Following its late 2012 approval by the Food and Drug Administration to treat two rare types of leukemia, Ariad Pharmaceuticals' (NASDAQ:ARIA) shareholders have experienced the full roller-coaster ride of unwavering success and unfathomable failure.
A little background on Ariad and Iclusig
As a quick background on the controversy that surrounds Iclusig, in October Ariad reported its 24-month safety findings and discovered that serious vaso-occlusive events (i.e., blood clots) had increased for patients taking the drug since its 11-month safety review. The reaction over the next month was swift with Ariad ending its newly diagnosed chronic myeloid leukemia study known as EPIC, and the FDA placing a temporary sales ban on Iclusig while it investigated the safety of the therapy.
Eventually, in December, Iclusig was allowed to return to market with beefed-up safety warnings and the reputation for being a last line of defense in its approved Philadelphia chromosome-positive leukemia treatment indications due to the higher propensity for patients to have thrombotic events.
Buyout rumor bonanza
The real fun began in January when U.K-based Daily Mail insinuated that Eli Lilly (NYSE:LLY) and GlaxoSmithKline had demonstrated interest in purchasing Ariad, with the publication rumoring that Lilly would pay as much as $20 per share for Ariad. Thus far, those rumors have turned out to be nothing more than hot air.
Similarly, just last week Daily Mail again ran a report, this time insinuating that Jazz Pharmaceuticals (NASDAQ:JAZZ) could be interested in gobbling up Ariad for as much as $20 per share. This time, though, Ariad's share price remained quite calm on the rumor announcement and failed to move 30% higher.
Ariad isn't completely without attractive components in that it does have an FDA and EU-approved drug in Iclusig, which has the opportunity to gain a number of additional indications. It also has very attractive carry-forward losses, which a buying company could use to reduce its own tax liability.
But these positives aside, I think an Ariad buyout is highly unlikely for three reasons.
Ariad doesn't add pipeline diversity or profitability
First and foremost, the purpose of an acquisition in the biopharmaceutical sector is to add either pipeline diversity or profitability to the purchasing company. Ariad offers neither of these traits to a prospective buyer.
Although Iclusig could eventually be approved for a number of additional indications, Ariad's entire pipeline consists of nine clinical-stage studies, of which eight are merely expansive indications for Iclusig. Aside from its ALK-positive non-small cell lung cancer experimental therapy AP26113, Ariad's pipeline diversity is nonexistent, which I think makes it a weaker acquisition target.
A lack of pipeline diversity is OK as long as there's the strong potential for profitability to back it up -- but you won't get that either with Ariad. In 2013, Ariad reported just $8.3 million in cumulative product revenue and, while providing no sales guidance for the drug in 2014, forecast using $165 million to $175 million in cash, leaving the company with just enough cash to suffice until mid-2015. What company is going to purchase a biopharmaceutical burning through $170 million in cash per year? None that I know of!
Also, think about this from the perspective of Daily Mail's two most prolific buyer candidates, Jazz Pharmaceuticals and Eli Lilly.
Jazz has made a number of acquisitions, and they've all been accretive to earnings. Jazz isn't the type of company that goes out of its way to purchase biopharmaceuticals which are deeply in the red. Furthermore, why would it pay upwards of $4 billion for a company with less than $10 million in full-year revenue when Jazz is closing in on its first $1 billion revenue year in its history in fiscal 2014?
For Eli Lilly, it's simply not that desperate despite its ongoing patent cliff. Eli Lilly is attempting to spread around its opportunities through collaborations and internal discovery, but I highly doubt that a $4 billion purchase of Ariad is anywhere even remotely on its radar.
Iclusig's safety is too much of a red flag
The second big problem is that Ariad is just in the initial stages of rebuilding the reputation of Iclusig after its damaging two-year safety report temporarily pulled the drug from pharmacy shelves in the U.S. and eventually led to tougher labeling.
I, of course, could be wrong, and Iclusig could surprise everyone with sales that simply take off. In its presentation at the JPMorgan Healthcare Conference in January, it was very clear that, despite its safety concerns, Iclusig is a very effective therapy in chronic myeloid leukemia patients who've progressed on at least two tyrone kinase inhibitors. With regard to the proportion of patients that achieved a cytogenic response, Iclusig's response rate was close to double its peers.
But we have to remember that efficacy usually takes a backseat to safety in the minds of the FDA, physicians, and often patients. It's going to be a monumental uphill challenge to push Iclusig's usage forward ahead of existing therapies, which are considered to be safer to use. The uncertainty surrounding this brand rebuild is more than likely enough in my mind to keep prospective bidders safely biding their time on the sidelines.
Is Ariad even looking for a buyer?
Finally, and I feel this is a key point that has been long overlooked, Ariad isn't necessarily looking for a buyer.
Although Ariad has made collaborative deals in the past, such as with Merck over now-rejected sarcoma drug ridaforolimus, the company and its CEO, Harvey Berger, have made it pretty clear that success comes internally and not from licensing out its products. In an interview with Pharmexec.com in August of last year, when asked why Berger had not licensed out Iclusig, he had this to say:
It's the foundation of why we think we're a sustainable, long-term, successful global oncology business. It goes back to two corporate values we have: scientific excellence, and clinical scholarship. The second one, clinical scholarship, we view as a critical part of our core values, and as a key distinguishing feature. Not only do we discover really important new medicines, but we take into account a deep understanding of the clinical and medical questions associated with those diseases, and we try to design and develop new medicines that are responsive to a deep understanding of the genetic and biologic basis of different diseases, and then incorporate that into our clinical trials and development, and ultimately into our commercialization strategies. If the biotech industry merely becomes a small specialty pharma company that in-licenses products that others don't know how to develop -- big pharma -- or universities say, 'here you go, develop this,' and in turn you add no real innovative value, you can't win in the end. You may be able to generate value, but you don't have a sustainable business, you become purely a small specialty pharma company.
With the exception of licensing Iclusig in Australia, Berger has shown little interest in licensing its diamond in the rough, and it's unclear that he wants to sell the company. Unless Ariad wants to be put on the block, it will be difficult for prospective buyers to purchase the company.