This small-cap stock is expected to take off - if its weight-loss pill trial succeeds
By Ciara Linnane
'We see TERN as an attractively valued way for investors to play the obesity market,' says Mizuho
The stock of small-cap Terns Pharmaceuticals Inc. rose 6% on Thursday, amid bullish analyst comment on the company's pipeline, which includes an oral treatment for obesity that one bank believes could send the stock sharply higher.
The company (TERN) is currently conducting a Phase 1 trial of its TERN-601 small molecule GLP-1 receptor agonist, the popular class of drugs that includes Wegovy, Ozempic and Mounjaro, that have been approved in injectable form for diabetes or weight loss.
Earlier this week, biotech Viking Therapeutics Inc. released positive data from the Phase 1 trial of its oral therapy called VK2735.
Mizuho analysts said Viking's (VKTX) positive data are an overall net positive for Tern, as VK2735 achieved a 3.3% placebo-adjusted weight loss at day 28 based on a 40 mg dose, and proved safe and well tolerated.
Tern is hoping to achieve body weight reduction of 3% to 5%, said Mizuho, which has a buy rating on Tern's stock.
On a call to discuss the data from the trial, Viking management reiterated its view that the opportunity for a pill-based weight-loss therapy is a big one. Most patients would rather take a pill than have an injection and analysts are expecting pills to be a game-changer in the space.
Mizuho spoke to Tern after the Viking data were released and management said the numbers look encouraging, they'll be interested to see how the efficacy and tolerability hold up as the trial progresses to bigger doses and they are happy to see the market rewarding Viking.
Viking's stock has gained 339% in the year to date.
"We continue to favor Tern as a top small-cap idea within our biotech coverage universe," Mizuho analysts wrote in a note.
While it remains to be seen how well TERN-601 performs in the trial, given the size of the potential market there's room for smaller players to participate, said the note.
"Furthermore, given a current market cap of $400 million (especially in light of VKTX's current $8.7 billion market cap), we see TERN as an attractively valued way for investors to play the obesity market," the analysts wrote.
Tern was last quoted at $6.49, compared with Viking's price of $81.58.
The two market leaders, meanwhile, have become far more expensive since winning regulatory approval for their products.
Eli Lilly & Co. Inc. (LLY), maker of Mounjaro, has a market cap of about $740 billion, while Denmark's Novo Nordisk (NVO) (DK:NOVO.B), parent to Wegovy and Ozempic, has a market cap of about $577 billion.
Tern's Phase 1 trial data are expected in the second half. The company is also developing a treatment for chronic myeloid leukemia called TERN-701 that won orphan drug designation from the FDA earlier this month, meaning the regulator believes it has promise.
"With potentially meaningful stock inflection following both data catalysts, and given current risk/reward, where we remind that '601 still represents upside to our estimates, we reiterate our Buy rating on TERN," said the Mizuho analysts.
GLP stands for glucagon-like peptide. It works by mimicking the effect of a gut hormone that can help control blood-sugar levels and reduce appetite.
Ozempic is a treatment for diabetes and Wegovy for weight loss and have become so popular that Novo Nordisk is struggling to meet demand, and its main shareholder is buying a contract manufacturer to help it ramp up supply.
-Ciara Linnane
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03-29-24 0719ET
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