Ariad Pharmaceuticals (NASDAQ: ARIA)

08/01/2016 Focused Stock Trader

ARIA

Overview:

There are times when a company posts blowout quarterly earnings that easily surpass analysts' expectations, causing its share price to jump. Quite often, however, that momentum is short-lived--usually because a deeper look at those earnings details raises questions about how sustainable the surprisingly good numbers will be, or reveals a one-time gain that has only temporarily inflated the quarterly numbers.

In the case of Ariad Pharmaceuticals' (ARIA) most recent earnings report for Q2 2016, released last week, the numbers appear to reflect a bona fide blowout, even after factoring in two mammoth one-time licensing payments that "juiced" those figures. As a result, FST is banging the table on ARIA shares as our latest Stock of the Week selection, and we see the potential for a powerful extended swing play from current levels as long as the company's performance metrics continue to weigh in at a similarly strong pace going forward. 

 U.S. Sales Jump, Incyte Buys European Rights 

By way of background, Ariad Pharmaceuticals currently markets Iclusig, a therapy for the treatment of chronic myeloid leukemia (CML) and Philadelphia chromosome positive acute lymphoblastic leukemia (Ph+ ALL), two rare blood and bone marrow diseases. The price tag for Iclusig is hefty, costing almost $150,000 per treatment.  

In the second quarter, Iclusig revenue came in at $65.3 million. Sales in the U.S. totaled $32.6 million, up 50% from last year, while sales overseas totaled $32.7 million, including a one-time $25 million payment from France tied to cumulative Iclusig shipments. That pushed EPS for the period up to $0.56, easily trumping the Street view that anticipated a loss of $0.10, compared to a loss of $0.28 in Q2 2015. 

Given the one-time nature of the French payment, ARIA naysayers will point to the likelihood of disappointing quarter-over-quarter European Iclusig sales, but there's a silver lining here. Last quarter Ariad also cut a milestone Iclusig licensing agreement that has far-reaching implications for the company's European sales figures. Big pharma heavyweight Incyte Corporation (INCY) ponied up $140 million to obtain the licensing and marketing rights to Iclusig in Europe, with Ariad continuing to receive tiered royalties in the 32%-50% range on future European sales on top of that. Couple those numbers with the promising growth in domestic sales and Ariad should have a healthy and growing revenue stream going forward. 

Cash and Brigatinib Progress

As a result of the the Incyte deal, Ariad's cash position also improved dramatically during Q2 as well, swelling from $168.3 million at the end of March to a current level of $278.5 million. That cash will make it easier for the company to market its second drug, brigatinib, which appears to be nearing FDA approval within the next year or so. The drug treats a specific type of non-small cell lung cancer, and trial results have been highly promising.

As you might expect, the good news ignited some significant buying interest in ARIA shares last week. Prior to the earnings release, ARIA was treading water just above the $8 level. In the wake of earnings the stock gapped up to a $9 opening print and briefly pulled back before challenging the mid $9.50 level. After some bouts of profit-taking, ARIA resumed its ascent, eventually pushing the stock up to an intraweek top of $9.89 Friday, before profit-taking once again knocked it back to the mid-$9 range.

So far, one of the half dozen or so analysts covering the stock has given Q2 earnings a vote of confidence, with Jefferies maintaining its Buy rating on the shares and establishing a $13 price target. With other analysts' ARIA price targets hovering near the $10 range or below, it may only be a matter of time before they weigh in with freshened targets of their own. 

If you're wondering why more analysts aren't readily jumping on the ARIA bandwagon and the share price isn't ripping to the moon, keep in mind that the company's latest guidance--which includes a solid revenue outlook--also projects whopping R&D expenses, accompanied by similarly large Sales and Administrative costs. As a result, shorts have taken aim at the issue, with E-Trade listing the current short interest level at 16.45%.

Conclusion:

No trade is risk-free, and very few stocks have absolutely everything going for them, but right now Ariad Pharmaceuticals shares are a compelling play on a well-managed, growing and cash-rich company. There may be bumps along the road, but as long as the uptrend continues in global Iclusig sales, and Brigatinib continues to work its way closer to FDA approval, the issue's current $8 - $10 trading range could prove to be a bargain entry point for the patient FST swing trader. From a day-trading perspective, I'd also monitor any break of $10 on heavy volume for some quick breakout trading gains.