that's an "8 year trailing price-to-sales multiple" of 26.

During the Internet boom, I learned to be creative with my valuation metrics.

For the big numbers, you have to go to the bottom line.  Over that same time frame (8 years), Geron has generated reported earnings of NEGATIVE $377 million.  I'm sure free cash flow was better! 

Suffice it to say, Geron's $100+ million cash balance and lack of debt isn't a result of anything approaching a profit.  That pretty balance sheet is a tribute to gullible investors who continually gobble up GERN shares.

So forgive me if I'm not all that impressed that Geron is testing the "safety" of one of its products in Phase 1 trials.  Testing the "effectiveness" of the treatment comes later.  And all the while Geron will be burning cash. 

Frankly, the treatment must succeed if Geron is to come close to justifying its current market value.  While investors continue to wait the company will continue to burn cash and issue stock to cover the losses.  At least this formula has worked for the company.

For investors at nearly every stage of this company's life, it's been a long road, paved with mountains of stock certificates and tax losses.

At the very least the employees of Geron owe their shareholders a "thank you" note and a viable product.

In the meantime, my money is on GERN's investment bankers!


Disclosure: Author does not (and never has) owned GERN shares.

5 comments:

  1. The difference between buying a dot com stock and biotech is 3 letters - F D A

    the products must move through a painfully slow testing cycle, there is no way to skip it or go around it.

    You make it sound like there have been product failures and that is not true. The telomerase / antiCancer products are still in the pipleline and are in Phase II testing.

    With Biotech until there is a product on the market, this is what you have... and that's why the stock is $6.50 and not $1,000
    Obviously if their products in the pipeline are all successful the company will be worth many times AMGN for example. The question is when do you buy? Do you buy at the IPO when there is nothing out? BTW, you forgot to mention that after the IPO investors could have reaped at least a 500% profit if they sold at the highs that followed in late 1999.
    With no products even in clinical testing that probably would have been a good time to take profits. Now with several products in clinical testing and in totally different technologies and with very significant partners like GE and MRK, clearly the company is closer to bringing products to bringing products to market. Will it be 2 years, 3 years, 5 years or what? That is the guess long term investors are making. it hardly seems that the current price is overvalued.
    Perhaps it if touches all time highs it would be overvalued... but at some point the products go into phase III and then to market. At that point the stock won't be six bucks. So do you wait until it's $600 per share or buy it now? What about the risk to reward ratio? I don't know of a stock with a higher potential for profit. While the downside is easily minimized with options or LEAPS. So I don't see your point really. Either it's that you don't understand biotech and the FDA approval process or you just have a thirst for a quick buck and this isn't quick enough for you. Do you really think GERN is going to take another 15 years to produce anything? How many other biotech companies can you compare GERN with? I think the closest thing is AMGN - they started with just 2 products in the pipeline and look at them now. GERN's pipeline is many times richer. Obviously the further the products are in the pipeline the lower the risk.
    There is one catch with this recent GRNOPC1 product. While it is a safety trial, it may actually also show efficacy because this is not a drug, it's living cells. So if these paralyzed people can feel things or get up and walk... it's not going to take 15 years for people to see the potential. The question is not if the stock would go up, the question is a good point to take profits. That's what you should be looking at. is it $20, $50, $100? I think if it hits $100 by the end of the year, then yes I would take some profits - because I've accumulated a lot below current prices! It's about intrinsic value... if these products make it, the company IS worth a lot more than it is now... and that's the point. They have not had any failures. Slow downs yes, but failures, no.

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    1. well, it's been just over two years and Geron is now trading at $1.53/share.

      GRNOPC1 has been shuttered
      GRN163L solid tumors study stopped
      GRN1005 has been closed

      but imetelstat is in full swing against hemotologic cancers, so we shall see....

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  2. Guess you forgot that IPO investors cashed out in 1999 at $60

    Or is it that you don't understand the FDA process? Dot Coms didn't have an FDA process, biotech does. Phases in clinical trials seem to average about 5 years per phase unless fast tracked. So when do you buy, when it's in phase I, phase II, Phase III or when you can only afford 1 share?

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  3. And all Cisco Systems investors sold when it's market value peaked at $600 billion?

    Come on.

    I understand there are products in the pipeline. I also can count shares and profits. Geron is a lottery ticket. Speculative.

    Investors have paid a heavy price for underwriting Geron's research. For those who remain, I sure hope something comes of it.

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  4. I don't know when GERN will have a product on the market, but I doubt that investors who bought shares at the IPO thought they'd be in this position 15 years hence.

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