January 18, 2011Healthcare ARIAD Pharma (NASDAQ: ARIA)Biotechnology Ph3 Ridaforolimus Study Meets Endpoint in SarcomaUnited States of America Investment Summary We view positive ridaforolimus Ph3 data in sarcoma as a transforming event for ARIA. Now with potential approval of ridaforolimus in 2012 (sarcoma), generating milestones/royaltyCompany Update revenue, and ponatinib pivotal Ph2 data in ~2H12 (CML;Price Target Change well-defined/proven market), we see continuing upside to ARIAEstimate Change shares.Rating: BUY EventPrice: $5.25 Positive Phase 3 sarcoma data for ridaforolimus; partner MRK to filePrice Target: $11.00 for approval in 2011; raising PT to $11 from $8 previously Previous: $8.00 Key PointsBloomberg: NASDAQ: ARIA • A nice surprise for positive Phase 3 data for ridaforolimus inMarket Data sarcoma. Ridaforolimus demonstrates a 3.1-week increase in52-Week Range: $5.58-$2.06 median PFS (p=0.0001, hazard ratio 0.72; ridaforolimus 17.7 weeksTotal Entprs. Value (MM): $533.8 vs. placebo 14.6 weeks). However, full analysis of PFS determinedMarket Cap. (MM): $581.7 by investigative sites showed a 7.7-week improvement in PFS (22.4Insider Ownership: 19.7% weeks for ridaforolimus vs. 14.7 weeks for placebo). In this pivotalInstitutional Ownership: 35.7% randomized Ph3 SUCCEED study (n=711), ridaforolimus (mTORShares Out. (MM): 110.8 inhibitor) was administered as a maintenance therapy inFloat (MM): 104.5 chemo-sensitive patients with metastatic bone and soft-tissueAvg. Daily Vol.: 1,042,280 sarcomas. The trial was under the FDAs SPA with a primaryFinancial Summary endpoint of median progression-free survival (PFS); secondaryBook Value (MM): $35.5 endpoints include overall survival (OS), anti-tumor response,Book Value/Share: $0.32 change in cancer related symptoms, and safety and tolerability.Net Debt (MM): ($47.9) ARIA expects full data including secondary endpoints to beLong-Term Debt (MM): $11.4 presented at a medical meeting later this year.Cash/Share: $0.54 • Median PFS improvement in advanced sarcoma modest;Cash (MM): $59.3 however, we see this as an unlikely hurdle for regulatory approval. The 3.1-week PFS improvement (7.7-week byUSD 2009A 2010E 2011E 2012E investigative sites) is less than what the ODAC (FDAs OncologicRev. (MM) 8.3 178.5 0.5 58.1 Drugs Advisory Committee) wants to see (at least 3 months PFS Prev. -- -- -- 1.0 benefits or OS benefits). However, based on the highly statisticallyEV/Rev. 64.3x 3.0x NM 9.2x significant benefits (meeting primary endpoint under SPA), we viewEPS likely low regulatory hurdles. While potential reimbursement issuesMar (0.26) (0.21)A (0.16) — remain, given the limited current therapeutic options for sarcomaJun (0.24) 1.44A (0.17) — (tumor resection with ~60-65% of patients progressing to multipleSep (0.21) (0.18)A (0.17) — rounds of chemotherapy) and small # of patients populationDec (0.17) (0.17) (0.17) — (~20K-30K in the U.S.), reimbursement may not pose significantFY Dec (0.86) 0.84 (0.66) (0.24) hurdle for ridaforolimus. Prev. FY -- -- -- (0.55) • Now with potential revenue for ridaforolimus, were raising ourFY P/E NM 6.2x NM NM PT to $11 from $8. Our NPV analysis puts ~$3/sh for ridaforolimusConsensus — 0.84 (0.37) (0.27) (new) and ~$8/sh for ponatinib (previously). For ridaforolimus, weDiluted assign a 90% probability to our $517M WW peak sales estimate in sarcoma in 2020 and 70% probability to our $647M WW peak salesEun K. Yang, Ph.D. estimate in endometrial cancer in 2022, with 20% royalty on total(212) 284-2264, firstname.lastname@example.org sales to ARIA. For ponatinib, our assumptions include WW sales ofKimberly Smith $543M in 2018 (90% probability), patent expiry in 2029-2030 and(212) 284-2192, email@example.com discounting at ~11% annually.Rohit Vanjani Valuation/Risks(212) 284-2378, firstname.lastname@example.org We arrive at our price target of $11 based on NPV of ponatinib and ridaforolimus. Risks associated with ARIA shares include, but are not limited to: (1) delay/failure in pivotal Phase 2 for ponatinib; (2) regulatory delay/failure for ridaforolimus; (3) distant profitability.Please see important disclosure information on pages 4 - 7 of this report.
(NASDAQ:ARIA)• We assume MRK to submit regulatory filings for ridaforolimus by end-2011 after full data analysis/presentation, with potential approval in 2H12. ARIA views the highly significant median PFS p-value (p=0.0001) and hazard ratio (HR=0.72; 28% reduction in risks) on full analysis of 552 PFS events (in 711 patients) as most important to the FDA under the SPA agreement. Given the wide distribution in patient responses, ARIA does not view the modest point difference in median PFS will impact ridaforolimus approvability in sarcoma.• We assume $50M in milestone payments from partner Merck in 2012. ARIA is now positioned to receive $65M in potential regulatory milestones from partner Merck (MRK, $33.82, Hold) upon NDA acceptance in the U.S. ($25M), U.S. approval ($25M), EU approval ($10M), and Japan approval ($5M). For royalty revenues for ridaforolimus, we now assume $7M in 2012 (on $35M in sales), $14M in 2013 (on $71M in sales), and $29M in 2014 (on $146M in sales).• Pivotal Phase 2 for ponatinib (AP24534) in CML/Ph+ ALL began in Sept. 2010; data in 2H12 with potential approval in 1H13 (by our estimate). ARIA expects to enroll 320 patients in 6 cohorts, including CP (chronic phase), n=160, AP (accelerated phase), n=80, and BP (blast phase) of CML (n=80; Ph+ ALL grouped w/ blast phase), +/- the T315i mutation (roughly 50/50 in each cohort). This registration study, PACE (Ponatinib Ph+ ALL and CML Evaluation), is single-arm enrolling 2nd-line (T315i mutation following BCR-ABL therapy) and 3rd-line patients (dosed 1x daily, 45mg). ARIA expects to complete patient enrollment by end-2011 and collect 6-month FU response data for filing by mid-2011. Thus, we expect data in 2H12 and potential approval in 1H13 (vs. ARIAs estimate of its market launch in late-2012/early-2013). ARIA expects >$600M in sales 5 years from launch in 2nd- and 3rd-line CML, with peak sales at >$900M. In 2018 (5 years from our estimated launch in 2013), we assume $543M in WW sales in 2nd- and 3rd-line CML.• Large market opportunity for marketed BCR-ABL drugs, with total sales of ~$4.5B in 2009 for all indications. For CML, estimated sales were ~$3B for Gleevec (imatinib), ~$400M for Sprycel (dasatinib), and ~$200M for Tasigna (nilotinib). Thus, we view our annual sales assumption of $543M for ponatinib in 2018 as reasonable.• Estimated current cash of ~$100M sufficient through 2H12. Including $57.4M in net proceeds from the recent raise on 10/26/10 (16M shares at $3.70/sh), ARIA expects to end the year with $102M in cash, which it estimates to be sufficient to fund the completion of the Phase 2 ponatinib registrational trial (350 patients enrollment completion in 4Q11) and NDA filing preparation 2H12. This does not include any milestone payment from a potential partnership for ponatinib (for certain territories) or the current MRK partnership for ridaforolimus.• Upcoming events include: (1) regulatory filing for ridaforolimus by partner MRK by end-2011; (2) completion of patient enrollment in pivotal Phase 2 study for ponatinib in advanced CML/Ph+ ALL by end 2011; (3) pivotal Phase 2 data/potential NDA filing for ponatinib in advanced CML/Ph+ ALL in 2H12; and (4) potential approval of ridaforolimus in 2H12.Company DescriptionFounded in 1991, Ariad Pharmaceuticals focuses on drug discovery and development for cancers by regulating cellsignaling with small-molecule drugs. Its lead drug candidate, ridaforolimus (a potent mTOR inhibitor), is in a Phase 3trial for metastatic sarcomas, licensed to Merck. Its two proprietary products include ponatinib in pivotal Phase 2 forCML/Ph+ ALL and AP26113 entering Phase I for cancer in 2H11. Targeted cancer therapy market, such as Ariadsproducts, is estimated at ~$30 billion in 2009. Ariads business strategy includes: (1) to build a pipeline portfolio oftargeted cancer therapies; (2) to establish an oncology-focused specialty force in the U.S.; and (3) to leverage itscell-signaling technologies (ARGENT, NF-kB intellectual property) for further revenue opportunities. Ariad has a strongintellectual property position, covering its mTOR inhibitor (ridaforolimus), various families of kinase inhibitors, andcell-signaling regulation technologies.Please see important disclosure information on pages 4 - 7 of this report.Eun K. Yang, Ph.D. , email@example.com, (212) 284-2264 Page 2 of 7
(NASDAQ:ARIA)ANALYST CERTIFICATIONSI, Eun Yang, Ph.D., certify that all of the views expressed in this research report accurately reflect my personal viewsabout the subject security(ies) and subject company(ies). I also certify that no part of my compensation was, is, or willbe, directly or indirectly, related to the specific recommendations or views expressed in this research report.I, Kimberly Smith, certify that all of the views expressed in this research report accurately reflect my personal viewsabout the subject security(ies) and subject company(ies). I also certify that no part of my compensation was, is, or willbe, directly or indirectly, related to the specific recommendations or views expressed in this research report.I, Rohit Vanjani, certify that all of the views expressed in this research report accurately reflect my personal viewsabout the subject security(ies) and subject company(ies). I also certify that no part of my compensation was, is, or willbe, directly or indirectly, related to the specific recommendations or views expressed in this research report.Important DisclosuresAs is the case with all Jefferies employees, the analyst(s) responsible for the coverage of the financial instrumentsdiscussed in this report receive compensation based in part on the overall performance of the firm, includinginvestment banking income. We seek to update our research as appropriate, but various regulations may prevent usfrom doing so. Aside from certain industry reports published on a periodic basis, the large majority of reports arepublished at irregular intervals as appropriate in the analysts judgement.An individual involved in the preparation of this report owns shares of Merck & Co. common stock.Jefferies makes a market in ARIAD Pharmaceuticals, Inc.Meanings of Jefferies & Company, Inc, RatingsBuy - Describes stocks that we expect to provide a total return (price appreciation plus yield) of 15% or more within a12-month period.Hold - Describes stocks that we expect to provide a total return (price appreciation plus yield) of plus 15% or minus10% within a 12-month period.Underperform - Describes stocks that we expect to provide a total negative return (price appreciation plus yield) of 10%or more within a 12-month period.Our focus on mid-capitalization and growth companies implies that many of the companies we cover are typically morevolatile than the overall stock market, which can be amplified for companies with an average stock price consistentlybelow $10. For companies in this category only, the expected total return (price appreciation plus yield) for Buy ratedstocks is 20% or more within a 12-month period. For Hold rated stocks with an average stock price consistently below$10, the expected total return (price appreciation plus yield) is plus or minus 20% within a 12-month period. ForUnderperform rated stocks with an average stock price consistently below $10, the expected total return (priceappreciation plus yield) is minus 20% within a 12-month period.NR - The investment rating and price target have been temporarily suspended. Such suspensions are in compliancewith applicable regulations and/or Jefferies & Company, Inc. policies.CS - Coverage Suspended. Jefferies & Company, Inc. has suspended coverage of this company.NC - Not covered. Jefferies & Company, Inc. does not cover this company.Restricted - Describes issuers where, in conjunction with Jefferies engagement in certain transactions, company policyor applicable securities regulations prohibit certain types of communications, including investment recommendations.Monitor - Describes stocks whose company fundamentals and financials are being monitored, and for which nofinancial projections or opinions on the investment merits of the company are provided.Valuation MethodologyJefferies methodology for assigning ratings may include the following: market capitalization, maturity, growth/value,volatility and expected total return over the next 12 months. The price targets are based on several methodologies,Please see important disclosure information on pages 4 - 7 of this report.Eun K. Yang, Ph.D. , firstname.lastname@example.org, (212) 284-2264 Page 4 of 7
(NASDAQ:ARIA)which may include, but are not restricted to, analyses of market risk, growth rate, revenue stream, discounted cash flow(DCF), EBITDA, EPS, cash flow (CF), free cash flow (FCF), EV/EBITDA, P/E, PE/growth, P/CF, P/FCF, premium(discount)/average group EV/EBITDA, premium (discount)/average group P/E, sum of the parts, net asset value,dividend returns, and return on equity (ROE) over the next 12 months.Risk which may impede the achievement of our Price TargetThis report was prepared for general circulation and does not provide investment recommendations specific toindividual investors. As such, the financial instruments discussed in this report may not be suitable for all investors andinvestors must make their own investment decisions based upon their specific investment objectives and financialsituation utilizing their own financial advisors as they deem necessary. Past performance of the financial instrumentsrecommended in this report should not be taken as an indication or guarantee of future results. The price, value of, andincome from, any of the financial instruments mentioned in this report can rise as well as fall and may be affected bychanges in economic, financial and political factors. If a financial instrument is denominated in a currency other thanthe investors home currency, a change in exchange rates may adversely affect the price of, value of, or incomederived from the financial instrument described in this report. In addition, investors in securities such as ADRs, whosevalues are affected by the currency of the underlying security, effectively assume currency risk. Rating and Price Target History for: ARIAD Pharmaceuticals, Inc. (ARIA) as of 01-17-2011 11/06/08 05/07/09 05/05/10 01/05/11 B:$6 B:$4 B:$6 B:$8 6 5 4 3 2 1 0 Q1 Q2 Q3 Q1 Q2 Q3 Q1 Q2 Q3 Q1 2008 2009 2010 2011 Created by BlueMatrix Rating and Price Target History for: Merck & Co. (MRK) as of 01-17-2011 09/16/10 10/25/10 11/15/10 01/11/11 01/14/11 I:H:$39 H:$39.8 H:$37.8 H:$37 H:$34.5 48 40 32 24 16 8 Q1 Q2 Q3 Q1 Q2 Q3 Q1 Q2 Q3 Q1 2008 2009 2010 2011 Created by BlueMatrixPlease see important disclosure information on pages 4 - 7 of this report.Eun K. Yang, Ph.D. , email@example.com, (212) 284-2264 Page 5 of 7
(NASDAQ:ARIA)Distribution of Ratings IB Serv./Past 12 Mos.Rating Count Percent Count PercentBUY [BUY] 580 51.60 44 7.59HOLD [HOLD] 498 44.30 25 5.02SELL [UNPF] 46 4.10 5 10.87OTHER DISCLOSURESThis material has been prepared by Jefferies & Company, Inc. a U.S.-registered broker-dealer, employing appropriateexpertise, and in the belief that it is fair and not misleading. The information upon which this material is based wasobtained from sources believed to be reliable, but has not been independently verified, therefore, we do not guaranteeits accuracy. Additional and supporting information is available upon request. This is not an offer or solicitation of anoffer to buy or sell any security or investment. Any opinion or estimates constitute our best judgment as of this date,and are subject to change without notice. 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JIL, JSL, JEFCO, theirassociates or affiliates, and their respective officers, directors, and employees may have long or short positions in, ormay buy or sell any of the securities, derivative instruments or other investments mentioned or described herein, eitheras agent or as principal for their own account. Upon request JEFCO may provide specialized research products orservices to certain customers focusing on the prospects for individual covered stocks as compared to other coveredstocks over varying time horizons or under differing market conditions. While the views expressed in these situationsmay not always be directionally consistent with the long-term views expressed in the analysts published research, theanalyst has a reasonable basis and any inconsistencies can be reasonably explained.This material does not constitute a personal recommendation or take into account the particular investment objectives,financial situations, or needs of individual clients. Clients should consider whether any advice or recommendation inthis report is suitable for their particular circumstances and, if appropriate, seek professional advice, including taxadvice. The price and value of the investments referred to herein and the income from them may fluctuate. Pastperformance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital mayPlease see important disclosure information on pages 4 - 7 of this report.Eun K. Yang, Ph.D. , firstname.lastname@example.org, (212) 284-2264 Page 6 of 7