Ariad Joins Rumor Mill: Hope May Trump Reality

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Ariad Pharmaceuticals Inc. (NASDAQ: ARIA) is joining the ranks of the next big biotech acquisitions. At least so goes the rumor mill. Ariad fits the bill of many biotech acquirers because its market cap is just over $1 billion and its revenue cycle is only just beginning.

Reports of buyout interest are driving Ariad shares higher, on the heels of FDA giving the go-ahead for ponatinib as a treatment for leukemia. Rumors circulated that three larger buyers may be interested in acquiring Ariad.

Eli Lilly & Co. (NYSE: LLY) was mentioned as one suitor, and its $59 billion market cap would make this more than doable. One report showed that Lilly would take a friendly approach, valuing the stock at more twice its current value.

UBS issued nine biotech merger candidates in the past week or so, but Ariad was not in that list as an immediate candidate. Ariad is expected to lose money for 2013 and in 2014, but sales are expected to be almost $44 million for 2013 and growing to just over $80 million in 2014. One analyst even sees 2014 sales being as high as $125 million.

Ariad shares were up 7% at $7.19 on more than 16 million shares after only 40 minutes of trading Thursday. Shares even traded as high as $7.43 on the day, and we would remind readers that Ariad’s problems have created a wide trading range — the 52-week range is $2.15 to $23.00.

Until rumors are confirmed or refuted, we would always warn not to put 100% faith in a rumor. Also, the volatile stock history of a company like Ariad fits the pattern of many past biotech stock rumors that never had much upside beyond hope.

While there could easily be some doubts about how accurate this rumor mill chatter is, we would point out that call option volume has spiked through the roof on Thursday. Even if there is risk, traders are betting real money that there could be more to this story than just hope.