Geron Corporation — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. Geron is a clinical-stage biotechnology company whose sole product candidate, imetelstat, is licensed exclusively to Janssen Biotech for development and commercialization. The unaudited interim results are not necessarily indicative of full-year results.
Financial performance and position
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $5.1 million | $35.4 million | $6.1 million | $36.2 million |
| Operating expenses | $9.0 million | $8.3 million | $27.9 million | $28.1 million |
| Operating income (loss) | $(3.9) million | $27.0 million | $(21.9) million | $8.1 million |
| Net income (loss) | $(3.6) million | $27.2 million | $(21.1) million | $8.5 million |
| Basic and diluted earnings (loss) per share | $(0.02) | $0.17 | $(0.13) | $0.05 |
- Q3 2016 revenue included $5.0 million from a newly signed Janssen Pharmaceuticals license; the remaining revenue was principally royalties and other license fees. Geron had no product revenue.
- The prior-year comparison includes recognition of the $35 million Janssen Biotech imetelstat upfront payment in Q3 2015. That one-time payment explains most of the year-over-year revenue and earnings decline.
- Research and development expense was $4.3 million in Q3 and $13.9 million for nine months, versus $4.1 million and $13.8 million, respectively, in 2015. General and administrative expense was $4.7 million and $14.0 million, versus $4.3 million and $12.9 million.
- For the nine months, operating cash use was $17.8 million, compared with $18.9 million in 2015. Investing activities provided $1.2 million, and financing activities provided $1.2 million. Cash and cash equivalents declined by $15.4 million to $5.9 million.
- At September 30, cash, restricted cash, cash equivalents and marketable securities totaled $129.8 million, compared with $146.7 million at December 31, 2015. Stockholders’ equity was $128.9 million; accumulated deficit was $949.4 million. The balance sheet reports no debt balance.
- Geron reported no gross margin because it had no product sales. The filing does not provide a meaningful product margin measure.
Material developments and outlook
- IMbark (myelofibrosis): After a planned 12-week review, Janssen closed the 4.7 mg/kg arm to new enrollment and suspended new enrollment in the 9.4 mg/kg arm while seeking longer follow-up. Janssen reported no new safety signal; it considered the higher-dose arm worth further investigation based on encouraging efficacy trends, although an insufficient number of patients met protocol-defined interim criteria. More than 100 patients had been enrolled across both arms by October 2016. A further review was expected by the end of Q2 2017; possible outcomes included resuming enrollment, changing dosing, adding an arm, or terminating the trial. The timing of the primary analysis was uncertain.
- IMerge (myelodysplastic syndromes): Part 1 was fully enrolled. Janssen’s initial review found emerging safety and efficacy consistent with Mayo Clinic pilot-study data, and the trial continued without modification. A further review was expected by the end of Q2 2017; if Janssen proceeded, the Phase 3 portion was expected to open in mid-2017.
- Geron and Janssen share IMbark and IMerge development costs 50/50. Janssen is responsible for worldwide development, manufacturing, regulatory approval efforts and commercialization. Geron said it expected 2016 direct external R&D expense to exceed 2015 as development progressed, partly offset by lower personnel-related R&D expense. G&A expense was expected to remain consistent for the rest of 2016.
- Geron estimated existing capital resources and future interest income would fund its current level of operations for at least 12 months. It anticipated negative cash flow and significant operating expenses for the foreseeable future; acquisitions, licensing, opting into further U.S. development or other changes could increase funding needs. Geron had not used its $50 million at-the-market sales agreement.
- A September 2016 Janssen Pharmaceuticals license covers certain RNA-interference technologies, excluding blood or bone-marrow cancers and products primarily acting through telomerase inhibition. It provides a $5 million non-refundable upfront payment, up to $75 million in potential development and regulatory milestones, and low-single-digit royalties. The upfront amount was recognized as Q3 2016 revenue; future milestone and royalty receipts are uncertain.
- Geron’s potential imetelstat payments under its Janssen Biotech agreement include milestones and royalties, but depend on clinical, regulatory and commercial success. The filing states that imetelstat could require years of further testing and may never be approved or generate royalties.
Risks, contingencies and unusual items
- Geron is highly dependent on Janssen and imetelstat. A negative continuation decision, trial failure or safety issue, regulatory hold, or termination of the collaboration could eliminate future milestone and royalty income and could require substantial additional funding.
- Imetelstat’s disclosed safety risks include cytopenias, liver-function-test abnormalities, bleeding and serious adverse events, including a patient death assessed as possibly related in an investigator-sponsored study. The filing cautions that interim findings may differ from final results.
- Three securities lawsuits concerning prior imetelstat disclosures were temporarily stayed in September 2016 while the parties sought resolution. Related derivative suits were stayed; a proposed settlement, preliminarily approved by the court, includes governance refinements and a $950,000 payment to plaintiffs’ attorneys by the insurer, subject to final approval. Geron had not established a reserve for potential liability and could not estimate possible costs or damages.
- Geron reported an accumulated deficit and a long history of losses, reliance on external financing and potential dilution if additional equity is issued. It also cited clinical, manufacturing, intellectual-property, competition, reimbursement and litigation risks. Disclosure controls were assessed as effective at a reasonable-assurance level, with no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Updates and final data from the IMbark 9.4 mg/kg arm, including whether enrollment resumes and when the primary analysis occurs.
- Janssen’s decision on whether to advance IMerge into Phase 3 after its planned data review.
- Whether Janssen makes an affirmative continuation decision under the collaboration agreement, and the related timing, economics and Geron opt-in choices.
- Actual cash burn and runway relative to management’s estimate of at least 12 months, particularly if development spending rises or Geron pursues acquisitions or opt-in rights.
- Final court approval and implementation of the derivative-litigation settlement, and any developments in the stayed securities cases or potential liabilities.