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Ariad Pharma: The Contrarian Long Thesis

CAMBRIDGE, Mass. (TheStreet) -- First off, kudos and congratulations to Ariad Pharmaceuticals (ARIA) skeptics and short sellers. They nailed this biotech disaster du jour. And a disaster it was, with Ariad shares tumbling from the $20s all the way down to the $2s. I was unfortunate and got caught owning a small long position in Ariad, but I'm actually buying more shares at these low prices.

Why? Because I believe Ariad is a good long-term investment. Let me explain.

I tend to be a contrarian investor because it's impossible to outperform the market by simply doing what everyone else does. Going along with market sentiment might be safe, but it's not necessarily profitable. So, while most investors are running away from Ariad amidst a deluge of analyst downgrades, I'm holding my nose and buying the stock. I have a 12-18 month outlook, looking for a substantial recovery in the 1-2 year time frame.

Ariad's Iclusig, for whatever problems it may now have, is actually an impressive scientific feat because it's the only chronic myeloid leukemia drug (CML) drug that hits the gatekeeper as well as other pesky mutations, most notably the T315i mutation. These mutations prevent competing CML drugs from being effective over time.

If Iclusig is only used to treat CML patients with the T315i mutation -- which is pretty much conventional wisdom these days -- the commercial potential is small and not very exciting. I'm not buying Ariad for the T315i market or even the possibility that Iclusig maintains or even grows market share in second-line CML. [First-line use is out.]

Instead, I believe there is likelihood that Ariad is successful in developing Iclusig for use in treating other types of cancer outside of CML. Based on its potency and ability to block important cancer-causing molecular targets, I see a strong likelihood of success for Iclusig in treating GI stromal tumors (a billion-dollar market for Novartis' (NVS) Gleevec), medullary thyroid cancer, and the approximate 1% of lung cancer cases driven by the protein RET.

The risk in these indications is likely more safety related and not efficacy. It is important to realize these patients are in more traditional oncology indications where drugs are given for months not years, as is the case for CML. For these more acute cancer indications, the emphasis on efficacy over safety could favor Iclusig.

Bottom line. I'm looking at the science underlying Iclusig and making a prediction ahead of actual clinical data. A lower dose of Iclusig may end up being better tolerated and efficacious across multiple types of cancer.

The market today is not giving any credit at all to the potential for Iclusig sales in cancer beyond CML.

I also believe Ariad's second drug, AP26113, will ultimately be approved for ALK-driven lung cancer. Like with Iclusig, the market appears to be ho-hum about '113, in part because of competing drugs from Novartis and Chugai. I'm willing to be contrarian again and bet that '113 ends up being a stronger, more potent ALK-inhibitor than most believe it will be.

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