Ariad cancer drug partnership with Merck may be worth $1 billion

Ariad Pharmaceuticals and Merck on Thursday said they will team up to develop an experimental cancer treatment _ a partnership that could be worth more than $1 billion to Ariad, which has been testing the medication.

On a day of broad gains across the stock market, Ariad's shares fell nearly 5 percent. Philip Nadeau, a Cowen & Co. analyst, said the company's shares had already been pumped up after the Cambridge, Mass.-based firm said in April that it would pursue a partnership with a major pharmaceutical company.

"There were a lot of expectations built into the stock price," Nadeau said.

The stock traded at more than 20 times its normal daily volume, and Nadeau said rapid in-out trading by hedge fund managers was sending Ariad's shares down.

Thursday's announcement pairs Ariad Pharmaceuticals Inc., a drug developer that reported less than $1 million in revenue last year, with Merck & Co., a Whitehouse Station, N.J.-based drug maker with revenues of $22.6 billion in 2006.

Ariad's lead experimental medication _ known in its pre-marketing stage as "AP23573" _ is a new class of potential cancer treatments designed to block a protein called mTOR and interfere with growth of cancer cells by starving them.

Ariad and Merck expect AP23573 will begin late-stage clinical development for the treatment of metastatic sarcomas _ cancer that spreads into other tissues _ later this summer. It's also in early stages of testing for solid tumors and blood-based cancers.

The so-called small-molecule inhibitor has been granted "orphan drug" status by the U.S. Food and Drug Administration _ a designation meant to spur development of treatments for rare diseases. It's also been granted fast-track status by the FDA, allowing for a quicker review process.

Under the agreement with Merck, Ariad will receive an initial payment of $75 million and up to $452 million more based on whether certain development goals are met. The deal could be worth some $600 million more to Ariad in payments that hinge on meeting sales targets and in commitments by Merck to help cover development costs.

Finally, Ariad will receive potential commercial returns from profit sharing in the U.S. or royalties paid by Merck abroad. The companies will share responsibility for global marketing and development.

Nadeau, the Cowen & Co. analyst, projects the medication could reach total annual sales of $200 million by 2011 in the U.S. and Europe for treatment of sarcomas.

Shares of Ariad fell 28 cents, or 4.6 percent, to $5.77, while shares of Merck rose $1.87, or 3.8 percent, to $50.77.

Also on Thursday, A.G. Edwards & Sons Inc. analyst Joseph Tooley upgraded his rating of Merck's stock to "Buy/Aggressive" and raised his earnings estimates, citing strong product sales and new drug launches.

Tooley didn't cite the deal with Ariad in upgrading Merck's stock, but said in a research note that the deal "only reinforces" his favorable view of the company. He said the deal will help Merck fill out its portfolio of experimental cancer medications in late-stage clinical testing.

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On the Net:

Ariad Pharmaceuticals: http://www.ariad.com

Merck: http://www.merck.com