3 Reasons an Ariad Pharmaceuticals Buyout Is Unlikely

Following its late 2012 approval by the Food and Drug Administration to treat two rare types of leukemia, Ariad Pharmaceuticals' (NASDAQ: ARIA  ) shareholders have experienced the full roller-coaster ride of unwavering success and unfathomable failure.

Source: Ariad Pharmaceuticals.

A little background on Ariad and Iclusig
As a quick background on the controversy that surrounds Iclusig, in October Ariad reported its 24-month safety findings and discovered that serious vaso-occlusive events (i.e., blood clots) had increased for patients taking the drug since its 11-month safety review. The reaction over the next month was swift with Ariad ending its newly diagnosed chronic myeloid leukemia study known as EPIC, and the FDA placing a temporary sales ban on Iclusig while it investigated the safety of the therapy.

Eventually, in December, Iclusig was allowed to return to market with beefed-up safety warnings and the reputation for being a last line of defense in its approved Philadelphia chromosome-positive leukemia treatment indications due to the higher propensity for patients to have thrombotic events.

Buyout rumor bonanza
The real fun began in January when U.K-based Daily Mail insinuated that Eli Lilly (NYSE: LLY  ) and GlaxoSmithKline had demonstrated interest in purchasing Ariad, with the publication rumoring that Lilly would pay as much as $20 per share for Ariad. Thus far, those rumors have turned out to be nothing more than hot air.

Similarly, just last week Daily Mail again ran a report, this time insinuating that Jazz Pharmaceuticals (NASDAQ: JAZZ  )  could be interested in gobbling up Ariad for as much as $20 per share. This time, though, Ariad's share price remained quite calm on the rumor announcement and failed to move 30% higher.

Ariad isn't completely without attractive components in that it does have an FDA and EU-approved drug in Iclusig, which has the opportunity to gain a number of additional indications. It also has very attractive carry-forward losses, which a buying company could use to reduce its own tax liability.

But these positives aside, I think an Ariad buyout is highly unlikely for three reasons.

Source: Ariad Pharmaceuticals.

Ariad doesn't add pipeline diversity or profitability
First and foremost, the purpose of an acquisition in the biopharmaceutical sector is to add either pipeline diversity or profitability to the purchasing company. Ariad offers neither of these traits to a prospective buyer.

Although Iclusig could eventually be approved for a number of additional indications, Ariad's entire pipeline consists of nine clinical-stage studies, of which eight are merely expansive indications for Iclusig. Aside from its ALK-positive non-small cell lung cancer experimental therapy AP26113, Ariad's pipeline diversity is nonexistent, which I think makes it a weaker acquisition target.

A lack of pipeline diversity is OK as long as there's the strong potential for profitability to back it up -- but you won't get that either with Ariad. In 2013, Ariad reported just $8.3 million in cumulative product revenue and, while providing no sales guidance for the drug in 2014, forecast using $165 million to $175 million in cash, leaving the company with just enough cash to suffice until mid-2015. What company is going to purchase a biopharmaceutical burning through $170 million in cash per year? None that I know of! 

Also, think about this from the perspective of Daily Mail's two most prolific buyer candidates, Jazz Pharmaceuticals and Eli Lilly.

Jazz has made a number of acquisitions, and they've all been accretive to earnings. Jazz isn't the type of company that goes out of its way to purchase biopharmaceuticals which are deeply in the red. Furthermore, why would it pay upwards of $4 billion for a company with less than $10 million in full-year revenue when Jazz is closing in on its first $1 billion revenue year in its history in fiscal 2014?

For Eli Lilly, it's simply not that desperate despite its ongoing patent cliff. Eli Lilly is attempting to spread around its opportunities through collaborations and internal discovery, but I highly doubt that a $4 billion purchase of Ariad is anywhere even remotely on its radar.

Iclusig's safety is too much of a red flag
The second big problem is that Ariad is just in the initial stages of rebuilding the reputation of Iclusig after its damaging two-year safety report temporarily pulled the drug from pharmacy shelves in the U.S. and eventually led to tougher labeling.

I, of course, could be wrong, and Iclusig could surprise everyone with sales that simply take off. In its presentation at the JPMorgan Healthcare Conference in January, it was very clear that, despite its safety concerns, Iclusig is a very effective therapy in chronic myeloid leukemia patients who've progressed on at least two tyrone kinase inhibitors. With regard to the proportion of patients that achieved a cytogenic response, Iclusig's response rate was close to double its peers. 

But we have to remember that efficacy usually takes a backseat to safety in the minds of the FDA, physicians, and often patients. It's going to be a monumental uphill challenge to push Iclusig's usage forward ahead of existing therapies, which are considered to be safer to use. The uncertainty surrounding this brand rebuild is more than likely enough in my mind to keep prospective bidders safely biding their time on the sidelines.

Source: Ariad Pharmaceuticals.

Is Ariad even looking for a buyer?
Finally, and I feel this is a key point that has been long overlooked, Ariad isn't necessarily looking for a buyer.

Although Ariad has made collaborative deals in the past, such as with Merck over now-rejected sarcoma drug ridaforolimus, the company and its CEO, Harvey Berger, have made it pretty clear that success comes internally and not from licensing out its products. In an interview with Pharmexec.com in August of last year, when asked why Berger had not licensed out Iclusig, he had this to say:

It's the foundation of why we think we're a sustainable, long-term, successful global oncology business. It goes back to two corporate values we have: scientific excellence, and clinical scholarship. The second one, clinical scholarship, we view as a critical part of our core values, and as a key distinguishing feature. Not only do we discover really important new medicines, but we take into account a deep understanding of the clinical and medical questions associated with those diseases, and we try to design and develop new medicines that are responsive to a deep understanding of the genetic and biologic basis of different diseases, and then incorporate that into our clinical trials and development, and ultimately into our commercialization strategies. If the biotech industry merely becomes a small specialty pharma company that in-licenses products that others don't know how to develop -- big pharma -- or universities say, 'here you go, develop this,' and in turn you add no real innovative value, you can't win in the end. You may be able to generate value, but you don't have a sustainable business, you become purely a small specialty pharma company. 

With the exception of licensing Iclusig in Australia, Berger has shown little interest in licensing its diamond in the rough, and it's unclear that he wants to sell the company. Unless Ariad wants to be put on the block, it will be difficult for prospective buyers to purchase the company.

Ariad shares have jumped noticeably since the year began, but it'll likely have a tough time keeping pace with this top stock moving forward
There's a huge difference between a good stock and a stock that can make you rich. The Motley Fool's chief investment officer has selected his No. 1 stock for 2014, and it's one of those stocks that could make you rich. You can find out which stock it is in the special free report "The Motley Fool's Top Stock for 2014." Just click here to access the report and find out the name of this under-the-radar company.


Read/Post Comments (14) | Recommend This Article (8)

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 04, 2014, at 3:09 PM, lz70d7 wrote:

    Hi,

    What is your position on this? Are U short on this?

    If not, what is the reason why you would post this article when there have been other articles already covering this subject. One from your Fool just yesterday. If you are going to convey the same, why address it again.

    Why do u guys coordinate and keep coming with article after article stating the same over and over again. Is it because you are not seeing as much stock movement as you would like for your shorting?

  • Report this Comment On April 04, 2014, at 4:11 PM, salsbery32 wrote:

    Its always the same analysts that talk bad about this company. There are countless articles about ariad that are MUCH better and give you a real idea of where the company can go from here. The buyout talks have been relevant for much longer than January btw. The drug is for last resort patients chance of blood clot or not u will take this medicine if u have no other options which is what is intended. And they will make money when sales increase. Screw this guy and the other motley fool pos

  • Report this Comment On April 04, 2014, at 4:21 PM, salsbery32 wrote:

    Sean williams looks like a snake

  • Report this Comment On April 04, 2014, at 9:14 PM, biotechnique wrote:

    So in your mind the FDA was correct in taking Iclusig off the market....read what the scientists and oncolgists reports about Pona in clinical trials. Go back and revist the ASH conference in Dec 2013. The SAE's provided by these studies do NOT match the outlandish SAE's the FDA forced on ARIAD. Don't you think investigating the FDA would be an interesting BLOG? Iclusig was on it's way to wipe out NVS's prime CML market, hmmmm, and all you FOOLS don't have the balls to investigate....just repeat the same old lie like your AF on the Street...cowards, or are you paided cowards...

  • Report this Comment On April 04, 2014, at 11:19 PM, TSIF wrote:

    Clearly you hit some conviction buyer folks on this one....having held since the heyday. There are simply drugs that don't get commercialized well and then the market cap of the company comes in question. Nothing negative about the drug, but most hope they do get bought out after approval. They simply can't take a drug from exploratory and then approval and then ramp up manufacturing and sales at a high cost...it's an entirely different skill set.

    What you wrote is unbiased and a nice summary. The only thing I disagree with is number 3, the CEO may be playing possum...there only hopes of a big paycheck are a buyout and a small paycheck has a limited duration at their loss rate.....keep up the good work....

  • Report this Comment On April 05, 2014, at 11:15 AM, OriginalNewman1 wrote:

    You guys must be in bed with Seeking ALpha.

    SAME BACK AND FORTH AS THE WIND BLOWS.

    Who in their right mind would ever think anyone

    would pay 20 for ARIAD?

    But at the current level they may pay 11, which would be 50% above their current price making the total cost around 1.3B.

    I see your recommendations on XOMA, OREX,WPRT are doing great. And you keep pumping WPRT. DDD is doing great too.

    GREAT IF YOUR SHORTING.

  • Report this Comment On April 05, 2014, at 11:44 AM, biotechnique wrote:

    Thanks for posting the comments by Dr. Harvy Berger....the only rational item in your entire BLOG. ARIAD has the science that Big Pharma wants...they out classed NVS with Iclusig and, now with their ALK inhibitor ap26113 for small cell lung cancer. They're setting the pace for future cancer therapy....

  • Report this Comment On April 05, 2014, at 2:45 PM, tradingcyclist wrote:

    The American Association Cancer Research (AACR) annual meetings starts today. Abstract No. 2726 [see AACR website for full abstract concludes:

    "These results provide strong support for the clinical evaluation of ponatinib [Iclusig] in patients with RET-fusion positive cancers, including colorectal cancer."

    I do believe that Iclusig's potential to treat colon cancer is significant.

  • Report this Comment On April 05, 2014, at 2:50 PM, tradingcyclist wrote:

    America Association of Cancer Research: Abstract 3719 [regarding Ariad's AP26113]

    This is about Ariad's new drug, AP26113. Punch line here (as quoted below) is that it represents an important development in potential cancer treatments. Full abstract available on AACR conference website.

    .

    "In this work we focused our attention on the more potent phase I/II dual ALK/EGFR inhibitor AP26113 (Ariad Pharm.), able to overcome the Crizotinib-resistant gatekeeper mutation L1196M. Two NPM-ALK+ human cell lines, KARPAS-299 and SUP-M2, were grown in four independent flasks in the presence of increasing doses of AP26113, so that eight cell lines able to grow in the presence of high AP26113 doses were selected. All cell lines show an AP26113 50% inhibitory concentration (IC50) value substantially higher than the one observed in parental cells, with a 130 to 1000-fold increase. All KARPAS-299 populations resistant to AP26113 show NPM-ALK overexpression, due to oncogene amplification, as the main cause of resistance, while SUP-M2 cells proliferating in the presence of the drug harbour several point mutations spanning the entire ALK kinase domain. In particular, we identified the following aminoacid substitutions: L1122V, , L1196M, S1206C and a double F1174V+L1198F mutation."

    "The knowledge of the possible appearance of new clinically relevant mechanisms of drug resistance is a useful tool for the management of new TKI resistant cases."

  • Report this Comment On April 05, 2014, at 3:00 PM, biotechnique wrote:

    Jazz can only dream to have the technolgy that ARIAD has....and they ain't gonna get for a mere $20/share.

    Also, not seen in ARIAD's pipeline arsenal yet....is pona's use in alzeimers....coming soon...It's a massive pipeline with just Pona. AP26113 will have many applications as well, but the best is yet to come....a target that no one has been able to touch before...along with the mutant variations. How do you put a price on this? Dr. Berger knows what he has.

  • Report this Comment On April 06, 2014, at 4:22 PM, tradingcyclist wrote:

    It is unfortunate that the author will not on data from American Association for Cancer Research presented at annual meeting now under way which indicates Ariad's Iclusig has potential to treat Colon Cancer. This is significant as, according to the American Cancer Society, health care expenditures on Colon Cancer come ton$8.4 billion annually. The financial implications of this new research result should be clear.

    Why will Motley Fool not address this issue?

  • Report this Comment On April 07, 2014, at 4:25 PM, Bellweather900 wrote:

    I can't help but think this article had some impact on this stock going down again today.

  • Report this Comment On April 08, 2014, at 10:22 AM, aldehyde wrote:

    pathetic fools

  • Report this Comment On April 08, 2014, at 10:59 AM, BioBat wrote:

    @tradingcyclist,

    RE: Abstract 2756. Iclusig has the potential to treat RET positive colorectal cancer, not colorectal cancer in general. There's a big difference between the two - something in the order of 99+% of colorectal cancers.

    I do agree that most analysts underestimate the market potential of iclusig and overestimate the safety concerns. The fact is iclusig works on patients who must continue to take it, where the only alternative option is currently death.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2902734, ~/Articles/ArticleHandler.aspx, 9/23/2014 10:49:54 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement