2023-06-01 18:47:13 ET
Summary
- Terns Pharmaceuticals has a promising pipeline with potential best-in-class therapies for obesity and NASH.
- Upcoming data readouts for TERN-601 and TERN-501 could unlock value, with positive outcomes expected for both binary events.
- Terns is well-financed with cash runway into 2026, and I believe now is the ideal time to build a position.
Introduction
Mounjaro, Semaglutide and other new GLP-1 based weight loss drugs have encountered no issue selling off the shelves or making headlines . And the NASH field, once a minefield for drug development, has attracted investor buzz yet again after Madrigal's TR? agonist proved successful in a phase three trial . Investors watching on the sidelines may have a sense that they have missed the gravy train profiting from successful efforts to fight these two colossal diseases. I would push back against this sentiment, since I do not believe that we have reached the end of road when it comes to developing new GLP-1 or TR? agonist based drugs; newer and better drugs of the same categories will arrive later in the market. Terns Pharmaceuticals happens to own both a GLP-1 and TR? agonist in early stage clinical testing, and they both have the potential to become the best treatments in their respective classes.
I personally believe that Terns Pharmaceuticals ( TERN ) has an incredibly promising pipeline with a seasoned management team behind it . They are well-capitalized, and two data readouts loom over the horizon, serving as potential catalysts for the stock price — with the nearest one arriving in late June. Both upcoming data releases are somewhat de-risked by existing preclinical data, and both assets have blockbuster commercial potential if approved.
With shares trading at an enterprise value of ~$315 million at the current stock price of ~$10.56, now would be a good time to build an early position in a clinical stage biotech developing potentially best in class therapies with validated mechanisms of action. I would assign Terns Pharmaceuticals a buy rating.
An Incredibly Rich Pipeline
Although Terns' pipeline is still young, it has already shown incredible promise. It is relatively diversified, with three different candidates targeting three different indications. None of the candidates share a mechanism of action; all three are addressing massive markets.
Summation of TERNS' Pipeline
Candidate | Mechanism | Indication | Stage | Status | Next Data Readout |
TERN-701 | Allosteric BCR ABL Inhibitor | CML | Phase 1 | China PH1 Trial Ongoing; U.S PH1 Trial Initiation By 2H'23 | TBD |
TERN-501 +- TERN-101 | TR? Agonist ('501) +- FXR ('101) | NASH | Phase 2a | Enrollment Completed | Top-line data due 3Q'23 |
TERN-601 | Oral GLP-1R Agonist | Obesity | IND-Enablement | Phase 1 Initiation By 2H'23; (topline data due 2024) | Preclinical data to be presented on June 23 at American Diabetes Association |
TERN-800 Series | GIPR Modulators | Obesity | Lead Optimization | Ongoing Discovery | IND-Enablement Expected in 2024 |
Each of these candidates are also promising because they have clinically validated mechanisms of actions. Instead of innovating from 0 to 1, Terns is trying to optimize an existing pathway that works by going from 1-2. This pipeline strategy is super intentional and is much less risky than pursuing novel and unproven mechanisms of actions in my opinion.
Terns' Corporate Presentation - March
TERN-701 is a proprietary allosteric BCL-ABL TKI inhibitor designed to treat CML. It represents the third generation of allosteric TKI's and comes after the approval of Ascimnib — a first-in-class allosteric inhibitor of BCR:ABL activity in CML patients. Analysts believe that Ascimnib can achieve ~$2 billion in peak sales , and TERNS believes that '701 has the potential to capture a slice of the total market too. Built into this thinking is that '701 does not even need to demonstrate superior efficacy to Ascimnib; all it needs to do is show some benefit. This is because roughly 30-40 percent of people who start on a TKI switch to another TKI during the course of their treatment. So '701 does not need to score a home-run to become a beneficial treatment option for those suffering from CML.
Hansoh — a Chinese pharmaceutical company — has already offered their endorsement by partnering with Terns to commercialize '701 in the greater China region. Under this agreement, Hansoh is given full commercial ownership of '701 in China in exchange for prospective royalty payments and $68 million upfront. (Terns fully retains U.S and world-wide rights under this agreement.) A clinical trial for '701 is already being conducted in China, and the U.S trial is expected to initiate at any moment between now and the end of 2024.
TERN-501 appears even more promising because it is treating an even larger total addressable market with no FDA approved treatment. '501 is TR? agonist, the same class of drug as Resmetirom, which made history by being the first treatment to succeed in a phase three NASH trial without serious safety issues. Although far behind Resmetirom, Terns believes that '501 has the potential to become a best in class treatment option. Moreover, Terns is taking a unique approach by assessing the efficacy of '501 in a phase 2a combination therapy trial (named DUET) with TERN-101, which is their propriety FxR agonist and are currently being evaluated in a phase 2a NASH trial. DUET is expected to report top-line data in the upcoming third quarter.
Terns also believes that their GLP-1 candidate — TERN-601 — has the potential to ultimately rise above other older GLP-1 drugs in treating obesity. With the massive commercial success of other GLP-1s such as Ozempic and Mounjaro, Terns believes that '601 can also strike gold through a potentially superior efficacy and AE profile. New preclinical data is slated to be unblinded soon at the upcoming American Diabetes Association conference in June.
TERN-601 and TERN-501: Upcoming Events Could Unlock Value
TERN-601 preclinical data will be presented on the 23rd of June at the American Diabetes Association's 83rd Annual Scientific Session, and top-line results from '501's phase 2a 'DUET' trial will be reported in 3Q'23. Now is a good time to accumulate shares, as I believe both binary events will yield positive outcomes.
What makes '601 special in my view is that it is has synergistic potential with both '501 and '101. NASH and obesity are both massive markets, and they also happen to be co-morbidities too; obesity is thought to be the most common-cause of NASH. If '601 proves itself to be effective in reversing obesity, then the opportunity to combine '601 and '501 (or with '101) presents itself.
Another benefit of '601 is that the dosing is once a day with an oral formulation of the drug. Semaglutide, Mounjaro and Saxenda are given as injectables when used to treat obesity, which represents a major inconvenience relative to simply just consuming a pill. Any preclinical data showing similar efficacy to any of the other approved GLP-1's would be incredibly promising, since '601's ease of use makes it a more attractive treatment option.
Pharmacokinetics Comparison
TERN-501 and resmetirom comparison: SHBG levels at day 15 (Terns Corporate Presentation - March)
TERN-501 by itself is promising because its pharmacokinetics already suggest it has a superior profile compared to Resmetirom, which shares a mechanism of action and has consistently reported positive data. The figure above shows the efficacy of '501 and Resmetirom compared head to head. Sex hormone-binding globulin, or SHBG, is a key drug activity marker which indicates TR? activity. This biomarker is relevant because it is highly correlated with MRI-PDFF fat reductions and improvements in NAS. Madrigal's trials showed that the greater the SHBG increase, the greater the improvement in liver fat reduction, NASH resolution and fibrotic reduction.
DUET Trial Design
The design of Terns' phase 2a 'DUET' trial (Terns Corporate Presentation - March)
Moreover, the trial design of DUET is unique. The 16 week trial will assess the efficacy of ‘501 coupled with a low dosage of ‘101 — which is their FxR agonist. Coloring the thinking behind this design is the belief that the addition of a low-dose FxR may improve treatment outcomes by driving a reduction in fibrosis without compromising safety. (Remember that Intercept’s FxR agonist succeeded in reducing NASH fibrosis in their phase three trial, but was ultimately rejected because of safety concerns .) Terns’ thinking is ahead of the curve in the sense that they are the first biotech company to pursue a combination therapy in NASH using the only two clinically validated mechanisms of action; no one else has evaluated the combined efficacy of an FxR agonist and TR? agonist.
In any event, DUET is bound to unveil the therapeutic potential of both ‘101 and ‘501. Based on the trial design — and existing data — I believe that there is a strong chance that the market will be positively surprised by the results. TERN-601 has the potential to surprise in June too with stellar preclinical data that could de-risk subsequent obesity trials. Recall that Viking Therapeutics was trading at ~$9 a share prior to releasing data from their phase one GLP-1 trial (28 day trial). Today, it trades at ~$20 a share at a $2 billion market capitalization. Terns is due to initiate their phase one trial of '501 soon after they present their preclinical by the end of the 2H'23 (if they run a one month trial, then I would expect top-line data no later than the 1H'24).
Financials
Trading at ~$11.30 a share at the time of writing, Terns has a market capitalization of ~$640.5 million and an enterprise value of ~$357.5 million. They have no debt on hand, and their balance sheet holds ~$283 million in cash and cash equivalents as of last March.
Averaging their last four quarters of net losses suggests that their quarterly burn rate is around ~$18 million. And if you factor in earlier quarters prior to Q1’22, that figure only decreases. I would expect operating expenses to increase in the coming quarters, since Terns is expecting to launch multiple trials by the end of the year. Their own estimate for cash runway gives them until the end of 2026.
At the end of last year, they conducted a secondary offering worth $86.3 million at an offering price of $7.25 a share. With such a recent offering, and their extensive cash runway, the risk of further shareholder dilution in the near-term is seemingly reduced. As Terns pipeline matures, I expect that there will be more offerings to come down the line to bring their products to the finish line. From a long-term perspective, the raw market potential of their pipeline — if it produces promising data — will likely overshadow the risk that stems from shareholder dilution.
Valuation
Using a discounted cash flow model to value Terns would be inappropriate, since Terns does not generate any free cash flows yet. It would also demand several more assumptions than a normal discounted cash flow model (how many trials Terns wishes to run, the time-frame for those trials, if they will succeed or not, etc).
The prudent means of valuation at this stage would be comparable company analysis, where Terns is valued based on metrics of other peer companies in the industry. First, this requires valuing each asset in the pipeline separately to get a sense of the total commercial potential locked within.
Asset | TAM | Peak Sales |
TERN-701 | Gleevec, which treated CML, had peak sales ~$4.7 billion in 2015 before patent expiration. | ~$1.17 billion |
TERN-501 +- TERN-101 | NASH ( ~$1.21 billion U.S market size) | $250 million |
TERN-601 | Obesity ( ~$4 billion U.S market size) | $1 billion |
Outlined above are several conservative estimates outlining projected peak sales for each product in the U.S if successfully approved. First, I assume that the total addressable market will not grow in any indication. Then, I assume that '701 is able to reach just 1/4 of Gleevec's peak sales before patent expiration (Novartis estimates that their new TIK inhibitor can reach ~$2 billion in peak sales). I also assume for TERN-501 + TERN-101 that the total market for NASH is ~$1.21 billion, and that '501 and '101 are just able to capture 1/4 of that. For perspective, Goldman Sachs predicts that Madrigal's TR? can hit $4 billion in peak sales . Lastly, I assume that '601 will be able to reach just $1 billion in peak sales. In comparison, Novo Nordisk projected that Semaglutide will generate ~$4.2 billion in sales for 2023 .
All in all, using conservative estimates, Terns' pipeline has a peak sales potential of $2.42 billion. Historically, stocks within the biotech industry have traded at a price to sales ratio of ~5 . Assuming, modestly again, that Terns' will ultimately trade at a price to sales ratio of 2.5 yields a final valuation of ~$6 billion.
Conclusion
Terns has a rock-solid balance sheet with a slate of seasoned veterans at the helm. Their unique approach is to not cross the finish line the first, but to optimize validated approaches to have the best in class treatment. This strategy de-risks the pipeline drastically, since the all of their drugs have already validated mechanisms of action. In essence, the risk of initial discovery and cost of expanding the market is shifted out to other companies that first demonstrate success and win approval.
With two important upcoming catalysts before the year ends, as well as trial initiations, I believe now is an ideal time to build a long-term position in Terns Pharmaceuticals — which is exactly why I would assign it a buy rating.
Risks to Thesis
There are two major risks to this thesis. In the short-run, there is a non-zero chance that the FDA may decide to issue a CRL in response to Madrigal's anticipated new drug application for resmetirom. Although it has a clean safety and efficacy profile, the FDA still may raise an issue with their use of surrogate endpoints. ( Recent documents accompanying Intercept's advisory committee meeting show that the FDA has a high bar for both efficacy and safety.) If resmetirom is rejected, I would expect the sentiment around '501 to shift — leading to value compression.
And in the long-run, there is no guarantee that Terns' strategy will work. Having a first-mover advantage is still important, especially when it comes to commercialization. Being the second-mover is viable only if you can prove that your product is better than the current leader. Also, it is worth noting that obesity and NASH are crowded indications in particular. Many other companies are developing their own novel treatments to fight these diseases, and there is no certainty that Terns owns the best in both fields, let alone one.
For further details see:
Terns Pharmaceuticals: Upcoming Obesity Data Is One Of Many Catalysts Coming Up