Better Buy: Geron Corporation vs. Incyte Corporation

You might think I'm crazy to compare Geron Corporation (NASDAQ: GERN) to Incyte Corporation (NASDAQ: INCY) -- or any other biotech stock, for that matter. After all, Geron stock crashed on Thursday following news that Johnson & Johnson's (NYSE: JNJ) Janssen subsidiary scrapped plans to move forward with Geron's sole pipeline candidate imetelstat.

To be honest, I was surprised by Janssen's decision. I expected this comparison of Geron and Incyte would be done with a green light for a continued partnership between Geron and Janssen. But I still think a discussion of the relative prospects for these two biotech stocks is warranted, especially in light of the collapse in Geron's share price.

Was the sell-off for Geron overdone, making it the better choice? Or is Incyte now the no-brainer pick between these two biotech stocks? Here are the arguments for both Geron and Incyte.

The case for Geron

The investing case for Geron one week ago, one month ago, and one year ago focused entirely on imetelstat. It still does. The main difference between now and the past, of course, is that the prospects for the drug are cloudier than ever before.

Why did Janssen bail out? Johnson & Johnson stated in a press release that the decision was "the result of a strategic portfolio evaluation and prioritization of assets within the robust Janssen portfolio." However, Geron still plans to advance imetelstat to a phase 3 study in treating relapsed and refractory myelofibrosis on its own.

There are now two scenarios in which Geron stock could rebound in a big way. One is that another partner steps in to collaborate with the biotech on late-stage testing of imetelstat. Another is that Geron goes it alone and succeeds in phase 3.

The first scenario doesn't appear to be very likely right now. No other companies have stepped forward to show any interest. Of course, that could be because other drugmakers assumed that J&J would move forward with imetelstat.

What about the second scenario? The odds of a hematology drug that advances to a phase 3 clinical study ultimately winning FDA approval are much better than you might think. The probability of approval for hematology drugs in phase 3 is 63%, based on historical data collected by the Biotechnology Innovation Organization (BIO).

Some observers think that imetelstat could generate peak annual sales of more than $1 billion if approved for myelofibrosis and at least another $1 billion in peak sales if it's approved for myelodysplastic syndromes (MDS). Using those estimates and the historical probability of approval for hematology drugs in phase 3 testing, Geron's market cap of around $440 million could make the stock an attractive pick right now.

The case for Incyte

Unlike Geron, Incyte already has three approved products on the market generating solid revenue. The biotech posted a profit in its last quarter. And it sits atop a nice cash stockpile of $1.2 billion, including cash, cash equivalents, and short-term investments.

Incyte's biggest winner continues to perform very well. Sales for hematology drug Jakafi are on track to easily generate $1.3 billion for Incyte this year. Incyte is also evaluating the drug in several late-stage studies targeting treatment of graft-versus-host disease (GVHD) and essential thrombocythemia.

Leukemia drug Iclusig is building momentum and will likely pull in around $80 million in 2018. Incyte also has high expectations for Olumiant, which is licensed to Eli Lilly. Olumiant won FDA approval in June as a treatment for rheumatoid arthritis and is also in clinical studies targeting other autoimmune diseases.

Incyte's pipeline includes several other candidates that could eventually be approved. Probably the most promising of these candidates is itacitinib. Incyte is evaluating the experimental drug in treating acute and chronic GVHD and in combination with osimertinib as a potential treatment for non–small-cell lung cancer.

Even after Geron's huge stock plunge on Thursday, Incyte has actually still underperformed Geron so far this year. The biotech had its own bad news in April with a clinical failure for epacadostat in combination with Merck's Keytruda immunotherapy.

However, this pipeline setback means that Incyte's market cap now stands well below $15 billion. The biotech has several products with growing sales plus a promising pipeline despite the problems with epacadostat. Incyte could regain momentum if it has positive clinical updates over the next couple of years.

Better buy

In my view, the decision between these two biotech stocks comes down to risk levels.

Geron's fortunes hinge on one drug that has just been tossed to the side by one of the biggest pharmaceutical companies in the world. The company didn't sell any shares to raise cash when its stock was soaring earlier this year. Geron will have to generate more cash to fund the phase 3 study of imetelstat -- and will probably do so through a stock offering that causes the dilution in value of existing shares.

Incyte has multiple approved products making money. Its pipeline gives it many more shots on goal than Geron has. The biotech also has a lot more cash than Geron. Because of these factors, I think Incyte is the better pick right now.

However, ranking higher than a clinical-stage biotech that just saw its stock crash doesn't necessarily make Incyte a stock to buy. My view is that there are too many other stocks with even better risk–reward propositions than Incyte has.

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Keith Speights has no position in any of the stocks mentioned. The Motley Fool owns shares of Johnson & Johnson and has the following options: short October 2018 $135 calls on Johnson & Johnson. The Motley Fool has a disclosure policy.