3 Ways Ariad Pharmaceuticals Could Mount a Comeback

Ariad Pharmaceuticals (NASDAQ: ARIA  )  has the dubious honor of being one of the worst-performing stocks in the past year, dropping over 60% in that time frame. As a brief refresher, shares dropped following a clinical hold on the company's only commercial product and primary clinical candidate, Iclusig, after the drug was shown to increase the risk of serious blood-clotting events. After some back and forth with the Food and Drug Administration, the clinical hold was lifted in December, but the drug's label was revised, restricting its use to cancer patients lacking alternative treatment options.

Specifically, Iclusig's new label states the drug can be used for T315I-positive chronic myeloid leukemia or T315I-positive Philadelphia chromosome positive (Ph+) acute lymphoblastic leukemia, and chronic phase, accelerated phase, or blast phase chronic myeloid leukemia or Ph+ acute lymphoblastic leukemia for whom no other tyrosine-kinase inhibitor therapy is indicated. While that's certainly a mouthful, what's key to understand is that Iclusig went from being used as a second-line leukemia treatment to a treatment of last resort for these indications.

Turning to the economics of the revised label, Ariad believes the stricter label cut the U.S. patient population in half, or from 2,500 patients down to 1,300. Afterward, most analysts slashed their price targets for Ariad and lowered their annual sales forecasts for Iclusig in dramatic fashion. More importantly, analysts lowered their peak sales projections for Iclusig from around $425 million to $300 million, on average. 

That said, I believe there are three reasons Ariad shares could rally and the company's upcoming first-quarter earnings call might shed light on these issues.

Reason No. 1
Ariad might explore modifying Iclusig's price in the U.S.. Iclusig presently runs between $115,000 to $138,000 per year in the U.S., and while that may seem high, it is far from being one of the most expensive cancer drugs on the market. Moreover, Iclusig belongs to a class of drugs known as tyrosine kinase inhibitors, or TKIs, which have historically high appreciation rates in terms of pricing. Novartis'  (NYSE: NVS  ) TKI called imatinib, for instance, saw its price climb by nearly 20% per year for over a decade.

Presently, Iclusig is priced at a premium relative to other commercially available TKIs, so the idea is that Ariad could increase Iclusig's price to maintain this premium. At the same time, experts have also raised the concern that these skyrocketing prices for TKIs are unsustainable. Also, there is a broader debate around drug pricing that was sparked by the controversy around Gilead's hepatitis C treatment Sovaldi. It's far from certain that Ariad would go this route, and it shouldn't be central to any investment thesis here, but the trend of rising prices for TKIs has yet to show any signs of slowing down. 

Reason No. 2
All hope is not lost that Iclusig's label could be revised again, allowing the drug to regain some of its lost target market. Ariad hopes to achieve this goal by launching a new dosing study in the second half of this year, where the risk to benefit profile of Iclusig will be explored at lower dosing regimens. Furthermore, Ariad's management has discussed exploring how medical interventions, such as blood thinners, might be used in conjunction with Iclusig to lessen the risk of serious blood-clotting events.

Reason No. 3
Ariad plans on launching new clinical trials to expand Iclusig's label later this year. Ariad stated earlier this year that it hopes to launch multiple investigator sponsored trials for Iclusig in 2014 in hopes of expanding the drug's label. Among these trials, I am particularly interested in seeing how Iclusig pans out as a treatment for acute myeloid leukemia, or AML. Although Iclusig is set to be studied in a variety of cancer types, the economic opportunity might be greatest as a treatment for AML. For instance, Sunesis Pharmaceuticals' (NASDAQ: SNSS  ) experimental drug for AML, vosaroxin, could be a blockbuster if approved due to the dearth of available treatments for certain forms of this disease. And while Iclusig's market opportunity in AML isn't exactly clear at this time, I believe it's at least on par with the drug's presently approved indications, given the optimistic projections for vosaroxin. In sum, you should keep a close watch on how Ariad is progressing in terms of expanding Iclusig's label.

Foolish wrap-up
Analysts expect Ariad to report revenue of a little over $11 million in the first-quarter and confirm full-year revenue guidance of $88 million on May 7. Put simply, this means that Ariad shares are trading at around 15 times annual revenues. Moreover, we could see a spike in operating expenses this quarter due to the cost of implementing the new safety study that is part of the revised label. Taken together, this is why some analysts have suggested that Ariad is still overvalued despite cratering over 60% in the last few months.

On the bright side, Ariad may be able to turn around its fortunes sooner than expected and there are compelling reasons to believe this could be the case. Although it might be a bad time to talk about a price increase, Ariad's clinical activities for Iclusig alone provide ample reasons to suggest a comeback could be in the cards. Investors, however, must carefully weigh the risks associated with this company's key product.

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