EFTA01450727.pdf

Equity Research Healthcare I Biotechnology (Wiliam Stair ARIAD Pharmaceuticals, Inc. December 23, 2013 Iclusig Comes Back With a New Label and REMS; Upgrade to Stock Rating: Outperform Outperform and Increase Price Target to $12 Company Profile: Aggressive Growth Price Target 512.00 On Friday, December 20, Ariad announced that it has reached agreement with the Symbol: ARIA (NASDAQ) FDA for immediate reauthorization of Iclusig marketing in the United States, with a Price: 56.43 (52-Wk. $2-$23) narrower label and accompanying Risk Mitigation Strategy (REMS) and post- Market Value (mil.): $1,025 marketing requirements (PMRs). Ariad plans to resume shipping of Iclusig by mid- Fiscal Year Mid: December January 2014. The new label stipulates that Iclusig is indicated in adult patients with Lang-Term EPS Growth Rate: T3151-positive chronic myeloid leukemia (CML) or T3151-positive Philadelphia Dividend/Yield: None 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 2012A 2013E 2014E note that on October 31, the Food and Drug Administration (FDA) suspended marketing Estimates of Iclusig based on the risk oflife-threatening blood clots and severe narrowing of blood EPS FY 5.134 5.154 5.0.78 vessels associated with Iclusig treatment We had been expecting the re- a S-1.54 S-0.78 Sales (mil.) 1 44 109 commercialization of Iclusig with a narrower label, and we consider the REMS Valuation accompanied by four PMRs without an Elements to Assure Safe Use (ETASU) to be a FY P/E NM NM NM favorable. We discuss the new label, REMS, and PMRs in detail herein. CY P/E NM NM We are upgrading Ariad shares to Outperform and increasing our price target from Trading Data (FactSet) $3 to $12 (exhibit 1, on page 5), based on the following: 1) limited downside with Shares Outstanding (mil.) 185 REMS and PMRs in place, in our opinion; 2) positive physician feedback during ASH Moat (mil.) 179 and high number of single-agent INDs filed during marketing suspension; 3) Avenge Daily Volume 15,567,546 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) Financial Data (FactSet) other potential indications of Iclusig that are not included in our model: GIST, and Long-Term Deht/Total Capital (MRQ) 0.2 NSCLC with FGFR and RET mutations; and 6) valuation: although the addressable Book Value Per Share (MRQ) 1.4 patient population in 2014 is cut in half because of the narrower label (from 2,500 Enterprise. Value (mu.) 973.0 to 1,300), the incidence is still substantial and the Iclusig patient population will EBITDA (TIM) -256.8 Enterprise Value/EBrIDA (TTM) -3.8x build over time. We have increased our peak worldwide Iclusig revenue forecast to $747 Return on Equity (TIM) -132.7 million in 2026 from our previous estimate of $275 million. Our revised probability- adjusted NPV now assumes $10 per share for Iclusig and $2 for AP26113, compared with Tivo-Year Price Performance Chart 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 Tz ti 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 `mounts: radtict. William Blair & Company cstimatcs randomized control study (part of the PMRs) assessing the long-term safety of Iclusig treatment Ariad Pharmaceuticals is a biopharmaceutical company basedin Cambric*, Massachusetts The companyfocusesIts research, development. and commercial efforts on the oncology space, in particular leukemia andlung cancer. V. Fill ° Pet Please consult pages 7-8 of this report for all disclosures. Analyst certification is on page 7. William Blair 8 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. CONFIDENTIAL — PURSUANT TO FED. R. CRIM. P. 6(e) DB-SDNY-0 106550 CONFIDENTIAL SDNY_GM_00252734 EFTA01450727