All things considered, it's been a relatively calm year for Ariad Pharmaceuticals (NASDAQ: ARIA) shareholders after their stock went cliff-diving in October of last year. With its shares down 11% year-to-date stakeholders probably aren't happy, but compared to where the stock was valued in November of last year (sub $2.50) they have to be pleased considering where Ariad closed on Friday (above $6).
Today, we'll take a look at why Ariad's stock has slid lower in 2014 as well as discuss what opportunities and headwinds are in its not-so-distant future. First, though, let's take a quick walk down history lane and briefly discuss why Ariad's stock has been so volatile over the past year.
Ariad's prior volatility, explained
Ariad stakeholders nearly saw their dreams go crashing through the floorboard beginning in October last year after the company announced a two-year follow-up study on the safety of its only drug approved by the Food and Drug Administration, Iclusig. Iclusig is a therapy used to treat Philadelphia-positive acute lymphoblastic leukemia, or Ph+ ALL, patients who've failed on prior therapies or can't take tyrosine kinase inhibitor-based medicines.
Source: Ariad Pharmaceuticals.
According to the company's October press release, patients taking Iclusig had an increasing number of arterial thrombotic events (i.e., blood clots) at the two-year mark than when the first follow-up was conducted at the 11-month mark. This potentially fatal, adverse event concerned the FDA enough that at one point Iclusig was pulled from pharmacy shelves so its safety could be evaluated. During the process, Ariad abandoned its EPIC trial which would have widely expanded Iclusig's usage to early stage chronic myeloid leukemia, or CML, patients, which is a much larger patient pool than Ph+ ALL.
To quickly summarize, Iclusig did wind up coming back to market weeks later with more stringent safety warnings, but it's prospects, at least in the interim, have been limited -- thus why Ariad shares were creamed last year.
What's been driving Ariad in 2014?
The way I view it, there are three factors influencing Ariad's stock this year: Iclusig's potential and additional data, buyout rumors, and cash burn.
First and foremost the market potential, efficacy, and safety of Iclusig continues to drive Ariad's stock price.
On one hand it's really hard to deny that Iclusig hasn't provided exceptional response rates in those patients who've taken it as a last-line therapy. A comparison announced at the 2013 American Society of Hematology involving Iclusig as a third-line treatment for CML against a number of its peers showed that Iclusig's overall cytogenic response rate was closer to 60%, while it peers were often closer to 30%.
Source: Ariad Pharmaceuticals via Lipton et al, ASH.
Furthermore, a 42.5 month follow-up of the company's phase 1 PACE trial patients continues to demonstrate anti-leukemic activity according to an early June 2014 press release. Specifically, trial data estimated that 87% of chronic-phase chronic myeloid leukemia patients still exhibited a major cytogenic response after two years.
However, it's also going to be hard for Ariad to overcome its safety headwinds on Iclusig. With the exception of AP26113, a midstage drug being studied as a treatment for ALK-positive non-small cell lung cancer, the remainder of Ariad's pipeline is based entirely on Iclusig. In all, Ariad has seven additional midstage studies ongoing with Iclusig, including lung cancer studies and gastrointestinal stromal tumor label trials. Considering its safety history in Ph+ ALL patients, and that different cancer types can respond differently to the same medication, investors are somewhat confused as to how much marketability Iclusig really has even if it sees its label expanded with new approvals.
Source: Ariad Pharmaceuticals.
Buyout potential?
Secondly, buyout rumors have played a role in buoying Ariad's share price, with the U.K.'s Daily Mail claiming that Eli Lilly (NYSE: LLY) may be an interested buyer in January, and then speculating weeks later that Jazz Pharmaceuticals (NASDAQ: JAZZ) could be interested in Ariad.
Like the previous argument, there are two sides to this coin as well. Optimally, big pharma companies are dealing with monstrous patent cliffs and witnessing many core drugs lose exclusivity to generic competition. Instead of replacing those drugs with internal products, many pharmaceutical companies have started to look at acquisitions as a way to replace this lost revenue. Having a drug already approved, and following its 2013 tumble and 11% decline in 2014 so far, could make Ariad an attractive buyout candidate.
On the flipside, you have to wonder:
- What company would take a chance on Ariad considering the potential safety issues behind Iclusig?
- Would there be any premium over its current share price if a buyout were to occur considering Iclusig's limited labeling outlook?
- Would Iclusig provide any bottom-line benefit for the buyer?
That last question is the biggie, and probably the reason why no buyout talk has genuinely materialized.
Cash burn
Lastly, while clinical-stage and single-drug biopharmaceutical companies often get somewhat of a free-pass come quarterly earnings time with regard to their profits or losses, they are heavily critiqued by Wall Street and investors with regard to their cash burn rate if they're losing money.
Source: Ariad Pharmaceuticals.
Ariad, for instance, issued $200 million in convertible bonds at 3.625% this past June in order to raise $176.9 million in cash after taxes. These bonds will be due in 2019, but shareholders can begin converting them to Ariad shares as early as mid-December 2018. Although this move bought the company more time and put it on pace to end 2014 with $230 million-$235 million in cash, it's also expected to burn through $165 million-$175 million in cash this year alone. In other words, even after this massive bond offering the company still only has about eight-10 quarters of cash left at current burn rates before it runs out. Not to mention, since this is a convertible offering, Ariad shareholders could see their shares diluted beginning in 2019.
Out of all the above factors, it would appear this might be playing the biggest role in pushing Ariad's shares lower in 2014.
Where does Ariad go from here?
Perhaps the toughest question of all is where Ariad Pharmaceuticals goes from here.
Source: Ariad Pharmaceuticals.
Although Ariad could just as easily head in either direction and there's no way for me to know with any certainty where it'll go next, my inclination is to expect further pressure on its shares.
My reasoning stems from a number of points. First, I don't expect a buyout of Ariad to materialize, or at least talks to progress to a serious nature until it gains a few additional label indications for Iclusig. Secondly, Ariad isn't expected to be borderline profitable on an annual basis until 2017 based on Wall Street's forecast, and its cash is slated to run out by late 2016 -- those figures don't quite mesh. Finally, I continue to weigh the benefits of Iclusig versus its vaso-occlusive risks, and I personally find it difficult for the company to see broad label expansion beyond just being a last-line option for various cancer types. I believe that will really limit Iclusig, and Ariad's, true potential.
With that being said, I'm remaining a bystander for now and watching Ariad from afar.
