The concept here is simple: Take a well-liked company on Motley Fool CAPS and completely debunk the notion that it's worth buying. Does this mean that after I put a company through the wringer, it's worth selling? Maybe, maybe not -- that's up to you to decide. The point of "Bash My Stock" is to expose the fact that there's another side to every trade, and this series will attempt to look at the bearish view of why a stock might not be such a great value after all. Today I suggest we take a closer look at Ariad Pharmaceuticals (Nasdaq: ARIA).
Don't be fooled by Ariad's two-star Motley Fool CAPS rating (out of a possible five stars). This tiny biotechnology company has garnered 343 picks from our CAPS community, with an overwhelming 308 rating the stock as an outperform.
As indicated by the bullish support in our own community, there are definite positives to be excited about if you're an Ariad shareholder. For starters, in late September, the company presented positive data on ponatinib, the company's experimental treatment for patients with resistant and refractory chronic myeloid leukemia. The data showed that in the long-term phase 1 study, 72% of patients achieved a major cytogenetic response.
In addition, the company, in partnership with Merck (NYSE: MRK), is developing ridaforolimus, an experimental drug targeting patients with bone and soft tissue cancers. It is currently in stage 3 clinical trials.
Still, not everything is as cut-and-dried as it may appear in the biotech sector. Ariad shareholders, it's time for me to bash your stock!
First up is ponatinib, which seems to be the "bee's knees" of the company's portfolio, despite the fact that it just now began phase 2 clinical trials. This means that, at best, Ariad is a couple of years from bringing ponatinib to market -- and that's if there are no setbacks. It's not uncommon for biotech companies to perform well in phase 1 and 2 clinical trials only to fail to impress the FDA with phase 3 clinical data. Shareholders would be counting their chickens well before they're hatched if they bought into the ponatinib hype. Shareholders might also be jumping the gun with ridaforolimus. The drug, which did show a 28% reduction in cancer progression relative to the placebo in phase 3 trials, isn't a lock yet.
Finally, there are the cash constraints of putting three major drugs through clinical trials (ridaforolimus, ponatinib, and AP26113) while still trying to develop an additional pipeline. Ariad has been burning cash nearly every year since inception, and it's very likely that even if these drugs were approved, the company would not be anywhere near profitable until many years from now. With only $81 million in cash remaining on its books and the company generally burning $50 million each year in cash, it's only a matter of time before Ariad brings a large and dilutive share offering to market.
Foolish roundup
I think shareholders have wrung every last drop of speculation out of the stock. At 190 times book value and with many years of losses still looming, this looks like a potentially dangerous investment.
Now it's your turn to weigh in by voting in the poll below on whether you think Ariad Pharmaceuticals is the next big blockbuster or perhaps the next portfolio popper. Also consider adding Ariad Pharmaceuticals to your free and personalized watchlist to keep up on the latest news with the company.
