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Monday, July 31, 2006

Geron & Stem Cells: Why the Traders Had It Wrong

Stock Tickers: GERN, DNA, DILD, STEM, VIAC, ASTM, OSIR

This morning was an interesting day for shares of Geron (GERN). The company reported slightly wider losses than the "consensus estimates." The question to ask here is simply SO WHAT? Before you interpret this as an open buy or purely a positive opnion, please understand that this is not. The headlines and summaries say "Losses Widen" and this appears to have concerned the day traders and short-term players.

What is important to understand about emerging biotech, and particularly Stem Cell companies, is that Earnings Per Share and even Revenue analysis may be completely worthless. There was a declining revenue base, but once again that needs to be qualified. This company is essentially a non-revenue company even though revenues are mentioned. Most other stem cell companies are essentially in the same boat. The "revenues" these companies report are merely one-time or short-term payments they receive from other partners or as grants. What you have to look at is the cash-burn rates, and that is why the shares have recovered from being down almost 4%.

The company's R&D expenditures are up and should stay up as they are in more collaborations and are in further steps toward trying to commercialize some products. The total Operating expenses were almost $12.2 million. Let's almost double this to be safe and average it out at $20 million per quarter to be safe. This company has NO long-term debt and essentially has $183 million in net tangible short term assets that are almost all comprised of cash and short-term interest securities. This is almost 2 and a half years of operations before cash concerns creep up, and that is without the company going to the trough to raise any capital. This number can change on a dime, but it sure looks like the day traders focused on the wrong items this morning.

Below are the company's highlights in the press release for the second quarter:

Clinical Development

* Geron initiated clinical testing of its lead anti-cancer compound, GRN163L, in patients with solid tumor malignancies at The University of Chicago Cancer Research Center. This study will evaluate the tolerability of IV infusions of GRN163L at various rates of administration, and enable an assessment of the pharmacokinetic profile of GRN163L at escalating doses and at decreasing infusion durations.
* Collaborators and independent researchers gave several presentations at the 2006 AACR Annual Meeting, including a preclinical study of the Company's telomerase inhibitor drug, GRN163L, from the laboratory of Dr. Jerry Shay at the University of Texas Southwestern Medical Center and a clinical study of the Company's telomerase vaccine, GRNVAC1, in advanced prostate cancer patients from the laboratory and clinic of Dr. Johannes Vieweg at Duke University Medical Center.
* New data published in Clinical Cancer Research demonstrating the broad efficacy of GRN163L, Geron's telomerase inhibitor drug, against multiple types of breast cancer cells as well as the significant reduction of metastatic activity in vivo. The research was authored by Dr. Brittney-Shea Herbert and colleagues at the Indiana University Cancer Center along with Geron collaborating scientists.
* Geron and TA Therapeutics, Ltd., a joint venture between Geron and the Biotechnology Research Corporation of Hong Kong (BRC), announced the presentation of studies demonstrating that their small molecule telomerase activator, TAT0002, enhances the anti-viral activity of CD8 T-cells from HIV/AIDS donors against infected CD4 cells from the same donors. TA Therapeutics is exploring multiple applications for telomerase activators in chronic degenerative and infectious diseases. The company's most advanced program is HIV/AIDS, and it has selected TAT0002 as the lead development candidate for this indication.

Intellectual Property

* The U.S. Patent Office granted to Geron U.S. Patent No. 7,033,831, covering the production of insulin secreting cells from human embryonic stem cells (hESCs). The new patent covers methods developed by Geron scientists working towards the scalable production of pancreatic islet cells from hESCs for use in new cell-based treatments for diabetes.
* The Opposition Division of the European Patent Office ruled at a hearing on claims of Geron's granted European Patent No. EP 0 841 396. The patent is directed to the cloned human telomerase gene and its uses. Pharmexa had filed an opposition to the patent, seeking revocation of all 47 claims in the patent. The ruling maintained 44 of the claims and canceled three.

Business Development

* Geron and Corning Incorporated entered into a collaboration and license agreement for the development and commercialization of synthetic surface matrices for the growth of hESCs. Geron and Corning Life Sciences will work together to develop synthetic growth surfaces to replace the biological surface coatings that are widely used today to grow hESCs.
* Invitrogen licensed Geron intellectual property related to the growth of hESCs to develop, manufacture and sell media, additives and reagents for use by hESC researchers subject to certain commercial use restrictions.

OUTSIDE NOTES

There was alos talk that the UK's Tony Blair was out visiting biotech companies to develop more stem cell and genomic initiatives in the UK. While Genentech (DNA), Stem Cells (STEM), and Gilead (GILD) were noted as the target visit companies, this has implications for the whole group. These stem cell companies are the potentially largest beneficiaries as most are small and would be leveraged winners to any developments there. Some other stem cell companies are Aastrom (ASTM), ViaCell (VIAC); and this Osiris Therapeutics (OSIR) that is set to IPO this week will be the first pure-play stem cell company we have seen come out in years.

Jon C. Ogg
July 31, 2006
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