Why Ariad Pharmaceuticals Inc. Shares Soared

The rumor mill is working overtime today on Ariad Pharmaceuticals thanks to a London newspaper article. Should shareholders jump or balk at this report?

Sean Williams
Sean Williams
Jan 24, 2014 at 3:58PM
Health Care

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of Ariad Pharmaceuticals (NASDAQ:ARIA), a biopharmaceutical company focused on developing therapies to treat cancer, jumped as much as 31% after the London Mail newspaper reported that the company could be a takeover candidate.

So what: Eli Lilly (NYSE:LLY), GlaxoSmithKline, and Shire are all reported to be interested in acquiring Ariad Pharmaceuticals. The Mail pointed to Eli Lilly as the top potential suitor at the moment, but the four companies involved could either not be reached or would not confirm the rumor. Furthermore, The report claimed that Eli Lilly would be willing to pay as much as $20 per share for Ariad, nearly three times yesterday's closing price, which would put the company's valuation back where it was before Iclusig's two-year follow-up study crushed its share price.

Now what: Before we discuss the pros and cons, let's recall that this is nothing more than a rumor right now and probably not worth changing our investment thesis over. Rumors arise all the time, but that doesn't mean Ariad will be purchased.

On one hand, Eli Lilly desperately needs growth avenues, with nearly three-quarters of its pipeline exposed to generic competition between 2010 and 2017. To add insult to injury, Eli Lilly has been piling up late-stage failures, so it needs to figure out a way to add fresh growth soon -- and Ariad could be a solution. The other factors that makes Ariad attractive are its hefty cash position and advantageous carry-over losses, which could be beneficial for tax purposes to any suitor.

On the other hand, Iclusig is still a mess! Ariad didn't really say at the recent JPMorgan Healthcare Conference exactly how it plans to instill confidence back into its leukemia drug. And it remains to be seen if Iclusig can garner significantly wider applications given safety study findings linking the drug to thrombotic events. Trying to bid this higher here seems like a risky proposition.