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Ariad Pharmaceuticals (NASDAQ:ARIA), based in Cambridge, Mass., engages in the discovery and development of small molecule drugs for the treatment of cancer. Earlier this month, the company released its 4Q 2010 earnings and hosted a conference call discussing the report. This follows the successful results from its pivotal, 700+ patient phase 3 SUCCEED trial. Globally, Ariad has given investors a lot to be excited about, but there are also causes for concern.

Positives: Ariad’s strong balance sheet is clearly a positive. With $103.6 MM in cash and cash equivalents, and with plans to spend approximately $53-56 MM, ARIA anticipates cash of $59-62 MM at the end of the year (assuming a $25 MM milestone payment for NDA filings by Merck (NYSE:MRK) and following modification of a term loan and warrant exercise earlier this year). Management says this will last through 2012. Cash burn has slowed for the time being, due to Merck’s assumption of costs associated with ridaforolimus. Further potential sources of cash include $40 MM from Merck for regulatory filings in Europe and Japan, and $14.2 MM from the exercise of warrants in February 2012 (exercise price: 2.15).

Furthermore, the tiered, double-digit royalties are favorable for Ariad and, following approval, we expect the company to be profitable. The FDA granted a special protocol assessment (SPA) for the SUCCEED trial, prior to dosing of the first patient.

The other two candidates, Ponatinib and AP26113, are showing promise. AP26113 is in preclinical trials with an expected IND filing in the middle of the year. According to Ariad, this compound has significantly higher potency than the investigative ALK inhibitor by Pfizer (NYSE:PFE) and inhibits mutated forms of ALK that have become resistant, something I view quite positively. Ponatinib continues to be on schedule in enrollment of its pivotal phase 2 trial, PACE, against resistant leukemias. Updated clinical data from the phase 1 trial showed that for all (small sample size) patients with a specific mutation, T315I responded to treatment, and 66% of patients overall achieved a major cytogenic response. Ariad also plans to possibly start clinical trials in other hematological indications. Per analyst questions, options for confirmatory trials are still being evaluated, but initial data is promising.

Risk Factors: While clearly there is an unmet need for treatments for sarcomas, the broad applicability of ridaforolimus is not guaranteed. Furthermore, statements from the SUCCEED trial press release raise the issue of how much pricing power and applicability Merck/Ariad will have. In this age of rising healthcare costs, convincing insurers and benefit providers that a statistically significant couple of weeks (almost two months) are worth a high price tag (~$50,000 per year) is not trivial.

Also of note, during the conference call management brought up the cancellation of a prostate cancer clinical trial (in asymptomatic patients, however) for ridaforolimus due to the adverse events, i.e. mouth sores. While this is a known effect of mTOR inhibitors (rapamycin-based analogs, so-called rapalogs, are already on the market for cancer and immunosuppressant indications), it raises questions of the broad applicability of ridaforolimus.

Conclusions and Future Directions: Globally, with three candidates in various stages of clinical development, Ariad’s eggs are now in multiple baskets. With the risk of the ridaforolimus platform mitigated by the Merck partnership, the company is nearing sustained profitability. In Ponatinib’s case, with any phase 2 trial, many candidates will not be effective, but this risk is mitigated by the potential effectiveness against certain indications. Currently, the stock’s impressive rise over the past year is reflective of the improved outlook for the company, and I believe potentially adding to positions on market weakness with careful attention to the upcoming events (numerous investor presentations at healthcare conferences in early March) would be appropriate.

Source: Earnings Analysis: Ariad Pharmaceuticals