Shorts Show Doubt, Too
A surefire way to ensure some measure of public enmity is make a public recommendation to short a stem-cell stock. That's what I did on Jan. 26, when I added Geron ( GERN) as a short to the model portfolio I manage as part of TheStreet.com's Biotech Select investment newsletter. As I told my subscribers at that time, I'm not against stem-cell medicine, and I certainly hope one day that the field provides medical breakthroughs. I simply don't believe Geron is going to be the company to deliver on the promise of stem cells, based on its ignominious track record of drug development so far. In fact, the only thing Geron has done exceedingly well in its 13 years as a public company is surf the waves of stem-cell hype and use that momentum to raise lots of money.
Geron reverted to this well-worn tactic again Thursday night, when it quickly sold 7.25 million shares at a price of $6.60, a 14% discount to the stock's Thursday closing price of $7.77. The spot-financing deal grossed Geron about $43 million. I was the first to report Geron's stock sale Thursday night on RealMoney.com. Geron confirmed the financing in a press release Friday morning but did not disclose the sale price. Geron said the financing will close on Feb. 19. Geron shares were falling 14% to $6.68 in early Friday trading. Geron's stock price has moved quickly from $5 to more than $8 in the past few weeks, culminating in the company's Jan. 23 announcement that the Food and Drug Administration had granted the company approval to start a phase I safety study of a human stem-cell therapy in patients with complete spinal cord injury.
Anyone who has followed Geron for a long time knows the company typically jumps on any big move in its stock price to soak investors again with a dilutive financing. In my Jan. 26 short recommendation, I wrote, "Don't be surprised to see Geron try and raise money on this news, either," referring to the new stem-cell study. "The company has used a short-term run in its stock price to cash out before. That's nearly always a recipe for stock-price deflation." It took just 14 trading days for my prediction to come true. Not bad. Geron CEO Tom Okarma went on a PR blitz to herald the start of the company's stem-cell study, but details leave much to be desired from an investor standpoint. Geron won't even begin enrolling patients in this small phase I safety study until this summer because the company hasn't yet received final clearance from the hospitals where the trial will be conducted. About 10 patients -- all paralyzed from spinal cord injuries -- will be enrolled in the study, but Geron has to wait one month between patients for safety reasons. Assuming Geron can enroll one patient per month (and I wouldn't necessarily make that assumption), the company won't have this study fully enrolled until the middle of 2010 at the earliest. Then, Geron has to complete one year of treatment for all patients, which means there won't be data from this study until the end of 2010, more likely 2011.
There's little reason for confidence in this study based on Geron's track record over under-delivering on high promises. From a drug development standpoint, Geron has wasted years on cancer vaccines and drugs based on its telomerase technology with little or nothing to show for the effort. The company's pipeline drugs seem to be permanently stuck in phase I and early phase II studies, never advancing, never moving forward in any meaningful way because the data collected is so mediocre. Does anyone remember Geron's prostate cancer vaccine that was so promising back in 2003 when the company's stock price was around $12. That program has been long buried. Or what about the groundbreaking data promised in the spring 2007 from Geron's telomerase-inhibitor cancer drug, GRN163L? Investors bid the stock up from $7 to $10 in anticipation, but the data disappointed when presented and Geron stock price fell quickly to $5. So, where does Geron deserve to trade? Until the company can come through with meaningful clinical data on anything, I wouldn't think the stock is worth much more than its cash on hand, which was about $165 million at the end of 2008 -- the company's current burn rate is about $13 million per quarter. Call that $2 to $3 a share. Thursday night's financing, which added around $40 million in cash but also another 7 million shares, doesn't change that calculation significantly. The stock price may not fall that low, especially since stem-cell buzz won't abate anytime soon. So perhaps a more realistic valuation is around the $5 level, which is where Geron traded before the Jan. 23 stem-cell trial announcement.
Like I said on top, I'm not against stem-cell science. That would be a bit like betting against moms, apple pie and baseball. But I am against stem cell companies that soak investors for cash in return for empty promises. To date, none of the stem-cell companies look investable to me on a fundamental level, and that includes stocks like StemCells ( STEM) and Osiris Therapeutics ( OSIR) (disclosure: I'm also short Osiris in the Biotech Select model portfolio) as well as Geron. For now, stem-cell stocks are for traders and short-term momentum investors. For everyone else, Geron and its ilk are a money-losing sinkhole.