GuruFocus Premium Membership

Serving Intelligent Investors since 2004. Only 96 cents a day.

Free Trial

Free 7-day Trial
All Articles and Columns »

Geron: Buyer Beware

October 13, 2010 | About:
Henry W. Schacht

Henry W. Schacht

13 followers
In recent days, shares of biopharma company Geron (GERN) have gone viral, up over 20% in a week. News of a clinical trial for an embryonic stem cell therapy aimed at spinal cord injuries has captured the imagination of investors. History should give them pause.

I've followed Geron off and on since the company went public. Hoover's reports that the IPO took place on July 31, 1996 at a price of $8 a share. 2 million shares were offered, with a total of 9.7 million shares outstanding after the IPO was completed. The result: a company with an $80 million market value and a pocket full of cash.

Today's market value of (plus or minus) $650 million might give the impression that early investors did well. Not quite.

In its 15th year as a public company, Geron doesn't yet have a viable product. In fact, the only thing the company has produced (in abundance) are newly minted shares. Shares outstanding now stand at around 100 million. Can you say DILUTION?!?

Just imagine buying shares at the IPO, holding the shares for 14 years, and realizing your stake is one-tenth the size and worth 20% less than you paid. Do they sell a drug for depression?

One doubts that today's 12 percent gain is much consolation.

Geron is a science project. A pure speculation and the farthest thing from an investment. Nonetheless, investors periodically convince themselves that the company is finally on to something. First, it was going to cure cancer by inhibiting the growth of telomerase. Now it's stem cells and spinal cord injuries. Both capture the imagination, but have done nothing for investors.

Operating results? Well, in the last 8 years, the company generated $25 million in sales. At today's price, that's an "8 year trailing price-to-sales multiple" of 26.

During the Internet boom, I learned to be creative with my valuation metrics.

For the big numbers, you have to go to the bottom line. Over that same time frame (8 years), Geron has generated reported earnings of NEGATIVE $377 million. I'm sure free cash flow was better!

Suffice it to say, Geron's $100+ million cash balance and lack of debt isn't a result of anything approaching a profit. That pretty balance sheet is a tribute to gullible investors who continually gobble up GERN shares.

So forgive me if I'm not all that impressed that Geron is testing the "safety" of one of its products in Phase 1 trials. Testing the "effectiveness" of the treatment comes later. And all the while Geron will be burning cash.

Frankly, the treatment must succeed if Geron is to come close to justifying its current market value. While investors continue to wait the company will continue to burn cash and issue stock to cover the losses. At least this formula has worked for the company.

For investors at nearly every stage of this company's life, it's been a long road, paved with mountains of stock certificates and tax losses.

At the very least the employees of Geron owe their shareholders a "thank you" note and a viable product.

In the meantime, my money is on GERN's investment bankers!

Disclosure: Author does not (and never has) owned GERN shares.


Henry W. Schacht

http://www.lonelyvalue.com/

About the author:

Henry W. Schacht
Henry W. Schacht, CFA is the founder of Schacht Value Investors, an investment management firm serving individuals and institutions. He currently serves as President and Chief Investment Officer. He earned his MBA at the University Of Chicago Graduate School of Business and a BBA in finance from the University of Notre Dame. Mr. Schacht is a member of the Association for Investment Management & Research (AIMR), the Investment Analysts Society of Chicago (IASC), and the National Association of Corporate Directors (NACD).

Rating: 3.0/5 (7 votes)

Comments

TRUTH
TRUTH - 3 years ago


GERON OWNS MOST OF THE KEY STEM CELL PATENTS THAT EXIST. THEY ARE THE WORLDS LEADING STEM CELL BIOTECH COMPANY, AND ANYONE WHO KNOWS HOW ALL GREAT BIOTECH COMPANIES GET STARTED KNOWS THAT THEY OPERATE WITH DEFICITS UNTIL THEIR FIRST PRODUCT GETS TO MARKET. COMPANIES LIKE AMGEN, GILEAD, DANDREON, ETC ALL BEGAN SAME AS GERON. YOU ARE OBVIOUSLY AND SADLY IGNORANT OF THE PROCESS, AND CHOOSE TO ATTACK THE LEADING COMPANY OF WHAT IS FAST BECOMING THE WORLD'S FUTUIRE IN HEALTHCARE SCIENCE, STEM CELLS. I CERTAINLY HOPE THAT SINCE YOU WROTE THIS SILLY, BIGOTED ATTACK ARTICLE, YOU HAVE COVERED YOUR SHORT POSITION IN GERON. IF NOT, I FEEL SORY FOR YOU.
paulwitt
Paulwitt - 3 years ago
Not knowing anything about the company or industry, aren't unused tax losses valuable?

Biotech, along with with regular tech, is outside my circle of competence (like I have one...haha) but

it sounds interesting and I will look at it....

Please leave your comment:


Get WordPress Plugins for easy affiliate links on Stock Tickers and Guru Names | Earn affiliate commissions by embedding GuruFocus Charts
GuruFocus Affiliate Program: Earn up to $400 per referral. ( Learn More)
Free 7-day Trial
FEEDBACK
Email Hide