Ariad Pharmaceuticals: A Small Company With Lots of Promise

| About: ARIAD Pharmaceuticals, (ARIA)
For years, much of Ariad Pharma’s (NASDAQ:ARIA) value had been tied to its mTOR inhibitor, Ridaforolimus. Ridaforolimus is an orally bio-available analog of Rapamycin- an immunosuppresent discovered decades ago- the “R” in mTOR. Thus far, there are two other analogs, or Rapalogs, as they are called, approved in oncology indications ahead of Ridaforolimus, the first-to-market Torisel from Wyeth (WYE), and Afinitor from Novartis (NYSE:NVS). Torisel is a pro-drug given by infusion while Afinitor is an oral medication. Should Ridaforolimus be approved, it will compete most directly with Afinitor.
mTOR is currently a very hot target in oncology due to its central role in the convergence of multiple signaling pathways. It is involved in cell proliferation, angiogenesis, and metabolism. Inhibition of this kinase by Rapamycin and its analogs has been shown to be effective against both solid tumors and leukemia as a monotherapy or in combination with chemotherapy or targeted agents.
Of the three analogs: Torisel, Afinitor, and Ridaforolimus, it has been suggested Ridaforolimus could be “best in class”. This may be due to the compound’s long half-life and good tolerability profile.
In 2007, Ariad signed a major partnership deal with Merck (NYSE:MRK) to develop the company's mTOR inhibitor, which provided Ariad $75 Million upfront and $850 Million in potential milestone payments. US profits would be split and Ariad would receive royalties on ex-US sales with both companies sharing development costs. At the time of the deal, Ariad’s CEO Harvey Berger called it “…an extraordinary partnership,” adding that Merck was selected “partly because the deal gave 16-year-old Ariad a chance to transform itself.” Ariad was determined to leave the ranks of the many biotechs that have languished as developmental stage companies and become a full-fledged commercial company.
Fast-forward three years: Merck’s bet appears to be paying off; Ridaforolimus is months away from completing Phase III trials for Sarcoma, with an anticipated regulatory filing end of this year. Rapalogs are now an accepted cancer treatment paradigm. Torisel brings in $500 million/annum, while Afinitor is poised to become a mega-blockbuster and Ridaforolimus looks to have blockbuster potential.
Ariad has also matured during this period, nurturing a promising multi-kinase inhibitor, AP24534, and an ALK inhibitor to its pipeline. However, its finances appear to have been strained by the cost sharing with Merck for the mTOR inhibitor trials, with multiple Phase IIs running in parallel to the ongoing Sarcoma Phase III trial, and additional Phase IIIs on the drawing board. In 2009 alone, Ariad paid about $30 million to support the mTOR program, about half its R&D budget. Realizing the costs for supporting the Ridaforolimus would continue to grow as the drug advanced toward commercialization, Ariad renegotiated its partnership deal with Merck for the development of the compound.
May 5, 2010- Ariad announces it has renegotiated its mTOR deal with Merck. The partnership deal became a licensing deal, with Merck assuming all costs associated with the development, manufacture and commercialization of Ridaforolimus. In return, Ariad received an infusion of $50 million plus the $19 million it had spent in 2010 on the program. It will now receive $514 million in milestone payments and greater than 10% royalties from worldwide sales.
Digging into this deal a bit, it seems Ariad has done quite well for itself, with impeccable timing. For simplicity, let’s first assume Ridaforolimus sales of $1 billion/yr, profit margins of 30% in the US, and one-third of total sales in the US. Under the original deal, Ariad was to receive half the US profits- that amounts to $50 million. It would also receive 7.5% of ex-US sales- also amounting to $50 million, for a grand total of $100 million.
What a coincidence, in the revised deal 10% of royalties on $1 billion in sales is $100 million.
The only difference is Ariad sacrificed some future milestone payments for $69 million in immediate, non-dilutive cash to strengthen its balance sheet, giving it enough run way to last until end of 2011. By then, it will likely have received multiple additional milestone payments from the Ridaforolimus deal.
With Ridaforolimus taken care of, Ariad can turn its focus to its multi-kinase inhibitor, AP24534, set to begin randomized Phase II trials later this year in CML. It is in the very enviable position of nearing success on its first proprietary compound while having the cash to put a second, and promising compound into pivotal trials. Results for AP24534 have compared favorably against Tasigna and Sprycel in multiple parameters, including complete cytogenic response and complete hematologic response. AP24534 differentiates itself from its competitors with its ability to inhibit a larger range of resistant mutations that occur in CML patients. It will be tested initially as a third line treatment, after patients fail Gleevec, then Tasigna or Sprycel. This is estimated to be a $300 million market.
Earlier this year, both Tasigna and Sprycel have been shown in large clinical trials to be superior to Gleevec in CML. Analysts and physicians alike, believe these two drugs will now vie for first line treatment status as a result of these studies. Sales of Gleevec for CML alone were about $3 billion. If Tasigna and Sprycel move into first line, AP24534 has the potential to become a second line drug. Ariad suggests this is a $600 million dollar opportunity. As a multi-targeted drug, AP24534 may be active in multiple indications beyond CML. Success beyond CML would expand its value significantly.
The last compound in Ariad’s arsenal is its ALK inhibitor, AP26113. Inhibition of the mutant ALK fusion gene (ELM4-ALK) by Crizotinib from Pfizer (NYSE:PFE) has been shown to be effective in NSCLC harboring this mutation. Preliminary results appear very good, though resistance to the drug appears over time. Pfizer estimates 45,000 NSCLC patients have this mutation. Although the patient populations are considerably smaller, ELM4-ALK is also found in neuroblastomas as well as a rare lymphoma, ALCL.
Pfizer’s Crizotinib has the overwhelming lead and may well become a blockbuster, but if AP26113 can prove its superiority over time with its increased potency against ELM4-ALK and lack of susceptibility to drug resistance, it has a chance at competing with Crizotinib in this niche.
These are all favorable developments as Ariad sets on the path toward becoming a revenue-generating biotechnology company. This is a small company with lots of promise.
Disclosure: Long NVS, MRK