Ariad's Lawsuit Loss and Investors' Gamble

If you're an investor in the pharmaceutical industry, you should realize that legal disputes are part of doing business. But it's not always generic- and branded-drug companies duking it out over patents. Sometimes it's branded-drug companies fighting among each other. And for investors in one company, those are almost a sideshow.

On Monday, Ariad Pharmaceuticals (Nasdaq: ARIA  ) announced that it was on the losing end of its lawsuit claiming that Amgen (Nasdaq: AMGN  ) and Wyeth's (NYSE: WYE  ) arthritis and psoriasis drug Enbrel infringed on patents it had licensed from three academic institutions. Ariad is, of course, planning on appealing the ruling, but given that the judge granted Amgen's motion for a summary judgment, things don't look too good for Ariad. Not unexpectedly, shares dropped as much as 8.5% on the news.

While royalties from sales of Enbrel would have been nice to have -- sales of the drug topped $5 billion last year -- this is not what's going to drive the company forward in the future. It still has a partnership with Merck (NYSE: MRK  ) to develop its mTOR inhibitor cancer treatment, deforolimus. The drug is in phase 3 trials to treat sarcomas and in phase 2 trials for various other cancers, including breast cancer in combination with Genentech's (NYSE: DNA  ) Herceptin.

Ariad will get an interim look at the phase 3 data at the end of this year, but unless deforolimus has a remarkable affect, the company will have to wait until next year to know if the drug works or not.

At a market cap under $200 million, Ariad looks like a cheap takeover target for Merck. That's hardly a good reason to buy the stock now, though. Merck could just as easily let it languish for a while in the hopes of picking it up even cheaper.

In the long run, the legal defeat shouldn't mean a heck of a lot for investors. Deforolimus' success or failure is what will drive the company's stock price. If the phase 3 trial is a success -- and that's the risk right there: if -- I think Ariad will double or more from this level. Those looking for a high-risk, high-reward investment can certainly find it in this company.