Why Are Investors Excited About Ariad?

| About: ARIAD Pharmaceuticals, (ARIA)

Founded in 1991, Ariad Pharmaceuticals (NASDAQ:ARIA) is a Cambridge, Massachusetts-based biotechnology company focused on small-molecule drugs that target proteins and pathways involved in cancer.

Ariad's discovery group is a multi-disciplinary team of scientists with expertise in medicinal chemistry, structural and computational drug design, cell biology and cancer genetics, pharmacology, and drug metabolism. These programs build on Ariad's in-house expertise in cell signaling, cancer biology and structure-based drug design to create molecules that overcome resistance to existing treatments. A major focus of the group is to identify inhibitors of protein kinases (enzymes that transfer phosphates between different proteins) that are implicated in specific cancers.

On December 14, 2012, the U.S. Food and Drug Administration (FDA) approved Iclusig (ponatinib) to treat adults with chronic myeloid leukemia (CML) and Philadelphia chromosome positive acute lymphoblastic leukemia (Ph+ ALL), two rare blood and bone marrow diseases. Iclusig is Ariad's first approved product.

The company is also studying AP26113, another molecularly targeted medicine, as a treatment for certain forms of lung cancer.

In addition to the development of these two drugs, Ariad is collaborating with Merck (NYSE:MRK) in the development of Taltorvic (ridaforolimus) for multiple cancer indications. The company is also partnering with Bellicum Pharmaceuticals for AP1903, an investigational dimerizer drug that is being evaluated in patients with prostate cancer and in patients with hematologic malignancies who develop graft-versus-host disease (GVHD), a complication of hematopoietic stem cell transplants (HSCT).


Ariad's highly touted Iclusig was approved more than three months before the product's prescription user fee goal date of March 27, 2013, the date the FDA was scheduled to complete review of Ariad's drug application for the drug. The FDA reviewed Iclusig under the agency's priority review program (PRP). PRP provides an expedited six-month review for drugs that may provide a safe and effective therapy when there are no other satisfactory therapies available, or for drugs that are a significant improvement compared to marketed products. Iclusig was also granted orphan product status because the drug is intended to treat a rare disease or condition.

The good news came with some bad news. The FDA's Iclusig approval had an unexpected caveat. The agency required that the drug carry a boxed warning stating that Iclusig may cause blood clots and liver toxicity. As a result, Ariad's stock dropped over 20% percent following the warning box news.

Iclusig is a kinase inhibitor designed using Ariad's computational and structure-based drug design platform. The drug works by blocking specific proteins that promote cancerous cells. The drug is taken once a day to treat patients with chronic, accelerated, and blast phases of CML and Ph+ ALL whose leukemia is resistant or intolerant to tyrosine kinase inhibitors (TKIs). Iclusig targets CML cells that have a particular mutation, known as T315I, which makes these cells resistant to currently approved TKIs. Iclusig is the only TKI that is effective in CML and Ph+ ALL patients with this mutation.

CML occurs when too many white blood cells are produced due to a genetic abnormality that produces the BCR-ABL protein. CML typically evolves to the more aggressive phases referred to as accelerated phase and blast crisis.

Ph+ ALL is a subtype of acute lymphoblastic leukemia that carries the Ph+ chromosome that produces BCR-ABL. Ph+ ALL has a more aggressive course than CML. Ph+ ALL is often treated with a combination of chemotherapy and tyrosine kinase inhibitors. The BCR-ABL protein is expressed in both CML and Ph+ ALL.

According to the American Cancer Society, about 5,430 new cases were diagnosed with CML in 2012, and about 610 people died from the disease. CML accounts for a little over 10% of all new cases of leukemia. The average person's lifetime risk of getting CML is about one in 625. This disease is slightly more common in men than in women. It is also more common in whites than in African-Americans. The average age at diagnosis of CML is around 65 years. Over 50% of cases are diagnosed in people aged 65 years and older. This type of leukemia mainly affects adults, and is only rarely seen in children.

The American Cancer Society notes that most people with CML are now surviving at least five years after diagnosis, but because the highly effective drugs are still fairly new, the average survival rate of people with CML is difficult to estimate.

According to the National Cancer Institute, about 6,050 people were diagnosed with acute lymphoblastic leukemia (ALL) and 1,440 men and women died from the disease in 2012. The Philadelphia chromosome is present in approximately 20% to 30% of adults with ALL.

Iclusig is the fifth TKI to be approved by the FDA. In May 2001, Novartis AG's (NYSE:NVS) Gleevec (imatinib) was the first drug to be approved by FDA in May 2001 to treat CML. Novartis' Tasigna (nilotinib) was approved in October 2007 for the treatment of adult patients with newly diagnosed, chronic phase Ph+ CML. Bristol-Myers Squibb's (NYSE:BMY) Sprycel (dasatinib) was approved by the FDA in October 2010. The FDA approved Pfizer Inc.'s (NYSE:PFE) Bosulif (bosutinib) for leukemia patients who have failed on other therapies in September 2012 and Teva Pharmaceuticals' (NYSE:TEVA) Synribo (omacetaxine mepesuccinate) in October 2012 to treat various phases of CML.

Talon Therapeutics' (OTC:TLON) Marqibo (vincristine sulfate liposome injection) was approved in August 2012 to treat Philadelphia chromosome negative ALL. Iclusig is approved for patients who don't respond to treatment with Gleevec, Tasigna. or Sprycel.

Ariad hopes to expand the indication of the drug so that it can be used as a first-line therapy. On December 10, 2012, the company announced data from its Phase 1 and pivotal Phase 2 trials of Iclusig in heavily pretreated patients with resistant or intolerant CML or Philadelphia chromosome-positive ALL. The studies found that 51% of chronic-phase CML patients in the Phase 1 trial achieved a major molecular response (MMR) with a median follow-up of 30 months, and 34% of chronic-phase patients achieved MMR in the trial with a median follow-up of 15 months.

Ariad and the United Kingdom National Cancer Research Institute (NCRI) CML Working Group are collaborating in a Phase 3 trial assessing the impact of switching CML patients being treated with a first-line tyrosine kinase inhibitor to Iclusig when these drugs fail or achieve an unsatisfactory response. NCRI expects to begin enrollment in the trial of 1,000 patients at approximately 172 clinical research sites in the United Kingdom during the second quarter of 2013.

Ariad has estimated that about 2,500 U.S. patients will stop other leukemia drugs because they have become resistant or intolerant to these drugs. Those patients are eligible for Iclusig. The drug will be priced at about $115,000 per patient, per year. Some analysts estimate that Iclusig will generate about $800 million in annual sales.

Since Ariad was expecting to receive Iclusig approval from the FDA, the company hired and trained its U.S. sales force enabling Ariad to begin marketing the drug immediately after the agency approved the drug. Despite these proactive efforts, the commercial launch of Iclusig was not spectacular with only 45% of Iclusig prescriptions being captured during the first six weeks on the market. The company predicts the capture rate will increase to 70% in the near future.

European Union (EU) regulators are expected to rule by mid-2013 on Ariad's application to sell the drug in Europe. The company has established a base in Lausanne, Switzerland to facilitate Iclusig sales in the EU. In Europe, Ariad has made major strides in executing on its commercial plan with the initiation of early-access programs and the implementation of pricing and reimbursement activities. The company has established its European supply chain, and hired key personnel for its European leadership team. Ariad plans to be commercial-ready in Europe on July 1, 2013.

Ariad plans to also file for approval in Canada, Switzerland, and Australia in the second half of this year. Based on the results of the ongoing Phase 1/2 trial of Iclusig in resistant and intolerant CML in Philadelphia-positive ALL in Japan, Ariad expects to file for regulatory approval in Japan in mid-2014.


AP26113, is a small-molecule that has exhibited activity as a potent dual inhibitor of anaplastic lymphoma kinase (ALK) and epidermal growth factor receptor (EGFR) in preclinical studies. Discovered by Ariad scientists, this compound targets unique genetic features of cancer cells similar to ponatinib.

Dosing continues in the ongoing Phase 1/2 clinical trial of AP26113, which is now being administered at a once-daily oral dose of 300 mg. Clinical investigators are enrolling patients at seven sites in the United States. The company also plans to open additional sites in Europe. Patients with non-small cell lung cancer (NSCLC) are now exclusively being enrolled in the trial.

Planning is actively underway for pivotal trials of AP26113 to start in 2013 in ALK-positive NSCLC patients. Ariad will also plan to begin a pivotal trial in patients with EGFR-mutant NSCLC who have failed prior EGFR inhibitor therapy, dependent on the clinical findings from the Phase 2 portion of the currently ongoing trial.

On September 29, 2012, Ariad announced the initial clinical results of AP26113, in patients with advanced NSCLC from the ongoing trial. Researchers found that AP26113 has impressive anti-tumor activity in ALK+ NSCLC patients. Researchers also saw a partial response in a patient with EGFR-mutant lung cancer and acquired resistance to Roche/Genentech's (OTCQX:RHHBY) and Astellas' Pharma's (OTCPK:ALPMY) Tarceva (erlotinib) in the Phase 1 dose-escalation portion of the trial. The trial is expected to be completed in September 2015.


In July 2007, Ariad and Merck entered into a collaboration to develop Taltorvic (ridaforolimus) for several potential cancer indications.

Ridaforolimus is an investigational small-molecule inhibitor of the protein mTOR, a protein that acts as a central regulator of protein synthesis, cell proliferation, cell cycle progression and cell survival, integrating signals from proteins, such as PI3K, AKT and PTEN, known to be important to malignancy.

At the start of the collaboration, Merck made a $75 million upfront payment to Ariad, Merck has also paid Ariad $53.5 million in milestone payments for the initiation of Phase 2 and Phase 3 clinical trials of ridaforolimus, in addition to paying a 50% share of Taltorvic development, manufacturing and commercialization costs.

In May 2010, Ariad and Merck announced the restructuring of the partnership. Under the new collaboration framework, Ariad granted Merck an exclusive license to develop, manufacture and commercialize ridaforolimus in oncology. Merck assumed responsibility for Taltorvic activities, including clinical trials and regulatory filings.

Ariad received a $50 million upfront cash payment, as well as approximately $19 million in cash to retroactively fund the cost of ridaforolimus development from January through April 2010. Under the new agreement, Merck will fund 100% of Taltorvic development, manufacturing and commercialization costs. Ariad is also eligible to receive regulatory and sales milestones and tiered double-digit royalties on global sales of ridaforolimus.

In January 2011, Ariad shares increased more than 30% when it was reported that ridaforolimus met its endpoints in a Phase 3 trial as a treatment for sarcoma.

In the United States, sarcomas account for approximately 1% of all adult solid malignancies and approximately 15% of pediatric cancers. According to the National Cancer Institute, there were an estimated 11,280 new cases of adult soft tissue sarcoma in 2012. Approximately 3,900 patients will die from the disease this year. There are few options for the treatment of sarcomas. Standard therapy includes surgery, chemotherapy, and radiotherapy. The most frequently used treatment for advanced disease is chemotherapy with anthracyclines such as Johnson & Johnson's (NYSE:JNJ)/Janssen's Doxil (doxorubicin), alkylating agents, such as, ifosfamide and dacarbazine, and platinum compounds such as cisplatin and carboplatin, or combinations of these agents.

Data from the SUCCEED (Sarcoma Multi-Center Clinical Evaluation of the Efficacy of Ridaforolimus) trial, found that the drug induced a significant 28% reduction in the risk of disease progression compared to placebo.

In March 2012, the FDA's Oncologic Drugs Advisory Committee (ODAC) voted 13 to 1 against Taltorvic to treat sarcoma, a rare cancer that occurs in the bones and soft tissue, but recommended that the FDA approve GlaxoSmithKline's (NYSE:GSK) Votrient (pazopanib) for that indication by an 11 to 2 vote. Votrient stopped sarcoma from spreading in soft tissue three months longer than placebo, while Taltorvic stopped progression of the disease three weeks longer than placebo. Patients in clinical trials experienced heart, kidney and liver disorders.

The committee rejected Taltorvic because they felt that the benefits of the drug did not outweigh the risks. Approximately 50% of patients discontinued Taltorvic therapy due to side effects. The high rate of adverse reactions and trial withdrawals compelled the panel to vote against approving Taltorvic.

In June 2012, Merck announced that the FDA would not approve Taltorvic unless Merck conducted further testing that finds the major side effects, such as lung irritation, kidney failure and high blood pressure, were worthwhile for patients

In November 2012, the European Medicines Agency's (EMA) Committee for Medicinal Products for Human Use (OTCQB:CHMP) also found that there was insufficient data available to support the approval of Taltorvic for maintenance treatment of patients with soft tissue sarcoma or primary malignant bone tumor in the European Union. As a result, Merck withdrew its European application of ridaforolimus for these indications. Merck insisted that this withdrawal does not change the company's commitment to the ongoing clinical trials with ridaforolimus for other indications.

Merck is currently conducting a Phase 1 trial for Taltorvic given with MK-2206 or MK-0752 as a therapy for advanced cancer, a Phase 2 trial comparing ridaforolimus and exemestane with ridaforolimus, dalotuzumab and exemestane in breast cancer, a Phase 1 study comparing dalotuzumab alone and with ridaforolimus in pediatric participants with advanced solid tumors, a Phase 1 study comparing ridaforolimus with cetuximab in advanced head and neck cancer, non-small cell lung cancer and colon cancer, a Phase 1 study of ridaforolimus in pediatric patients with advanced solid tumors, a Phase 1 study of carboplatin/Taxol/ridaforolimus in endometrial and ovarian cancers, and a Phase 1 study of ridaforolimus and vorinostat in patients with advanced renal cell carcinoma.


Licensed to Bellicum Pharmaceuticals, Ariad's investigational dimerizer drug, AP1903, is being evaluated in patients with prostate cancer and in patients with hematologic malignancies who develop graft-versus-host disease (GVHD), a complication of hematopoietic stem cell transplants (HSCT).

Clinical proof of concept data for the use of AP1903 to treat GVHD was published in the New England Journal of Medicine in 2011.

AP1903 was discovered and developed by Ariad scientists, as a part of the company's ARGENT technology platform which combines chemistry and genetics to allow specific cell-signaling and gene-expression events to be chemically activated in whole animals and cultured cells. The technology platform includes a portfolio of distinct small-molecule "dimerizer" compounds optimized for specific applications. Dimerizers bring specific proteins together in cells.

Ariad has an equity stake in Bellicum and is eligible to receive milestones on regulatory and clinical progress and royalties on future product sales. Bellicum is responsible for all manufacturing, regulatory and clinical activities and holds the investigational new drug applications for these programs.


The first quarter of 2013 was the first quarter that includes Iclusig sales revenue. On February 25, 2013, Ariad reported that their net loss for the fourth quarter ended December 31, 2012 was $60.5 million, or $0.36 per share, compared to a net loss of $51.8 million, or $0.38 per share, for the same period in 2011.

Net loss for the full year 2012 was $220.9 million, or $1.34 per share, compared to a net loss of $123.6 million, or $0.93 per share, for the full year 2011.

As of December 31, 2012, cash, cash equivalents and marketable securities totaled $164.4 million, compared to $306.3 million at December 31, 2011. In January 2013, Ariad raised net proceeds of $310 million in an underwritten public offering and sale of approximately 16.5 million shares of our common stock.

The company forecasts that their cash, cash equivalents and marketable securities will be between $195 million and $205 million at the end of 2013, Ariad is confident they have sufficient funds to continue operations into the fourth quarter of 2014

Conclusion: Buy

After the FDA ruled that Iclusig must include a box warning for arterial thrombosis and hepatotoxicity, virtually all analysts covering Ariad continued to recommend Ariad as a wise investment, although several firms lowered their price targets for the stock due to undisclosed safety issues.

After the FDA vote, the Jefferies Group maintained their "Buy" rating, but chopped their price target on Ariad to $23 from $27. On February 26, 2013, Jefferies boosted their target price on Ariad from $23.00 to $25.00. However, Barclays Capital decreased their price target on Ariad from $30.00 to $29.00 and rated the stock "overweight." Stifel Nicolaus also cut their price target on shares of Ariad Pharmaceutical from $27.00 to $26.00 on February 14. They have a "buy" rating on the stock. On February 8, JMP Securities initiated coverage on Ariad with an "outperform" rating on the stock.

In January 2013, Oppenheimer advised that they conducted a survey of US physicians following the FDA's approval of Iclusig. The survey found that only "a 15% minority of physicians who find Iclusig's arterial thrombosis and liver toxicity to be prohibitive." Oppenheimer has a "Perform" rating on Ariad and remains confident that Iclusig represents "a significant long-term market opportunity." UBS AG maintained their "Buy" rating but lowered their target from $29 to $26. Brean Capital also kept their "Buy" rating, but lowered their price target from $35 to $29. RBC Capital reiterated their "outperform" rating. On January 14, Leerink Swann raised their price target from $23 to $28 and maintained their "Outperform" rating.

On December 25, Ariad Pharmaceutical had its "Overweight" rating reiterated by analysts at Barclays Capital who have a $30.00 price target on the stock. On December 17, 2012, William Blair reaffirmed their "outperform" rating and put a $28.00 target on the stock. Analysts at the Maxim Group lowered their price target to $24, but maintained their "Buy" rating on the stock. On December 14, Citigroup reiterated their "Buy" rating and have a $31.00 price target. On December 14, Cowen also reaffirmed "outperform" rating.

Iclusig is frequently referred to as a "first in class" drug. While the FDA has only approved Iclusig for leukemia patients who are resistant or intolerant to other drugs, research is ongoing which may enable Iclusig to expand the label for other indications, which would provide Ariad with an opportunity to gain a larger portion of the estimated $4.5 billion annual CML market now dominated by Novartis with their Gleevec and Tasigna products and Bristol-Myers Squibb with their Sprycel drug.

The optimal first-line treatment for patients with newly diagnosed chronic-phase CML is controversial. When used as first-line treatments, some studies have found that Tasigna, Sprycel and Bosulif have all produced better response rates than Gleevec.

In July 2012, Ariad launched a Phase 3 trial testing Iclusig head to head with Gleevec in people newly diagnosed with CML. Positive results from that trial could propel Iclusig to blockbuster drug status. Harvey Berger, Ariad's CEO, has predicted that Iclusig could generate $1.5 billion in projected revenue if the company can broaden the label to include its use as an initial treatment for leukemia.

Due to its strong oncology pipeline, some analysts believe Ariad could be a potential acquisition candidate for such pharmaceutical industry giants as Celgene (NASDAQ:CELG), Amgen (NASDAQ:AMGN), Eli Lilly (NYSE:LLY), Merck and Johnson & Johnson . Others have speculated that Ariad could be a prime target for Gilead Sciences (NASDAQ:GILD), a company that "has spent $1.2 billion in two years to buy blood cancer drugs" and "it's looking for more." Ariad insists that the company is not for sale and they are determined to remain independent.

Remaining independent is a key reason why many Ariad investors are so excited about the company. While most small cap and mid cap biotech firms must partner with pharmaceutical giants like Pfizer or Merck to help pay for the development of promising investigational drugs, Ariad has been able to raise the necessary funds to develop Iclusig and AP26113, and thus maintain worldwide rights for its two most promising drugs.

With the US approval of Iclusig, Ariad is transforming from a biotech research firm to a revenue generating, commercial pharmaceutical company. It has taken over 20 years for Ariad to get here. Recently, the company's workforce has more than doubled to about 300 employees. Ariad has opened a European headquarters in Lausanne, Switzerland. There is plenty to be excited about in this $3.5 billion market cap company. With these recent developments, Ariad can not only save lives, but also offer the prudent investor a lucrative return.

Disclosure: I am long AMGN, CELG, GILD, MRK. 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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