Is an Ariad Pharmaceuticals, Inc. Acquisition Realistic?

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Back in January, the Daily Mail ran a story suggesting that pharmaceutical companies Eli Lilly (NYSE: LLY  ) and GlaxoSmithKline (NYSE: GSK  )  had shown interest in Ariad Pharmaceuticals (NASDAQ: ARIA  ) . According to another recent article by the same publication, however, Jazz Pharmaceuticals (NASDAQ: JAZZ  )   is now reported to be in the mix. The article states that Jazz may be willing to pay north of $20 per share for Ariad and its leukemia drug Iclusig. Aside from there being a lack of synergy, does the move make sense for any of the potential acquirers?

Is $20 a share absurd?
$20 a share for Ariad Pharmaceuticals is a tough stretch, and represents an upside of approximately 150% from where Ariad is currently trading. The reports by the Daily Mail caused shares of Ariad to rise 5% on Friday. However, it's worth noting that Daily Mail began to float a similar rumor back in January and nothing materialized .

In case you haven't followed the story of Ariad Pharmaceuticals, it is the maker of the drug Iclusig , which treats an aggressive and chronic form of leukemia. Ariad has lost approximately 56% of its market value in the last year, all stemming from Iclusig being pulled from the market due to safety concerns and later put back on the market with a revised Risk Evaluation and Mitigation Strategy (REMS).

It all started in early October, when Ariad suspended the enrollment of new patients in a trial for chronic myeloid leukemia, a large and important indication for Ariad. The company noted increased cardiac related problems as the cause. The FDA then responded, investigating life-threatening blood clots, heart attacks, strokes, and the narrowing of large arteries in the brain . As a result, marketing and distribution of the drug was suspended , and then a couple months later it was made commercially available once more for the two severe forms of leukemia.

The problem for Ariad is that most of the fundamental upside in Iclusig was in its ability to prove the drug successful in further trials; Ariad was testing Iclusig in six additional clinical trials. Chardan Capital Markets estimates just $240 million in peak sales. Therefore, reports that Jazz, or any company, would be willing to pay $20 a share, $3.7 billion, sounds absurd, especially with the FDA's awareness of its safety profile and uncertainty regarding whether its use will ever be expanded.

Will Jazz really buy Ariad?
Jazz Pharmaceuticals is not an oncology-focused company per-say. The company has nearly a dozen products that are used for psychiatry, pain, narcolepsy, and oncology. The bulk of its revenue comes from Xyrem, a narcolepsy drug, which grew 50% last year to $569.1 million, or 65% of the company's total revenue.

Erwinaze is its second best-selling product, which created revenue of $174.3 million last year and is used with a multi-agent chemotherapeutic regimen on patients with acute lymphoblastic leukemia or ALL. This is the only possible connection to link Jazz to Ariad, although the two drugs are used for completely different purposes and on different patients.

With that said, a $3.7 billion acquisition would be nearly half the market cap of Jazz, and while the company has a history of being acquisitive, Ariad doesn't seem to fit its pattern. For example, Jazz's last acquisition was Gentium for $1 billion. This gave Jazz the drug defibrotide, which treats an orphan condition called veno occlusive disease, or VOD. Defibrotide grew at a 60% clip last year with much of its revenue coming off-label, but a product that has peak sales estimates in excess of $500 million .

It looks like this was a good acquisition for Jazz, and the company has historically tried to broaden its drug line-up. Ariad's Iclusig would be a pricey entrant into a crowded leukemia space, however, and with no guarantees to earn additional FDA approvals.

What about Glaxo and Eli Lilly?
With that said, I also don't think it make a lot of sense for either Eli Lilly or GlaxoSmithKline to acquire Ariad either.

Eli Lilly, specifically, is in the middle of a major transition, losing patent protection on the antidepressant Cymbalta and its diabetes drug Humalog . The company is reportedly in talks with Novartis for its animal health business , and just last month, its Phase 3 drug Ramucirumab met its primary endpoint in a study on patients with non-small cell lung cancer, or NSCLC. This product is one of 13 Phase 3 drugs that Eli Lilly has in its pipeline, and with its interest in animal health and its patent losses, it seems unlikely that it'll pay such a high price for Ariad.

With regards to GlaxoSmithKline, it has a promising oncology product line, but acquiring a leukemia drug doesn't appear to be the company's main focus. In the last four months, the company has gained two breakthrough designations for a malaria and a blood disorder drug. It is set to begin late-stage testing on 10 additional drugs over the next 24 months. Also, with expected blockbusters like Breo and Anoro for COPD launching and GlaxoSmithKline leading the race for injectable asthma drugs, it seems very unlikely that it would take a $3.7 billion chance on Ariad.

Final thoughts
The addition of Jazz Pharmaceuticals in Ariad acquisition rumor mill is hard to fathom. Albeit, GlaxoSmithKline and Eli Lilly are tough to imagine as being interested as well. Thus, regardless of the recent articles suggesting otherwise, until an acquisition is announced, don't bet on it.

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Read/Post Comments (8) | Recommend This Article (1)

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 April 02, 2014, at 5:40 PM, Hosana33 wrote:

    Do you currently have a short position in ARIA ?

  • Report this Comment On April 02, 2014, at 6:04 PM, maxamillion wrote:

    well your " news article" seems a bit one sided, most people actually understand iclusig was a front line drug !! and and a FEW people who WERE already dying died! every drug has dangers. this drug EXTENDS patients lives period end of discussion. why did you not mention the fda came back and let iclusig back on the market in RECORD time?? and that patients had a lot to do with it coming back?? the whole down fall of iclusig was plotted, why would a compant with a front line ( first line ) drug want another competitor ?? anyone who watches aria daily knows and sees what is going on..... to laugh at a $20 per share buyout is laughable, the market for this drug is huge and iclusig WILL be front line again, despite the manipulation. mark this post.

  • Report this Comment On April 02, 2014, at 6:18 PM, BrianNichols wrote:

    I did say that the FDA put the drug back on the market. I think "record" time is a bit meaningless as it relates to whether it will be approved for future indications or acquired.

    I do not have a short position

  • Report this Comment On April 02, 2014, at 6:41 PM, Ml56782 wrote:

    This article is a joke. You must have a major short position to boost.

  • Report this Comment On April 03, 2014, at 12:28 AM, salsbery32 wrote:

    I'm sick of these Motley Fools bashing this company. I'm a novice investor but Ariad is one of the companies that caught my eye. I've been buying and selling way to much haha. But i'm all in at this point. The stock price will rise on the the sales of inclusig and the advance of their pipeline. With eli lily, shire and glaxosmith talking about a buyout for a long time now. Even if there is no buyout still a great company. But what do I know

  • Report this Comment On April 03, 2014, at 6:08 PM, siteobserver wrote:

    ARIAD has proven its ability to develop and get an oncology drug through the FDA approval process, albeit they had to modify their claims to narrow the patient sector. They have a phase 2 clinical trial for another drug which they describe as "pivotol." It doesn't matter if they are an acquisition candidate or not. They are a biotech with a proven ability to develop life saving drugs and based on this it can be expected that they will produce more drugs in the future, and that's how the company should be valued.

  • Report this Comment On April 03, 2014, at 8:07 PM, biotechnique wrote:

    I'm collecting names of bloggers like AF from the street, Brian Nichols of MF...and sending them to my local representatives to initiate a congressional investigation on Wall Street stock manipulation of decent companies, like ARIAD. You don't think that retail investors saw all the bashing leading up to the FDA's decision to suspend marketing of Iclusig.....and who pays the FDA off....BIG PHARMA!! (NVS) The trail is soo wide, and these bashing blogs are soo stupid with actually no DD on the company....You guyz are going to jail...period. We're as MAD HELL, and we're not gonna take it anymore!! Brian there are plenty of jobs out can do better than posting simplistic garbage...unless the pay for posting simplistic garbage is that good...

    Task #1 Boy, start posting what the Oncologists are reporting in from the clinical trials...NEJM etc. You will find that the SAE's do NOT come close to what the FDA has forced ARIAD to publish as REM's. The Dec. ASH conference, Patients who's quality of life is extremely better since they got off of NVS's CML drugs. Just get off your ass and do the something believeable...your BLOG is far from it.

  • Report this Comment On April 03, 2014, at 9:21 PM, biotechnique wrote:

    The FDA is now a Political organization...not one based on science.

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Brian Nichols

Brian Nichols is the author of "5 Simple Steps to Find the Next Top-Performing Stock: How to Identify Investments that Can Double Quickly for Personal Success (2014)" and "Taking Charge With Value Investing (McGraw-Hill, 2013)". Brian is a value investor, but emphasizes psychology in his analysis. Brian studied psychology in undergrad, and uses his experience to find illogical value in the market. Brian covers technology and consumer goods for Motley Fool. Brian also updates all of his new and current positions in his Motley Fool CAPs page. Follow Brian on Twitter and like his page on Facebook for investment conversations and recent stories.

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