I Was Wrong About Ariad Pharma and Here's Why

CAMBRIDGE, Mass. ( TheStreet) -- I missed the call on Ariad Pharmaceuticals ( ARIA). While it's true that no one is right with all their stock picks, it's little comfort because I greatly dislike being wrong and losing money. The only positive that can come out of missing Iclusig's toxicity and getting Ariad wrong is learning from the mistake and trying not to repeat it in the future.

What did I miss with Ariad?

I fell prey to confirmation bias. In general, when you're long a stock, you're more likely to dismiss neutral and negative news and/or spin it positively. The opposite is true when you're shorting a stock. In other words, once you make a decision to buy or short a stock, you tend to see all additional information as confirming your position.

Obviously, investors should try to minimize confirmation bias but one can never completely escape its effects. This is why I like engaging the bear thesis when I'm long. It forces you to rethink or re-evaluate your investment thesis.

There were certainly bits of information about Iclusig's safety profile that in retrospect were more serious than I originally believed. The changes made to the protocol of the phase III front-line EPIC study -- excluding more patients with pre-existing cardiovascular conditions -- was probably the most important signal I overlooked.

I interpreted the changes made to the EPIC study as Ariad trying to get a cleaner test of the "dirty drug" hypothesis. I also felt the changes were not out of line relative to changes made to studies involving similar CML drugs.

Interpreting these changes to the most important Iclusig clinical trial as relatively benign was a mistake. More skepticism was clearly needed.

The lower dose of Iclusig introduced into the "Cortes" study at MD Anderson could have confirmed the elevated safety risk, but again, I saw nothing wrong because competing CML drugs are also often dosed lower than their labels prescribe. The changes made to the "Cortes" study should have given me more pause.

What really threw me, however, was the lack of adverse events reported in the FDA's adverse event database. I assumed if Iclusig's safety risk was really significant, it would have showed up in the FDA database, but it wasn't (yet.) Instead, Iclusig-related adverse events showed up in the long-term followup from patients enrolled in the pivotal PACE study used to get the drug approved. I was looking in the wrong place for clues to Iclusig's safety.

Ariad shares are down 70% as I write this column Wednesday afternoon. What have I done since the bad news broke? For starters, I sold my Ariad shares and took my loss.

This is not the first time nor will it be the last time in which I missed a stock call. My modus operandi in these cases is to sell, get some distance, and re-examine when the dust settles.

Iclusig is not dead but it's definitely on life support. I believe the higher dose is done but lower doses being tested might salvage the drug to some degree.

This is not to say Iclusig is coming back and will turn out to be a billion-dollar drug, but there is a chance the lower dose has a better therapeutic window. This makes the presentation of new data at the upcoming American Society of Hematology (ASH) annual meeting all the more important. Even if the data are positive and Iclusig is salvaged, Ariad still faces significant headwinds. The company does not immediately need cash but it will burn through what it has on hand well before Iclusig can turn around (assuming that it does, which is not guaranteed.)

It's worth following the ASH data on Iclusig in December to see if the lower doses can create a cleaner therapeutic window. If so, there might be an opportunity in 2014 to revisit Ariad as a long. That being said, the base case at this point has to be that the data will be unclear and that Iclusig will be relegated to use in third-line CML patients. If that turns out to be true, Ariad is unlikely to become cash flow positive any time soon.

Even with positive data at ASH, however, it still might not be enough to gain enough traction for Iclusig and move Ariad to cash flow positive. Ariad is in a difficult (but not impossible) position and at this point it seems better to watch and wait and see if they can draw the inside straight needed to get back on track.

David Sobek has been writing on biotech for a number of years through various outlets with a general focus on small cap oncology and antibiotics companies. He received his PhD in political science from Pennsylvnia State Univeristy in 2003 and a BA in international relations from The College of William and Mary in 1997.

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