Buy, Sell, or Hold: Ariad Pharmaceuticals

When considering any stock for your portfolio, don't be swayed by just the positives. Examine its pros and cons, and decide whether its possible upside outweighs its risks. Let's take a look at Ariad Pharmaceuticals (Nasdaq: ARIA  ) today, and see why you might want to buy, sell, or hold it.

Buy

When it comes to biotech companies, their pipelines of drugs in development are usually of paramount concern, since many of them don't yet have successful products on the market and so often don't have profits yet, either.

What might put Ariad firmly in the black? Well, some successful treatments. It has two promising ones that will be reviewed this year. Ridaforolimus, which Ariad is working on with Merck (NYSE: MRK  ) , treats sarcoma cancer, and an FDA decision on it is expected in June. Ponatinib, meanwhile, targets leukemia, and has had some phase 2 trial results that are so promising that it might win early approval from the FDA. Ponatinib's approval shouldn't impact Novartis' (NYSE: NVS  ) Tasigna sales, as patients would have to fail that treatment first.

Some investors favor companies such as Ariad because of their potential for being bought out at a premium price. Some large pharmaceutical company, for example, might decide that, instead of partnering with Ariad on one or more drugs in development, it could just buy the whole company, getting access to the entire pipeline and not having to share profits with any others. Though such acquisitions happen all the time, it's still speculation to think that it will happen with Ariad.

Sell

As my colleague Rich Smith has pointed out, like many small companies trying to get big, Ariad is burning through a lot of cash -- more than $44 million over the last 12 months. It recently had about $86 million in cash and cash equivalents on its balance sheet. This situation means that the company might end up bought, but perhaps ultimately not at a huge premium. It might also mean that Ariad remains independent, but raises needed cash by issuing more debt or (shudder) more shares. Increasing the company's share count will dilute the value of existing shareholders' stakes.

Hold

One reason to temper expectations for Ariad is its partnership with Merck. Such biotech-and-big-pharma pairings are common, as they permit small, often cash-strapped biotechs to share the risk and cost of drug development. But eventual profits are also shared.

The verdict

As for me, I don't think I'll be buying Ariad any time soon; its risks worry me. Just about every company has its risks, but there are plenty of lower-risk stocks that can help you sleep better at night while still rewarding you.

If you're looking for some more aggressive holdings for your portfolio, though, and are interested in biotech stocks, perhaps consider AEterna Zentaris (Nasdaq: AEZS  ) and its partner on the colorectal cancer drug perifosine, Keryx (Nasdaq: KERX  ) . The drug is currently in phase 3 trials and earlier data has been promising. However, if something goes wrong, both companies have drug candidates to fall back on. Keryx has renal disease treatment Zerenex, which is through half of its phase 3 trials. AEterna's rich pipeline includes a phase 3 drug to treat growth hormone deficiency, a phase 2 cancer fighter, and several other early-stage drugs.

Looking for more promising investments? Here are "5 Stocks with Explosive Potential" and "4 Stocks as Cheap as They've Ever Been."

Longtime Fool contributor Selena Maranjian owns shares of Novartis, but she holds no other position in any company mentioned. You can follow Selena on Twitter @SelenaMaranjian. Click here to see her holdings and a short bio. Motley Fool newsletter services have recommended buying shares of Novartis. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (6) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 08, 2012, at 5:26 PM, biotechnique wrote:

    GAWD! When are fools at MF going to get the facts right about ARIAD!! Do you guys really follow this stock?

    Anyway...ARIAD has over $300,000,000 in cash now...you guys at MF must of been asleep at the wheel again when ARIAD raised the cash a little over a month ago....So let's see here $44 milllion into $300 million goes how many times? MF can answer this one (I hope).

  • Report this Comment On February 08, 2012, at 6:52 PM, lloyd789 wrote:

    Selena,

    Nothing personal but I would stick to anthropology if I were you.

    You obviously spent very little time on this article and are unqualified to write about biotech.

    It would be nice if Motley Fool had some standards regarding the people they let write investment critiques.

  • Report this Comment On February 08, 2012, at 9:01 PM, TechnoPharm wrote:

    I agree with biotechnique and lloyd789. The article is very shallow and contains only a rehash of information already published.

    The whole argument around why to Sell is flawed from the start because outdated data was used as the premise. Simply reading the comments to Rich's article before starting this one could have helped.

    Research companies well before writing articles that Google finds quickly. Don't write the same stuff everyone else is writing. And PLEASE don't write about stuff that was announced months ago as if it's a new revelation.

    Hate the stock if you will but at least have a relevant case.

    Risky? Maybe. But with the strong clinical results already announced and $300 million in the bank I'll take my chances.

    MF, you're chipping away at your cred.

  • Report this Comment On February 09, 2012, at 5:29 AM, Jeffbahr wrote:

    Selena,

    You are entitled to your opinion but you should at least get the facts straight. Anyone writing an article should go through a fact checking process. As the other posters have pointed out ARIAD did a secondary stock offering raising over $200. I would suggest removing your article from circulation or correcting your statement about their cash position.

  • Report this Comment On February 09, 2012, at 7:14 PM, lloyd789 wrote:

    Motley Fool should make corrections to this piece. They should also issue an apology for the obvious ineptitude and false information therein.

    If the author is going to issue advice on biotech stocks they should at least have some authority on the subject matter.

    Most investors invest in Biotech firms because they think the company has a good liklihood of developing sucessful drugs.

    Motley Fools indeed!

  • Report this Comment On February 10, 2012, at 12:03 PM, bata1 wrote:

    Frightening Ineptitude here reveals that MF, once again, believes it's more important to say something,even if it bears no relationship to the "reality???" commented upon, than not to.

    This entity(MF) is obviously "beyond embarrassment"!

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