2023-10-09 09:19:04 ET
Summary
- Terns Pharmaceuticals stock is down 15% in the past 10 months, despite bullish articles following a bearish prediction.
- The company initially planned to develop drugs for the Chinese market but switched to developing US drugs for US consumers.
- Terns' lead candidate TERN-501, a THR-? agonist, lacks convincing data and faces competition in the NASH market.
I covered Terns Pharmaceuticals ( TERN ) last year in a rare bearish article, and gave an even rarer sell rating. Three very bullish articles by other authors followed my rather pessimistic effort. The stock is down 15% in these 10 months, however that doesn’t mean I was right, because the stock had doubled from its December prices, sometime in April. So what does Terns do, and what has happened to it in the last 10 months?
Terns, as I noted, began life as a discovery team in California with a development team in China, planning to take advantage of China’s improving drug approval bureaucracy to develop drugs for the Chinese market. Midway, they switched gears and started developing US drugs for US consumers; however, that copycat mindset didn’t go away, and their drugs, instead of being Chinese copycats of US drugs, are now rather poor US copycats of US drugs. This is the TERN story as I see it.
Take their THR-? agonist and lead candidate TERN-501, for example, which is in a phase 2a trial in NASH. The space leading THR-? agonist is, of course, Madrigal’s resmetirom, which will have its regulatory fate decided in a few months. Resmetirom has very strong results, and there are many other players in the NASH market, some of which have different mechanisms of action, while some are THR-? agonists as well. There is no space yet for yet another THR-? agonist like TERN-501, especially since TERN-501 hasn’t even put forward an adequate thesis for why we should consider it, let alone provided convincing data.
This NASH asset is from Eli Lilly originally. In 2018, Terns, then an exclusively Chinese company, became a naturalized American company by acquiring three programs from Eli Lilly and a $30 million series A backed by Lilly Asia Ventures. At that time, these programs included an FXR agonist called TERN-101, an SSAO inhibitor called TERN-201, and a preclinical candidate against an undisclosed target. Intercept’s obeticholic acid is an FXR agonist, and it was recently rejected by the FDA for NASH, while also restricting its usage in primary biliary cholangitis, its first approved indication, for serious livery injury issues. Thus, FXR agonists are not the in-thing right now. Terns has quietly abandoned its 201 program, and 101 only lives on as a potential combo with its current lead asset, TERN-501, the THR-? agonist.
I noted how this THR-? agonist showed disease activity in a MAD study involving healthy volunteers. Of course, there is no disease in healthy volunteers, so that term - disease activity - is a little silly. By disease activity, I simply mean adequate target involvement, like binding with the right receptors, reducing the correct pathologic proteins, and so on. I have discussed all of that priorly, so you can go through that earlier article for background.
TERN stock fell drastically on June 27, from $12 to nearly $7, after Eli Lilly published what the market considered best-in-class data from a phase 2a trial of its weight loss candidate retatrutide in obese patients with excess liver fat. Around that date, many NASH stocks fell, as you can see from the chart below, so it wasn’t TERN alone. However, possibly due to its NASH connection to LLY, Terns fell more drastically than the rest of the pack.
In August, the company published data from the phase 2a DUET trial, which effectively puts TERN-101 out of the picture. Data showed statistically significant improvements in the TERN-501 monotherapy arms in liver fat content, but only modest improvements in the combo therapy arm. This data had very little effect on the stock price, because despite the company’s claims, there isn’t much differentiation for a product that will take at least 6 more years to reach the market, compared to competing drugs with similar mechanisms and profiles that will be in the market in a few months. What analysts at Jefferies said, as quoted in Fierce , sums up my thinking:
Despite it looking generally in line on a [placebo]-adjusted basis versus its peers, we still aren’t sure given the timelines in NASH and the cost of development that this asset makes sense for Terns to develop standalone (perhaps an out license) given the cost and development timelines in NASH.
Financials
TERN has a market cap of $327mn and a cash balance of $286mn. R&D expenses were $14.2 million for the quarter ended June 30, 2023, while G&A expenses were $7.0 million. At that rate, they have a cash runway of well over 10 quarters.
TERN stock is primarily owned by institutions, followed by PE/VC firms, and retail presence is low. Keyholders are Orbimed, FMR and Vivo. Insiders regularly purchase stock.
TERN recently lost its CEO, who resigned citing health reasons, and was replaced by the Chair of the Board.
Risks
TERN is a risky investment because of all the reasons I stated earlier, and now. Their molecules have also-ran profiles, not clinically perhaps, but because they are chasing entrenched rivals with so-so data.
Bottom Line
I reiterate my avoid rating on this stock. They do have a lot of cash, which I guess they can legitimately use to purchase better and more competitive assets. But what they do have right now does not impress.
For further details see:
Terns Pharmaceuticals: Business Model Does Not Impress