Why Ariad Pharmaceuticals Stock Broke Out in September

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What happened

Shares of cancer treatment specialist Ariad Pharmaceuticals (NASDAQ: ARIA) rose by more than 34% last month,according to data fromS&P Global Market Intelligence.

ARIA data by YCharts

The drugmaker's stock tracked higher in September largely because of rumors that the company was attracting interest from potential buyers. Ariad's product portfolio currently consists of a single drug, Iclusig, which is approved as a later-line therapy for two rare forms of leukemia. Iclusig is forecast to generate between $170 million to $180 million in revenue this year, according to Ariad's internal forecast.

So what

While M&A fever has definitely hit the biopharma space, and cancer companies are proving to be prime targets, Ariad's present valuation might be too rich to warrant a compelling tender offer. In short, Ariad's shares are already trading at 11 times the company's projected 2017 revenue, making it one of the more expensive mid-cap biopharmas.

Keeping with this theme, Ariad's lofty valuation already scuttled a prior deal withBaxalta last August. Specifically,Baxalta was reportedly willing to pay $2 billion for Ariad, but shareholders balked at the idea of paying such a high premium for a company worth under $1.5 billion in market cap.

Now what

Ariad's market cap currently exceedsBaxalta's former offer by a noteworthy 33%, meaning that it might take an especially desperate suitor to get a deal done anytime soon. Having said that, Ariad's valuation might become more enticing if the drugmaker gets the green light from the FDA for itssecond-lineALK+ non-small-cell lung cancer (NSCLC) drug candidate, brigatinib.

Long story short,brigatinib has the potential to produce blockbuster level sales if it can gain approvals as both a second-line and front-line therapy for ALK+NSCLC. The FDA is expected to make a determination onbrigatinib's second-line regulatory filing in the first half of 2017, and the drug's late-stage trial for a front line indication is on track to produce top line data in 2019.

Until Ariad has a second approved product on the market, however, the company's valuation simply looks too rich to make a buyout a strong possibility. Ariad, after all, has been attracting unwanted attention over its series of dramatic price hikes for Iclusig this year, which could result in pushback from payers moving forward.

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George Budwell has no position in any stocks mentioned. 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.