Cost Savings Through Clinical Data Due Diligence

Merck & Co. (MRK) achieved approximately $1 billion in cost savings during its acquisition of Terns Pharmaceuticals (TERN) by meticulously reviewing the clinical data of Terns' chronic myeloid leukemia (CML) treatment candidate, TERN-701. Before the due diligence process, there was bidding competition at around $61 per share. However, the final agreement adjusted the price to $53 per share, completing the acquisition at a total of $6.7 billion. This is considered a prime example of how thorough clinical data due diligence can lead to substantial financial benefits.

Clinical Value and Data Re-evaluation of TERN-701

Merck's decision to proceed with the acquisition despite lowering the price was based on a rigorous scientific analysis of TERN-701's potential for regulatory approval. Terns had previously announced promising interim results from the CARDINAL trial (Phase 1/2), showing a Major Molecular Response (MMR) rate of up to 80% at week 24. However, Merck's scientific analysis team, after detailed analysis of individual patient data, predicted that a conservative estimate aligned with the criteria of the Food and Drug Administration (FDA) would be 'north of 50%'. While the clinical differentiation of the data was slightly adjusted, the company determined that the drug still held significant commercial value as a novel therapy.

Competitive Advantage Compared to Scemblix

Even after confirming a conservative MMR expectation of 50%, Merck strongly pursued the acquisition due to TERN-701's unique competitive advantages. Novartis' Scemblix (asciminib), a leading competitor in the CML market and the only approved allosteric BCR::ABL1 inhibitor, demonstrated a 24-week MMR rate of only 25% in clinical trials. If TERN-701 achieves an MMR of 50% or higher, as predicted by Merck's conservative analysis, it would demonstrate more than double the efficacy compared to its competitor. Furthermore, its once-daily oral administration and the absence of dietary restrictions are likely to make it a significant game-changer in the market.

Merck's BD Strategy to Address Keytruda Patent Expiration

This acquisition is a key component of Merck's Business Development (BD) strategy, which aims to diversify its portfolio and drive long-term growth. With the 2028 patent expiration of Keytruda (pembrolizumab), a blockbuster immuno-oncology drug that accounts for more than half of Merck's annual revenue, the company faces significant pressure to diversify its portfolio. Rob Davis, Merck's CEO, has stated that the company aims to secure multiple promising pipelines simultaneously to offset the potential revenue decline. TERN-701, which has received Breakthrough Therapy Designation, is expected to strengthen Merck's oncology and hematology pipelines and serve as a solid foundation for the post-Keytruda era.

Changes in the CML Treatment Market and Expanded Patient Options

The global market for CML treatments has a high unmet medical need, particularly for patients who have developed resistance to first- and second-generation tyrosine kinase inhibitors (TKIs). Merck's entry is likely to disrupt the market, which has been dominated by Novartis' next-generation allosteric CML treatment, Scemblix, and provide patients with new treatment options with significantly improved efficacy. If it successfully completes Phase 2 and achieves commercialization, it could capture a significant share of the multi-billion dollar CML market currently held by Scemblix.