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A year after announcing its decision to exit stem cell therapy, Geron Corporation (GERN - Analyst Report) announced that it has entered into a non-binding letter of intent (LOI) with BioTime, Inc. and BioTime`s subsidiary, BioTime Acquisition Corporation (BAC), regarding the stem cell program.

According to the LOI, Geron will provide BAC with the intellectual property and other assets related to its discontinued human embryonic stem cell programs. BioTime will provide BAC with cash ($5 million), shares ($30 million), warrants to purchase 8 million shares at a pre-determined price, rights to use certain human embryonic stem cell lines, and minority stakes in two subsidiaries of BioTime.

Meanwhile, Geron stockholders would have a 21.4% stake in BAC along with warrants to purchase 8 million shares at a pre-determined price. Geron would also be entitled to receive royalties on the sale of products covered by the patents acquired by BAC from Geron.

Apart from Geron, BioTime would have a 71.6% stake in BAC and the remaining 7% would be owned by a private investor (for an investment of $5 million). BioTime will also have warrants which would allow the company to increase its stake in BAC by 2%. However, this would lead to a 2% dilution in Geron’s stake. Geron and BioTime are yet to sign a definitive agreement.

We currently have a Neutral recommendation on Geron, which carries a Zacks #3 Rank (short-term ‘Hold’ rating). Geron suffered a huge setback earlier in September with the discontinuation of its oncology candidate, imetelstat, for breast cancer. Moreover, the company said that the chances of moving the candidate into phase III development for non-small cell lung cancer (NSCLC) are pretty low.

Given the imetelstat update, we have low expectations from this candidate and expect investor focus to shift entirely to GRN1005 which is currently in phase II studies for brain metastases arising from NSCLC and breast cancer. The company expects to present interim data from the GRN1005 breast cancer trial (GRABM-B) in early December. We prefer to remain on the sidelines until we see data on GRN1005.

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