Merck to Acquire Terns Pharmaceuticals in $6.7 Billion Deal

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2:06Scarlet Fu:We need to talk about the M &A deal that has come out in New York this morning. Merck to buy Terns Pharmaceuticals for$6.7 billion to grow in the blood cancer space. Michelle Davis is our senior deals reporter here in New York and is covering this story for us. I feel like we should call it M &A Wednesday now because the deals no longer happen on Monday anymore. You know, it's because we have a deal show now. So, of course, that's why they're happening on Wednesday. But, yeah, big deal for Merck today. It makes a lot of sense that they're doing this because their best-selling drug, Keytruda, which contributed half of their sales last year,$31 billion, is also the world's best-selling drug, is going off patent.

2:46So they really need to do M &A to replenish their pipeline. Turns is not its drug is not yet approved. But analysts are saying that in a few years, assuming it does get approval, it could have peak sales of several billion dollars. And so for Merck, it's a bet that at the end of the decade, around the same time that Kate Truitt is going off patent, they will have this drug coming in to kind of help fill some of that hole. Merck, what are they saying about their M &A appetite, I guess? because we joke that the pharmaceutical industry is such a deal-heavy industry, pharma, biotech, that kind of thing.

3:24What's Merck saying? Because they do have that key trigger risk. Exactly. So Merck has been one of the most aggressive when it comes to M &A. Earlier this year at the JPMorgan Healthcare Conference, the CEO, Rob Davis, said that he wants to do several deals in the tens of billion dollar range. And so that means we'll probably see more from them. Also interesting to note that Merck's stock is up today on the news. And normally in M &A, the buyer's stock tends to go down on an announcement. But the fact that, you know, shares are up means investors are applauding this and they, you know, want Merck to keep doing stuff like this.

3:58Scarlet Fu:So the deal's worth$6.7 billion. It's a$53 a share in cash, which is a 6 % premium to Tern's last close. There are some analysts out there who say that maybe Merck is not spending enough here. And this invites other companies to come in and make their own bid for turn pharmaceuticals as well. You know, we will see if that happens. There were some bidding wars in pharma last year with the Medsera deal being, you know, one of the most notable ones. That said, the stock turns the stock has increased like 50 percent since January on basically no news. So there could be an argument that maybe there was some built in, you know, M &A speculation already into the already built, baked into the price.

4:41But, you know, you never know. There are other pharma companies out there who are also trying to replenish their pipeline. So it wouldn't be unprecedented. And of course, which bankers were on this deal? They don't have they didn't list the acquirer advisor, but the financial target Centerview Partners and Jeffries. So a couple unusual or not unusual, but just more boutique, more boutique. center view has i mean they're generally on most of these on the sell side and jeffries has has been doing a lot more on the sell side too yeah the boutiques are like we used to call them boutiques but in mna they're not really boutiques anymore are they exactly they've really made a commitment during real pjt and all those guys um is there any regulatory risk when these health care deals get done or is it just a big mark buying a little biotech thing and nobody really cares how's that work not as much i mean the last time we saw something kind of splashy get attention was when Amgen tried to buy Horizon and FTC tried to block that deal.

5:34They ended up settling and the deal went through anyway. But in something like this where, you know, Tern's drug isn't even approved and its biggest competitor is owned by Novartis, you know, the competing kind of compound, it seems unlikely.

5:48Scarlet Fu:So given what Merck has done and the fact that investors like the deals that it's made so far, I'm guessing we're going to expect to see more acquisitions from Merck in the coming weeks and months? That's probably, yeah, definitely. Stay with us. More from Bloomberg Intelligence coming up after this. Support for the show comes from Public. Lately, it feels like there are two types of investing platforms. Some are traditional brokerages that haven't changed much in decades, and others feel less like investing and more like a game. Public is positioned differently. It's an investing platform for people who are serious about building their wealth.

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7:03See complete disclosures at public.com slash disclosures. The thing about AI for business, it may not automatically fit the way your business works. At IBM, we've seen this firsthand. But by embedding AI across HR, IT, and procurement processes, we've reduced costs by millions slash repetitive tasks and freed thousands of hours for strategic work. Now we're helping companies get smarter by putting AI where it actually pays off, deep in the work that moves the business. Let's create smarter business, IBM. From coast to coast, unlock adventure at Red Lion Hotels by Sinesta, where restful sleep, friendly service, and trusted local knowledge are part of every stay.

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8:12Scarlet Fu:You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at 10 a.m. Eastern on Apple CarPlay and Android Auto with the Bloomberg Business app. Listen on demand wherever you get your podcasts or watch us live on YouTube. Let's talk a little media here. Interesting story on the Bloomberg Terminal. Walt Disney Chief Executive Officer Josh DeMauro has seen$2 billion technology bets falter. One of them unraveling entirely just days into his new job. Let's see what this means for the Walt Disney Company. We've got some other media stuff to talk about. And we turn to Geetha Ranganath, and she is the media analyst for Bloomberg Intelligence.

8:48Hey, Geetha, there's news out regarding Disney. Can you talk to us about a couple of these deals that seemingly are falling apart here? Yeah, this is a big deal, Paul. I mean, you know, Josh Tamaro obviously took the helm at Disney just a week ago, and we're seeing this open AI Sora deal that, you know, Disney had kind of inked about three months ago. And basically the deal here was that this would be a three year licensing agreement where Disney would make a one billion dollar equity investment into OpenAI. And Sora would be allowed to use about 200 of Disney's characters to kind of create all of these short form videos, which, you know, users could basically engage with on the Disney Plus platform.

9:29You know, this was kind of, I think, Disney's way of playing offense, defense with, you know, the whole rise in AI and kind of, if you can't beat them, join them, kind of really joining the bandwagon and saying, yes, we have a stake here with AI. So this falling apart definitely kind of leaves Disney. Definitely they were blindsided. They've been kind of trying to do different things in terms of really monetizing their IP, creating like this really this franchise fandom, if you will, right, really digging deep into it. That's what Josh tomorrow has spoken, both with this opening idea as well as the Epic Games deal.

10:06That was a deal that actually Josh tomorrow had kind of brokered. And just over the past few days, we've kind of seen, you know, a lot of news with Epic Games, too. And so this really kind of now raises the stakes for them to kind of find out, you know, whom else they can partner with to kind of deepen that that fan engagement.

10:23Scarlet Fu:OK, so he's got his work cut out for him. Certainly makes for a busy first week on the job. Geeta, we also want to talk to you about what's going on with Netflix. It's bolstering its live streaming, live streaming mega events. There was the BTS comeback show, which I guess the live show didn't attract as many people as thought, you know, actually attending the event. But the actual streaming of it was a monster hit, wasn't it? It was a monster hit, Scarlett. You're absolutely right. Over 18 million viewers worldwide. And this is, again, we come back to the basic buzzword in media right now, which is engagement.

11:01What are all the different ways that you can build engagement? And, you know, again, the OpenAI sort of deal with Disney was, again, a way for Disney to build that engagement with their fans. Netflix kind of chasing all of these different types of content, you know, whether it is sports, whether it is this live event, the BTS comeback tour. Again, trying to deepen that engagement, trying to deepen their connection with fans. as you have more and more sources of, you know, video basically competing for time spent. Again, huge, you're absolutely right, huge event for Netflix really shows how they can kind of go after all of these different genres and build that scale, build that appointment television kind of buzz and, you know, really get a good ROI on their investment.

11:49By the way, they're increasing their content spending for events like this this year by two billion dollars that's a pretty sizable step up so we're looking at them uh you know spending about 20 billion dollars scarlet this year on content wow all right geetha it's uh opening day for my new york yankees they'll be opening up out in san francisco this evening 8 p.m eastern first pitch i'm not gonna be a good game yep i'm not going to espn to watch this i'm not even going to the yankees own network yes i'm I'm going to Netflix to watch this game tonight. Where are we in this world? Where are we in this world?

12:22Talk to us about, you know, Netflix has said, oh, we're never getting into sports. Well, that's gone by the wayside. What do you think their sports strategy is? So their sports strategy, Paul, I mean, this is a really important point. Their sports strategy has been very, very calculated, very, very measured. At a time when we've seen other media companies like, you know, Disney and Amazon and YouTube kind of spend billions and billions of dollars on sports rights. Netflix has taken a far more cautious approach, but an approach that has really served them well. So they started out with this$500 million deal for, you know, WWE content.

12:55They went after some NFL Christmas Day games. But this World Baseball Classic was actually their first big foray into world live sports, you know, an event in Japan. And it has really served them well. So you just look at the ROI on that event. They spent about$100 million for, you know, 47 games. And they got something like 31 million global viewers. really a huge, huge viewing record for them. And again, just shows how, you know, by making really calculated bets, again, you can kind of build that buzz and for them really build that critical engagement metric.

13:29Scarlet Fu:Yeah, that is pretty incredible. And I guess part of it is also to build up the Netflix brand outside of the U.S. where sports rights have gotten to the point where it's prohibitive. But you look at the rest of the world and it's a little bit more doable. Absolutely. So if you're just looking this year at sports rights, Scarlett, companies are spending about over$40 billion just this year across the board for U.S. sports rights. And we're only looking at that going up further and further as, you know, the NFL looks to hike its fees. The NBA looks to hike its fees. So, yes, they do. They are making this really smart move by diversifying, going across the board.

14:05And it's paying off. That's what's so great about it. To me, the defining moment will be when Netflix takes a Sunday package from the NFL. And Geetha, I think that's that day is coming. What do you what do you think? I also think it is coming. So they've already kind of dabbled with that, Paul. You know, they've done the Christmas Day games again. They had some of the highest viewerships ever for the Christmas Day games, something like 45 million viewers. Yeah. Yeah. So I also think that they are definitely, you know, probably going to go for a digital package. I mean, I mean, the NFL wants to go there.

14:44They know that majority of the viewership is migrating to streaming and it would be stupid for them not to kind of sell a digital package. So I definitely think it's going to happen sooner rather than later.

14:55Scarlet Fu:Stay with us. More from Bloomberg Intelligence coming up after this. Support for the show comes from Public. Public is an investing platform that offers access to stocks, options, bonds, and crypto. And they've also integrated AI with tools that can assist investors in building customized portfolios. One of these tools is called Generated Assets. It allows you to turn your ideas into investable indexes. So let's say you're interested in something specific like biotech companies with high R &D spend, small cap stocks with improving operating margins, or the S &P 500 minus high debt companies. Chances are there isn't an ETF that fits your exact criteria.

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17:18Scarlet Fu:You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at 10 a.m. Eastern on Apple CarPlay and Android Auto with the Bloomberg Business app. Listen on demand wherever you get your podcasts or watch us live on YouTube. Chewy, forecasted sales for the year that beat analyst expectations. Stocks are pretty big here, 10, 12 percent here today. That's good news here. Let's break it down with Diana Rosado-Pena, consumer staples analyst at Bloomberg Intelligence. She joins us live here in our Bloomberg Interactive Broker Studio. you. So, Chewy, what did you learn on their earnings call?

17:52Yeah, I mean, they have been doing pretty well, both on the top line and profitability. There's no complaints from investors, or at least they shouldn't be for this quarter. So, I'm just looking at the stock here. The stock's up, again, about 12 % today, but it is down 20 % year to date and down about 20 % over the trailing 12 months. What's the investment call here for Chewy? What are the growth drivers top line for this company? Yes. So it's their ability to grab consumers. Once you enter, I guess, the chewy environment, it's difficult for you to leave. They have about 84 % of their revenue comes from Autoship.

18:33So it's pretty much you set it up. It's subscription-based pretty much. So you set it up and every so often you get your goodies at your doorstep. So did they compete against the Amazons of the world, the Walmarts of the world, the Pets.com? They do. Yes. So, you know, they have about a third of the e-commerce, you know, market share in the United States. They compete with Amazon. It has around the same. Well, there are not many companies out there that can say they have a third of a market where you compete against an Amazon and a Walmart and things like that. Exactly. And the thing with Chewy is that they have expanded beyond merchandise, beyond food.

19:16Now you can get your, you know, your pharmacy, you can get, you know, your vet needs. They actually have vet locations, 18 vet locations. They're starting to do that. They see that that engages customers more. So that is, you know, an upside for them. So how is that business? I have no idea because it's all kinds of pet food in general. than stuff like toys and all that kind of stuff. What's the tariff situation for those, that kind of stuff? So it seems that they have been able to navigate that. Obviously, you know, some of the pressure, they pass that through consumers. They're seeing a net sales per active consumer, which is kind of like, you know, their pricing grow in the low single digits.

20:02So they are comfortable with that. You know, the scale and the price and the product mix that they have allows them to kind of like get the hit on the margin without, you know, showing it to us. This was a obviously a COVID stock that just like like a Peloton a little bit. But this is obviously done much better post. How do people view this? Is this a kind of a consumer staple kind of name? How do you think about that? I would say it's it's a it's a, you know, it's a retailer, you know, the way that I would see it. You know, going back to the, you know, pandemic and COVID, they actually had, obviously, this was a very favored stock because everybody was at home.

20:48And then, you know, the cohorts that were acquired during the pandemic, they kind of reduced. And that was kind of like a story of 2024. It was difficult for them to grow consumers because, you know, the cohort was so massive that it was pretty much the, you know, they couldn't keep up with, you know, they couldn't keep a lot of those consumers. But that has turned around and they are seeing, you know, significant growth. We actually expect that most of the growth in sales is probably going to come from active consumers rather than pricing. I mean, I look at, you know, I know nothing about this business, but I look at the first place I look for when I look at a P &L free cash flow, great free cash flow here.

21:28I mean, it's$700 million for calendar year 26, maybe$850 projected for calendar year 27. What do they do with the free cash flow? They invested in the business. They're growing scale. Obviously, they're opening vets. That is something that they haven't pretty much experienced. They're actually investing outside of the United States. They're trying to get into Canada. They're giving some of that back in share repurchases, but we don't necessarily expect it to be significant, you know, in 2026. What's the margin analysis you guys do as analysts and investors? Where's the leverage in the income statement to maybe improve margins?

22:10Because as a retailer, tight margins. What can they do, really? I mean, there are actually, it seems that, you know, they're working a lot with leverage, operating leverage, in their distribution centers. They seem to be, they are automated. So that has been building scale, trying to get consumers to buy in more premium brands. They have private label, which they wanted to grow it to like the mid-teens. That is going to add about 500 basis points to gross margin. And other non-merchandise revenue. So that is usually higher profit than merchandise. Stay with us. More from Bloomberg Intelligence coming up after this.

23:22Steady. Retirement accounts? Yep. High yield cash? Yes again. They even have direct indexing. Public has modern design, powerful tools, and customer support that actually helps. Go to public.com slash market and earn an uncapped 1 % bonus when you transfer your portfolio. That's public.com slash market. Add paid for by Public Holdings. Brokered services by Public Investing, member FINRA SIPC. Advisory services by Public Advisors, SEC Registered Advisor. Crypto services by ZeroHash. All investing involves risk of loss. See complete disclosures at public.com slash disclosures. So there's a lot of noise about AI, but time's too tight for more promises.