What is Terns Pharmaceuticals and why is Merck acquiring it?

Terns Pharmaceuticals is a clinical-stage biotechnology company focused on developing small-molecule drugs against validated biological targets where there is an opportunity to improve on existing therapies. Merck agreed to acquire Terns for $5.7 billion, or $6.7 billion inclusive of Terns' cash, primarily because of TERN-701, its lead CML drug candidate. The acquisition is a bet that TERN-701 can outperform or complement Novartis' Asciminib in chronic myeloid leukemia.

What is TERN-701 and how does it work?

TERN-701 is an allosteric BCR-ABL1 inhibitor — specifically a STAMP inhibitor that targets the ABL myristoyl pocket rather than the active site targeted by most existing CML drugs. Allosteric sites differ more across kinases than active sites do, which may reduce off-target effects and allow higher dosing. Novartis' Asciminib works through the same mechanism and has already been approved, which the report argues significantly de-risks TERN-701's biological approach.

How much clinical data exists on TERN-701?

The most recent Phase 1 CARDINAL trial update included 38 efficacy-evaluable patients. Terns divided those patients into two subgroups based on why they had previously switched from another TKI — 20 for lack of efficacy and 16 for lack of tolerability — with two patients unaccounted for in the split. Two Natural Capital notes that investor confidence is based heavily on the well-understood CML treatment landscape rather than on a large or mature trial dataset.

What is MMR and why does it matter for TERN-701?

MMR stands for major molecular response, a measure of how much the BCR-ABL1 cancer signal has been suppressed. MMR is achieved when BCR-ABL1 levels fall to no more than 0.1% of what they were at the time of CML diagnosis. It is a standard efficacy benchmark in CML trials, and the debate over TERN-701 centers significantly on whether its MMR rates will hold up — and remain clearly above Asciminib's — as the patient population grows.

What is Terns' broader business strategy?

Terns' stated approach is to develop small-molecule drugs targeting already-validated mechanisms of action where there is an identifiable opportunity to improve on efficacy, safety, or tolerability. TERN-701 in CML is the lead example. Terns went public in 2021 and was initially focused on a MASH treatment; it shifted emphasis to CML with the announcement of TERN-701 in 2022. Two Natural Capital likens the model to Karuna Therapeutics, which licensed a compound from Eli Lilly and built it into a $14 billion acquisition by BMS.

What happens next for Terns and TERN-701?

The Merck acquisition is in progress. Key upcoming developments include additional CARDINAL trial data readouts, further evidence on whether TERN-701's efficacy and safety profile holds as more patients are evaluated, and any confirmation of whether it avoids Asciminib's associated pancreatic toxicity and hypertension. The answer to those clinical questions is, in Two Natural Capital's framing, what will ultimately determine whether Merck paid a fair price or overpaid.

Merck's $5.7B Terns Bet Rests on 38 Patients: Does TERN-701 Justify the Price Over Asciminib?

The merger process disclosed in the Schedule 14D-9 complicates the low-ball narrative: six bidders were involved, two couldn't reach Terns' market price, and Party C withdrew after reviewing updated CARDINAL data showing TERN-701's MMR achievement rate was lower than at ASH, attributed partly to more patients having been pre-treated with Asciminib. The commercial case rests on two unproven advantages over Asciminib: TERN-701 can be taken with food, and it aims to avoid Asciminib's pancreatic toxicity and hypertension. Asciminib itself validates the path, already generating $1.3 billion in 2025 revenue on track to a $4 billion peak, but second-generation TKIs Dasatinib and Nilotinib each peaked at roughly $2 billion, illustrating what TERN-701's downside could look like if it fails to clearly separate. The central risk Two Natural Capital identifies is convergence: efficacy narrows and side effects worsen as more patients accumulate, leaving TERN-701 as a good but not transformative drug in a fragmented market.

Ticker: TERN (Terns Pharmaceuticals)
Research Firm: Two Natural Capital
Report URL: https://www.twonaturalcap.com/p/terns-pharma-derisked-allosteric?ref=shortreport.fyi
Position Disclosure: The report does not disclose a short or long position in Terns Pharmaceuticals. No financial interest in the outcome of the analysis is stated.

Thesis

Two Natural Capital argues that Merck's $5.7 billion acquisition of Terns is a reasonable but not obviously cheap bid for an early-stage CML asset whose value depends entirely on whether TERN-701 can outperform Novartis' Asciminib on both efficacy and tolerability as the clinical dataset matures.

Validated-Mechanism Strategy: Terns' core approach is developing small molecules against already-proven biological targets where there is a specific opportunity to improve efficacy, safety, or tolerability — with TERN-701 in CML as the lead execution of that strategy.
Large, Underserved Market: Imatinib transformed CML from a cancer with roughly a 30% five-year survival rate to one above 70%, but tolerability problems with subsequent TKIs remain significant — company management estimates 40% of CML patients on active-site inhibitors switch therapy within five years. Terns estimates 17,000 new frontline patients and 13,000 switching patients annually across G7 nations, per its 2025 Annual Report.
Asciminib Validates the Path: Novartis' allosteric STAMP inhibitor Asciminib received accelerated approval in third-line CML in October 2021 and first-line in October 2024. It is already generating $1.3 billion in 2025 revenue against an estimated $4 billion peak sales, per Novartis' 2025 investor presentation — proving that the allosteric mechanism works commercially and clinically, and that the path from third-line to first-line is achievable.
TERN-701's Differentiators Are Real But Unproven: TERN-701 can be taken with food, unlike Asciminib, which requires a two-hour pre-dose and one-hour post-dose fast. It is also designed to avoid Asciminib's most notable side effects, specifically pancreatic toxicity and hypertension. If it delivers on both counts, the report says it could capture Asciminib's $4 billion opportunity "and then some."
Small Dataset Underpins a Big Bet: The most recent Phase 1 CARDINAL update covered 38 efficacy-evaluable patients. Once split by reason for prior TKI failure — 20 for lack of efficacy and 16 for tolerability — the relevant subgroups are thin, with two patients unaccounted for in the company's own breakdown. The market's positive reaction reflects confidence in a well-understood mechanism, not a large or mature trial.
Merger Process Complicates the Low-Ball Narrative: The Schedule 14D-9 shows six potential bidders. Party E never responded. Party D was not interested. Parties A and B both said they could not arrive at a valuation above Terns' then-current market price of approximately $36–37 per share. Leerink had argued peak sales of ~$6.2 billion justified 1.5–2x that figure in acquisition price; the bidder behavior suggests that view was far from consensus among strategic buyers.
One Bidder Left After Seeing New Data: Party C withdrew from discussions after reviewing updated CARDINAL data. The Schedule 14D-9 notes that the updated MMR achievement rate was lower than the ASH presentation, attributed at least in part to more patients having been pre-treated with Asciminib, and that management speculated the updated data may have contributed to the withdrawal.
The Core Risk Is Convergence: The key downside scenario is that TERN-701's efficacy edge narrows and its side-effect profile worsens as more patients are evaluated, leaving it as a modestly differentiated competitor rather than a category winner. In that case, both Asciminib and TERN-701 could peak around $2 billion — a viable drug, but not a $6.2 billion one.

Notable Details

Asciminib has captured 23% of U.S. frontline CML prescriptions, 57% of second-line, and 59% of third-line, per the 2025 Novartis investor presentation — penetration rates that make the commercial opportunity feel immediate rather than speculative.
Party C's withdrawal came after a presentation by Ms. Burroughs showing that TERN-701's MMR rate in the updated CARDINAL data was lower than at ASH, though it remained within the confidence interval Terns had disclosed and the safety and tolerability profile continued to look encouraging.
The allosteric binding-site challenge is significant enough that D.E. Shaw's founder has reportedly spent enormous sums building supercomputers to run molecular dynamics simulations aimed specifically at finding these pockets — context that underscores how technically valuable Asciminib's validation of the ABL myristoyl pocket actually was for the entire field.
Second-generation TKIs Dasatinib and Nilotinib each peaked at roughly $2 billion in sales and Bosutinib at around $600 million — a fragmented market that the report uses to illustrate what TERN-701's downside could look like if it fails to clearly separate from Asciminib.
Nilotinib's cardiac side effects did not become fully apparent until after five years of patient follow-up, a precedent the report cites as a reminder that tolerability risks in CML drugs can take years to surface — directly relevant to whether TERN-701's clean early safety data will hold.

"Party C's withdrawal illustrates an important point when determining Terns' fair value. The risk with this asset is that its efficacy drops/side-effects increase as more patients are evaluated, such that it ends up trending closer to Asciminib."

— Two Natural Capital, after disclosing that one acquisition bidder exited following a review of updated CARDINAL trial data

FAQs

How does TERN-701 compare to Novartis' Asciminib (Scemblix)?

Both drugs target the same allosteric binding pocket in BCR-ABL1. The investment case for TERN-701 rests on two potential advantages: it can be taken with food, while Asciminib requires patients to fast for two hours before and one hour after dosing, and it aims to avoid Asciminib's most notable side effects, specifically pancreatic toxicity and hypertension. Whether TERN-701 actually delivers on those differences in larger trials is the central unresolved question, per Two Natural Capital.

Why do some analysts think Merck underpaid for Terns?

Leerink estimated TERN-701's peak sales at approximately $6.2 billion and argued the acquisition price should be 1.5–2x that figure, implying a materially higher bid or the emergence of a competing offer. That view assumes TERN-701 achieves clear differentiation from Asciminib on both efficacy and tolerability across a large patient population.

What did the Schedule 14D-9 reveal about the sale process?

The Schedule 14D-9, a regulatory filing disclosing the mechanics of the acquisition process, showed that six potential acquirers were involved. Party E never responded to outreach. Party D expressed no interest. Parties A and B both concluded they could not reach a valuation above Terns' then-current market price of roughly $36–37 per share. Party C withdrew after reviewing updated CARDINAL trial data. Only Merck proceeded to a signed agreement.

Why did Party C withdraw from the acquisition process?

Per the Schedule 14D-9, Party C reviewed updated CARDINAL trial data presented by Ms. Burroughs showing that TERN-701's MMR achievement rate was lower in the updated dataset than in data previously presented at the ASH Annual Meeting. The lower rate was attributed at least in part to more patients in the evaluable population having been pre-treated with Asciminib. Management speculated that aspects of the updated data may have contributed to Party C's decision to exit discussions.

How large is the CML drug market?

Terns estimates approximately 17,000 new frontline CML patients annually across G7 nations and 13,000 patients who switch medications each year, per the company's 2025 Annual Report. Asciminib alone is tracking toward $1.3 billion in 2025 revenue with an estimated $4 billion peak sales potential. The second-generation TKI market — Dasatinib and Nilotinib — each peaked at roughly $2 billion, with Bosutinib topping out around $600 million.

What is the bear case for TERN-701's valuation?

Two Natural Capital identifies convergence as the primary risk: if TERN-701's efficacy advantage over Asciminib narrows and its side-effect profile worsens as more patients are evaluated, it could end up as a modestly differentiated competitor rather than a dominant drug. In that scenario, both Asciminib and TERN-701 could peak at roughly $2 billion each — a commercially viable outcome, but one that would not support the $6.2 billion peak sales estimate that underpinned the most bullish pre-deal analysis.

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