Biopharma company Ariad Pharmaceuticals, Inc. (NASDAQ:ARIA) is one of the undervalued stocks with excellent growth potential and return on investment.
Its product pipeline includes Ponatinib, a pan BCR-ABL inhibitor in phase 2 clinical trial for applications in various hematological cancers and solid tumors; and AP26113, an anaplastic lymphoma kinase (ALK) inhibitor in preclinical studies for the treatment of various cancers, including non-small cell lung cancer, lymphoma, and neuroblastoma.
Ponatinib for chronic myelogenous leukemia (CML), or bone marrow cancer, is the core of Ariad's stock value because of its proprietary worldwide ownership, potential FDA approval in the second half of 2012, and blockbuster revenue opportunity starting soon.
Ponatinib will likely initially grow in refractory utilization, particularly given the efficacy after other CML drugs. Ponatinib could also move into some firstline because of its broader efficacy than competitors Novartis's Gleevec and Tasigna, and Bristol-Myers Squibb's (NYSE:BMY) Sprycel.
RBC Capital Markets estimate Ponatinib is a potential $700-million franchise with a long-term opportunity to grow globally into earlier stages of use, which offers an attractive multi-year upside growth opportunity for Ariad.
But, analysts believe the company's AP26113 should be better than Ponatinib and could drive further stock upside.
"While investors have focused primarily on Ponatinib as Ariad's blockbuster drug (and rightly so), we think they should now start to look beyond the current enthusiasm and realize that AP26113 could be as big as or bigger than Ponatinib over the long run," RBC Capital Markets analyst Michael Yee wrote in a note to clients.
Yee said Ariad shares could move higher based on the potential of AP26113 in ALK+ lung cancer and other rare mutated forms of lung cancer, driving a long-term opportunity of $500 million to $1 billion that is not widely reflected in Street estimates.
Meanwhile, the analyst said the drug should be very active in ALK+ treatment-naïve patients, showing 10 times more potent affinity than Pfizer's Crizotinib (brand name Xalkori) and thus could compete in the first line against Pfizer (NYSE:PFE).
At roughly $100,000 annually and 25 percent to 50 percent penetration in the long term, AP26113 could become a $500 million+ drug in the US and Europe alone just in ALK+ patients, or $350 million in the US and $200 million+ in the EU, the analyst said.
The company estimates roughly 40,000 ALK+ patients worldwide. The AP26113 could be at least a $1 billion to $2 billion drug worldwide if it was commercialized in all major developed and developing countries.
Yee noted that consensus estimates for Pfizer's Crizotinib are up to $800 million in peak sales based on various market assumptions, which implies that AP26113 could become a blockbuster if it is used where Crizotinib is used, but also in patients who fail Crizotinib, which is an open market opportunity given no other primary competitor in ALK+ development.
AP26113 could be in a pivotal Phase II registration study as early as 2013.
"We believe Phase II data will show solid efficacy in ALK+ naïve and ALK+ Crizotinib refractory patients, as well as in EGFR+ mutant patients. Clear efficacy in different patient groups would lead investors to believe AP26113 is as good as or potentially better than Pfizer's blockbuster ALK+ drug, which the Street has modeled up to peak sales of $1 billion," said Yee, who initiated coverage on the stock with an "outperform" rating.
Ariad is expected to announce its fourth-quarter and full-year results on Feb.28. Analysts expect a loss of 17 cents a share on revenue of $1.02 million for the fourth quarter and a loss of 70 cents a share on revenue of $26.18 million for the full year, according to Thomson Reuters.
Shares of Ariad have surged 139 percent in the last one year and is currently trading at $15, down 25 cents or 1.62 percent on Nasdaq. Analyst Yee has a price target of $20.