Safety concerns for Ariad Pharmaceuticals' (NASDAQ:ARIA) Iclusig resulted in a temporary suspension of its sales in 2013, a more stringent prescribing label upon its commercial return in 2014, and a sagging share price that includes a retreat from more than $25 in 2012 to about $8 currently.
That's a pretty disappointing track record, but Iclusig revenue is beginning to quicken and a new drug may be coming, and as a result, some investors think that Ariad Pharmaceuticals' sub-$10 share price is a bargain. That may be true, but I'm not fully convinced.
Picking up the pace
Ariad Pharmaceuticals won approval for Iclusig's use in previously treated chronic myeloid leukemia, or CML, patients, and Philadelphia chromosome positive acute lymphoblastic leukemia, or Ph+ ALL, patients in 2012.
Because both of those indications are relatively rare, Ariad Pharmaceuticals' commercial hope for Iclusig was more tightly tied to its potential use in previously untreated CML patients. Unfortunately, Ariad was forced to shelve plans for use in treatment in naive CML patients after it was discovered that Iclusig can increase the risk of life-threatening blood clots -- a discovery that would have severely limited its widespread use in otherwise healthy CML patients.
Because of the inability to advance Iclusig into the larger treatment naive CML patient pool, Iclusig has been relegated to a niche status drug and, as a result, sales of Iclusig were only $55.7 million last year.
Based on that performance, it would be hard to argue that Ariad Pharmaceuticals is cheap by any metric, but there are some bright spots that are encouraging to investors. For example, Iclusig's $55.7 million in sales was 23% higher year over year, and Iclusig's sales in the first quarter of this year nearly tripled to $23.9 million from a year ago when Iclusig was relaunched with the more stringent label. Iclusig's first quarter performance has Ariad Pharmaceuticals guiding for Iclusig full year sales of between $130 million-$140 million this year, too.
However, while that's good news, investors may not want to extrapolate Iclusig's sales growth to a potential for Ariad Pharmaceuticals shares soaring higher. That's because Ariad Pharmaceuticals' current $1.5 billion market cap means investors are already paying more than 10 times estimated sales to own Ariad Pharmaceuticals shares, and that's not cheap.
Prospect in the pipeline
Because of Ariad Pharmaceuticals' price to sales multiple, any argument that Ariad Pharmaceuticals' share price is too low also needs to be based on the future revenue potential of brigatinib, a treatment for ALK-positive non-small cell lung cancer, or ALK+ NSCLC, that is currently under development.
Recently, Ariad Pharmaceuticals reported a 70% average patient objective response rate during brigatinib's phase 1/2 study and median 13.4 month progression free survival rate for patients previously treated with Xalkori.
If that data is confirmed by additional trials, it could mean that brigatinib gets filed for FDA approval in 2016 and hits the market in 2017. If so, brigatinib could justify a bigger market cap for the company, but given that there are still a lot of "ifs" remaining, I'm unsure how much of a premium brigatinib is really worth for shares.
Too risky a bet?
Ariad Pharmaceuticals' ability to grow Iclusig sales and win regulatory approval for brigatinib in 2017 could allow it to turn a profit in 2018, but investors will have to endure painful losses until then. In the first quarter, Ariad lost $52.7 million, up from $49.8 million the year before, and as a result the company's cash and equivalents slipped from $352.7 million in December to $304 million in March.
Because of the size of its losses, its cash burn, and the fact that I can't help but think that a lot of Iclusig and brigatinib's potential is already being priced into shares, it's hard for me to recommend this stock to anyone other than someone who could accept the risk of a brigatinib failure. Ultimately, Ariad Pharmaceuticals may prove to be a good buy, but in my view, it's not nearly as cheap as it's price tag makes it appear -- nor cheap enough to pique my interest.