Ariad: Shares Overvalued On Fundamentals

| About: ARIAD Pharmaceuticals, (ARIA)

Ariad Pharmaceuticals (NASDAQ:ARIA) is a biotechnology company that discovers, develops, and commercializes treatments for cancer. Last December, its lead drug Ponatinib was approved by the FDA for managing chronic myeloid leukemia (CML) and Philadelphia chromosome-positive acute lymphoblastic leukemia (Ph+ ALL). The company's second product AP26113 is undergoing Phase I/II development as treatment for ALK+/EGFR+ non small cell lung cancer (NSCLC). With Ponatinib already launched in U.S. markets, the next stock moving event for ARIA is likely the announcement of beat or miss 1Q2013 revenues for the drug.

Ponatinib like other CML and Ph+ ALL therapies on the market is a tyrosine kinase inhibitor (TKI). However, it is more effective than other TKIs in its ability to overcome the resistant and mutant forms of the BCR-ABL oncogene expressed in the cancer cells. In addition, Ponatinib is a potent blocker of the T315I mutant form of BCR-ABL against which other TKIs are ineffective. The compound was approved on the basis of the Phase II PACE study as treatment for CML and PH+ ALL in patients that have failed prior TKI therapy. The label carries a boxed warning for hepatotoxicity and arterial thrombosis.

PACE Follow-Up Data Presented at ASH 2012

The trial enrolled 449 Nilotinib and/or Dasatinib intolerant or resistant patients or those presenting with the T315I mutation, and suffering from either chronic phase (CP), accelerated phase (AP), or blast phase (BP) CML, or Ph+ ALL. All patients received a once daily 45 mg dose of Ponatinib. The primary endpoint was a major cytogenetic response (MCyR) for CP-CML patients, and a major hematologic response (MaHR) for AP/BP-CML and Ph+ ALL patients.

Results from the CP-CML group with a median follow-up of 15.3 months were most comprehensive: overall 56% and 46% of patients achieved a MCyR and a complete cytogenetic response (CCyR); 70% and 66% of patients that presented with the T315I mutation experienced a MCyR and a CCyR; 51% of patients without the T315I mutation achieved a MCyR; and overall a major molecular response (MMR) was observed in 34% of patients. Among patients in the AP-CML and BP-CML/Ph+ ALL groups, overall 57% and 34% experienced a MaHR. These data are still maturing and outcomes could change on final analysis.

PACE 12 Months Follow-Up Data on Primary End-Points

Source: Ariad Presentation ASH December 2012;

Given that patients in the study were heavily pretreated, with 93% having received two TKIs, and 58% having been on three or more TKIs, these results are remarkable. Importantly, these responses were observed in patients that had run out of options and did not have viable treatments available for their condition. Although, it is very possible that with long-term exposure to Ponatinib, patients might develop a resistance to the drug, it is likely that compared with other TKIs, the time to development of resistances will be longer, and the number of resistances smaller.

Ponatinib Potential Uptake by Line of Treatment

Based on clinical trial results it is clear that Ponatinib is effective in a substantial population of CML and Ph+ ALL patients that have few feasible treatment options. However, data read-outs that would clearly confirm the drug's efficacy in earlier stages of the disease are limited. In addition, it is likely that doctors will factor in the serious adverse events (SAEs) observed in the PACE study, and included in the boxed warnings on the label into their decision regarding the best option for their patients. Specifically, the warnings mention deaths due to arterial thrombosis and liver failure, and require routine monitoring for conditions such as congestive heart failure, hepatic function, high blood pressure, serum lipase, hemorrhage, fluid retention, and blood count.

Ponatinib: Serious Adverse Events

Source: Ponatinib Label;

Management on the post-approval conference call attributed the warnings on the label to older patients that suffered from multiple pre-existing conditions, and had received two or more TKIs for their disease. In addition, since the SAE's mentioned were observed in initial stages of the regimen and did not accumulate on exposure to the drug, it appears likely the events were not due to Ponatinib. Still, I believe that there will be some impact of the black box warnings on potential use of the agent, and the impact will vary with the line of treatment.

In 3rd or Higher Line Treatment

CML and Ph+ ALL patients that have failed two of more TKIs represent the low hanging fruit for Ponatinib. The risk-benefit of treating these types of patients with Ponatinib is clear as patients with the same epidemiology were enrolled in the PACE study. Given the limited treatment options available to physicians at this stage of CML and Ph+ ALL, the boxed warnings on the Ponatinib label will not be a gating factor for widespread utilization of the drug. Physicians will monitor for comorbidities and manage toxicities as they develop in patients.

In 2nd Line Treatment

Since ~90% of CML patients present with CP-CML, Ponatinib's focus in 2nd line will clearly be on patients in the chronic phase of the disease. The compound will compete largely with 2nd generation TKIs, Dasatinib and Nilotinib. Both drugs were approved as 2nd line therapy on the basis of single arm Phase II studies that evaluated the agents in patients that had failed imatinib. Dasatinib is approved for CP-CML, AP-CML, and BP-CML, whereas Nilotinib is approved for CP-CML and AP-CML. Importantly, Ponatinib is being tested in patients that are unresponsive to two or more TKIs, while Dasatinib and Nilotinib were examined in patients who had failed just one TKI.

In the Dasatinib CP-CML study, 59% and 49% of patients achieved a MCyR and a CCyR after a median follow-up of 15.2 months, compared with 56% and 46% observed in CP-CML patients in the PACE study, after 15.3 months follow-up. Moreover, 84% (resistant) and 97% (intolerant) of patients that achieved a MCyR in the Dasatinib CP-CML study maintained their responses at 24 months, relative to 91% of patients in the PACE study, at 12 months. In the Nilotinib study, a MCyR and a CCyR were seen in 59% and 44% of CP-CML patients at 24 months follow-up.

Comparison of Pivotal Trial Data of TKIs in 2nd Line CP-CML Treatment

Source: NCCN CML Guidelines; Ponatinib ASH 2012 Presentation;

Based on the above data one could argue that Dasatinib appears superior to Ponatinib. However, it is important to keep in context that the patient population enrolled in the PACE study was sicker and had already received two or more TKIs prior to enrollment in the trial. In contrast, Dasatinib was tested in patients that had failed only Imatinib. Moreover, Ponatinib fared pretty well in the 19 patients on the study who had previously failed only one TKI, reporting a MCyR of 84% at 15.3 months of follow-up. However, these trends favoring Ponatinib in a less heavily pretreated population need to be confirmed in a larger group of patients to derive any competitive benefit.

Nevertheless, the data clearly demonstrates the effectiveness of all three drugs in patients who have failed prior TKI therapy. Therefore, it is likely that physicians will turn to elements such as a patient's age, ability to tolerate the medicine, and the presence of comorbid conditions, in their evaluation regarding the choice of drug for each specific patient. For example, since Nilotinib carries a boxed warning for cardiac complications, it might be preferred for patients with a history of lung disease, or for patients at risk for pleural effusions. Since Dasatinib is associated with pleural effusions, it might be favored for patients with a history of arrhythmias, heart disease, pancreatitis, or hypoglycemia.

Based on these factors, I believe that the boxed warnings and routine monitoring requirements will restrict Ponatinib use as 2nd line treatment in CP-CML. However, the drug will be used extensively in patients that present with the T315I mutation. In addition, Ponatinib use will be positively impacted by the updated NCCN guidelines that require patients be monitored every 3 months (by quantitative polymerase chain reaction (QPCR) testing) to determine whether the TKI they are receiving continues to benefit them. As patients switch to an alternate TKI on failing the previous TKI, Ponatinib will be used earlier in the disease continuum, although as a later line of therapy.

In AP-CML, 64% of patients on Dasatinib after 8 months follow-up achieved a MaHR, compared with 57% of patients in the PACE study after a median follow-up of 15.8 months, and 47% of patients on Nilotinib at 12 months follow-up. In BP-CML, 34% patients on Dasatinib after 8 months follow-up achieved a MaHR, compared with 35% of patients in the PACE trial after 6.2 months follow-up.

Comparison of Pivotal Trial Data of TKIs in 2nd Line AP-CML and BP-CML Treatment

Source: NCCN CML Guidelines; Ponatinib ASH 2012 Presentation;

Even though the data above do not provide an outright choice in favor of Ponatinib in AP-CML or BP-CML, I believe that given the preponderance of patients that present with resistances and mutations including the T315I mutation, it is more than likely that Ponatinib will be heavily used as 2nd line treatment in AP-CML and BP-CML.

In 1st Line Treatment

Imatinib, Dasatinib, and Nilotinib are drugs approved for treating CML and Ph+ ALL in the front line setting. Imatinib, approved in 2003, was the first TKI launched to treat CML and Ph+ ALL. Dasatinib and Nilotinib are 2nd generation TKIs, and in clinical studies have demonstrated superiority over Imatinib as treatments for CML and Ph+ ALL in 1st line treatment. However, Imatinib continues to dominate the market driven in part by the high percentage of patients that initially respond to the drug, but also because early responders continue to receive the drug as maintenance therapy for many years. However, the drug's share within the newly diagnosed patients is shrinking and Dasatinib and Nilotinib are capturing market share. Based on clinical trial data, Imatinib is extremely effective in patients presenting with CP-CML, however the drug is only marginally beneficial as treatment for AP-CML and BP-CML.

Imatinib Follow-Up Data in Front-Line CP-CML

Source: Imatinib Labels: 2003; 2006; 2008; and 2011;

Ponatinib is currently being investigated against Imatinib in front line setting in the Phase III EPIC trial. The study is expected to complete enrollment by YE2013 and interim results are expected in 2014. If approved, the drug's expected launch in 2015 would coincide with Imatinib going generic in the same time frame. Based on the considerations that ~90% of CML patients are diagnosed with CP-CML, that 76% of patients on Imatinib achieve a MCyR within 12 months, and that generic Imatinib would be priced at an extremely steep discount to the branded drugs, it is more than probable that physicians would place most patients with CP-CML initially on generic Imatinib. My argument is bolstered by the NCCN guidelines which call for QPCR monitoring every 3 months to determine if patients are responding to their TKI therapy. As such, doctors have the option of switching early in the disease continuum to another TKI in case Imatinib is ineffective. Within the group of non-responders to Imatinib, Ponatinib would compete with Dasatinib and Nilotinib as treatment for newly diagnosed CP-CML patients. A physician would likely match patient characteristics such as the risk score, age, the presence of comorbid conditions, the ability to tolerate therapy, with the SAEs profile of each drug to choose between the three drugs.

In the case of AP-CML and BP-CML where only 38% and 7% patients on Imatinib achieve a complete hematologic response (CHR), Ponatinib would be the clear choice. In addition, newly diagnosed patients that present with the T315I mutation would also be placed on Ponatinib.

Commercialization Strategy and Low Near-Term Share Dilution Risk

ARIA continues to hold rights to develop and commercialize Ponatinib and AP26113 in all geographies and in all indications. Management has indicated that is unlikely to out-license rights to Ponatinib to strategic partners. In the U.S., the company has built a sales and marketing infrastructure and launched Ponatinib. In Europe, the company has made key hires and expects to be launch-ready by July this year, in time for the 3Q2013 expected approval of Ponatinib in the geography.

ARIA raised ~$310 million in a registered public offering of ~16.5 million shares priced at $19.60/share in January. This transaction takes the number of shares outstanding to ~183 million and excludes any potential dilution from exercise of warrants and/or stock options. I believe that the ~$142 million the company exited 3Q2012 with, and the $310 million raised in January is sufficient to support commercialization of Ponatinib in domestic and international territories as well as the development of AP26113, over the near-term.

Ponatinib Market Opportunity

Tyrosine kinase inhibitor therapies for CML and Ph+ ALL are developed, approved, and commercialized on the basis of line(s) of treatment. Imatinib is approved only as front line therapy, while Dasatinib and Nilotinib are approved for front and later lines. Ponatinib and Bosutinib have approval for second or higher lines of treatment, whereas Synribo, though not a TKI, is approved for third and later lines.

In the U.S., an estimated 4,900 new patients will be diagnosed with CML in 2013, and another 2,500 previously treated patients will switch to another TKI. In addition, an estimated 3,800 and 600 CML patients in Europe and Japan will be placed on an alternate TKI in 2013. Moreover, the number of newly diagnosed patients in the U.S., Europe and Japan will expand to 5,850, 8,600, and 1,200, respectively, by 2017. Imatinib, Dasatinib, and Nilotinib are expected to go generic in 2015, 2020, and 2023, respectively.

Follow-up data from the study that evaluated Imatinib as treatment for newly diagnosed disease demonstrated that 40% of the initially enrolled patients discontinued therapy within 5 years. In Dasatinib and Nilotinib studies that tested the agents separately in patients that had failed Imatinib, 63% and 69% of enrolled patients were off therapy at 5 and 4 years follow-up respectively. Although the discontinuations happened over time, annual rates of discontinuations directly correspond to the absolute rates due to accumulation of patients that discontinue every year. In addition, patients who fail second line therapy have also failed first line therapy. So of the 40% that fail Imatinib every 5 years, 63% will also fail Dasatinib. ARIA has stated that the mean duration of treatment associated with Ponatinib will be 3 years, on average patients will receive 6 months of treatment every year, and the cost will be $9580/month of treatment. I assume that Ponatinib's cost/month of treatment in Europe and Japan will be 25% lower than the U.S. price.

Ponatinib Value/Share Based on Line of Treatment

In 3rd or higher line treatment
Incorporating the data points mentioned above and assuming a 90% penetration rate in 3rd or higher line therapy, treatment discontinuation rates of 15% and 25% in year 2 and 3 respectively, I estimate U.S. revenues of $150.5 million in 2020. For Europe and Japan, I estimate combined revenues of $252.9 million in 2020.

In 2nd line treatment
Based on key parameters discussed above and assuming a 33% penetration rate in 2nd line therapy, treatment discontinuation rates of 15% and 25% in year 2 and 3 respectively, I arrive at a U.S. revenue estimate of $110.9 million in 2020. For Europe and Japan, I estimate combined revenues of $186.2 million in 2020.

In 1st line treatment
Again considering the core elements of valuation provided by ARIA and market research providers and assuming a 10% penetration rate in 1st line therapy (given that Imatinib is going generic in 2015), treatment discontinuation rates of 15% and 25% in year 2 and 3 respectively, I estimate U.S. revenues of $125.6 million in 2020. For Europe and Japan, I estimate combined revenues of $210.7 million in 2020.

Incorporating the revenue estimates, and assuming a profit margin of 30%, an earnings multiple of 20, and a discount rate of 20%, I arrive at an $11.40/share value for Ponatinib.

AP26113 Valuation

The company also has AP26113 which is currently undergoing Phase I/II development as treatment for ALK+ and EGFR+ NSCLC. ARIA has indicated that the drug is likely to enter Phase III development later this year. For the EGFR+ NSCLC indication, I estimate a value of $2.50/share based on 5x my 2020 revenue estimate of $602 million. Similarly, for the ALK+ indication, I calculate a value of $1.00/share based on 5x my 2020 revenue estimate of $240 million. I assume a discount rate of 20%, and probability of approval of 45% in both cases.

Price Target
Combining a Ponatinib value of $11.40/share with a value of $3.50/share for AP26113, I arrive at a 1-year Price Target of $15/share for ARIA.


Initially, Ponatinib will be used heavily to treat CML patients who present with or progress to the AP-CML and BP-CML/Ph+ ALL phases, those who are diagnosed with the T315I mutation, and those that have few options. If on further follow-up of the PACE study, the drug demonstrates durable response as well as a comparable or superior efficacy and safety/tolerability profile to Dasatinib and Nilotinib, it will see improved utilization in 2nd line CP-CML. Remarkable outcomes from the Phase II study currently underway evaluating Ponatinib in patients that have failed Imatinib will also help. The drug's use in newly diagnosed CP-CML will likely be limited.

Importantly, my 2020 revenue estimate for Ponatinib of ~$1.04 billion is comparable with the $600 to $800 million ARIA has guided to for 2017-2018. In fact, given my thesis, it could be argued that my penetration rates for Ponatinib are aggressive. However, since the stock appears overvalued despite the aggressive revenue estimate, it only reinforces my bear case. The real overhang on the stock is the company's large number of outstanding shares.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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