I got something for nothing, at least according to my bookkeeping of my portfolio. One stock, GERN, spun off another stock, ASTY; which didn’t seem to cost anything and almost makes my portfolio look like it is more diversified. Yes. No. Well, no wonder it is hard keeping track of investments when management dives into mergers, acquisitions, or spinoffs. Regardless, the move inspired me to buy a few more shares to tidy up the numbers, which surreptitiously resulted in a 60% return within a few days. Keep up that pace and it will return something like an 11,000%. Fantastic. Let’s get real. I’ve seen similar deals. Let’s see how this one plays out.
Geron is one of the few stocks I own because a friend suggested it. Back in 1999, I had just retired (evidently temporarily) and so had a friend (more successfully from what I gather). We got together for regular lunches until our post-corporate lifestyles diverged as they were released from their old constraints. I spent more time outdoors. He spent more time in politics, quite effectively managing the power behind the power. In one of our last lunches he described a company that was so leading edge that few investors would consider it, but based on technologies that he and I recognized as based on solid data and logic. If they succeeded, their technologies would cure or alleviate many of aging’s ills, and many that afflicted young people too. It was time for a bit more risk in my portfolio, so I bought a small position in GERN.
Geron’s business was based on technical terms that have too many syllables for the evening news: nuclear transfer, telomerase, and stem cells. That last one, stem cells, doesn’t have many syllables but it certainly generated a lot of words, many of which were spoken from ignorance and fear. The simpler way of describing their business was that those three technologies would be used for cloning replacement organs, convincing cancer cells to turn off in some while convincing other cells to continue living despite auto-immune responses, and that last one would let the body repair itself. Stem cells are so controversial because they can do so much and use terms that are used elsewhere with different connotations causing great confusion and igniting passionate defenses, even when they are unnecessary.
Those treatments sounded so useful that I suspected they’d also cost a lot; so, I bought more shares which might appreciate enough to afford the treatments. That was about 15 years ago. Geron’s clinical trials have been difficult. The treatments are controversial, and the FDA is known for being stricter, more cautious, and taking longer when dealing with new technologies – regardless of the patients. Geron’s stem cell trial was cautious, only involved a few people, and conducted as quietly as most trials. The results weren’t conclusive enough and the trial was put aside. The cloning was also put aside, probably because the company’s progress was taking too long and costing too much so they had to concentrate on fewer treatments and trials. The telomerase trial was halted as well, and only recently re-initiated.
Effectively, Geron’s diversified approach was winnowed down to one set of trials. They picked the telomerase trial, and used the stem cell intellectual property as a source of cash via a deal that spun off the treatment into a new company, Asterias, and a new trading symbol, ASTY. GERN shareholders now became shareholders of ASTY. (At least that happened for me. I hear some got cash.) A few weeks ago the shares showed up in my portfolio. I found that out a few days ago. Maybe a letter got lost in my recently bizarre mail traffic.
I noticed the shares because I noticed the news. Asterias was re-initiating the Geron trial, but was going to apply the treatment to patients who were more in need, in doses that were much higher, and with more people. This is not some insignificant condition they are working on. The treatment aims to help people with major spinal cord injuries, the sort of people who can benefit greatly if they can regrow major nerves. I know they say they’ll look for increased motor function in fingers and toes, but I’d be amazed if they and the patients weren’t also hoping for movement in arms and legs. Or, maybe I’m just an optimist.
Stock spinoffs usually involve some ratio of one stock based on the value of the other. I ended up with some small prime number of shares. It is silly, but that looked untidy and was too small a number to effect my finances; so I bought enough shares to make a round number, but not enough to pay for a treatment. My finances haven’t recovered enough for that.
Their announcement of the new trial popped the stock a bit just before I bought, but I am a fan of LTBH (Long Term Buy and Hold) and estimated a much higher eventual value. Word of the stock spread more slowly than usual, but met interested investors who drove the stock up again the next day. And again. Hence, my 60% return in a few days.
I’m not extrapolating out to 11,000% within a year. That would exceed my mortgage debt, but it would also exceed credibility. Trial data takes long to accumulate, is kept secret, and will probably require another phase or two prior to the company applying for FDA approval. Years can go by. And yet, the market is irrational and can have incredible reactions to incredible results.
MicroVision (MVIS) spun off Lumera (LMRA) which was merged and acquired or taken over by GigOptix which then became GGOX and now GIG, all based on a simple and ingenious technology for electro-optical switches. No FDA. No public controversy. No risk to patients. No great expectations. Much lower cost to implement. That was over 8 years ago. Only within the last year or so have LMRA’s technologies become products making profit. And yet, they are making more profit than all of MVIS.
Real Goods Solar (RGSE) has swept into and out of Gaiam (GAIA), changing character a bit along the way, working within an impressive industry, yet failing to reliably make money, and recently being heavily discounted by the market.
Barnes and Noble bookstores spun off bnbn.com, hoping to make money from the dotcom boom. Despite being in the same business as amazon, they never attained the same premium pricing for their stock.
Spinoffs are not always good. They aren’t always bad. Management supposedly does them in the best interests of the company, but that can never be truly judged because the comparison of not having done the spinoff is moot.
I wish Geron didn’t have to spin off the stem cell technology to raise money, but if that money means the telomerase trials succeed and patients, the company, and the shareholders benefit, then great. I’m glad that the spinoff also means the stem cell trials continue, rather than languishing awaiting the conclusion of the telomerase trials. Two patient populations, two companies, and some shareholders like me may benefit. One of the pains of investing in biotechs is learning about patients who need the treatment, and then watching as the treatment is put aside because there isn’t enough money to find out if it would make their lives more livable. At least in Geron’s and Asterias’ case, we’ll have a chance to find out. Hmm, an 11,000% return would cure some of my other ills.
PS Investor Village has been nice enough to initiate a discussion board for ASTY.