Tug Of War In Ariad Pharmaceuticals

When investing in the biotech and the pharmaceutical arena, there are always plenty of surprises. Following the announcement of drug trials by the FDA, there can be wild price fluctuations in an issue's price.

Many of the smaller companies are also the targets of the big pharma that are looking to add to the product pipeline.

Ariad Pharmaceuticals ARIA is an excellent example of both of these factors playing a significant part in its price action.

On October 8, 2013, the company announced that it was pausing patient enrollment in studies of Iclusig, a drug used to treat different forms of leukemia. As a result, ARIA plunged 66 percent from its October 8 close of 17.14 to 5.83 the following day.

After several downgrades by Wall Street analysts, including Brean Capital, Bank of America, Barclays, Maxim Group, JMP Securities, Citigroup and Chardan Capital, the issue was under severe selling pressure.

Only three days later, the FDA reported serious adverse reactions in the eyes of patients treated with Iclusig. That, coupled with a negative tweet by TheStreet.com's Adam Feuerstein, pushed ARIA another 18 percent lower to close at 4.26.

The final nail in the coffin was on October 18, when the company announced the discontinuation of Phase 2 EPIC trial of Iclusig. This news slashed another 40 percent off as it closed at 2.67.

This prompted more Wall Street analysts to throw in the towel as Oppenheimer, HC Wainwright, Guggenheim, Leerink Swann and William Blair removed or lowered ratings and price targets. By October 31, ARIA bottomed intraday at 2.15 and posted its lowest close of 2.21 since January of 2010. That low coincided with the announcement of the temporary suspension of Iclusig marketing in the United States.

From that level, ARIA began to rebound. In early November, the company reduced its staff by 40 percent in the U.S., in response to its decision to temporarily suspend the marketing and commercial distribution of Iclusig in the United States.

Finally, things started to turn around for the company in late November, when the company revealed that advisors to European Union regulators believe that Iclusig should stay on the European markets.

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In early December, the company confirmed discussions with the FDA regarding lifting the ban on Iclusig. Although the company did not reveal any timelines regarding the timeline for lifting the marketing ban, the news had a positive impact on the issue.

The potential change of heart by the European Union and the FDA ignited a rally in December from under $5 to nearly $7 that month. On December 20, ARIA received U.S. approval to bring Iclusig back to market, with selling to restart again by mid-January.

After laboring between $6.50 and $7.50 for the next month, the company needed another catalyst besides the slew of upgrades by the firms that had abandoned the ARIA near the lows of move.

A better catalyst was a report from the UK Daily Mail on January 20 that at least three international firms have approached the company regarding a potential buyout for as much as $20.00 per share.

During the next three trading sessions , ARIA rallied from the $7.00 level to nearly $10.00 in Monday's trading. On Monday, Adam Feuerstein attempted to squash the reported takeover speculation, citing an institutional investor who's been shorting ARIA, betting against the rumored takeover.

The rationale for shorting was based on the notion that a potential suitor would be be paying a high premium for Iclusig and the ALK Inhibitor AP36116, when it could face significant competition from drugs in the Novartis NVS pipeline.

If the Novartis drug development comes to fruition, it could have significant negative impact on the sales of Iclusig here and abroad -- a risk Eli Lilly LLY or other big pharma may be unwilling to undertake if a high premium is paid for ARIA.

Feuerstein's post had a significant impact on ARIA in Monday's trading as the issue declined 12 percent from $8.99 to $7.91. However, in Tuesday's trading, the issue has bottomed above Monday's panic low ($7.57) at $7.95 and is attempting to reclaim the $8.00 handle.

With impact of the recent news having little more than a one-day negative influence on the issue, one has to wonder whether or not big pharma may be sizing up the issue for a takeover. Being short a stock that may be in play has not always been the the most profitable investment strategy.

Instead, investors should closely monitor the sales and progress of Iclusig, while keeping a close eye on the proposed progress by Novartis in that arena. If the Novartis trial follows a similar course to the ARIA trial, it may fuel further speculation of the company being a potential target of big pharma.

This story was written by Joel Elconin