ARIA HAS THE NECESSARY COMPONENTS IN PLACE TO SUCCEED

#1 Significant Phase 2 results derived from a meaningful patient pool.

The Phase 2 trial studied 212 patients with advanced sarcomas. About 90% of the patients in the trial were experiencing disease progression. Rida was shown to be both safe and effective, and the trial achieved its primary endpoint.

“Treatment with ridaforolimus more than doubled progression-free survival.

At the 2007 annual meeting of the American Society of Clinical Oncology (ASCO), we announced that further analysis of the Phase 2 trial of ridaforolimus demonstrated that documented disease stabilization and/or tumor regression with single-agent ridaforolimus is a strong predictor of improved overall survival. Specifically, patients with a ridaforolimus CBR—tumor regression or disease stabilization for at least 16 weeks—had a median overall survival of approximately 17 months, nearly double that of the overall trial population (approximately 9 months).”

Source: Ariad Pharmaceuticals

#2 Collaboration arrangement with a larger, well capitalized partner. 

In July 2007, ARIA and Merck (MRK) partnered up to develop and commercialize rida.  After reviewing some of the terms of the ARIA-MRK collaboration, it certainly appears the bright folks at MRK are betting rida will be a winner.

“Both ARIAD and Merck share overall responsibility for global development and commercialization of ridaforolimus. In the United States, ARIAD will distribute and sell ridaforolimus for all cancer indications and book all sales, and ARIAD and Merck will co-promote ridaforolimus. ARIAD and Merck will each receive 50% of the income from such sales. Outside the United States, Merck will distribute, sell and promote ridaforolimus and book all sales. Merck will pay ARIAD tiered double-digit royalties on such end-market sales of ridaforolimus.

The collaboration provides ARIAD with up-front and milestone payments, sharing of development costs and other provisions that may be valued at approximately $1 billion based on successful development of ridaforolimus in multiple cancer indications and achievement of significant sales milestones, excluding potential commercial returns from profit-sharing in the U.S. or royalties paid by Merck for sales of ridaforolimus outside the United States.”

Source: Ariad Pharmaceuticals

#3 Rida is demonstrable. 

See Carolyn Boone’s story.  In 2003, Carolyn was diagnosed with mullerian sarcoma.  Prognosis, Carolyn had less than 12 months to live.  Carolyn was the very first patient – numero uno – treated with rida in a clinical trial held in south Texas. 

Today, Carolyn is a cancer survivor.

ITINERARY 2009-10

·       By year-end 2009, ARIA expects to complete enrollment for the first Phase 3 rida trial. 

·       On or before March 31, 2010, ARIA plans to announce the second interim analysis from the trial. 

·       After the second interim analysis, the company intends to file for US approval – presuming the results are favorable and warrant filing the application. 

·       Upon priority review, rida could be approved by the end of 2010.

THOSE LESS OPTIMISTIC

(1) On July 31, 2009, Merriman conveniently downgraded ARIA from neutral to sell.  Merriman’s downgrade came after shares had sold off in after hours trading the previous night.  According to TheFlyontheWall, Merriman was concerned that “Merck (MRK) and the company (ARIA) are not agreeing on development plans for ridaforolimus.”

(2) On April 1, 2009, Joseph Pantginis, Merriman’s analyst, told the Dow Jones Newswires, interim data would not be available until year-end 2009.  Therefore, Pantginis concluded, “There’s not a major catalyst for the remainder of the year.”

Not to pick on Merriman or Mr. Pantginis, I just see things a bit differently.

(1) MRK evaluated the market potential for rida when used in a combination setting for aggressive breast cancer.  As result of this evaluation, MRK said it will not pay for a fifth Phase 3 trial to study this particular indication.  From a simple man’s view, it seems evident that the costs to run the trial coupled with US regulatory risks might outweigh the market potential and patient benefit, if any, that rida in combination with trastuzumab could provide.  Assuming I’m close, this is likely a smart move by MRK.  In the near-term, however, the real key to ARIA’s success (or failure) rests on the existing Phase 3 rida trial for soft tissue and bone sarcomas, which brings me to my second point.

(2) As I indicated above, ARIA expects to announce results of the first Phase 3 interim analysis for rida in patients with soft tissue and bone sarcomas at some point in the next six weeks.  Although the results are preliminary, I argue that positive results will likely boost ARIA’s shares above $2.00 – the after hours closing price on July 30 which was the night before Merriman downgraded ARIA to sell.

CONCLUSION

Investors should avoid getting distracted with other trials and remain focused on the current Phase 3 rida trial. 

With positive interim Phase 3 results, shares of ARIA are highly likely to move higher.

Factoring that ARIA’s collaboration agreement with MRK is valued at or near $1 billion, I would not be shocked if MRK makes a move to acquire ARIA at some point in the not-so-distant future. 

Closing with a final thought . . .

The patent privileges associated with an orphan drug once approved should be especially attractive to MRK.  Rida has obtained orphan drug status for the soft tissue and bone sarcoma indication.

Disclosure: Long ARIA

CAVEAT

As many have learned the hard way, investing in new drug development is NOT always easy.  Risks are high.  The shorts sellers are brutal and prey on failure.  Missteps are NEVER forgiven.  To invest in such an environment, investors need to be prepared for the worst.  In other words, investors must manage the risks.  One way investors can manage risk is to hedge ALL long positions – common stock or call options – with put options.