Geron: Calcualting the Potential Value Gap

[Fishermangents]

On 17 September we have seen the article on SA titling "Geron: Calcualting the Potential Value Gap". This was a nice attempt to provide rationale for a potential value gap and to quantify it. In the meanwhile we know more, so there may be some parameters which we now can fill into this calculation.

With the latest presentations we know more about responses and mutations. We know Geron will focus on imetelstat as a platform drug for the coming time. We have ODD in Europe. MDS P2/3 has started and we know JnJ will go for approval in 2017 for MF (see JnJ presentation dd 20 May 2015). We should be able to apply this new information and insights to get a picture of the addressable market for MF, MDS (and maybe AML, althoug this will be based on some more assumtpions).

So let's us ask ourselves the following questions:
- do we believe that there is a value gap on Geron PPS today?
- if yes: what is the gap and how can we make an acceptable calculation?
- can we still use the rationale from the 17 Sept SA article?

This is not supposed to be a discussion about long term estimations and expectations, but rather about the Geron PPS today.

[I_Believe_Irish]

The value gap exists because there is currently no Geron product on the market (ignoring the relatively small license fees for diagnostic tests) and the stock is being actively manipulated by the people that are currently short 31 million shares. It is hard to place a firm number on the size of the gap, but every day that goes by with good performance in the drug in trials, the gap becomes more obvious and more attractive to investors that seek out "earlier that Wall St." opportunities.
In comparison to other companies that have brought a single drug to market, the future prospects begin to be reflected in the stock price as the anticipated approval draws nearer followed by a spike up when the approval is announced. After approval, analysts begin projecting future revenues and growth rates which is what they do well.
The current gap is based on the probability and prospects of the drug trials succeeding and following that, becoming a commercial success, which the analysts are not good at and they don't even look at unless some big news puts it in front of them. Mannkind is a good example of a company that had great anticipation upon approval, but its product is not unique even though it was approved with much anticipation, and it has had trouble getting commercial success.
One of the main drivers of the Geron value gap is the incredible performance of the drug in reversing the fibrosis aspect of the disease and returning the marrow to normal in some patients while providing life extension to those that do not fully respond. The brilliant strategy of using transfusion independece as the metric captures all patients that respond and can be clearly seen to provide quality of life benefits over the competitive drug. It is well documented that the currently approved competitive drug offers palliation but does not improve life expectancy. So, how much should that be "valued"? The competitive drug costs over $100,000 US per year. Imetelstat has to be priced higher than that by Janssen. My opinion is that it must be at least 25% higher, possibly more. Given that, how quickly will the drug revenues increase after approval when the drug becomes available? My assessment is the revenues will grow rapidly and level out for MF at 80% of the diagnosed cases or 100% of the diagnosed cases that are genetically known to respond to the drug. In addition, and completely different from the current drug which "loses" all its patients in 18 months, there will be a "maintenance" treatment that will be required for those patients that respond, perhaps every 12 months or 18 months, at a somewhat lower price per patient, but with that number of surviving and thriving patients increasing each year for many years.
Returning to the value gap question, since the market values sales rather than potential sales, you should expect that the price of the stock will not reflect the proper value until the sales are possible (approval) and can be forecast by Wall Street analysts (several quarters into the availability).
The preceding was for a single disease only whichever is the first to be approved (MF or MDS?). Once approved, then the Wall St. analysts will then focus on the potential enough to be able to understand the growth for other diseases still in trials and will make sales forecasts that have the full potential of Imetelstat.
The bottom line is the value gap is large and will stay large until Wall St. analysts "get on board", which will be a while, but when they do wake up, the company will be overvalued until the growth rate decreases due to competitive alternatives (long time thanks to ODD) or other changes in the market.

[Fishermangents]

I_B_I, thanks for your reflections. From a business point of view the 25% higher prices for a 1 year of imetelstat treatment is nice, from a societal point of view we may run into some trouble... But that is, I believe, beyond our reach. However, pricing is a strategic choice. We have this phenomenon called 'price elasticity', which means that if price is too high, revenues and profits can suffer from it because end users can't/don't want to pay that. Lowering price to achieve higher volumes and market penetration can create better bottom line results while beating competition quicker. Eg: lowering the price to 15% below the competition may increase market penetration by 50% (just and example, not applicable to imet).

I share your overall views. Now the questions is: can we turn this into a calculation on what the gap actually is and what PPS should be today? Or doesn't that make sense, because we just have to live with the PPS as it is and take it as a fact?

[I_Believe_Irish]

Your points are well thought out. There is a constant clash between the cost of treatment and the entities that pay for the treatment (insurance companies, government, individuals) that comes into play whenever pricing is concerned. We have seen that once a medicine is approved, the price to the patient is enormous relative to the actual cost of the chemical compound, but it is understood that the development costs over the decade that it took to get approval have to be paid by someone. Typically, large insurance companies get a reduced price in exchange for a quantity of purchases they expect over a year. I don't know what the insurance companies actually pay for the competitive drug, but it has to be a high number.
The competitive drug already approved for MF patients costs over $100,000 per year and it merely reduces the symptoms or consequences of the disease. It is documented that the life expectancy of the patients is unaffected by the use of the drug, but it still commands over $100,000 per patient per year but only for about 18 months.
Imetelstat introduces a value proposition for the patients and insurance companies that has been dealt with before for other diseases. If a treatment can save a life that would otherwise have been lost, we all value that because it could be our own lives or the lives of family members that is saved.
It has been shown that drugs that save lives and return people to a high quality of life can be priced at levels that would make most people faint. The highest priced drugs are Orphan drugs and the cost will surprise you ( http://www.forbes.com/2010/02/19/expens ... eases.html).
$200,000 per patient to return to a productive life is very economical when compared to the alternative cost to treat patients with no quality of life through the end of life. The thing that makes high orphan drug costs tolerable is that there are very few patients and the cost is spread among the entire insured population.
The Janssen staff knows what price the market will accept better that anyone, but I expect it to be much higher than the current approved treatment.
That in turn feeds into the value gap, which leads to the need for a reliable estimate of sales in the first quarter after approval and a projected growth rate. We may have to wait until sales numbers come it to see the value realized. The good news is that shouldn't be much longer than a year to 18 months away, which gives us all time to buy more shares.