Ariad Pharmaceuticals Chairman and CEO Harvey Berger defended himself this morning in a conference call with investors, after a nasty boardroom dispute spilled out into plain view and four directors accused him of “grossly inappropriate” conduct.

The controversy emerged late Friday when Ariad disclosed in a regulatory filing that four of its nine directors resigned on Dec. 1, citing “self-interested, combative and obstructionist actions” by Berger in the handling of a merger with a company subsidiary called Ariad Gene Therapeutics. Ariad, (NASDAQ:ARIA) was founded in 1991 and has no marketed products. Its cancer drug deforolimus is in the final stage of clinical trials in a partnership with Merck.

Berger, in prepared remarks on the call this morning, said he was “extremely disappointed” with the way the directors chose to resign. “I will not stand idly by and let them potentially damage the reputation of the company they once served,” he said.

The roots of the dispute, as described by Berger, go back a couple of years. Ariad Gene Therapeutics (AGTI) was a subsidiary Ariad set up in 1994 to in-license technology from Harvard University and Stanford University focused on a process called dimerization, he said. This technology has become critical to Ariad’s strategy, and to its ownership of deforolimus, which is being tested as a treatment for multiple tumor types. Ariad has long owned 80 percent of AGTI, and the board has been discussing ways to buy out the remaining minority interest held by the universities and various scientists for years, Berger said.

Ariad announced on Sept. 12 that it had reached an agreement for such a buy-out after years of discussion about the timing, methods, and valuation, Berger says. Berger and another director Jay LaMarche abstained from the vote because they had personal interest in the deal, which gave shareholders in the subsidiary two shares of Ariad stock for each one they held—a ratio determined by the other directors of Ariad’s board. This exchange rate ended up giving the AGTI shareholders about a 3.1 percent ownership stake in Ariad, the company said.

Berger opposed this deal, but once the board approved it, he said he felt duty-bound … Next Page »

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Ariad Pharmaceuticals, the Cambridge, MA-based developer of cancer drugs, said today it will receive a $12.5 million milestone payment from its partner, Merck, for beginning a mid-stage study of deforolimus for patients with advanced prostate cancer. The treatment, an oral pill, is being tested against other forms of cancer through the Merck partnership.

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Investors may not be in the mood to hear it when most portfolios are in the gutter, but life goes on during downturns at smallcap biotechs. One example is Cambridge, MA-based Ariad Pharmaceuticals, (NASDAQ: ARIA), the developer of cancer drugs. Without generating much buzz in the market, the company is edging closer to becoming a commercial operation with its first product to sell.

Ariad has been making steady progress in clinical trials with its lead drug candidate, called deforolimus. The medicine is in the final stage of clinical development for patients with sarcoma, with results on whether it can slow the spread of cancer expected by the second half of 2009, says CEO Harvey Berger. The drug, being developed in partnership with Whitehouse Station, NJ-based Merck (NYSE: MRK), is attempting to become the first oral cancer drug that blocks the mTOR protein, known as a master switch that allows tumors to grow and thrive. Ariad and Merck see big potential here: They’ve moved the drug into mid-stage studies for breast cancer and endometrial tumors, while prostate cancer is another potential use, Berger says.

“Ariad is priced at a discount to its peer oncology companies,” said Phil Nadeau, an analyst with Cowen & Co. in a note to clients Aug. 7. “We expect Ariad to outperform the market by 25 percent+ over the next 12-18 months as deforolimus progresses through its clinical trials and investors gain confidence in its potential.”

If deforolimus succeeds (in a clinical trial actually dubbed SUCCEED) then Ariad will have cut a pretty sweet deal for itself by industry standards. It isn’t planning to collect a small percentage royalty on sales, and let Merck do most of the heavy marketing work, the sort of terms that are more common in biotech. Instead, Ariad is in line to book product sales on its own income statement, and will split operating profits in the U.S. 50/50 with Merck, Berger says. The deal puts it in a position to build up its own commercial sales team, with a fairly typical 50 to 100 sales reps. It can then build up commercial heft over time as use of deforolimus expands, or other product candidates emerge from its pipeline. “We have a very favorable and well-situated partnership with Merck,” he says.

Berger adds: “The whole strategy is to build a long-term presence in the oncology business. We want to build a meaningful oncology business, not just an R&D operation.”

Ariad has been in business since 1991, when Berger co-founded the company after a stint as president of research and development at Centocor, a pioneering biotech that developed the arthritis drug Remicade. The early years at Ariad were about developing technology. It went public in 1994, and went on to seize on the boom in genomics during the Human Genome Project. By 2000 (just before the air really popped out of the genomics bubble), Ariad decided to take knowledge from the genome and put it toward its current strategy, developing cancer drugs. The company has spent a whopping $402 million of investment dollars in its history through the end of June, and had about $60 million in cash and investments left then, according to a regulatory filing. The Merck deal, signed last year, brought in $75 million upfront, plus potential for lucrative paydays down the road: $452 million in milestone payments from success in development, and another $200 million in sales milestones.

Ariad picked mTOR as its drug target because “it’s well positioned at the crossroads of cancer,” Berger says. To extend the analogy, he pointed to some familiar geography. “If you think of New York City, mTOR is like it’s at Times Square, with all the roads that cross there.” Specifically, it plays a role in growth of blood vessels to tumors, cell metabolism, and cell size, he says. That’s in contrast to the targets of many other cancer drugs which tend to play a single role, he says.

Ariad’s not the only company pursuing mTOR blockage. Madison, NJ-based Wyeth (NYSE: WYE) won FDA approval last year for Torisel, an intravenously delivered drug for kidney cancer. Basel, Switzerland-based Novartis (NYSE: NOVN) is also developing an oral mTOR blocker for cancer called everolimus, Berger says.

All drugs have side effects, and cancer drugs can be especially rough, so I wanted to know what kind of side effects have been seen with deforolimus. The big one is mouth sores, which can be painful, Berger says. It makes sense biologically, because cells that line the mouth have unusually fast turnover, like tumor cells, he says.

I wanted to know if Berger’s vision of becoming a commercial biotech forced him to compromise on basic research, which a lot of companies cut when budgets get tight, or priorities shift to the marketplace. He insisted he wouldn’t mortgage away the company’s future like that. “We are a science-driven company that’s poised to make our commercial transformation,” he says.

It’s a good thing, not just for the scientists who want to keep their jobs. As Berger knows well, if Ariad’s stock gets bid up on deforolimus winning market approval, it can drop just as fast if he can’t really tell investors what the company’s next big cancer drug will be.

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Ariad Pharmaceuticals (NASDAQ: ARIA), the Cambridge, MA-based developer of cancer drugs, said today it has started a mid-stage clinical trial of a breast cancer treatment designed to help patients who resist Genentech’s Herceptin. The drug, an oral pill called deforolimus, is designed to block the mTOR protein, which acts like a “master switch” for cancer cells. Ariad will now receive a $15 million milestone payment from its partner, drug giant Merck (NYSE: MRK) for starting the study. The trial, of 33 patients, should wrap up in the second half of 2009.

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