Sometimes, we at BuyersStrike! HQ come across true cult stocks. Not the wildly popular, flavor of the moment, media darling stocks, but the People’s Temple or Heaven’s Gate of stocks. Smaller groups of fanatical retail investors make up the shareholder base, without attention from the broader market. And regardless of how much dis-confirming evidence one presents to the cult members, few (if any) will heed the warning. Most prefer to take the potion like they did in ancient Greece, and step over quietly. They are not committing investing suicide; it’s a revolutionary act!
(If one has read “When Prophecy Fails”, by Festinger and Riecken, the following should be familiar. If one has not, it is highly recommended, along with the other works on the BuyersStrike! Bookshelf.)
In psychology, cognitive dissonance is the mental anguish experienced by one who holds a belief contrary to overwhelming evidence. For stuckholders in cult stock Geron (GERN), this belief is:
Geron shares are a worthwhile investment
The contradictory belief, shown by overwhelming evidence is:
Imetelstat will never receive FDA approval
As Geron is a single product company, both cannot be true. Let’s explore the data generating this cognitive dissonance.
All legitimate drug development companies strive to secure FDA approval of their drug candidate. This is the primary accomplishment to which these companies aspire. Geron was founded in 1990. In the intervening 27 years, Geron has accomplished exactly nothing on the drug development front, and little else save for a 1998 NY Times-induced frenzy (fake news!) in the shares. Sure, they have been put on clinical hold twice,1,2 conducted over a dozen clinical trials with the same drug all of which have failed3, and summarily destroyed nearly one billion dollars of shareholder cash4 but in terms of value-add, these hardly qualify as achievements.
If you are a current Geron shareholder, you have been given a gift. The company’s market capitalization has held up well despite a third update regarding their collaboration with Janssen. At the time of the third update, Janssen, yet again, did not opt-in5.
We could examine the most recent Geron press release to highlight why Imetelstat won’t work in MDS but the fact is, proving Festinger correct, if one is still a Geron shareholder after that PR, no amount of disconfirming evidence whatsoever will convince you Imetelstat is a zero. Not a dozen failed clinical trials. Not a prior reverse stock split6. Not an investigator whose prior phase 2 success failed in phase 37. Not competition in the form of Acceleron, Celgene, and Janssen itself with daratumumab (wait, you didn’t know Janssen was running a MDS trial with an identical design to IMERGE with their own drugs daratumumab and taclotumumab?)8,9. Not even a preposterous mechanism of action.10
GERN longs are now confronted with the choice of holding Geron shares until late 2018 or early 2019 for the final update on the Imerge trial or moving on to greener pastures. In the meanwhile, there will be data from Acceleron and Celgene and Janssen itself. There is also the opportunity cost of having cash in Geron for a year when it is obvious no one will buy them (there is nothing to buy after all) and Janssen won’t do anything until late 2018 early 2019 when the next batch of Imetelstat data is revealed.
Meanwhile John “Chip” Scarlet will continue to draw his $622,000 salary and be eligible for a bonus that is 60% of his salary for achieving such difficult milestones as “Prepared for and attended regulatory meetings with Janssen related to imetelstat.”11 Don’t believe me? Check out page 37 of the Geron proxy statement. It is unclear if Scarlet even needs a pulse to meet some of these milestones.
Check out this chart:
It is Geron’s share price since its public market debut in 1996. Hardly inspiring. The only question is “When does it meet the X-axis?”.
This chart is Geron’s share count over time:
If only Geron’s share price compounded at the same CAGR as their share count it would have been a good investment! Since their IPO in 1996, Geron’s share price has compounded at -6.34%. That may not seem like much but over 21 years, it adds up. Geron’s shares outstanding, on the other hand, has compounded at 15.2% (using a fully diluted share count for 2017 of 159mm common outstanding plus 30mm reserved for future issuance, from the most recent 10Q). Despite this, Geron’s market capitalization stands approximately four-fold higher today than it did on the date of their IPO in 1996. So much for the efficient market hypothesis.
Geron has one drug. your author doesn’t believe it works. Even if one thinks it does work, one must admit that if the efficacy was profound, we would have seen it by now. We haven’t. One can wait around for the data in 2018/2019 and maybe Janssen will do something foolish and opt-in (or wait for the spacecraft to arrive and save you). Alternatively, there might be another clinical hold due to more patient deaths (if one read the 10-K one would know about these). Cult members can stay with their Geron positions or leave the cult. The choice is theirs but when prophecy fails, they’ll have no one to blame but themselves.