EFTA01465999.pdf

Equity Research Healthcare I Biotechnology ARIAD Pharmaceuticals, Inc. Iclusig Comes Back With a New Label and REMS; Upgrade to Outperform and Increase Price Target to $12 On Friday, December 20, Ariad announced that it has reached agreement with the FDA for immediate reauthorization of Iclusig marketing in the United States, with a narrower label and accompanying Risk Mitigation Strategy (REMS) and postmarketing requirements (PMRs) Ariad plans to resume shipping of Iclusig by midJanuary 2014. The new label stipulates that Iclusig is indicated in adult patients with T315I-positive chronic myeloid leukemia (CML) or T315I-positive Philadelphia chromosome positive acute lymphoblastic leukemia (Ph+ ALL), or in adult patients with CML and Ph+ ALL where no other tyrosine kinase inhibitor (TKI) therapy is indicated. We note that on October 31, the Food and Drug Administration (FDA) suspended marketing of Iclusig based on the risk of life-threatening blood clots and severe narrowing of blood vessels associated with Iclusig treatment. We had been expecting the recommercialization of Iclusig with a narrower label, and we consider the REMS accompanied by four PMRs without an Elements to Assure Safe Use (ETASU) to be a favorable. We discuss the new label, REMS, and PMRs in detail herein. We are upgrading Ariad shares to Outperform and increasing our price target from $3 to $12 (exhibit 1, on page 5), based on the following: 1) limited downside with REMS and PMRs in place, in our opinion; 2) positive physician feedback during ASH and high number of single-agent INDs filed during marketing suspension; 3) potential for safer administration of Iclusig with lower doses in the future; 4) potential attempt at the frontline setting at lower doses as long-term upside; 5) other potential indications of Iclusig that are not included in our model: GIST, and NSCLC with FGFR and RET mutations; and 6) valuation: although the addressable patient population in 2014 is cut in half because of the narrower label (from 2,500 to 1,300), the incidence is still substantial and the Iclusig patient population will build over time. We have increased our peak worldwide Iclusig revenue forecast to $747 million in 2026 from our previous estimate of $275 million. Our revised probabilityadjusted EFTA01465999 NPV now assumes $10 per share for Iclusig and $2 for AP26113, compared with our previous estimate of $1 and $2 per share, respectively. • Iclusig is now accompanied by a REMS and PMRs without a dedicated restricted distribution plan, thus enabling relatively easy growth with limited downside risk, in our opinion. We had expected an ETASU in the REMS that could impose greater restrictions in the distribution of Iclusig. We believe with the new label, REMS, PMRs, and no ETASU, associated risks can be identified and managed without severely impeding Iclusig uptake and sales growth. From a regulatory perspective, we believe that Iclusig has been de-risked in the near term until perhaps 2016-2018 when we expect the readout of the required randomized control study (part of the PMRs) assessing the long-term safety of Iclusig treatment. Ariad Pharmaceuticals is a biopharmaceutical company based in Cambridge, Massachusetts. The company focuses its research, development, and commercial efforts on the oncology space, in particular leukemia and lung cancer. Y. Katherine Xu, Ph D. +1 212 237 2758 kxu@williamblair.com Filippo Petti +1 212 237 2741 fpetti@williamblair.com Please consult pages 7-8 of this report for all disclosures. Analyst certification is on page 7. William Blair & Company, L.L.C. does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as a single factor in making an investment decision. December 23, 2013 Stock Rating: Symbol: Price: Outperform Company Profile: Aggressive Growth Price Target: ARIA (NASDAQ) Market Value (mil.): Fiscal Year End: $6.43 (52-Wk.: $2-$23) $1,025 December Long-Term EPS Growth Rate: Dividend/Yield: Estimates EPS FY EFTA01466000 CY Sales (mil.) Valuation FY P/E CY P/E None 2012A 2013E 2014E $-1.34 $-1.54 $-0.78 $-1.54 $-0.78 109 1 44 NM NM NM NM NM Trading Data (FactSet) Shares Outstanding (mil.) Float (mil.) Average Daily Volume $12.00 185 179 15,567,546 Financial Data (FactSet) Long-Term Debt/Total Capital (MRQ) 0.2 Book Value Per Share (MRQ) Enterprise Value (mil.) EBITDA (TTM) 1.4 973.0 -256.8 Enterprise Value/EBITDA (TTM) -3.8x Return on Equity (TTM) -132.7 Two-Year Price Performance Chart $25 $20 $15 $10 $5 $0 12/30/11 12/31/12 Sources: FactSet, William Blair & Company estimates EFTA01466001 William Blair & Company, L.L.C. • Of the 640 patients on therapy at the end of October at the time of marketing suspension, 350 patients are on treatment under single-patient investigational INDs, including 260 who were on treatment before the suspension and 90 who were new patients. We note that since launch in the United States in January 2013, over 1,300 patients have been treated with Iclusig, with 640 on active treatment through the end of October. Management commented that since marketing suspension, 350 patients have continued treatment under single patient investigational new drug (IND) applications as required by the FDA, including 90 new patients over the 1.5-month period. Interestingly, those under the treatment INDs comprise second -line patients (about 20%) as well as third-line patients (about 30%), and later lines of therapy accounted for another 40%, with the remaining 10% being those with the 1315I mutation. Given such a breakdown, we suspect that the relaunch will likely go well, assuming treatment IND patients come on line immediately, coupled with the high level of interest expressed by physicians at the recent ASH meeting. • Key opinion leaders we spoke with at ASH are keeping patients on Iclusig but on lower maintenance doses, and are actively managing and monitoring patients. For patients who failed Gleevec and second-generation products such as Tasigna or Gleevec, as well as patients with the 1315I mutation, Iclusig is the only option. Key opinion leaders advocated using Iclusig intelligently and selectively by excluding patients with high risk factors; aggressively managing high blood pressure, high lipids, and other cardiovascular symptoms; and using the lowest doses possible. • Lower maintenance doses might improve safety. At ASH 2013, Cortez et al. (abstract No. 650) reported that factors significantly associated with arterial thrombotic adverse events included old age (p<0.0001), history of diabetes (p=0.0003), history of ischemic events (p=0.0087), and higher dose intense to time of first event (p=0.0009). Further, every 15 mg/day dose reduction resulted in predicted 40% reduction in risk of arterial thrombotic events. These data support re-evaluating Iclusig at lower doses. • Although lower maintenance doses do not appear to compromise efficacy, it is unclear whether a lower induction dose would. Ariad will initiate a study in relapsed/refectory (R/- R) patients in the second half of 2014 to evaluate Iclusig at a 30 mg starting dose, followed by the maintenance dose of 15 mg. We note that this study will be a post-marketing requirement (PMR), which will determine the true risk of vascular occlusions as well as the safety of the 45 mg starting dose. It is unclear whether the 30 mg dose would be as efficacious as the 45 mg dose to EFTA01466002 induce as deep and durable a response. But such a strategy could decrease the risk of thrombotic events dramatically and is worth evaluating, in our opinion. Lastly, positive results from this study may serve as the impetus for use in the frontline at lower doses. • Phase II Iclusig studies in other indications, GIST and FGFR/RET lung cancer, will reopen and patients reconsented once Iclusig returns to market; data in GIST could be presented at the 2014 ASCO. Management commented that Iclusig studies in these indications will continue and doses are likely to be reduced as well. As treatment duration is much shorter in solid tumor patients than in CML patients, there could be less risk or concerns in these indications. We have updated our model to incorporate the revised Iclusig label in our estimates. We now estimate peak worldwide sales in 2026 at $745 million compared with our previous estimate of $275 million. As a result, we are increasing our price target from $3 to $12 based on the following assumptions: • A peak market penetration in the second-line CML setting for Iclusig at 14% and 12% in the United States and Europe, respectively. As a result, we estimate peak sales from the second - line setting at $90 million and $25 million in the United States and Europe, respectively, in 2026. • We estimate Iclusig's peak market penetration in the third -line CML setting at 80% and 75% in the United States and Europe, respectively. As a result, we estimate peak sales from the third - line setting at $278 million and $112 million in the United States and Europe, respectively, in 2026. • We estimate Iclusig's peak penetration into the T315I patient population at 90% for both regions. We estimate peak sales in 2026 from patients with T315I mutation at $102 million and $69 million for the United States and Europe, respectively. 2 I Y. Katherine Xu, Ph.D. +1 212 237 2758 EFTA01466003 William Blair & Company, L.L.C. • We estimate the number of total patients treated at peak in 2026 at 7,200, with over 3,200 patients treated in the United States and about 4,000 patients treated in Europe. We also estimate the number of second-line, thirdline, and 1315I patients treated at peak in the United States in 2026 are 625, 1,920, and 705, respectively. For Europe, we estimate the number of second-line, third-line, and 1315I patients treated at peak are 507, 2,150, and 1,330, respectively. • We maintain our pricing assumptions, yearly price increases, and gross-to- net discounts for Iclusig both in the United States and Europe. For the U.S. market, we continue to assume a gross list price for Iclusig of $124,000 for 2014, with 4% annual price increases and a gross-to-net discount of 9%. In Europe, we continue to assume an average gross price of $75,000 across the continent, flat pricing, and a gross-to- net discount of 13%. • Our worldwide peak sales estimates for Iclusig in 2026 increased from $275 million to $745 million, with $470 million in sales attributed to the United States, $210 million attributed to Europe, and $67 million attributed to additional territories. Our previous estimate for peak sales of $275 million included estimates of $199 million, $64 million, and $16 million for the United States, Europe, and additional territories, respectively. • We increased our total Iclusig sales for 2014 and 2015 to $108.8 million and $212.8 million, respectively, compared with our previous estimates of $69.7 million and $84.2 million, and consensus of $70.8 million and $169.5 million. We now estimate U.S. Iclusig revenues for 2014 and 2015 at $65.6 million and $158.3 million, respectively, versus our previous estimate of $32.2 million and $40.7 million. In addition, we increased our estimates of Iclusig revenue from Europe for 2014 and 2015 to $42.9 million and $54.3 million, respectively, compared with our previous estimates of $37.4 million and $43.5 million. On the bottom line, we now estimate a net loss per share for 2014 and 2015 of $0.78 and $0.11, respectively, compared with our previous per share loss estimate of $0.98 and $0.76 and consensus of $0.96 and $0.60. • As a result, we have increased our 12-month price target to $12 from $3 (exhibit 1). Our current valuation is based on our probability-adjusted net present value (NPV) model and assumes Iclusig in CML constitutes the majority of Ariad's valuation at $10 per share, compared with our previous estimate of $1. We continue to estimate AP26113 is valued at $2 per share, with peak sales of $280 million and 81% probability in ALK+ NSCLC. Based on such assumptions, our probability-adjusted NPV model now derives a 12-month fair value for Ariad at $12 per share. EFTA01466004 Iclusig is now indicated for those with the T315I mutation and in salvage therapy, albeit with a caveat. The new label allows Iclusig to be used as a third-line agent after Gleevec and a second - generation TKI such as Tasigna and Sprycel. However, as 60% of patients in the United States and 50% in Europe are initiating therapy with Tasigna or Sprycel, Iclusig could still potentially be used as second-line therapy in these patients after they fail. Although the company noted it can only market Iclusig as second line to those with the T315I mutation, second -line patients under the treatment IND account for 20% of the total INDs. Given the treatment paradigm, we are therefore optimistic about Iclusig's opportunity. Below, we provide further details on the revised label. • Iclusig is now indicated for the following: 1) adult patients with T315I- positive chronic myeloid leukemia (CML, chronic phase, accelerated phase, or blast phase) or T315I-positive Philadelphia chromosome positive acute lymphoblastic leukemia (Ph+ ALL) and 2) adult patients with chronic phase, accelerated phase, or blast phase CML or Ph+ ALL for whom no other tyrosine kinase inhibitor (TKI) therapy is indicated. • The revised "Warnings and Precautions" section includes new language detailing the risk of vascular occlusion events. Of note, the new label describes the risk of arterial and venous thrombosis and occlusions events as occurring in at least 27% of treated patients. • The 45 mg starting dose remains part of the revised label, but the "Dosing and Administration" section of the label has been revised to state that the optimal Iclusig dose has not been identified. The revised Iclusig label will be accompanied by a REMS and associated PMRs. The REMS consists of a Medication Guide and a communication plan to be accompanied by four post-marketing requirements (PMRs) to better understand the risk of occlusions while increasing patient and prescriber awareness. 3 I Y. Katherine Xu, Ph.D. +1 212 237 2758 EFTA01466005 William Blair & Company, L.L.C. • The REMS program will consist of a communication plan to better educate patients and prescribers about the increased risk of occlusions and the revised indication This will consist of letters to be mailed out to prescribing healthcare professionals informing them of the associated risks and a fact sheet and summary page also informing healthcare professionals about the risk to be distributed at meetings and disseminated through various medical journals. We note that the level of awareness will be evaluated by the FDA during its REMS assessment, which will be documented in the expected approval letter. • There will be a number of PMRs, which, in our opinion, will better assess the true risk associated with Iclusig. Ariad will be held to four PMRs: 1) a pharmacovigilance assessment of risk factors associated with vascular occlusive events and an assessment of patient management and consequences with those who experience vascular occlusive events; 2) a prospective observation assessing the incidence of vascular occlusive events associated with Iclusig with or without anticoagulant or antiplatelet agents; 3) a follow-up of patients who were previously enrolled in the Phase I, II, and III (EPIC) studies to better understand the long-term safety of Iclusig; and 4) In the second half of 2014, a trial will be initiated to assess the long-term safety of Iclusig treatment, including the long-term risk of vascular occlusive events over time. 4 I Y. Katherine Xu, Ph.D. +1 212 237 2758 EFTA01466006 William Blair & Company, L.L.C. Exhibit 1 ARIAD Pharmaceuticals, Inc. Sum-of-Parts Fair Value (dollars in thousands) Drug Iclusig—CML Worldwide AP26113—ALK+ NSCLC Worldwide Subtotal Net Cash at Year-end 2014 Net Present Value of additional Gain (Loss)* Sum-of-Parts Fair Value * Includes costs not directly related to programs above Sources: Company reports and William Blair & Company, L.L.C. estimates 2678.220028 Peak Sales Stage of Development $746,822 Marketed $280,018 Phase I/II Estimated Launch Date January 2013/ July 2013 H2:2016 Probability of Commercialization 100% 81% Percentage of Sales to Company 100% 100% ProbabilityAdjusted NPV $1,843,975 $325,268 $2,169,243 $63,406 ($22,727) $2,209,922 Value per Share $9.85 $1.74 $11.59 $0.34 ($0.12) $11.81 EFTA01466007 Percentage of Fair Value 83.4% 14.7% 98.2% 2.9% (1.0%) 100.0% 5 I Y. Katherine Xu, Ph.D. +1 212 237 2758 EFTA01466008 William Blair & Company, L.L.C. Exhibit 2 ARIAD Pharmaceuticals, Inc. Income Statement (dollars in millions) 2011 FY:11A Revenues Iclusig - U.S. revenue Iclusig - EU revenue AP26113 - U.S. revenue AP26113 - EU revenue Royaties License and collaboration revenue Service revenue Total Revenues Expenses COGS R&D expense SG&A expense Total Operating Expenses Operating income Interest income/(expense) Revaluation of warrant liability Pretax income/(loss) Provision for income taxes/(income) Net Income/(Loss) GAAP EPS, basic Weighted average shares outstanding, basic $0 25,189 111 25,300 77,743 24,380 102,123 (76,823) (65) (46,715) (123,603) 2012 FY:12A $0 EFTA01466009 490 68 558 144,710 60,909 205,619 (205,061) 113 (15,924) (220,872) ($123,603) ($220,872) ($0.93) 132,375 Sources: Company reports and William Blair & Company, L.L.C. estimates 164,955 ($1.34) Q1A $6,400 64 6,464 269 41,263 29,481 71,013 (64,549) (62) (64,611) 59 ($64,670) ($0.36) 178,541 Q2A $13,934 77 14,011 228 EFTA01466010 40,668 42,101 82,997 (68,986) 87 (68,899) 86 ($68,985) ($0.37) 184,726 2013 Q3A $16,658 74 16,732 415 45,145 37,395 82,955 (66,223) (6) (66,229) 110 ($66,339) ($0.36) 185,238 Q4E $5,380 1,329 64 6,773 335 47,402 40,761 88,498 (81,726) (6) (81,732) 113 EFTA01466011 FY:13E $42,372 1,329 279 43,980 1,247 174,478 149,738 325,463 (281,484) 13 (281,471) 368 ($1.54) 2014 FY:14E $65,689 42,854 250 108,793 5,195 140,685 106,159 252,040 (143,247) (24) (143,271) 1,197 ($81,844) ($281,838) ($144,468) ($0.44) 185,338 183,461 185,588 ($0.78) 2015 FY:15E $158,277 54,345 EFTA01466012 173 212,796 10,303 133,337 87,787 231,427 (18,632) (24) (18,656) 2,174 ($20,829) ($0.11) 188,773 6 I Y. Katherine Xu, Ph.D. +1 212 237 2758 EFTA01466013 William Blair & Company, L.L.C. IMPORTANT DISCLOSURES William Blair is a market maker in the security of ARIAD Pharmaceuticals, Inc. and may have a long or short position. William Blair intends to seek investment banking compensation in the next three months from the subject company covered in this report. Additional information is available upon request. This report is available in electronic form to registered users via R*Docsffl at www.rdocs.com or www.williamblair.com. Please contact us at +1 800 621 0687 or consult williamblair.com/Research- and-Insights/Equity-Research/Coverage.aspx for all disclosures. Y. Katherine Xu attests that 1) all of the views expressed in this research report accurately reflect his/her personal views about any and all of the securities and companies covered by this report, and 2) no part of his/her compensation was, is, or will be related, directly or indirectly, to the specific recommendations or views expressed by him/her in this report. We seek to update our research as appropriate, but various regulations may prohibit us from doing so. Other than certain periodical industry reports, the majority of reports are published at irregular intervals as deemed appropriate by the analyst. DOW JONES: 16,221.14 S&P 500: 1,818.32 NASDAQ: 4,104.74 ARIAD Pharmaceuticals, Inc. (ARIA) Dec 20, 2010 - Dec 20, 2013 $10 $15 $20 $25 $0 $5 12/31/10 Source: FactSet and William Blair 12/30/11 12/31/12 Legend: I = Initiation, RI = Reinitiated, @ = Analyst Change PT = Price Target Previous Close: $6.43 9/30/13 - PT:$26 10/9/13 - PT:$7 10/18/13 - M - PT:$3 7/30/12 - I-0 - PT:$25 10/22/12 - PT:$28 Current Rating Distribution (as of 11/30/13) Coverage Universe Percent Outperform (Buy) Market Perform (Hold) Underperform (Sell) 61 EFTA01466014 35 1 Inv. Banking Relationships* Outperform (Buy) Percent Market Perform (Hold) Underperform (Sell) 11 1 0 *Percentage of companies in each rating category that are investment banking clients, defined as companies for which William Blair has received compensation for investment banking services within the past 12 months. The compensation of the research analyst is based on a variety of factors, including performance of his or her stock recommendations; contributions to all of the firm's departments, including asset management, corporate finance, institutional sales, and retail brokerage; firm profitability; and competitive factors. OTHER IMPORTANT DISCLOSURES Stock ratings, price targets, and valuation methodologies: William Blair & Company, L.L.C. uses a three-point system to rate stocks. Individual ratings and price targets (where used) reflect the expected performance of the stock relative to the broader market (generally the S&P 500, unless otherwise indicated) over the next 12 months. The assessment of expected performance is a function of near-, intermediate-, and long-term company fundamentals, industry outlook, confidence in earnings estimates, valuation (and our valuation methodology), and other factors. Outperform (0) — stock expected to outperform the broader market over the next 12 months; Market Perform (M) — stock expected to perform 7 I Y. Katherine Xu, Ph.D. +1 212 237 2758 EFTA01466015 William Blair & Company, L.L.C. approximately in line with the broader market over the next 12 months; Underperform (U) — stock expected to underperform the broader market over the next 12 months; not rated (NR) — the stock is not currently rated. The valuation methodologies used to determine price targets (where used) include (but are not limited to) price-to-earnings multiple (P/E), relative P/E (compared with the relevant market), P/E-to-growth-rate (PEG) ratio, market capitalization/revenue multiple, enterprise value/EBITDA ratio, discounted cash flow, and others. Company Profile: The William Blair research philosophy is focused on quality growth companies. Growth companies by their nature tend to be more volatile than the overall stock market. Company profile is a fundamental assessment, over a longer-term horizon, of the business risk of the company relative to the broader William Blair universe. Factors assessed include: 1) durability and strength of franchise (management strength and track record, market leadership, distinctive capabilities); 2) financial profile (earnings growth rate/consistency, cash flow generation, return on investment, balance sheet, accounting); 3) other factors such as sector or industry conditions, economic environment, confidence in long-term growth prospects, etc. Established Growth (E) — Fundamental risk is lower relative to the broader William Blair universe; Core Growth (C) — Fundamental risk is approximately in line with the broader William Blair universe; Aggressive Growth (A) — Fundamental risk is higher relative to the broader William Blair universe. The ratings, price targets (where used), valuation methodologies, and company profile assessments reflect the opinion of the individual analyst and are subject to change at any time. Our salespeople, traders, and other professionals may provide oral or written market commentary or trading strategies—to our clients and our trading desks—that are contrary to opinions expressed in this research. Certain outstanding reports may contain discussions or investment opinions relating to securities, financial instruments and/or issuers that are no longer current. Always refer to the most recent report on a company or issuer before making an investment decision. Our asset management and trading desks may make investment decisions that are inconsistent with recommendations or views expressed in this report. We will from time to time have long or short positions in, act as principal in, and buy or sell the securities referred to in this report. Our research is disseminated primarily electronically, and in some instances in printed form. Electronic research is simultaneously available to all clients. This research is for our clients only. No part of this material may be copied or duplicated in any form by any means or redistributed without the prior written consent of William Blair & Company, L.L.C. THIS IS NOT IN ANY SENSE A SOLICITATION OR OFFER OF THE PURCHASE OR SALE OF SECURITIES. THE FACTUAL STATEMENTS HEREIN HAVE BEEN TAKEN FROM SOURCES WE BELIEVE TO BE RELIABLE, BUT SUCH STATEMENTS ARE MADE WITHOUT ANY REPRESENTATION AS TO ACCURACY OR COMPLETENESS OR OTHERWISE. OPINIONS EXPRESSED ARE OUR OWN UNLESS OTHERWISE STATED. PRICES SHOWN ARE APPROXIMATE. EFTA01466016 THIS MATERIAL HAS BEEN APPROVED FOR DISTRIBUTION IN THE UNITED KINGDOM BY WILLIAM BLAIR INTERNATIONAL, LIMITED, REGULATED BY THE FINANCIAL CONDUCT AUTHORITY (FCA), AND IS DIRECTED ONLY AT, AND IS ONLY MADE AVAILABLE TO, PERSONS FALLING WITHIN COB 3.5 AND 3.6 OF THE FCA HANDBOOK (BEING "ELIGIBLE COUNTERPARTIES" AND "PROFESSIONAL CLIENTS"). THIS DOCUMENT IS NOT TO BE DISTRIBUTED OR PASSED ON TO ANY "RETAIL CLIENTS." NO PERSONS OTHER THAN PERSONS TO WHOM THIS DOCUMENT IS DIRECTED SHOULD RELY ON IT OR ITS CONTENTS OR USE IT AS THE BASIS TO MAKE AN INVESTMENT DECISION. "William Blair" and "R*Docs" are registered trademarks of William Blair & Company, L.L.C. Copyright 2013, William Blair & Company, L.L.C. All rights reserved. 8 I Y. Katherine Xu, Ph.D. +1 212 237 2758 EFTA01466017