Executive Summary / Key Takeaways

• Strategic Pivot from Failure to Focus: Terns Pharmaceuticals' October 2025 decision to abandon its metabolic pipeline after disappointing TERN-601 Phase 2 data (4.6% placebo-adjusted weight loss, 12% discontinuation rate, and reversible Grade 3 liver enzyme elevations) represents a costly but necessary reset that concentrates all resources on TERN-701, its allosteric BCR-ABL inhibitor for chronic myeloid leukemia.

• TERN-701 Shows Best-in-Disease Potential: Early CARDINAL trial data demonstrate a 64% major molecular response (MMR) achievement rate by 24 weeks in heavily pretreated, refractory CML patients, with 75% cumulative MMR overall—metrics that management claims are "at least two times higher" than competing therapies, including Novartis (NVS)' asciminib (Scemblix), suggesting potential to disrupt the $2-3 billion CML market.

• Strong Balance Sheet Buys Execution Runway: With $295.6 million in cash and marketable securities as of September 2025, TERN has sufficient capital to fund operations into 2028 at current burn rates (~$20 million quarterly), providing critical time to mature CARDINAL data without immediate dilution risk, though eventual funding needs remain certain.

• Shelved Metabolic Assets Retain Partnership Optionality: While TERN-501 (THR-β agonist) and TERN-801 (GIPR modulator) are no longer internally funded, the company is actively seeking strategic partners, potentially salvaging value from these programs in a competitive obesity landscape where GLP-1 dominance has raised the bar for new entrants.

• Key Risks Center on Execution and Geopolitics: The investment thesis hinges on TERN-701's ability to replicate early success in larger patient cohorts, while regulatory disruptions at the FDA, U.S.-China trade tensions affecting the company's Hong Kong operations, and the eventual need for additional capital present material downside scenarios.

Setting the Scene: From Metabolic Hope to Oncology Focus

Terns Pharmaceuticals, incorporated in Delaware in 2016 after Cayman Islands domestication, began as a clinical-stage company pursuing both metabolic diseases and oncology through small-molecule innovation. For years, the company balanced these dual mandates, advancing TERN-601 (an oral GLP-1 receptor agonist for obesity) and TERN-501 (a THR-β agonist for MASH) alongside its oncology asset TERN-701. This bifurcated strategy reflected a common biotech approach: diversify across therapeutic areas to mitigate binary clinical risk.

That strategy collapsed in October 2025. The Phase 2 FALCON trial for TERN-601 delivered a maximum placebo-adjusted weight loss of just 4.6% at 12 weeks—far below the 10-15% threshold needed to compete in a GLP-1 market dominated by Novo Nordisk (NVO) and Eli Lilly (LLY), where approved therapies achieve 15-20% weight loss. Worse, 12% of patients discontinued due to adverse events, and three participants experienced reversible Grade 3 liver enzyme elevations, two deemed drug-related. In a single data release, TERN-601 went from potential oral GLP-1 contender to clinical also-ran.

The implications were immediate and severe. Management announced it would "not advance TERN-601 or invest in other metabolic assets, including TERN-501 or the TERN-800 series," effectively writing off years of R&D investment and the company's original metabolic focus. This decision, while painful, reveals a management team willing to make ruthless capital allocation decisions when data dictate failure rather than sinking good money after bad. For investors, this pivot transforms TERN from a speculative metabolic play into a pure oncology bet, dramatically altering the risk-reward calculus.

Technology, Products, and Strategic Differentiation

TERN-701: The New Center of Gravity

TERN-701, a next-generation allosteric BCR-ABL inhibitor targeting the ABL myristoyl pocket, now carries the entire investment thesis. The CARDINAL Phase 1 trial, initiated in patients with heavily pretreated chronic phase CML, has generated data that management describes as "unprecedented" and potentially "best-in-disease." As of the June 30, 2025 cutoff, 55 patients were enrolled with a median of three prior tyrosine kinase inhibitors (TKIs), including 36% with prior asciminib exposure and 25% with prior ponatinib or investigational TKIs.

The efficacy data justify the hyperbole. Among 32 efficacy-evaluable patients, the cumulative MMR rate reached 75% by 24 weeks, with 64% achieving MMR and 100% maintaining it. Critically, in difficult-to-treat subgroups, TERN-701 demonstrated consistent activity: 69% MMR in patients lacking efficacy to their last TKI, 60% in prior asciminib patients, and 67% in those with prior asciminib, ponatinib, or investigational agents. No patients had lost MMR at data cutoff. These response rates, if sustained in larger cohorts, would indeed represent a step-change improvement over existing therapies.

The safety profile supports broad utility. With 87% of patients remaining on treatment, discontinuations were driven primarily by disease progression (n=4) rather than adverse events (n=1). The majority of treatment-emergent adverse events were low-grade, with diarrhea (22%), headache (18%), and nausea (16%) all Grade 1-2. Grade 3+ events were uncommon, most frequently neutropenia (7%) and thrombocytopenia (4%). No dose-limiting toxicities were observed up to the maximum 500 mg daily dose, and exposures were dose-proportional, suggesting a wide therapeutic window.

Why does this matter? CML treatment has seen incremental progress, but resistance and intolerance to existing TKIs remain significant unmet needs. Novartis' asciminib, the current standard in later-line therapy, generated MMR rates of 25-40% in similar patient populations. If TERN-701's 64% MMR achievement rate holds in the dose-expansion phase—enrolling up to 40 patients each at 320 mg and 500 mg doses—it could capture substantial market share in a $2-3 billion global CML market. The March 2024 Orphan Drug Designation provides seven years of market exclusivity upon approval, enhancing the commercial moat.

The Abandoned Metabolic Programs: From Pipeline to Partnership Candidates

The metabolic assets, while no longer strategic priorities, retain potential value through partnerships. TERN-501, a liver-distributed THR-β agonist, showed preclinical data in June 2024 demonstrating synergistic weight loss when combined with GLP-1R agonists, normalizing energy expenditure and preserving lean mass. In a GLP-1-obsessed market where combination therapy is the next frontier, TERN-501's mechanism could appeal to partners seeking to extend their franchises.

Similarly, TERN-801, a GIPR modulator from the TERN-800 series, represents another potential combination partner. The challenge is timing: with TERN-601's failure highlighting the difficulty of competing in obesity, and big pharma already advancing their own combinations, these assets may face limited partnership interest. Management's explicit statement that they are "seeking a strategic partner" acknowledges this reality—value realization is highly uncertain, and failure to secure deals would render these programs worthless.

The "so what" for investors is clear: metabolic assets represent optionality with low probability of success. Any partnership deal would provide non-dilutive capital and validation, but investors should assign minimal value to these programs in their base case valuation. The pivot to oncology is complete, and TERN-701 must succeed on its own merits.

Financial Performance & Capital Allocation

Terns' financials reflect a classic clinical-stage biotech profile: zero revenue, rising R&D investment, and disciplined cash management. For the three months ended September 30, 2025, research and development expenses increased 27% year-over-year to $19.9 million, driven by clinical and preclinical program expenses. General and administrative expenses decreased 11% to $7.8 million, demonstrating management's willingness to cut overhead while protecting core development.

The nine-month picture shows R&D up 18% to $59 million, with total operating expenses of $82.5 million generating a net loss of $72.6 million. Operating cash burn was $63.1 million, a manageable rate given the cash position.

The balance sheet remains robust: $295.6 million in cash and marketable securities as of September 30, 2025, down from $358.2 million at year-end 2024, representing a quarterly burn rate of approximately $20 million.

Management's guidance that existing cash will fund operations "into 2028" implies roughly 12-14 quarters of runway at current spending levels. This provides crucial time to generate mature CARDINAL data without near-term financing overhang. However, the company acknowledges it "will need substantial additional funding" and expects "to continue to incur net operating losses for at least the next several years." The September 2024 capital raise, which generated $161.9 million net proceeds from issuing 14.06 million shares and pre-funded warrants, demonstrates access to capital markets but also highlights the dilution risk inherent in the eventual next round.

The capital allocation decision to abandon metabolic programs, while painful, improves efficiency. The $18 million spent on TERN-601 in the first nine months of 2025—representing nearly one-third of total R&D—can now be redirected to TERN-701, accelerating enrollment and data generation. This focus reduces the "science experiment" risk of managing multiple unrelated programs and allows the company to build deep expertise in CML.

Outlook, Execution Risk, and Competitive Positioning

The CARDINAL Trial Path Forward

The immediate catalyst is the December 2025 ASH presentation, where an abstract with updated CARDINAL data has been selected for oral presentation. This forum will provide the first look at mature data from the dose-expansion cohorts, potentially validating or refuting the early efficacy signals. Success here would position TERN-701 for Phase 2/3 development and attract investor attention to the CML opportunity.

The competitive landscape is formidable but not impenetrable. Novartis' asciminib generated $500 million in 2024 sales and holds a dominant position in later-line CML. However, its MMR rates in refractory patients hover around 30-40%, well below TERN-701's early 64% achievement rate. If TERN-701 can demonstrate superior efficacy with comparable or better safety, it could capture significant share, particularly in patients who have failed asciminib—a population representing 36% of CARDINAL enrollees.

The broader CML market includes first-line therapies like imatinib, dasatinib, and nilotinib, but the real opportunity lies in the later-line setting where resistance and intolerance drive treatment changes. TERN-701's allosteric mechanism, distinct from ATP-competitive TKIs, provides a rational basis for activity in heavily pretreated patients. The key execution risk is whether the small sample size (32 efficacy-evaluable patients) will translate to consistent results in larger, more diverse populations.

Geopolitical and Regulatory Headwinds

Terns' operations in Hong Kong and China create unique risks. The company highlights potential disruptions from U.S.-China trade policy, including "increased costs of materials and production processes, supply chain disruptions, and delays due to new tariff policies or trade restrictions." The BIOSECURE Act, passed by the Senate in October 2025, targets Chinese biotechnology companies, and while Terns is a U.S. corporation, its Hong Kong subsidiary could face scrutiny or restrictions on technology transfer and clinical operations.

FDA disruptions pose another threat. The Secretary of HHS announced a 20,000-person reduction in force in March 2025, with the FDA losing 3,500 full-time employees. Executive Orders from the Trump Administration targeting deregulation could accelerate approvals but also create uncertainty in guidance and review standards. For a company dependent on timely IND approvals and clear regulatory pathways, this instability adds execution risk.

Partnership Prospects for Metabolic Assets

The search for partners for TERN-501 and TERN-801 faces headwinds. The obesity market is increasingly concentrated around GLP-1 therapies, with big pharma prioritizing internal combinations over external assets. TERN-501's preclinical data showing synergy with GLP-1R agonists is encouraging but early-stage, and potential partners will demand robust clinical validation before committing resources. The failure of TERN-601 may tarnish Terns' metabolic credibility, making partners wary of the company's platform.

The "so what" is that metabolic asset value is likely minimal in the near term. Investors should treat any partnership announcement as upside surprise rather than base case assumption. The real value driver remains TERN-701's CML potential.

Valuation Context

Trading at $29.36 per share, Terns carries a market capitalization of $2.64 billion and enterprise value of $2.35 billion. As a pre-revenue clinical-stage company, traditional earnings multiples are meaningless. The valuation must be assessed through the lens of pipeline potential, cash runway, and comparable oncology biotech valuations.

Peer comparisons provide context. Akero Therapeutics (AKRO), with a Phase 3 FGF21 analog for NASH, trades at an enterprise value of $3.75 billion despite no revenue. 89bio (ETNB), also in Phase 3 for NASH, carries an EV of $1.68 billion. Viking Therapeutics (VKTX), with Phase 2/3 obesity assets, trades at $3.64 billion EV. TERN's $2.35 billion EV positions it in the middle of this range, reflecting its earlier-stage but potentially higher-impact oncology asset.

The CML market opportunity supports this valuation. With global sales of TKIs exceeding $5 billion annually and the later-line segment representing 20-30% of patients, a best-in-disease therapy could capture $500 million to $1 billion in peak sales. Applying a typical 3-5x revenue multiple for oncology biotechs and a 15-25% probability of success for Phase 1 assets, the current EV appears reasonably calibrated to TERN-701's potential, though it leaves little room for execution missteps.

Cash position is the critical valuation anchor. With $295.6 million and burn of ~$20 million quarterly, TERN has 12-14 quarters of runway—sufficient to reach Phase 2 data readouts that would significantly de-risk the program. This financial stability distinguishes TERN from many cash-constrained peers and reduces near-term dilution risk, supporting a higher valuation multiple than typical Phase 1 companies.

Risks and Asymmetries

The central thesis faces several material risks. Clinical execution risk is paramount: the CARDINAL data, while promising, derive from just 32 efficacy-evaluable patients. Larger cohorts could reveal lower response rates or safety signals that undermine the best-in-disease narrative. Any loss of MMR in the expansion phase would severely damage credibility.

Competitive risk extends beyond asciminib. Several companies are developing next-generation TKIs and combination therapies for CML. If a competitor reaches market first with superior data, TERN-701 could be relegated to a niche role, limiting market opportunity. The CML treatment landscape, while stable, is not static.

Geopolitical risk is uniquely acute for Terns. The company's Hong Kong operations expose it to escalating U.S.-China tensions, potential supply chain disruptions, and the BIOSECURE Act's restrictions. While not currently targeted, future legislation could prevent clinical development collaboration or technology transfer, crippling the company's ability to operate efficiently.

Funding risk looms beyond 2028. Even if TERN-701 succeeds, commercialization will require hundreds of millions in manufacturing, marketing, and sales infrastructure. The company will need to raise substantial capital, likely at valuations highly sensitive to clinical data outcomes, creating potential for significant dilution if data disappoint.

Regulatory risk from FDA disruptions could delay approvals or create uncertainty in review standards. The 3,500-person FDA workforce reduction and executive orders pushing deregulation might accelerate timelines but could also reduce predictability in regulatory interactions, increasing development risk.

Conclusion

Terns Pharmaceuticals' metabolic reckoning, while painful, has crystallized a focused, high-impact oncology strategy centered on TERN-701. The early CARDINAL data suggest genuine best-in-disease potential in a well-defined $2-3 billion CML market, with response rates that could challenge Novartis' asciminib dominance. The company's $295.6 million cash hoard provides runway to mature this data without near-term financing pressure, a critical advantage in the volatile biotech sector.

The investment thesis hinges on two variables: TERN-701's ability to replicate its 64% MMR achievement rate in larger, more diverse patient populations, and management's capacity to navigate geopolitical and regulatory headwinds while maintaining capital discipline. Success would position TERN as a leading CML player, justifying significant valuation expansion. Failure would likely render the company a sub-scale oncology biotech with limited options.

For investors, the risk-reward is asymmetric: downside is capped by cash and limited metabolic asset optionality, while upside could be substantial if TERN-701 delivers on its early promise. The December 2025 ASH presentation represents the next major catalyst, offering a clearer view of whether this pivot from metabolic disappointment to oncology focus will ultimately create shareholder value.