Geron Corporation — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. Amounts are in U.S. dollars; financial statement figures below are in millions unless stated otherwise.
Business context
Geron is a clinical-stage oncology company whose sole product candidate, imetelstat, is exclusively licensed worldwide to Janssen. Janssen conducts development and is responsible for manufacturing, commercialization and regulatory approval. Geron shares 50% of the costs of the IMbark Phase 2 myelofibrosis trial and the IMerge Phase 2/3 myelodysplastic syndromes trial. Geron has no product sales; its reported revenue is from licenses and royalties. The $35 million Janssen upfront payment was fully recognized in 2015, not in the current periods.
Financial results and liquidity
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $0.211 | $0.251 | $0.960 | $0.788 |
| Research and development | $4.575 | $4.812 | $9.608 | $9.799 |
| General and administrative | $4.547 | $3.977 | $9.340 | $8.577 |
| Operating loss | $(8.911) | $(9.479) | $(17.988) | $(18.935) |
| Net loss | $(8.637) | $(9.356) | $(17.479) | $(18.671) |
| Basic and diluted loss per share | $(0.05) | $(0.06) | $(0.11) | $(0.12) |
- License fees and royalties totaled $211,000 in Q2 and $960,000 for the first half. First-half revenue rose year over year, primarily due to higher license fees and royalties; Q2 revenue declined, principally due to lower research-license fees.
- R&D declined modestly year over year for the first half. Direct external R&D costs rose to $7.639 million from $4.259 million, mainly reflecting Janssen clinical-development cost sharing; lower personnel and other costs offset that increase. G&A rose to $9.340 million for the first half, largely due to higher noncash stock compensation and allocated overhead.
- No gross margin is meaningful or reported: Geron had no product revenue. The company expects continued operating losses.
- Operating cash used was $11.214 million in the first half, versus $14.040 million in 2015. Investing activities used $2.902 million; financing provided $1.067 million. Cash and cash equivalents fell to $8.199 million from $21.248 million at year-end.
- Cash, restricted cash and marketable securities totaled $136.4 million at June 30, versus $146.7 million at December 31, 2015. Current assets were $111.702 million and current liabilities $7.111 million. The balance sheet reports no debt.
- Management estimated existing capital resources and future interest income would fund the current operating level for at least 12 months, while warning resources could be used sooner. No interest-bearing debt or debt obligations are reported in the supplied financial statements.
Changes, outlook and material matters
- Net losses narrowed versus the prior-year periods, but remain substantial. The 2015 annual profit resulted from recognition of the Janssen upfront payment and should not be treated as recurring operating performance.
- Management expects direct external R&D spending to increase during the rest of 2016 as imetelstat development advances, partly offset by lower personnel costs. G&A was expected to remain consistent for the remainder of 2016.
- Janssen was expected to conduct internal IMbark data reviews in the second half of 2016, including review of initial dosing after 40 patients had been enrolled and followed for at least 12 weeks, and a further review by year-end of patients followed at least 24 weeks. IMerge Phase 3 enrollment was anticipated in the first half of 2017 if Janssen decided to proceed. These were expectations, not guaranteed milestones; the filing said internal review results were not expected to be disclosed.
- The Janssen agreement provides for potential milestone payments totaling up to $900 million and royalties, all contingent on development, regulatory and commercial outcomes. A future continuation decision could lead to further payment and optional U.S. cost-sharing arrangements; these amounts are not current assets or assured proceeds.
- Key clinical risks include potentially serious cytopenias, liver-function-test abnormalities and other adverse events. The filing notes a prior patient death in the myelofibrosis pilot study assessed by the investigator as possibly related to imetelstat, as well as a past FDA clinical hold. Trial failure, safety concerns, delay or Janssen termination could eliminate future collaboration payments and require substantial new capital.
- Three securities lawsuits remained pending. Several derivative lawsuits were subject to a proposed settlement filed July 22, 2016, subject to court approval; Geron agreed to implement governance refinements and have its insurer pay plaintiffs’ attorneys $950,000. The company had not established reserves for potential liabilities related to the lawsuits and said it could not estimate their possible costs.
- Geron had an unused at-the-market sales agreement allowing up to $50 million of common stock sales; no shares had been sold under it as of the filing. Future financing may be unavailable or dilutive. Management also cited dependence on Janssen, clinical and regulatory uncertainty, manufacturing, competition, intellectual-property and litigation risks.
Important facts for investors to verify
- Janssen’s enrollment, safety and efficacy progress in IMbark and IMerge, and any resulting continuation decision or change in development plans.
- Cash burn relative to the stated minimum 12-month runway, including the effect of rising collaboration costs, business-development plans and any opt-in or independent-development decisions.
- Whether imetelstat’s safety profile, clinical results, manufacturing costs and regulatory pathway support further development and potential commercial viability.
- Final court approval and financial consequences, if any, of the derivative-litigation settlement, and developments in the securities lawsuits.
- Whether any contingent Janssen milestones, royalties or equity financing become probable or are received; none should be assumed from the potential amounts disclosed.