Shares of Ariad Pharmaceuticals (NASDAQ:ARIA), a biopharmaceutical company focused on the development of therapies to treat cancer, surged higher by 17% in October, according to data from S&P Capital IQ, despite a lack of headline news.
The primary catalyst that came to the rescue of Ariad and other biotech stocks was a lack of follow-through from Congress on prescription drug reform.
If you recall, Hillary Clinton issued a prescription drug reform proposal in September, shortly after privately-held Turing Pharmaceutical jacked up the price of a drug it had purchased a month prior by close to 5,500% per pill. Clinton's proposal called for the federal government to be more involved with drug price negotiations and established monthly out-of-pocket limits for consumers for select therapies. However, only a few drug developers (e.g., Valeant Pharmaceuticals) have caught the eye of lawmakers, lowering the likelihood that broader reform takes shape.
Why is this important for Ariad? Ariad Pharmaceuticals' lead drug is Iclusig, a blood cancer drug that's demonstrated strong efficacy in late-line usage for select chronic myeloid leukemia patients or T315l-positive Philadelphia chromosome positive acute lymphoblastic leukemia patients. In other words, Iclusig has a pretty narrow patient pool -- but when used it tends to deliver a superior response. This allows Ariad to charge a wholesale cost of around $149,000 per year for Iclusig, which could clearly put it on the radar of "excessive" in the eyes of lawmakers. If, however, lawmakers sweep prescription reform down the road, then existing therapies may have little to worry about, and future innovation will likely not be dissuaded.
The question we really need to ask is whether or not Ariad's gains can extend into the long-term. The answer to that question largely depends on Iclusig.
Some investors view Iclusig as a dangling carrot that could attract a buyer. In fact, Ariad shares soared this summer on word that Baxalta was interested in possibly acquiring it. Ultimately the talks never transformed into a deal.
The biggest issue I have with this thesis is Iclusig's less-than-favorable safety profile. While effective in treating certain types of blood cancers, Iclusig was shown to increase the chances of a vaso-occlusive event in a two-year follow-up study that was released in 2013. This follow-up study led to the drug being temporarily pulled from pharmacy shelves for roughly two months. Though I don't question the drug's usage for current indications, I believe its safety profile could limit its label expansion potential.
Then again, Ariad has levers it can pull to reduce its costs to the point where Iclusig's current indications, along with its potential for label expansion, have the opportunity to push it into the black. Based on Wall Street's estimates, Iclusig could see its current sales triple between 2014 and 2018, with Ariad potentially delivering a full-year profit by 2019 or 2020.
Patient investors may very well wind up being rewarded, but I'd caution investors to keep their expectations modest considering Iclusig's safety profile.
Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
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