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.
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.
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.
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.
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.