Ariad Pharmaceuticals: Solid Company but Not a Steal

| About: ARIAD Pharmaceuticals, (ARIA)

Ariad Pharmaceuticals, Inc. (NASDAQ:ARIA) is a small cap biotech company focused on the discovery and development of breakthrough cancer medicines. The Cambridge, MA headquartered company prides itself on values of scientific excellence and clinical scholarship. While the company keeps its eyes on the cancer fighting prize, it is hard for investors not to notice that Ariad's stock sports a very nice looking two year chart.

My brief, yet productive involvement with Ariad began with an announcement many investors have come to loathe: Dilution.

On 10/25/10, after closing the regular trading session at $4.10, Ariad announced a public offering of 16M shares to fund the clinical development of oral ponatinib, an investigational pan BCR-ABL inhibitor. The following morning it was announced that the offering was priced at $3.70. While many investors were initially unimpressed by the dilution news (the stock received an immediate 10% haircut), it cannot be argued that it has been a fruitful last five months for those that took advantage of the offering (which should keep the company sufficiently funded through H1 2012) and those of us that saw this stock's portfolio enhancing potential during the month that followed, when the share price dipped as low as $3.57.

Since the dilution announcement, the stock is up a respectable 56% and currently trades at $6.40, about 12% off its 52 week intra day high of $7.32, which came on 01/18/11 after the company announced positive phase III data from its SUCCEED trial, which revealed that its lead cancer product candidate, ridaforolimus, showed improved progression-free survival v. placebo.

The company has worked in collaboration with Merck & Co., Inc. (NYSE:MRK) toward the development of ridaforolimus since mid 2007. On 03/17/11 it was announced that Ariad had elected to exercise an option it had with Merck to co-promote ridaforolimus for the sarcoma indication, contingent upon receiving US FDA approval in 2012. From the company's official PR, "Merck has indicated its intention to file for marketing approval of ridaforolimus in patients with metastatic sarcomas this year."

The market didn't seem to react much to the Merck news that day, with Ariad's stock trading up an unremarkable 4.5% on slightly higher than average volume. What caught my attention was the 8% jump on heavy volume the following day (03/18/11). Of the 9.25M total shares traded that day, nearly 4.75M shares changed hands (over 51% of the days volume) right at the close of regular trading and during the after hours session. It was an abnormal trading week in general and perhaps options expiry/quadruple witching Friday had something to do with the lackluster response to the 03/17/11 news and the unusual trading on the day that followed, but that's all behind us now as the focus becomes:

What’s the attraction now?

Apart from still having three promising and attractive cancer product candidates, during the last quarter Ariad saw a 24% increase in institutional ownership, bringing the total to just over 56% of the float. While that’s not a very high percentage by most investors' standards, for a company with no potential to post positive earnings this year, it could be far worse. The stock has an average one year analyst price target of $9.00 with $11.00 being the highest of eight estimates and $8.00 being the lowest, which very loosely implies a minimum upside potential of 25% from current levels.

Then you have the unexpected positive PR factor which certainly comes along with a stock whose company has three products in various stages of development for multiple applications. Who doesn't like the idea of the potential for positive news to hit the wires on any given day for a stock in their portfolio?

Ariad has certainly been keeping up appearances, as of recent. So far in 2011, the company has set itself at a pace to participate in three industry conferences per month. Also, Ariad has made no attempt to retract or revise its stated desire to enter into partnerships with major pharmaceutical or biotechnology companies for the purposes of accelerating the development of its potential cancer products and to commercialize them in selected markets. These items seem to have sparked new partnership and even buyout speculation among investors. While not completely out of the realm of possibility, such unfounded speculation is par for the course in the biotech investment world and should be taken with a wheel barrel of salt.

Lastly, the short interest hasn't been much to speak of. It's been hovering around 10M for several months, which would seem to indicate that the bears see limited upside to betting against the company at this point and consider the stock too risky to toy with.

While I believe Ariad is a solid company with serious potential for future growth, when compared to prices of just a few months back, it's hard to say (ARIA) is a steal at current levels. As such, I have no plans to add to my position at this time. If you aren't in it yet, perhaps you will find an overdone pullback to exploit for a suitable entry point on this stock. It has rewarded its holders very nicely over the last two years while showing little sign of slowing down.

Disclosure: I am long ARIA.