Why ARIAD Pharmaceuticals Needs an SEC Investigation

On December 5, 2008, ARIAD Pharmaceuticals (ARIA) filed an SEC Form 8K which disclosed that four independent directors had abruptly resigned from the board of directors. The resignations came within a few months after another director, who was also the chairman of the audit committee, resigned and the general counsel was terminated.

In a letter to Ariad Chairman Harvey Berger, the resigning directors justified their action by saying:

Due to our vigorous disagreements with you over fundamental matters of corporate policy, professional ethics and proper standards of corporate governance on behalf of all ARIAD stockholders.

These allegations are very serious, especially because they come from highly respected individuals including the vice chairman of the board, who has been a member of the ARIAD board of directors for seventeen years and is Executive Vice President of Genzyme (GENZ).

Resigning directors – experience (from the ARIAD 2008 Proxy):

Michael D. Kishbauch, 59, one of our Directors since September 2004, has been President and Chief Executive Officer and a director of Achillion Pharmaceuticals, Inc., a biopharmaceutical company, since July 2004. Previously, Mr. Kishbauch was President and Chief Executive Officer of OraPharma, Inc., a biotechnology company, from 1996 until 2003 when it was acquired by Johnson & Johnson. Subsequently, from 2003 to 2004, he was President of the OraPharma division of Johnson & Johnson. From 1992 to 1995, he held various senior management positions at MedImmune, Inc., a biotechnology company, as President and Chief Operating Officer and Executive Vice President, Operations. From 1987 to 1992, Mr. Kishbauch was Vice President, Product Planning and Promotion of the Pharmaceuticals Division of Ciba-Geigy Corporation, and from 1982 to 1987, he was Executive Director of Product Management. Mr. Kishbauch received his M.B.A. degree from the Wharton School at the University of Pennsylvania and his B.A. degree in Biology from Wesleyan University.

Sandford D. Smith, 61, one of our Directors since October 1991 and our Vice Chairman since January 1999, is Executive Vice President and President, Genzyme International for Genzyme Corporation, a biotechnology company. From October 1997 to December 2000, he was President, Therapeutics International and from May 1996 to September 1996, Vice President and General Manager, Specialty Therapeutics and International Group for Genzyme. Mr. Smith was President and Chief Executive Officer and a Director of RepliGen Corporation, a biotechnology company, from 1986 to March 1996. Mr. Smith previously held a number of positions with Bristol-Myers Squibb Company from 1977 to 1986, including Vice President of Corporate Development and Planning for the United States Pharmaceutical and Nutritional Group. He is a director of Nventa Biopharmaceuticals Corporation, a biopharmaceuticals company. Mr. Smith earned his B.Sc. degree from the University of Denver.

Burton E. Sobel, M.D., 70, one of our Directors since June 2002, has been E.L. Amidon Professor and Professor of Biochemistry at the University of Vermont since 1994. He was also Physician-in-Chief from 1994 to 2005 and since 2005 has been Director of the Cardiovascular Research Institute at the University of Vermont. Dr. Sobel was a trustee of Fletcher Allen Health Care Center, in Burlington, Vermont from 1998 to 2004. Previously, he held senior academic and administrative positions at Washington University School of Medicine, from 1973 to 1994, and at the University of California, San Diego, from 1968 to 1973. Dr. Sobel is a director of Nuvelo, Inc., a biopharmaceutical company, and Clinical Data, Inc., a biopharmaceutical company. Dr. Sobel completed postgraduate training at the Peter Bent Hospital, Boston and the National Institutes of Health, Bethesda and received his M.D. degree from Harvard University and his A.B. from Cornell University.

Elizabeth H. S. Wyatt, 60, one of our Directors since June 2002, held various senior management positions over a period of twenty years at Merck & Co., Inc., most recently, from 1992 to 2000, as Vice President, Corporate Licensing. She also served in leadership positions in corporate licensing from 1980 to 1992 at Merck. Previously, she held administrative positions at Harvard Business School, Doyle Dane Bernbach, and Boston College. Ms. Wyatt is a director of The Medicines Company, a biopharmaceutical company. She received her M.B.A. from Harvard Business School, her M.Ed. in education from Boston University, and her B.A. from Sweet Briar College, Virginia.

Director resigned July 2008 - experience (from the ARIAD 2008 Proxy):

Peter J. Nelson, 50, one of our Directors since November 2004, is Managing Partner of Morecambe Partners, an advisory firm for real estate companies and early stage enterprises. Previously, from 2004 to 2005, he was Co-Chief Executive Officer of National Beverage Properties, Inc., a private real estate investment firm and, from 1997 to 2004, he was Senior Vice President-Operations, Chief Financial Officer, and Treasurer of Alexandria Real Estate Equities, Inc., a NYSE real estate investment trust principally providing scientific research space to life science entities and biotechnology companies. He continues to serve as Corporate Secretary of Alexandria Real Estate Equities, Inc. Previously, from 1995 to 1997, Mr. Nelson was Chief Financial Officer of Lennar Partners, Inc. (nka LNR Property Corporation). From 1986 to 1995, he also held senior management positions at Public Storage, Inc. and Westrec Properties, Inc. From 1980 to 1986, Mr. Nelson was an audit manager at Ernst & Young, LLP. Mr. Nelson received his B.S. degree from California State University, Northridge and is a certified public accountant.

No press release was issued by ARIAD at the time of the 8K filing; however, on Sunday night December 7, 2008 at 5:33 PM ET, ARIAD issued a press release announcing a conference call would be held just 15 hours later, on Monday December 8, 2008 at 8:30 AM ET

to discuss the recent resignations from its Board of Directors and to provide an update on progress in the Company's programs.

Only Phil Nadeau, a Managing Director and Senior Research Analyst at Cowen and Company LLC, asked questions on the call. A great many analysts were attending the American Society of Hematology meeting in San Francisco. It was 5:30 AM in San Francisco when the ARIAD explanation call began. If in fact others were on the call and did not ask questions, their indifference would be no better than condemnation. What is not clear is would that be a condemnation of management or the resigning board members?

During the conference call, Harvey Berger addressed the allegations contained in the resignation letter.

The financial media along with equity analysts play an important disclosure role in the investment community. However, both have been surprisingly quiet on the unusual events at ARIAD, except for an article written by Steve Syre in the Boston Globe titled: "Directors Revolt".

The catalyst causing the recent upheaval stems from ARIAD’s purchase of a 20% minority interest of Ariad Gene Therapeutics (AGTI). ARIAD already owned 80%. AGTI was set up years ago. It in-licensed gene regulation technology ARIAD needed to run its business. Shares of AGTI were issued as payment to the individuals and institutions that contributed the intellectual property.

ARIAD, in an unusual transaction, issued options to buy AGTI shares to several members of ARIAD management, including Harvey Berger, Jay LaMarche, John Illiucci and David Berstein. For years, stockholders have wondered why these individuals were compensated with AGTI options when they were already being paid by ARIAD. On the conference call, Berger justified the granting of AGTI options to management by reporting that on the year of grant, the individuals did not receive ARIAD options. The issuance of AGTI options to ARIAD management created a potential significant conflict of interest, which, although it had been disclosed for several years in filings to the SEC, may have acted as the incendiary device.

The obligation of ARIAD management is to maximize shareholder value, which would include paying as little as possible to buy the AGTI shares. However, as owners of AGTI shares, the obligation to themselves and their families is to maximize the sales price.

In the SEC Form 8K filed on September 23, 2008, it appears that the independent directors acting at the advice of their valuation consultant Oppenheimer & Co. offered to buy the AGTI shares and pay one share of ARIAD stock for each share of AGTI owned. Berger and LaMarche suggested AGTI minority stockholders receive 10 shares of ARIAD for each share of AGTI. Eventually the price was settled at two shares of ARIAD for each AGTI.

Berger and LaMarche properly recused themselves from the final ARIAD vote in an effort to not influence the final outcome, but the critical question remains. Did Berger and LaMarche attempt to interfere with negotiations in an attempt to influence the price to be paid to them?

It appears relations between certain parties significantly deteriorated, both before and after the acquisition causing the directors to resign.

The director’s scathing resignation letter reads as follows:

Re: Resignation from the Board of Directors

Dear Harvey:

We are writing to confirm our immediate resignations as four independent members of the board of directors (the “Board”) of ARIAD Pharmaceuticals, Inc. (“ARIAD”) due to our vigorous disagreements with you over fundamental matters of corporate policy, professional ethics and proper standards of corporate governance on behalf of all ARIAD stockholders.

Throughout our Board tenure, we have understood that our primary role as independent directors has been to promote the success of ARIAD and to act in the best interests of all ARIAD stockholders. We worked diligently to ensure there would be a level playing field for all ARIAD stockholders as a result of the recent AGTI transaction, in which you and Jay LaMarche had a clear conflict of interest. Unfortunately, the recent completion of the AGTI merger transaction has obviously been the trigger for your grossly inappropriate behavior in your dealings with the four independent directors who approved the AGTI merger despite your unjustified objections.

Our resignation is prompted by your self-interested, combative and obstructionist actions — particularly over the last month — involving implementation of the AGTI merger, the replacement of the Company’s general counsel, the mishandling of the AGTI appraisal litigation, your manipulative conduct prior to and at the November 3 meeting of the Board, the recomposition of the Board to allow your surrogates to control the Board’s decisions without regard to or even inviting our input, the removal of the vice chairman of the Board at a precipitously called meeting in which you knew we could not participate, your installation of a close personal family friend as lead director of the Board, and your determination to cause ARIAD to breach agreements approved by the Board over your opposition.

The four of us have irreconcilable differences with you and the four other directors constituting the current Board majority on the foregoing matters, the present and future policies of ARIAD, and your tenure as Chairman and CEO of ARIAD. Accordingly, we are required to resign and publicly disclose our disagreements.

The acts of unfair dealing against the four independent directors by you and the current Board majority have created a toxic environment within the company’s leadership ranks and inside the boardroom. Regrettably, you are now responsible for causing the departure of four more independent directors, as well as the prior departures of officers and other directors who were not full supporters of what we now recognize to be your personally motivated agenda for running ARIAD.

We are disappointed that your recent actions have caused a split on the Board which causes the simultaneous departure of four independent directors. The resigning directors include the senior officer of a sizeable publicly traded biopharmaceutical company and former vice chairman of the Board who has served ARIAD since its inception, a long-serving director who was a nationally respected member of ARIAD’s scientific advisory board, a CEO of a publicly- traded biotech company, and the former head of technology transfer of a major pharmaceutical company. In our many decades of public company experience, we have never before witnessed the egregious misbehavior in which you have engaged during recent weeks. We cannot continue to serve on ARIAD’s Board under these circumstances.

Our resignations are without prejudice to any of our rights (including indemnification, advancement, D&O insurance or exculpation) to which we may be entitled, by reason of the fact that we have been directors of ARIAD, under the ARIAD certificate of incorporation, the ARIAD bylaws, any applicable insurance policy, any agreement to that any of us is a party, or any applicable law.

We depart with the recognition that the scientific personnel and programs at ARIAD are first-rate and we continue to hope that they will be commercially successful. We hope that this success ultimately comes with a commitment by the Board to strong ethics and good corporate governance in which the ARIAD stockholders’ best interests are paramount. It is the abrogation of these fundamental principles at ARIAD today that prompts these resignations.

The resigning directors condemn Berger for his attempt to influence the work of the independent directors and for his retribution towards them for acting in the best interest of the ARIAD shareholders. The most serious allegation is the charge that Berger has stacked the board with his surrogates in an effort to control future votes and circumvent the practice of good corporate governance. Their statement specifically charges

the recomposition of the Board to allow your surrogates to control the Board’s decisions…..

Does this mean there are no longer truly independent directors at ARIAD?

Often an accusation is confused with a guilty verdict. It would be a mistake to assume that because Berger, LaMarche and the remaining board members are accused, that they are actually guilty of anything.

Internet stock market message boards are abuzz with both praise and condemnation for all the parties involved.

ARIAD’s response embedded in the SEC 8K filed on December 5, 2008 included the following:

Regarding the specific matters raised in the Resigning Directors’ letter, the Continuing Directors believe that (i) the Company has taken the appropriate steps to implement the AGTI merger which was approved by the Board (including by the Resigning Directors but excluding Dr. Berger and Mr. Jay LaMarche who, as previously disclosed, appropriately abstained from the vote) in September 2008 and to resolve the assertion of appraisal rights by certain former AGTI minority stockholders, (ii) the Company has complied fully with all of the terms of the agreements between the Company and its former general counsel (including the agreements described in the AGTI Merger 8-K) and intends to honor all of its obligations under those agreements, despite the suggestion by the Resigning Directors that such obligations will not be met, and (iii) to the Continuing Directors’ knowledge, no agreement entered into by the Company has been breached.

The Continuing Directors believe that the Company’s actions regarding these business matters are properly within the responsibility of the Company’s management, with oversight and guidance from the Board. The Continuing Directors fully support the actions taken by management with regard to these matters and do not concur with the positions taken by the Resigning Directors concerning the Company’s obligations under the agreements with its former general counsel. The Continuing Directors view the Resigning Directors’ positions as contrary to the best interests of the Company and its stockholders.

All actions taken by the Board on November 3, 2008 occurred at a meeting that was duly called and held in accordance with the Company’s charter and by-laws and for which proper notice had been given to all directors, including the Resigning Directors. After due consideration, the Board appointed Dr. Athanase Lavidas as lead director, replacing Mr. Smith, in an effort to strengthen the leadership of the non-management directors and their ongoing interactions with management. Dr. Lavidas, who was proposed for this leadership position by the Independent Directors, has served as an independent director of the Company for over five years and is the chairman and chief executive officer of a global healthcare company founded almost 100 years ago. Finally, while the Company is disappointed by the manner in which the Resigning Directors chose to depart, the Continuing Directors believe that the appointment of Dr. Lavidas as the lead director and the resignations of the Resigning Directors will further the ability of the Board to serve the best interests of the Company and its stockholders as the Company seeks to implement its strategic business plan.

The Independent Directors believe that Dr. Berger and other members of the Company’s management have at all times conducted themselves with the highest regard for integrity, good corporate governance and professional ethics, and they reiterate their strong, long-term support for Dr. Berger and the Company’s management team, especially during these challenging economic times. The Board further reiterates its commitment to fiduciary and ethical principles and will continue to serve the interests of the Company and its stockholders to the best of their abilities. The Board also intends to identify additional director candidates, as it believes that a diverse and sophisticated group of directors is critical to satisfying these objectives and executing the business strategy of the Company.

In a marital divorce, there are always three sides to the story: his…hers… and the truth. The divorce at ARIAD may be the same.

Early stage biotech companies burn lots of cash and need to access the capital markets on a regular basis. The capital markets are now stressed and only the best companies will have access to funding at favorable rates. Emerging biotechnology companies are filing for bankruptcy at an alarming rate. The current image of ARIAD is not flattering. Unless they are able to raise significant funds from the deforolimus collaboration with Merck, enter into a new collaboration with significant upfront payments or financially benefit from their litigations with Lilly or Amgen; they will need to look well-run, scientifically attractive and soundly managed or they will be unable to raise capital on favorable terms.

All of the persons involved in recent events deserve better than the negative innuendos in current circulation. For that reason and to assure stockholders that ethical corporate governance is being conducted at ARIAD; we need to know the truth which will only be learned after an SEC investigation.

Wall Street dislikes uncertainty of which there is plenty surrounding ARIAD at this time. Many opinions are circulating as to who did right and who did wrong. There is not enough public information to draw a comprehensive conclusion. In the best interest of the company, its management and the stockholders; I recommend that all interested parties including Ariad stockholders contact the SEC and ask for an investigation.

The SEC accepts and encourages such requests here.

Ariad is rapidly approaching an inflection point. The resigning directors closed their letter with,

We depart with the recognition that the scientific personnel and programs at ARIAD are first-rate and we continue to hope that they will be commercially successful.

No matter what the investment community thinks happened or who was at fault, we need to know the truth.

Disclosure: Author holds a long position in ARIAD stock

Comments

[cposch:]

I 100% agree with this article.

As a long, I recommend every single long of Ariad to file a report with the SEC to investigate Berger and Ariad. This company has been run, wrongly, by this guy for way too long. If he won't resign on his own, perhaps shareholders need another avenue - and the SEC hopefully will be just that.

2008 Dec 15 09:23 AM

[Stan08:]

Totally agree. Ariad should be investigated. The purpose of the CEO seemed always to maximize his own interest at the expense of shareholders. It is pathetic. it is disgusting. Shareholders should file for SEC investigations

2008 Dec 15 11:30 AM

[JM0558:]

Ariad shareholders have carried the full cost of patent litigation while the shareholders of AGTI carried none......yet they profit nicely from their share conversion. This has been the single consistent achievement for Ariad....the ability to grant themselves shares and look after their own financial gain while dumping on shareholders. Berger needs to go....the fish rots from the head. While I place value in Merck's due diligence....I hope they have this guy measured.

2008 Dec 15 12:35 PM

[cposch:]

Look at the history of this company since the IPO.

Look at the performance of the company since the IPO (excluding the hype and bubble of 2000 which was a complete hoax).

Look at the abysmal failures of products since the IPO.

Look at all the personnel and Directors who have resigned since the IPO.

Look at the AGTI agreement in the first place. How many CEOs of public companies design a scheme whereby the CEO is allowed to be rewarded financially in a private subsidiary, by products funded by the public company and financed by public investors?

Look at Harvey Berger's compensation arrangement since the IPO. Last year his total package was roughly $1 million - (which the company bleeds 10's of millions of dollars a year, with no commercial product, and many empty promises).

This company is nothing but a money machine for Dr. Berger and a couple others. Everyone else is funding their lives.

As a shareholder in this company, I strongly advise the author of this article and others, to contact the SEC at the email address provided, and also contact the largest percentage holders in Ariad to voice their opinion to author a proxy to kick Dr. Berger out of his position.

This company, in my opinion, will always be a failure as long as Dr. Berger is running it. Look at history, and what he has brought to shareholders - nothing but losses. Not for him, however....I'm sure he's made millions off public investors.

2008 Dec 15 02:30 PM