Good Deal Now, Bad Deal Later: It's a Biotech Thing

Watch stocks you care about

The single, easiest way to keep track of all the stocks that matter...

Your own personalized stock watchlist!

It's a 100% FREE Motley Fool service...

Click Here Now

Cash rules the drug-development world. Companies should grab it anyway they can, and investors should take notice when they do.

Ariad Pharmaceuticals (Nasdaq: ARIA  ) could certainly use some; the company ended last year with just $40 million in the bank and had a cash spend of $75 million in 2009. Fortunately partner Merck (NYSE: MRK  ) was willing to oblige, helping the company boost its cash and lower its spending.

Merck and Ariad were already partners on cancer drug ridaforolimus. The old partnership had Ariad paying a portion of clinical trial costs while retaining half of the U.S. marketing rights. Under the new deal, Merck gets worldwide rights, but has to pay for all the clinical trial costs.

In exchange for giving up its half of the U.S. rights, Ariad will get a $50 million payment and another $19 million to reimburse the company for costs incurred since the beginning of the year. Instead of getting half the U.S. profits and royalties elsewhere, Ariad will now receive tiered double-digit royalties everywhere, but the rate is higher than the old ex-U.S. royalty rate.

And there's still more cash on the table. The new deal calls for $514 regulatory and sales milestones including $25 million when the Food and Drug Administration accepts the marketing application for ridaforolimus. That could come as early as next year as the company expects to get an interim look at the data for ridaforolimus' phase 3 trial this quarter. Hopefully by then they'll have a brand name for ridaforolimus that doesn't sound like Snuffleupagus' little brother on Sesame Street.

The infusion of cash and lower costs should extend Ariad's runway into second half of 2011 even if it doesn't get any milestones. The cash will help it start a phase 2 trial for another cancer drug, AP24534, in the second half of the year and perhaps put it in a better bargaining position for potential partners for its pipeline. The company has already licensed ridaforolimus for use in two drug-eluting stents. The correlation between cancer and drug-eluting stents isn't that farfetched; Novartis' (NYSE: NVS  ) cancer drug Afinitor is used in Abbott Labs' (NYSE: ABT  ) Xience V.

Until they're cash flow positive, drugmakers should always make sure they have enough cash to tide themselves over. You didn't hear me belittling Dendreon (Nasdaq: DNDN  ) when it grabbed cash while it waited for an FDA decision -- even though it would have been cheaper to grab it now. All it takes is one tragedy like InterMune (Nasdaq: ITMN  ) experienced to make it even more expensive later.

The deal will look like a stupid move by Ariad if ridaforolimus becomes a megablockbuster in the U.S., but at this point, living to see that day is much more important.

Jim Royal reminds us that not all cash machines are created equal.

Motley Fool Rule Breakers is always on the hunt for hot drug stocks and other cutting-edge picks. Click here to see all of our latest discoveries with a free 30-day trial subscription.

Fool contributor Brian Orelli, Ph.D., doesn't own shares of any company mentioned in this article. Novartis is a Motley Fool Global Gains recommendation. The Fool has a disclosure policy.

Read/Post Comments (0) | Recommend This Article (15)

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.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

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: 1176021, ~/Articles/ArticleHandler.aspx, 10/27/2016 3:47:51 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...

Today's Market

updated 6 hours ago Sponsored by:
DOW 18,199.33 30.06 0.17%
S&P 500 2,139.43 -3.73 -0.17%
NASD 5,250.27 -33.13 -0.63%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

10/26/2016 4:00 PM
ARIA $9.31 Down -0.03 -0.32%
Ariad Pharmaceutic… CAPS Rating: ***
MRK $60.87 Down -1.08 -1.74%
Merck and Co. CAPS Rating: ****
ABT $39.96 Down -0.23 -0.57%
Abbott Laboratorie… CAPS Rating: *****
DNDNQ $0.00 Down +0.00 +0.00%
Dendreon Corp CAPS Rating: *
ITMN.DL $0.00 Down +0.00 +0.00%
InterMune CAPS Rating: **
NVS $71.13 Down -1.50 -2.07%
Novartis CAPS Rating: ****