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Geron Corp: Lost in Translation?

George Budwell, The Motley Fool

Yesterday, I wrote an article that some Geron (NASDAQ: GERN) bulls took umbrage with. As my overarching thesis was actually bullish, this reaction definitely left me scratching my head. In fact, I implied that the stock could gain another 20% to 30% on a positive continuation decision by Johnson & Johnson (NYSE: JNJ). That would translate into an astonishing 368% rise from the stock's 52-week lows, making Geron one of the best-performing biotechs in recent history. 

My key take-home point yesterday -- a point that seems to have gotten lost in translation -- was that Geron's risk-to-reward ratio has morphed dramatically over the last few months -- thanks to both J&J's job posting (risk has seemingly gone down) and the stock's meteoric rise (future rewards have dropped as well due to the the company's new valuation). That's not a bearish take, but it is a black and white assessment of where things stand now.

Purple chromosomes floating in a blue background.

Image Source: Getty Images.

As a result, I wanted to spell out exactly where I think this stock is headed in both the short and long term. So, without further ado, let's dig in.  

Geron's short-term outlook 

Getting down to brass tacks, I think this stock is nearing a short-term top -- somewhere in the area of $8.00 to $8.50 upon a positive continuation decision. Again, that's not a negative assessment, but one that might satisfy some hoping for a massive windfall later this month. 

My reasoning is that it no longer appears like a buyout or an accelerated filing are in play in the near term. J&J, after all, has not been actively promoting imetelstat in recent presentations.

I don't view that pattern as a negative per se, but rather as a sign that the drug is probably headed toward a late-stage program. As this clinical program unfolds, J&J might then sing the drug's praises to the investing community. But investors may have to wait a while longer to fully realize imetelstat's true value. 

Keeping this theme in mind, I also wanted to caution investors against putting too much stock (pun intended) into a buyout scenario in the near term. That doesn't mean I don't think Geron is a viable buyout candidate in the long run, only that investors shouldn't be piling into this stock for this sole reason right now. 

A buyout should be viewed as icing on the cake -- not the main course. 

Geron's long-term outlook

This part is far harder to predict. While it looks like imetelstat might break through in low-risk myelodysplastic syndromes based on the data so far, the drug's fate in advanced myelofibrosis is a total unknown at this point. There's also a growing chance that J&J will expand imetelstat's clinical program to include acute myeloid leukemia.

The point is that imetelstat's commercial opportunity is continually evolving in lockstep with its clinical program, making it difficult to handicap Geron's long-term valuation. At a bare minimum, though, I think Geron's market cap should reach $3 billion, assuming at least one of these high-value indications bears fruit.

All things being equal, that valuation would translate into another 183% rise in Geron's share price from current levels. And that's the low-end forecast. All bets are off if imetelstat breaks through in multiple hematology conditions at the same time. 

What is long term? If J&J commits, imetelstat's late-stage program appears set to get under way right away. So, without any major speed bumps, the drug could be on the market for one or more indications as soon as 2021. That's not a particularly long wait in the world of clinical-stage biotechs. 

Key takeaways

Geron's shareholders are clearly on pins and needles ahead of J&J's all-important decision. Nonetheless, I think investors should keep their eye on the prize for the moment. J&J has come this far, and a decision is only days away. That said, we all need to check our expectations for the near term. This stock has had an incredible run in 2018. As a result, another leg up may take some time to materialize. 

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George Budwell owns shares of Geron and Johnson & Johnson. The Motley Fool owns shares of Johnson & Johnson and has the following options: short October 2018 $135 calls on Johnson & Johnson. The Motley Fool has a disclosure policy.