Merck takes Terns

As soon as Terns Pharmaceuticals reported knockout data at ASH, turning into a multi-billion dollar biotech in the process, it became a takeover target for big pharma. On Wednesday that takeover was cemented, with Merck & Co tabling a $6.7bn acquisition.

While a deal might have logically been expected, the emergence of Merck – a company with no meaningful presence in Terns’ target area of chronic myelogenous leukaemia – as the winner seems surprising. Also surprising is the value of the acquisition; $6.7bn might look high for a mid-stage company, but it represents only a 6% premium over Terns’ closing price on Tuesday.

That’s not to say that Terns investors don’t have plenty to celebrate. Terns’ stock had already risen 24% since the start of this year, and had nearly doubled since before the company presented the CML data on its lead asset, TERN-701, at ASH in December; that made Terns the conference’s best-performing stock, and put the company clearly on the M&A list.

A better BCR-ABL

TERN-701 is a BCR-ABL inhibitor, playing into the same mechanism that has seen several drugs approved for CML over the past 25 years. Notably, none of these belongs to Merck; and, though that company does have a limited presence in haematological cancers, it’s not sponsoring any active studies specifically in CML with any of its projects, according to OncologyPipeline.

Indeed, the reality of CML is that it’s the domain of just a handful of big companies. Novartis sells no fewer than three BCR-ABL inhibitors: the original Gleevec, the second-generation Tasigna and the key third-generation molecule Scemblix; marketed second-generation drugs include Bristol Myers Squibb’s Sprycel and Pfizer’s Bosulif.

It’s possible that all three off these were interested in Terns, but equally likely that a bid by any of them could have attracted the attention of anti-competition authorities. As such, perhaps any acquirer of Terns had to have been an outsider.

So what’s special about Terns’ TERN-701? Like Scemblix this is a late-generation BCR-ABL inhibitor that works allosterically, meaning that it binds in a region other than the protein’s active site. This might prove safer and less susceptible to resistance than orthosteric molecules like Gleevec, and Scemblix has shown its value, now being approved in front-line CML.

But TERN-701 could be even better. Notably, the ASH dataset showed a 43% major molecular response rate in patients progressed on Scemblix, though admittedly this comprised just seven subjects. If Scemblix establishes itself first line this could make TERN-701 the next go-to molecule; and then there’s the possibility of moving TERN-701 itself into the front line.

On an analyst call to discuss the acquisition Merck confirmed plans to run a phase 3 study in first-line CML, comparing TERN-701 against physician’s choice therapy. The start of this will follow another pivotal trial, in second-line or later CML, effectively to confirm the ASH data that Terns generated in its phase 1/2 Cardinal trial.

Key studies of TERN-701

Source: OncologyPipeline & Merck presentation.

Surprisingly, Terns’ rise to prominence has been relatively recent. Until late last year the company’s valuation was eclipsed by Enliven Therapeutics, whose own BCR-ABL inhibitor ELVN-001 was seen as a key Scemblix follower. But ELVN-001 is orthosteric, and while it has post-Scemblix activity its dataset isn’t as impressive as Terns’.

Already analysts see ELVN-001’s role being limited to second-line CML, with Jones Research’s Soumit Roy calling it the “best option” in settings after the front line. On Wednesday morning Enliven traded up 14%, perhaps because the Terns takeover at least validated its own approach.

A final surprise is that it was only two years ago that Terns pivoted to TERN-701, having listed on Nasdaq on the promise of drugs for liver disease and obesity. On the analyst call Merck made it clear that its valuation of the Terns business was entirely based on TERN-701.

Those still thinking that $6.7bn is low for a drug of TERN-701’s potential might hope that Merck’s move flushes out a higher bidder – a hope supported by the deal’s somewhat low breakup fee of $235m. But on Wednesday Terns traded below the $53-per-share value of the Merck acquisition, suggesting that the chances of a higher bid are slim.