Why Ariad Pharmaceuticals Gained 26.9% in July

By George BudwellMarketsFool.com

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What:Shares of Ariad Pharmaceuticals(NASDAQ: ARIA), a mid-cap oncology company, gained close to 27% in July, according to data fromS&P Global Market Intelligence. Given that the biotech didn't release its stronger-than-expected second quarter results until the tail end of the month (July 28th to be exact), the primary driver behind this noteworthy surge appears to be the growing speculation that Ariad is finally nearing a deal to sell itself.

ARIA data by YCharts

So what:Ariad has been the subject of buyout rumors for years at this point, and nothing has ever come of them. In fact, Ariad just signed an agreement with Incyte Corp. (NASDAQ: INCY)for its European division that includes regional commercial rights to the blood cancer drug Iclusig in return for $140 million upfront, potential milestone payments, and royalties on future sales. If anything, this piecemeal deal with Incyte seems to imply that a buyer probably isn't waiting in the wings at this point.

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Now what: The silver lining is that Ariad recently initiated a rollingNew Drug Application (NDA) for brigatinib with theFDAfor patients with ALK+ non-small cell lung cancer (NSCLC) who are resistant to Pfizer's (NYSE: PFE) Xalkori. As the company is seeking an accelerated approval and has requested a priority review for brigatinib, there's a chance that Ariad could have its second cancer drug on the market by perhaps mid-2017.Unfortunately, this drug probably won't garner much in the way of sales as a later-line treatment for ALK+ NSCLC. Pfizer's Xalkori, for example, only generated $137 million in worldwide sales in the second quarter of 2016, despite sporting a label that's far broader than the onebrigatinib's initial NDA is targeting.

The bottom line is Ariad is likely going to need to wait untilbrigatinib's ongoing phase 3 trial as a front-line treatment for ALK+ NSCLC wraps up in 2019 to attract a worthwhile buyout offer.Fortunately, the biotech has significantly shored up its balance sheet of late, thanks largely to its deal with Incyte. Specifically, Ariadreported in its second quarter earnings release a nice uptick in cash, cash equivalents, and marketable securities to $278.5 million, compared to $168.3 milliona year ago. As such, Ariad should have the bulk of the financial resources necessary to see it through to the end ofbrigatinib's front-line phase 3 study, especially ifbrigatinib grabs its first approval in early 2017.

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George Budwell owns shares of Pfizer. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.