1 High-Risk Penny Stock That May Be Worth Buying

Penny stocks, or stocks with a sub-$5 share price, generally aren't my cup of tea. These types of companies tend to be far too risky to make them worthy of serious investment consideration. The oncology specialist Geron (NASDAQ: GERN), however, has piqued my interest of late -- even though the company's share price is presently hovering around $2.

While I fully admit that there are a couple of solid reasons to fear that thus speculative biotech  could well end up going bankrupt, the stock's monstrous upside potential has my full attention ahead of what could be a major clinical update at the American Society of Hematology meeting later this month. So without further ado, here's why I think this penny stock may be worth buying right now.


Geron's sole value driver is a first-in-class telomerase inhibitor known as imetelstat. After failing to show enough of a clinical benefit in the solid tumor arena, Geron decided to explore the drug's potential against liquid tumors back in 2010. The transformational event that sent Geron down its current path was a small pilot study initiated in 2012 by Dr. Ayalew Tefferi of the Mayo Clinic, in patients with myelofibrosis (MF), and other myeloid malignancies.

In 2014, Dr. Tefferi reported that imetelstat had reversed bone marrow fibrosis in a handful of patients with MF. That was a stunning result because the single drug specifically approved for MF -- Incyte's (NASDAQ: INCY) Jakafi -- is only effective at reducing the swelling of the spleen in these patients, and that therapeutic benefit typically fades over time. Imetelsat may have disease-modifying abilities that would allow it to usurp Jakafi as the market share leader.

This extremely encouraging clinical outcome caught the attention of biopharma heavyweight Johnson & Johnson (NYSE: JNJ): In late 2014, J&J and Geron signed an agreement under which they would co-develop imetelstat for both MF, and another bone marrow disorder called myelodysplastic syndrome (MDS) -- a licensing deal valued in excess of $1 billion in milestone and royalty payments on any net sales.

Fast-forward three plus years, and that licensing deal has now resulted in imetelstat being assessed in both a Phase 2 trial for advanced MF (patients who no longer respond, or never responded, to Jakafi) known as IMbark, as well as a combined Phase 2/3 MDS trial referred to as IMerge. Geron and J&J are presently splitting the development costs of these two initial indications, but the terms of the deal could change significantly if J&J decides to continue the drug's development in MF next year.

Why is J&J so interested in imetelstat that it signed a $1 billion-plus licensing deal with the likes of Geron? The long story made short is that imetelstat could generate over $1 billion in peak annual sales in just MF, based on Jakafi's commercial performance to date. As such, J&J has repeatedly highlighted imetelstat as one of the most valuable candidates in its vast clinical pipeline.

As an added bonus, imetelstat should also be able to rake in several hundred million more as a treatment for MDS, and perhaps another billion or so if it can expand into the high-value acute myeloid leukemia (AML) space later on. Equally as critical, it would sport a robust competitive moat as the only approved telomerase inhibitor on the market.

Imetelstat thus has the potential to become one of the top-selling blood cancer drugs in the world, and it may be able to do so without facing any major competitive threat for years to come.

Bumps in the road

Like nearly every other experimental cancer drug, though, imetelstat's clinical program has been far from perfect during its trialing in MF and MDS. In 2014, for example, the Food and Drug Administration put a clinical hold on imetelstat's development after low-grade liver abnormalities were found in some patients receiving the drug. Although Geron was able to eventually get that hold lifted, imetelstat also ran into problems reproducing some of the early efficacy results that sparked its licensing deal in the first place.

After the first internal data review for imetelstat's two ongoing studies, for instance, the drug's effectiveness in advanced MF was in serious doubt. J&J reported that its researchers decided to close patient enrollment in the 4.7 mg/kg dosing arm of the study altogether, and they also noted that the higher 9.4 mg/kg dosing arm only exhibited an "encouraging trend" on the efficacy front.

The spleen volume response rate in the higher dose arm also failed to match Jakafi's at a similar point in development for front-line MF patients -- casting doubt on its ability to be a bona fide game-changer for this indication. In fact, J&J decided to also suspend enrollment in the higher dose arm in September 2016 following the first internal review, presumably because of the lack of a pronounced reduction in spleen volumes.

That was especially worrying, because J&J's continuation decision will likely be based exclusively on IMbark's success -- or failure. The MDS indication being studied in IMerge is widely viewed as "icing on the cake" -- not the drug's main target market.

Another major red flag is that the FDA reportedly asked for additional information on imetelstat's risk-to-reward ratio in MF patients last October to justify IMbark's continuation. In other words, there is a real possibility that the FDA may shutter IMbark. That's seriously bad news for Geron, which probably can't survive if J&J decides to drop imetelstat -- and it might if the FDA decides IMbark is a futile endeavor.

Green shoots

Despite all these headwinds (which have weighed heavily on Geron's share price this year), the drugmaker has still made some significant strides toward justifying imetelstat's overall development in myeloid-based malignancies. Last November, the FDA granted a Fast Track designation for imetelstat in MDS. The two companies plan on unveiling the data that led to this coveted regulatory designation at the upcoming ASH meeting in less than two weeks from now, which may turn out to be a major near-term catalyst for Geron's stock.

While a Fast Track designation in no way enhances a drug's chances for approval, it does allow for more frequent interactions with the agency, which could eventually lead to a Priority Review and a quicker-than-normal regulatory decision.

Another important point is that the FDA probably wouldn't have granted a Fast Track designation to imetelstat in MDS if it was on the verge of halting the drug's MF trial for safety reasons. Of course, these two trials may be producing markedly different risk-to-reward ratios for their respective patient populations, but the drug's side effects should be fairly similar across these two trials.

That suggests the FDA's focus is currently on imetelstat's efficacy in advanced MF at this point. And that's a complicated issue, to put it mildly.

While we know imelelstat hasn't been achieving the amount of reduction in spleen volume that would clearly indicate a strong response to treatment, IMbark has also yet to reach the median overall survival mark (per Geron's last update in October). So, there's a real chance that imetelstat could be extending the lifespan of these extremely sick patients with advanced forms of MF, without reducing spleen volumes in a stepwise fashion.

The point is that this medical paradox can't be resolved without allowing IMbark to progress. And the longer the trial goes on, the better the chance that imetelstat will ultimately produce a favorable survival curve.

Turning back to MDS, the two companies also recently decided to expand the first part of IMerge to explore the drug's potential in transfusion dependent patients with low or intermediate-1 risk myelodysplastic syndromes who are refractory or resistant to treatment with an erythropoiesis stimulating agent. Patient dosing in this augmented portion of the trial has reportedly already gotten under way.

Summing up, imetelstat appears to be progressing fairly well in MDS based on these various developments in the past few months, but its fate in advanced MF currently hangs in the balance.

Is Geron's stock worth the risk?

Point blank, Geron's shares could arguably become worthless if IMbark turns out to be a dead end. The encouraging MDS data may intrigue J&J enough to stay the course, but it wasn't the indication that sparked this partnership. Moreover, Geron simply doesn't have the financial resources to either reconstitute its clinical pipeline, or to advance imetelstat on its own. The biotech exited the last quarter with less than $113 million in cash and investments.

The silver lining is that there appears to be something to the notion that imetelstat might be shifting the overall survival curve in advanced MF patients. Remember, J&J closed the higher dose arm in IMbark in September 2016 -- roughly 15 months ago. The reported historical range of median overall survival for patients that have discontinued Jakafi, however, is seven to 14 months, according to Geron.

Based on the all the available evidence, I think it's reasonable to assume that at least some patients in this trial are still alive two years after beginning treatment with imetelstat, and discontinuing Jakafi. And that's likely the reason J&J and Geron have stated that imetelstat's IMbark data "suggest an overall survival benefit." If the drug wasn't showing any clinical benefit, after all, J&J almost certainly would have hit the exits following imetelstat's second internal review last April.

So, in the absence of undisclosed treatment-related patient deaths, I find it hard to believe that the FDA wouldn't allow IMbark to at least advance to its next scheduled internal data review in the first quarter of 2018, where the drug's overall survival data can be vetted more carefully.

Valuation scenarios

From the viewpoint of an outsider, I think the make-or-break moment will be IMbark's upcoming third internal review, which should be released in early April. If imetelstat is still showing compelling signs of efficacy in advanced MF, I expect J&J to simply buy Geron for between $1.5 billion to $3 billion based on its commercial potential in MF alone. After all, J&J probably won't take a chance on letting yet another breakthrough hematology drug get picked off by a competitor.

In the worst-case scenario where this review disappoints, though, Geron's shares are most likely worth next to nothing, and that stark reality bears repeating. Shareholders must be prepared to lose their entire investment if they buy this high-risk stock.

On the flip side, I also believe that Geron has the very real potential to transform an investment of $1,000 at current levels into $5,000 to $10,000 within the next 16 months (assuming a buyout). And if Geron's management decides to get "greedy" by sticking to the original terms of the licensing deal, this stock could produce some truly life-changing returns on capital over the next decade.

More to the point, Geron and J&J have designs on expanding imetelstat's label to include other high-value indications like AML that could push its sales into the $3 billion annual range (10 times Geron's current market cap). Some compelling early-stage work has already been published suggesting that imetelstat may turn out to be a key drug in the AML landscape going forward.

Putting these rosy valuation scenarios aside for the moment, the situation as its stands right now is that market is betting heavily against imetelstat because of the drug's less than stellar spleen responses in advanced MF, along with the FDA's request for additional information. As such, Geron's current valuation is a mere fraction of imetelstat's ginormous commercial opportunity.

While the market could certainly be proven correct in its dire view, there are plenty of examples of the market turning out to be dead wrong about experimental cancer drugs. Wall Street's pessimism shouldn't be taken as gospel when it comes to clinical-stage biotechs.

In conclusion, I think Geron is a compelling watchlist candidate because of its explosive upside potential, and it may even warrant a smallish, speculative position for that reason. However, this penny biotech stock is an all-or-nothing proposition: You shouldn't invest more than you can afford to lose.

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George Budwell has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Johnson & Johnson. The Motley Fool has a disclosure policy.