Is an Ariad Pharmaceuticals, Inc. Acquisition Realistic?

Jazz Pharmaceuticals, GlaxoSmithKline, and Eli Lilly have all been linked to Ariad Pharmaceuticals as potential acquirers, but will it actually occur?

Apr 2, 2014 at 5:16PM

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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Brian Nichols owns shares of Jazz Pharmaceuticals. The Motley Fool has no position in any of the stocks mentioned. 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.

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