Is This Biotech Fishing for a Higher Bid?


Geron's (NAS: GERN) deal with BioTime (ASE: BTX) might be the best the former stem-cell company can hope for. We'll know soon enough.

In a non-binding letter of intent, the companies have agreed to a deal that would send Geron's stem cell assets to a BioTime subsidiary. In exchange, BioTime will contribute $5 million in cash and $30 million of BioTime shares to the subsidiary.

Geron shareholders will receive shares in the new stem-cell company that will result in them owning 21.4% of the new company. Shareholders will also get warrants to buy BioTime shares at a specified price. Since BioTime owns 71.6% of the new subsidiary, investments in BioTime are indirectly an investment in the stem-cell assets.

A private investor has agreed to make a $5 million investment in the stem-cell company for which the investor will get a 7% stake in the company. That values the stem-cell company -- at least according to the investor -- at about $71 million. Geron's shareholders' piece of that will be about $15 million.

It's curious that Geron announced the letter of intent to divest the assets rather than just waiting until there was a final deal. Of course, it's been almost exactly a year since the biotech said it was shuttering its stem-cell program; investors deserve some news. And BioTime had already called the company out in a letter to Geron's shareholders, encouraging them to push for the deal.

It's also possible that the pre-final deal was released to see if any other companies would step up to the plate and acquire the assets. While Geron's shareholders will get something out of the deal, the company won't get any cash to help develop its oncology program. If a large company -- such as GlaxoSmithKline (NYS: GSK) , Pfizer (NYS: PFE) , or Teva Pharmaceuticals (NYS: TEVA) , which have all shown varying degrees of interest in stem cells -- would buy the assets for at least $15 million, Geron would likely jump at the deal rather than spinning them out into a BioTime-run company.

In that scenario, investors wouldn't get anything directly, but their shares of Geron would be worth more because the company would have a larger pile of cash to work with as it pushes its drugs through phase 2 development. If you own Geron right now, getting rid of the stem-cell assets -- no matter how it eventually goes down -- is positive because it helps the company focus on the programs that it's hitched its wagon to.

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