Did Q2 Prove This Biotech Is Overvalued?

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Ariad Pharmaceuticals (NASDAQ: ARIA) reported its second quarter results last week and focused the associated conference call on the company’s two drugs. Leukemia drug Iclusig is growing in sales but faces a market saturated with generics and a long-standing blockbuster from Novartis (NYSE: NVS).  And the oncologic pipeline project lost out on a Food and Drug Administration acceleration, which will put it further behind the competition.  

Are Ariad’s days of growth behind it? Here are the two key takeaways from Ariad’s second quarter.

1. Iclusig’s growing, but at Tasigna rates?

Iclusig won FDA approval late last year for the treatment of two treatment-resistant types of leukemia: a mutated version of acute lymphoblastic leukemia, or ALL, and chronic myeloid leukemia, or CML.

Second quarter sales for Iclusig totaled $13.9 million, and Ariad predicts more than $50 million in global sales for 2013. The quarter included over 600 patients, and Ariad hopes to grow the patient base to over 1,000 by the end of the year.

But the competition is fierce in the leukemia market. Novartis’ Gleevec is typically the first-line treatment. If that fails, patients move on to Bristol-Myers Squibb’s Sprycel or Novartis’ Tasigna. According to Novartis’ annual report, Gleevec had global sales of $4.7 billion and Tasigna had sales of $1 billion.

According to Ariad’s second quarter conference call, Inclusig’s total prescriptions during the first six months were 40% higher than the total for Novartis’ Tasigna during its comparable launch period. If that growth held, Novartis could start to sweat under its collar. Novartis needs Tasigna to help keep its leukemia footing as Gleevec heads for the patent cliff next year.

But Gleevec and Tasigna have both picked up additional indications that broaden their markets. Iclusig’s current indications have their limitations. ALL accounts for 80% of childhood leukemia, but Iclusig is approved for a mutation appearing in fewer than 30% of those cases. CML has an even lower incidence rate with about 5,000 new cases per year in the U.S. compared to over 600,000 for general ALL.

That’s not to say Iclusig can’t grow more in the future. There’s a slate of ex-U.S. approvals expected next year. And the drug is involved in potential indication-expanding trials that include a global phase 3 trial for treatment naive CML patients, which should report in the third quarter next year, and a phase 2 trial for gastrointestinal stroma, which should report in the first half of 2014.   

2. No “breakthrough” for AP26113

Ariad voluntarily announced that the FDA decided not to award a breakthrough therapy designation for its lung cancer drug AP26113. The drug treats a type of non-small cell lung cancer, or NSCLC, that includes a mutation of the ALK gene. NSCLC accounts for about 85% of overall lung cancer cases and the ALK gene appears in 3 to 5% of those patients.

The breakthrough designation would’ve given the drug an accelerated review process, but the FDA felt the submitted trial data had a “short follow-up and small number of patients.” That puts Ariad running behind Novartis’ ALK drug LDK378, which did receive the designation in March.  

Ariad still plans to push forward with AP26113 with a pivotal trial launching in the third quarter. Late-stage data showing a clear advantage over LDK378 would help offset Ariad's drug coming later to market. 

Performance comparison

Comparing the typical financial metrics for a company freshly out of the development stage is going to produce some ugly numbers. So let’s look instead at performance over the past year compared to Santarus (NASDAQ: SNTS) and Aegerion (NASDAQ: AEGR) -- two companies that launched highly anticipated drugs around the same time as Iclusig.

<img alt="" src="http://media.ycharts.com/charts/2ac2c8dedb24b1311947efa5f08dd4aa.png" />

ARIA data by YCharts

Santarus is riding high on its new ulcerative colitis drug Uceris. But Santarus already had four approved products and has three more in the pipes.

Aegerion is closer to Ariad in number of projects. The biotech’s lone drug -- Juxtipid for severely high cholesterol -- launched earlier this year. Juxtipid also faces a field thick with competition courtesy of generic statins, but the drug does have a built-in market with types of high cholesterol that don’t respond to statins. And Juxtapid proved safer than a competitor from Isis during trials.  

Ariad’s slowly deflating from the anticipation around Iclusig’s approval and release. But Ariad’s still overvalued. Remember how Ariad predicted $50 million in Iclusig sales this year? That would still make the company’s market cap over 60 times annual sales.

Foolish final thoughts

It’s great that Iclusig is selling and growth potential exists in the ex-U.S. rollouts and indication expansion trials. But it’s still in a market with a lot of competition from generics and a big pharma company. Pipeline drug AP26113 will need to show some strong late-stage data to differentiate from Novartis’ breakthrough drug. And it will take some time before Iclusig anticipation levels back out to an appropriate valuation.

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