Ariad Could Be Next Biotech Star

05/12/2011 2:05 pm EST

Focus: STOCKS

Hilary Kramer

Editor, GameChanger Stocks

The company’s potentially revolutionary cancer treatment is nearing milestones that could launch the stock higher still, writes Hilary Kramer, editor of GameChangers.

Ariad's (ARIA) goal is to produce breakthrough cancer medicines, and it is focusing first on aggressive cancers where current therapies are inadequate.

The biotech company has two potential new drugs in clinical trials, and a third is expected to begin trials later this year. These compounds target cell signaling, which management believes not only makes them potentially very effective, but means they may end up being treatments for multiple cancers.

Ariad is an exciting story because its compounds have broad, game-changing potential in treating cancer. I like that the company is concentrating on patients most in need and cancers with few treatment options, rather than going the easier route of developing “me-too” drugs. That is how game changers are born.

With the incidence of cancer likely to increase significantly over the next two decades, companies that develop breakthrough treatments have huge potential. We are still early in the game, but Ariad has that kind of potential.

The furthest along and most important of its treatments is ridaforolimus (drugs in development have the worst names, don’t they?), and as you would expect, it’s also the one investors are paying most attention to.

It works by blocking a protein (called mTOR) which, as Ariad describes it, “creates a starvation-like effect in cancer cells by interfering with growth, division, metabolism, and angiogenesis” (the growth of blood vessels that feed the tumor).

Merck Sees Big Opportunity
Ariad has partnered with pharmaceutical giant Merck (MRK) to help develop ridaforolimus and bring it to market. Merck paid Ariad $75 million up front, and then added two $53.5 million milestone payments at the start of Phase II and Phase III trials. In addition, Merck paid half of the development costs.

The deal was reworked last year, giving Merck exclusive license to develop, manufacture, and commercialize ridaforolimus in oncology (excluding other potential areas of treatment that may be discovered down the road). Merck now funds all development, manufacturing and commercialization costs, and Ariad also received $50 million up front and $19 million to retroactively cover costs from January to April 2010.

Ariad, of course, is eligible to receive future payments as regulatory and sales milestones are met (up to $514 million), and the company would also receive tiered double-digit royalties on eventual global sales of ridaforolimus.

You know Merck would only enter into a deal like this if they see big potential—and so far, clinical trial results have indeed been encouraging.

Ariad received good news in January from a Phase III trial of ridaforolimus in patients with metastatic soft-tissue and bone sarcomas (a type of cancer that develops in certain tissues like bone or muscle). Data showed the trial met its primary endpoint on progression-free survival (PFS), with a 28% reduction in risk of the cancer’s progression compared with placebo.

NEXT: Big Catalyst Looms in June

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Big Catalyst Looms in June
This trial is continuing, and here’s one reason now is a good time to get in the stock: Additional data will be released at the American Society of Clinical Oncology (ASCO) meeting early next month (June 3 to 7, in Chicago).

ASCO is the biggest event of the year for biotech and pharmaceutical companies involved with cancer therapies. More than 30,000 people will attend, and I can tell you that companies usually only release data at this important event when it is good news. I can also tell you that experts in this field are eagerly awaiting Ariad’s presentation.

Assuming data continue to be positive, upcoming results could be the next major catalyst for ARIA. Merck intends to file for FDA approval of ridaforolimus sometime this year, which should be another significant catalyst. Merck is also continuing development of ridaforolimus with additional clinical trials to test it on other types of cancer.

Ariad’s other two potential new drugs are in earlier stages of development, so they won’t drive the stock as much as ridaforolimus in the near future.

Ponatinib is currently in Phase II trials to treat resistant or intolerant chronic myeloid leukemia, or CML, and Philadelphia positive acute lymphoblastic leukemia. Patient enrollment is expected to be completed by the end of this year. Early-stage data have been very encouraging in mice, reducing tumor growth by 80% in certain instances.

The third drug candidate, AP26113, is in preclinical testing and other studies required to advance to clinical trials. The company expects to begin the first Phase I trials shortly after the middle of this year.

Ariad is still a development-stage company, so it does not have any revenues from products yet. Total revenues last year were $178.9 million, virtually all of it from the agreement with Merck. In the recently reported first quarter, just reported after the close today, revenues fell to $56,000 because of the reworked deal with Merck. Yes, that looks like a huge decline, but it's meaningless.

Company May Sell More Stock
At the end of the first quarter, Ariad had cash and equivalents of $98 million, down from $103.6 million at the end of 2010. The company raised over $50 million in the equity markets the past two years, and with less than a $1 per share in cash and equivalents, it will probably need to raise additional capital at some point this year or next to fund research efforts.

Additional offerings can dilute shares, but they are expected with development-stage companies like Aria, so any pullback would likely be temporary. Depending on the stock’s price at the time, additional offerings could also be good buying opportunities.

I am confident we will see more positive data on ridaforolimus in June, which should send the stock higher.

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