The Ariad Pharmaceuticals Conundrum (ARIA, MRK)

Business Week has run a brief feature article on Ariad Pharmaceuticals (NASDAQ:ARIA) in its "Inside Wall Street" magazine section and noted that the company’s partner Merck (NYSE:MRK), has "deep pockets."  Unfortunately it only spells out one side of the reality, and saying Merck or any other Big Pharma has deep pockets is like reannouncing the latest officially confirmed developments from the Department of Redundency Department.  It just isn’t enough to go on, even with the positive analyst and holder citations you can see in the article.

We previously noted this just back on July 12, 2007 that Ariad Pharmaceuticals and Merck entered into a collaboration to jointly develop and commercialize AP23573 for use in cancer.  Oddly enough, shares of Ariad had risen sharply from the sub-$5.00 prices just a couple months before the announcement.

The article from Business Week points out that Merck has paid $75 million up front for the drug; future milestone payments for the phase II and III clinical trials, will fund the remaining development costs. Merck will pay $452 million in all for development, plus $200 million upon Ariad’s hitting sales thresholds, and a further $200 million for global development.  Even to 24/7 Wall St,. a company like Ariad with a $333 million market cap would stand to benefit greatly on the surface if this all works out. 

A key problem may be that it seems no one has remained in very strong focus after such a long and lackluster history. The options show a fairly quiet picture: 2,151 of the SEP07 $5 CALL contracts are in the open interest, 2,545 of the OCT07 $5 CALL contracts are in the open interest, and only 2,394 of the NOV07 $5 CALL contracts are in the open interest.  In the JAN09 $5 and $7.50 Calls there are only just over 2,700 contracts combined in the open interest.  None of the premiums indicate a massive price move expected.  Visit the JAN09 PUTS & CALLS and you hardly see any big speculation.  So options traders aren’t exactly lined up betting the farm on this one to be ‘the next big thing in biotech’ anytime soon.

It would seem that Ariad’s biggest conundrum is that much depends on actual sales down the road.  Outside of the milestone payment received, this company has never generated anything to bother mentioning as far as revenues are concerned.  That isn’t any easy situation for anyone to just openly accept as not being a risk. 

Options trading and the underlying stock volume may increase because of the Business Week exposure.  But with the Business Week phenomena usually being short-lived and with this edition being ahead of the Labor Day weekend, there may not even be many people that hear or see the tree in the forest to decide if it stands or falls.

Ariad closed Thursday at $4.82, down some 25% from the $6.40 highs after the Merck deal was announced.  Ariad has also been public since the mid-1990’s and shares briefly traded north of $10.00 back in 2004 and north of $20.00 for an even briefer period in 2000.  There is promise to this company and that part isn’t being questioned.  But it sure has a long way to go and will have a lot to prove when you consider its long past and the long stretch of the actual calendar ahead.

Jon C. Ogg
August 31, 2007

Jon Ogg can be reached at [email protected]; he produces the 24/7 Wall St. Special Situation Investing Newsletter and he does not own securities in the companies he covers.