SmartMoney.com
Geron's Tea Leaves
By Mark Glassman
April 27, 2006
EVERY ONCE IN A WHILE, a company comes along that embodies its sector so nicely that you can keep tabs on the larger industry just by watching its ticker. Intel's (INTC1) performance guides the chip sector. Exxon Mobil (XOM2) shares are good indicator for consolidated energy (even with its disappointing results Thursday). And Ford Motor (F3) is a bellwether for the U.S. auto sector (such as it is).
For the time being, Geron (GERN4) may well be an excellent company by which to gauge the small-cap biotechnology sector. In fact, when the company releases its first-quarter earnings Friday, biotech investors and fund managers would do well to listen in — even if they don't own shares of the company. The guidance Geron gives regarding funding opportunities, research and development spending and the environment for future collaborations could be applied to the larger sector.
Biotech has been in a funk this quarter, and Geron's depressed share price has reflected that decline. The company's stock is trading at about $7.50, a year-to-date drop-off of about 12%. Shares did ride a few peaks and valleys in between, but in the biotech tradition, those were largely driven by headlines — or headlines about headlines. The largest one-day jump of the year — a 15% jump to $9.30 a share on Feb. 24 — came on the day the company announced it would be featured in a segment airing on CBS's "60 Minutes."
Like most small-cap biotechs, Geron's actual earnings are of less interest to investors than the company's forward-looking statements. That's because, like most small-cap biotechs, Geron doesn't actually make anything yet. All of Geron's products are in clinical testing or preclinical development. Revenues come from grants and collaborations and are therefore poor indicators of the company's real value. (For the record, Thomson First Call estimates say Geron will bring in about $1 million — and that's rounding up to the nearest million. Analysts also project a year-over-year earnings decline of 13%, resulting in a net loss of about 16 cents a share.)
Geron's main research programs are in the two hottest fields in the sector. The company is working on a cancer vaccine, a telomerase inhibitor (another cancer treatment) and a program in embryonic stem-cell research, which could lead to multiple advances in regenerative medicine. If there is a company whose suite of research projects better typifies where biotechnology is headed, it isn't publicly traded.
Last July, the cancer-vaccine program got an enormous stamp of validation when it spawned a collaborative partnership with a large-cap pharmaceutical company looking to fill its medicine cabinet: Merck (MRK5). That deal gave Geron an immediate cash infusion of $2.5 million plus $18 million in equity investment. Now, the larger and more pressing question is whether Big Pharma will continue to broker similar deals with biotechs this year. Geron's conference call may offer some guidance about the broader funding outlook in oncology research.
In the stem-cell space, Geron has sought private investors, largely ignoring the Congressional debates over expanding federal research dollars and the vast bureaucracy that has held up state funding in California. "Given their financial acumen, they are pretty much self-sustaining for the foreseeable future," says Steve Brozak, an analyst at WBB Securities, a brokerage based in San Diego. "They've managed that by tapping into the capital markets. These folks have learned very well; they don't want to be caught at the mercy of anybody."
Geron has spent more than $100 million over the past 10 years on stem-cell research. "At some point, we will start to see the funding spigot open up, and all roads will lead to Geron," Brozak says. "When California finally gets its act together, the advancements will lead into providing commercial applications for Geron's products." He added, "It's just a question of when."
The short answer could be "soon." On Wednesday, Geron announced that it had been granted U.S. Patent No. 7,033,831, which covers the production of insulin-secreting cells from human embryonic stem cells. The company has also announced it expects to file for permission from the Food and Drug Administration to begin trials for an embryonic-stem-cell-based therapy for spinal-chord injuries this year. Look for Geron to offer updates on those stem-cell programs on Friday to reassure investors that they remain on track.
Finally, keep on eye on the company's costs and R&D allocation. Mark Monane, an analyst with Needham & Co., an investment bank in New York, wrote in a research report last month that he expects Geron's 2006 cash burn to come in at about $50 million. Brozak says that the company has a knack for stretching a dollar. "They're pretty thrifty guys," Brozak says. "I know for a fact that even though they fly quite a bit, they typically fly close to the back of the plane." |
