It's not every day that a stock gets upgraded by a major broker with a price target of nearly 100% higher and the stock falls. Well, that's what happened so far with Geron Corporation (GERN).
Geron Corporation is a clinical stage biopharmaceutical company developing a first-in-class telomerase inhibitor, imetelstat, in hematologic myeloid malignancies i.e. cancer.
Needham & Company analyst, Chad Messer, Ph.D. says the biotech is headed to $10 as his new price-target, which is 100% upside to target as of this keystroke.
Messer's research tells clients, "Last night Geron presented updated data from an ongoing investigator-sponsored Phase II study of imetelstat in myelofibrosis (MF) patients at the American Society for Hematology (ASH)."
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He went on to write, "GERN shares have run ahead of the data from this open label study based on upbeat commentary from the company and earlier positive data in essential thrombocytopenia. While we have advised caution ahead of a peer-reviewed release of the MF data, we can now report that the robustness of these data exceed our expectations. While some developmental questions remain, we believe imetelstat has blockbuster potential as the first treatment with the potential to induce treatment response in MF."
So you know, if you don't, according to the Mayo Clinic, "Myelofibrosis is a serious bone marrow disorder that disrupts your body's normal production of blood cells. The result is extensive scarring in your bone marrow, leading to severe anemia, weakness, fatigue, and often, an enlarged spleen and liver.
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Myelofibrosis is a type of chronic leukemia — a cancer that affects the blood-forming tissues in the body. Myelofibrosis can occur on its own (primary myelofibrosis) or it can occur as a result of another bone marrow disorder (secondary myelofibrosis)."
! The Geron presentation shows:
Unprecedented remissions (CR+PR) by IWG-MRT criteria observed in 5/22 patients
Clinical improvement (CI) by IWG-MRT criteria observed in another 4/22 of patients
Some clinical benefit was seen in the majority of patients, including resolution of circulating blasts, leukocytosis and thrombocytosis.
Despite the upgrade and positive data review, GERN is down nearly 10% today. A classic case of buy the hype, sell the news.
GERN has been a wild-one. The stock hit an all-time intraday high of $75.88 on March 3, 2000 and spent a lot of time around a buck, too. (iStock wonders how many Geron insiders regret not implementing an options collar?)
The tiny biotech is big on potential and short on money. As of September 20, 2013, the company has $68.4 million in current assets i.e. stuff they can convert to cash quickly. At the same time, management is on pace to spend about $40 million in 2013 while taking in licensing fees close to $1.3 million. You don't need to be a math major to understand the unbalanced relationship.
Until approval approaches, GERN will have to raise money like a politician, which will most likely mean diluting shareholder value.
Investors who want to participate in the biotech's upside potential, but cutback on some of the risk in the next year, might consider buying GERN stock and writing calls. You could buy the stock for about $5 today, write the January 2015 calls and collect close to a $1 in premium - $5,000 out and $1,000 in, which reduces the cost basis to $4ish, not including commissions and fees.
If Messer is right and the stock hits $10 or more in the next 13-months, then you'll have to sell at $10 and keep the $1 option premium, which is essentially the same as selling at $11, which is 120%.
On the other hand, if the stock trades below $10, then you keep the $1 premium and write some more calls or just hang onto the stock if you like.
Overall: Geron Corporation (GERN) is a home-run or strikeout stock. Investors might be wise to reduce their risk based on the company's trading past.
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