ARIAD Pharmaceuticals, Inc. 10-Q

Unless stated otherwise, references in this Quarterly Report on Form 10-Q to “we,” “us,” or “our” refer to ARIAD Pharmaceuticals, Inc., a Delaware corporation, and our subsidiaries including our 80% owned subsidiary, ARIAD Gene Therapeutics, Inc., or AGTI, unless the context requires otherwise.

Overview

We are engaged in the discovery and development of breakthrough medicines to treat cancers by regulating cell signaling with small molecules. We are developing a comprehensive approach to patients with cancer that addresses the greatest medical need - aggressive and advanced-stage cancers for which current treatments are inadequate. Our goal is to build a fully integrated oncology company focused on novel, molecularly targeted therapies to treat solid tumors and hematologic cancers, as well as the spread of primary tumors to distant sites.

Our lead cancer product candidate, AP23573, has been or is being studied in multiple clinical trials in patients with various types of cancers, including sarcomas, hormone refractory prostate cancer, endometrial cancer, brain cancer and leukemias and lymphomas. We expect to initiate patient enrollment in our initial Phase 3 clinical trial of AP23573 in patients with metastatic sarcoma in the third quarter 2007. We discovered AP23573 in a research and development program conducted by us on behalf of ARIAD Gene Therapeutics, Inc., or AGTI, our 80%-owned subsidiary. In 2005, we entered into a partnership with Medinol Ltd., a leading cardiovascular medical device company, to develop and commercialize stents and other medical devices to deliver AP23573 in order to prevent reblockage of injured vessels following stent-assisted angioplasty, a common non-surgical procedure for dilating or opening narrowed arteries. Our second product candidate, AP24534, is in preclinical testing for the treatment of chronic myeloid leukemia. We expect to file an Investigational New Drug application, or IND, for this product candidate with the United States Food and Drug Administration, or FDA, in the second half of 2007.

In addition to our lead development programs, we have a focused drug discovery program centered on small-molecule, molecularly targeted therapies and cell-signaling pathways implicated in cancer. We also have an exclusive license to a family of patents, three in the U.S. and one in Europe, including a pioneering U.S. patent covering methods of treating human disease by regulating NF-κB cell-signaling activity. Additionally, we have developed a proprietary portfolio of cell-signaling regulation technologies, our ARGENT technology, to control intracellular processes with small molecules, which may be useful in the development of therapeutic vaccines and gene and cell therapy products and which provide versatile tools for applications in cell biology, functional genomics and drug discovery research.

Since our inception in 1991, we have devoted substantially all of our resources to our research and development programs, including those we conduct on behalf of AGTI. We receive no revenue from the sale of pharmaceutical products, and most of our revenue to date was received in connection with a joint venture we had with a major pharmaceutical company from 1997 to 1999. Except for the gain on the sale of our fifty percent interest in that joint venture in December 1999, which resulted in net income for fiscal 1999, we have not been profitable since inception. We expect to incur substantial and increasing operating losses for the foreseeable future, primarily due to costs associated with our pharmaceutical product development programs, including costs for clinical trials and product manufacturing, personnel and our intellectual property. We expect that losses will fluctuate from quarter to quarter and that these fluctuations may be substantial.

As of March 31, 2007, we had an accumulated deficit of $324.0 million and cash, cash equivalents and marketable securities of $39.1 million and working capital of $21.4 million. In February 2007, we obtained a commitment for up to $50 million in equity financing from Azimuth Opportunity Ltd. which is available for us to access, subject to certain terms and conditions, over the 18-month term of the agreement. On March 26, 2007, we sold Azimuth 3,072,393 shares of our common stock at an aggregate purchase price of $12.5 million under this agreement. The net proceeds from this transaction, after deducting issuance expenses, were approximately $12.3 million. As of March 31, 2007, $37.5 million remained available to us under this equity financing facility.

General

Our operating losses are primarily due to the costs associated with our pharmaceutical product development programs, personnel and intellectual property protection and enforcement. As our product development programs progress, we incur significant costs for toxicology and pharmacology studies, product development, manufacturing, clinical trials and regulatory support. These costs can vary significantly from quarter to quarter depending on the number of product candidates in development, the stage of development of each product candidate, the number of patients enrolled in and complexity of clinical trials and other factors. Costs associated with our intellectual property include legal fees and other costs to prosecute, maintain, protect and enforce our intellectual property, which can fluctuate from quarter to quarter depending on the status of patent issues being pursued.

Because we currently receive no revenue from the sale of pharmaceutical products and receive only limited license revenue, we have relied primarily on the capital markets as our source of funding. In October 2006, we raised approximately $14.3 million through an underwritten offering of our common stock. We have also entered into a $50 million equity financing facility pursuant to which we raised approximately $12.5 million in March 2007. We utilize long-term debt to supplement our funding, particularly as a means to fund investment in property and equipment and infrastructure needs. In addition, we plan to seek funding from collaborations with pharmaceutical, biotechnology and/or medical device companies for development and commercialization of our product candidates. We are completing negotiations for a partnership to develop and commercialize AP23573 in a broad range of cancers, although we can provide no assurance that we will be able to reach a definitive agreement on acceptable terms. These collaborations may take the form of licensing arrangements, co-development or joint venture arrangements or other structures. If funding from these various sources is unavailable on reasonable terms, we may be required to reduce our operating expenses in order to conserve cash and capital by delaying, scaling back or eliminating one or more of our product development programs.

Critical Accounting Policies and Estimates

Our financial position and results of operations are affected by subjective and complex judgments, particularly in the areas of the carrying value of intangible assets, deferred compensation benefits for executives, and stock-based compensation.

At March 31, 2007, we reported $4.3 million of intangible assets, consisting of capitalized costs related primarily to purchased and issued patents, patent applications and licenses, net of accumulated amortization. These costs are being amortized over the estimated useful lives of the underlying patents or licenses. Changes in these lives or a decision to discontinue using the technologies could result in material changes to our balance sheet and statements of operations. We have concluded that the carrying value of our intangible assets is not currently impaired because such carrying value does not exceed the future net cash flows expected to be generated by such intangible assets. If we were to abandon the underlying technologies or terminate our efforts to pursue collaborations or license agreements, we may be required to write off a portion of the carrying value of our intangible assets. The net book value as of March 31, 2007 of intangible assets related to our NF-êB technology is $470,000. If the patentability of our NF-κB patents, one of which is currently the subject of litigation and reexamination proceedings (see Part II, Item 1, Legal Proceedings), is successfully challenged and such patents are subsequently narrowed, invalidated or circumvented, we may be required to write off some or all of the net book value related to such technology.

Under our deferred executive compensation plans, we are required to adjust our recorded obligations to our employees on a periodic basis to reflect fair value based on the quoted market value of certain underlying mutual funds. Fluctuations in the quoted market value of such mutual funds can result in uneven expense charges or credits to our statements of operations. If, for example, the quoted market prices of the underlying mutual funds were 10% higher at March 31, 2007, we would have recognized an additional $97,000 in compensation expense in the three-month period ended March 31, 2007.

In determining expense related to stock-based compensation, we utilize the Black-Scholes valuation model to estimate the fair value of stock options granted to employees, consultants and directors. Application of the Black-Scholes option valuation model requires the use of factors such as the market value and volatility of our common stock, a risk-free discount rate and an estimate of the life of the option contract. Fluctuations in these factors can result in adjustments to our statements of operations. If, for example, the market value of our common stock, its volatility, or the expected life of stock options granted in the three-month period ended March 31, 2007 were 10% higher or lower than used in the valuation of such stock options, our valuation of such awards would have increased or decreased by up to $264,000, $154,000, or $142,000, respectively. This increase or decrease in valuation would be recognized on our statement of operations over the vesting period of such awards.

Results of Operations

For the three months ended March 31, 2007 and 2006

Revenue

We recognized license revenue of $190,000 in the three month period ended March 31, 2007, compared to $229,000 in the corresponding period in 2006. The decrease in license revenue was due primarily to the impact of the expected timing of receipt of future milestone payments pursuant to our agreement with Medinol Ltd., in accordance with our revenue recognition policy.

Operating Expenses

Research and Development Expenses

Research and development expenses decreased by $651,000, or 6%, to $11.0 million in the three month period ended March 31, 2007, compared to $11.7 million in the corresponding period in 2006. The research and development process necessary to develop a pharmaceutical product for commercialization is subject to extensive regulation by numerous governmental authorities in the United States and other countries. This process typically takes years to complete and requires the expenditure of substantial resources. Current requirements include:

·	preclinical toxicology, pharmacology and metabolism studies, as well as in vivo efficacy studies in relevant animal models of disease;

·	manufacturing of drug product for preclinical studies and clinical trials and ultimately for commercial supply;

·	submission of the results of preclinical studies and information regarding manufacturing and control and proposed clinical protocol to the FDA in an IND (or similar filings with regulatory agencies outside the United States);

·	conduct of clinical trials designed to provide data and information regarding the safety and efficacy of the product candidate in humans; and

·	submission of all the results of testing to the FDA in a New Drug Application, or NDA (or similar filings with regulatory agencies outside the United States).

Upon approval by the appropriate regulatory authorities, including in some countries approval of product pricing, we may commence commercial marketing and distribution of the product.

We group our research and development, or R&D, expenses into two major categories: direct external expenses and all other R&D expenses. Direct external expenses consist of costs of outside parties to conduct laboratory studies, to develop manufacturing processes and manufacture the product candidate, to conduct and manage clinical trials and similar costs related to our clinical and preclinical studies. These costs are accumulated and tracked by product candidate. All other R&D expenses consist of costs to compensate personnel, to purchase lab supplies and services, to maintain our facility, equipment and overhead and similar costs of our research and development efforts. These costs apply to work on our clinical and preclinical candidates as well as our discovery research efforts. These costs are not tracked by product candidate because the number of product candidates and projects in R&D may vary from time to time and because we utilize internal resources across multiple projects at the same time.

Direct external expenses are further categorized as costs for clinical programs and costs for preclinical programs. Preclinical programs include product candidates undergoing toxicology, pharmacology, metabolism and efficacy studies and manufacturing process development required before testing in humans can begin. Product candidates are designated as clinical programs once we have filed an IND with the FDA, or a similar filing with regulatory agencies outside the United States, for the purpose of commencing clinical trials in humans.

Our research and development expenses for the three month period ended March 31, 2007, as compared to the corresponding period in 2006, were as follows:

	Three months ended March 31,				Increase/
*In thousands*	2007		2006		(decrease)
Direct external expenses:
Clinical programs	$	3,170	$	4,183	$	(1,013	)
Preclinical programs		1,549		135		1,414
All other R&D expenses		6,304		7,356		(1,052	)
	$	11,023	$	11,674	$	(651	)

AP23573, our lead product candidate which is in Phase 2 clinical trials, was our only clinical program in 2007 and 2006. Direct external expenses for AP23573 decreased by $1.0 million in the three-month period ended March 31, 2007, as compared to the corresponding period in 2006, due primarily to decreases in manufacturing related costs of $917,000 and clinical trials costs of $251,000. The decrease in manufacturing related costs was due to the timing of production runs of AP23573. The decrease in clinical trial costs is directly related to a decrease in number of patients on trial during the period driven by the successful conclusion of enrollment in several clinical trials in 2005 and 2006. Through March 31, 2007, we have incurred a total of approximately $59.1 million in direct external expenses for AP23573 from the date it became a clinical program. We expect that our direct external costs for AP23573 will increase during the remainder of 2007 as we prepare to initiate enrollment in our initial Phase 3 clinical trial for this product candidate.

Our preclinical programs are focused on the development of additional novel, small molecule, molecularly targeted therapies including kinase inhibitors targeting cancer-related processes such as cell survival, metastasis and angiogenesis. Our kinase inhibitor program includes our second product candidate, AP24534. Direct external expenses for preclinical programs will increase or decrease over time depending on the status and number of programs in this stage of development and the mix between external and internal efforts applied to such programs. Direct external expenses for preclinical programs increased by $1.4 million in the three-month period ended March 31, 2007, as compared to the corresponding period in 2006 due primarily to the initiation of certain toxicology and contract manufacturing studies for AP24534 in 2007. We expect that our direct external expenses for preclinical programs will increase slightly during the remainder of 2007, as resources allow, as we prepare to file an IND for AP24534 in the second half of 2007 and continue to move our other preclinical programs forward in development.

All other R&D expenses decreased by $1.1 million in the three month period ended March 31, 2007 as compared to the corresponding period in 2006, due to lower personnel costs primarily from a decrease in stock-based compensation expense of $253,000 due to the impact of stock option forfeitures and the timing of stock option awards, a decrease in depreciation and amortization of $526,000 due to an increase in the useful life of leasehold improvements upon the extension of the term of the lease of our lab and office facility, and a decrease in laboratory supplies and services of $182,000 as we shifted later stage preclinical testing from internal studies to external contract laboratories. We expect that all other R&D expenses will increase slightly during the remainder of 2007 to support our clinical and preclinical development programs.

The successful development of our product candidates is uncertain and subject to a number of risks. We cannot be certain that any of our product candidates will prove to be safe and effective or will meet all of the applicable regulatory requirements needed to receive and maintain marketing approval. Data from preclinical studies and clinical trials are susceptible to varying interpretations that could delay, limit or prevent regulatory clearance. We, the FDA or other regulatory authorities may suspend clinical trials at any time if we or they believe that the subjects participating in such trials are being exposed to unacceptable risks or if such regulatory agencies find deficiencies in the conduct of the trials or other problems with our products under development. Delays or rejections may be encountered based on additional governmental regulation, legislation, administrative action or changes in FDA or other regulatory policy during development or the review process. Other risks associated with our product development programs are described under the heading “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2006 as updated from time to time in our subsequent periodic reports and current reports filed with the SEC. Due to these uncertainties, accurate and meaningful estimates of the ultimate cost to bring a product to market, the timing of completion of any of our drug development programs and the period in which material net cash inflows from any of our drug development programs will commence are unavailable.

General and Administrative Expenses

General and administrative expenses decreased by $53,000, or 1%, to $4.4 million in the three month period ended March 31, 2007, compared to $4.5 million in the corresponding period in 2006. The decrease in expenses was due primarily to decreases in professional services, primarily $289,000 in legal fees associated with our patent litigation, costs related to business and commercial development initiatives completed in 2006, and miscellaneous decreases in other expenses, offset in part by an increase in personnel expenses related to stock-based compensation expense of $401,000 resulting from grants of stock options and restricted stock in the three-month period ended March 31, 2007. We expect that our general and administrative expenses will remain at approximately the current level for the remainder of 2007 as necessary to support our research and development programs.

We expect that our operating expenses in total will increase during the remainder of 2007 for the reasons described above. Operating expenses may fluctuate from quarter to quarter. The actual amount of any change in operating expenses will depend on the progress of our product development programs, including preclinical and clinical studies and product manufacturing, the status of our patent infringement litigation with Lilly and Amgen, our ability to raise funding through equity offerings, collaborations, licensing, joint ventures or other sources and the timing of any such funding transaction.

Interest Income/Expense

Interest income decreased to $390,000 in the three month period ended March 31, 2007 from $664,000 in the corresponding period in 2006, as a result of a lower average balance of funds invested in 2007, offset in part by higher interest yields from our securities.

Interest expense decreased to $105,000 in the three month period ended March 31, 2007 from $121,000 in the corresponding period in 2006, as a result of lower average loan balances in 2007, offset, in part, by higher interest rates on our long-term debt.

Operating Results

We reported a loss from operations of $15.2 million in the three month period ended March 31, 2007 compared to a loss from operations of $15.9 million in the corresponding period in 2006, a decrease in loss of $665,000, or 4%. Such decrease was due primarily to the decrease in operating expenses noted above. We expect that our loss from operations will increase slightly during the reminder of 2007 due to the various factors discussed under “Operating Expenses” above. Losses may fluctuate depending on the extent to which, if at all, we enter into collaborations for one or more of our product candidates or licenses for our technologies. The extent of operating losses will also depend on our ability to raise funds from other sources, such as the capital markets, or utilize the remaining $37.5 million under our equity financing facility, which will influence the amount we will spend on research and development and the development timelines for our product candidates.

We reported a net loss of $15.0 million in the three month period ended March 31, 2007, compared to a net loss of $15.4 million in the corresponding period in 2006, a decrease in net loss of $407,000 or 3%, and a net loss per share of $0.23 and $0.25, respectively.

Liquidity and Capital Resources

We have financed our operations and investments primarily through sales of our common stock to institutional investors and, to a lesser extent, through issuances of our common stock pursuant to our stock option and employee stock purchase plans, supplemented by the issuance of long-term debt. We sell securities and incur debt when the terms of such transactions are deemed favorable to us and as necessary to fund our current and projected cash needs. We seek to balance the level of cash, cash equivalents and marketable securities on hand with our projected needs and to allow us to withstand periods of uncertainty relative to the availability of funding on favorable terms.

Sources of Funds

For the three months ended March 31, 2007 and 2006, our sources of funds were as follows:

	Three Months Ended March 31,
*In thousands*	2007			2006

Maturities of marketable securities, net of purchases	$	(6,931	)	$	11,191
Proceeds from issuance of common stock, net of issuance costs		12,300
Proceeds from issuance of common stock pursuant to stock option and purchase plans		247			986
	$	5,616		$	12,177

We manage our marketable securities portfolio to provide cash for payment of our obligations. We purchase marketable securities to enhance our yield on invested funds and when such amounts are not needed for near-term payment of obligations. We generally hold our marketable securities to maturity. Upon maturity of such marketable securities, a portion may be retained as cash to provide for payment of current obligations while the remainder will be reinvested in accordance with our investment policy. For the three-month periods ended March 31, 2007 and 2006, proceeds from maturities of marketable securities, purchases of marketable securities and the resulting net amount retained as cash for payment of obligations or reinvested was as follows:

	Three Months Ended March 31,
*In thousands*	2007			2006

Proceeds from maturities of marketable securities	$	8,107		$	22,831
Purchases of marketable securities		(15,038	)		(11,640	)
	$	(6,931	)	$	11,191

The amount of funding we raise through sales of our common stock depends on many factors, including, but not limited to, the status and progress of our product development programs, projected cash needs, availability of funding from other sources, our stock price and the status of the capital markets.

We have filed shelf registration statements with the SEC, from time to time, to register shares of our common stock for sale, giving us the opportunity to raise funding when needed or otherwise considered appropriate. On January 30, 2007, we filed a shelf registration statement with the SEC registering for issuance, from time to time, $100 million of common stock, preferred stock, various series of debt securities and/or warrants to purchase any of such securities, at prices and on terms to be determined at the time of any such offerings. This filing was declared effective on February 6, 2007.

On February 14, 2007, we entered into an agreement with Azimuth Opportunity Ltd. under which we may offer and sell, at our sole discretion, and Azimuth is committed to purchase, subject to the terms and conditions set forth in the agreement, the lesser of up to $50 million of our common stock, or the number of shares which is one less than twenty percent of the issued and outstanding shares of our common stock as of the effective date of the agreement. The per share purchase price for these shares will equal the daily volume weighted average price of our common stock on such date, less a discount ranging from 3.5% to 5.5%. The term of the agreement is eighteen months. Upon each sale of common stock to Azimuth, we will pay to Reedland Capital Partners a placement fee equal to 1.0% of the aggregate dollar amount received by us from such sale.

In March 2007, we sold to Azimuth 3,072,393 shares of our common stock pursuant to this agreement. We received aggregate gross proceeds from this sale of $12.5 million, or $12.3 million net of issuance expenses. These shares were registered under our shelf registration statement filed on January 30, 2007. Following this transaction, we have $37.5 million available under our equity financing facility with Azimuth and $87.5 million of securities remaining for issuance under our shelf registration statement.

In March 2003, we entered into a term loan agreement with a bank for $7.5 million, the proceeds of which were used to repay existing long-term debt, to pay off our obligations under certain operating leases for equipment and for general working capital purposes. The loan is secured by all of our assets excluding intellectual property, which we have agreed not to pledge to any other party without the consent of the bank. The loan carries interest at the bank’s prime rate or LIBOR plus 2%. We amended the terms of the loan on December 31, 2003 and December 31, 2004, receiving another $2.0 million and $3.0 million, respectively, in loan proceeds. The amended loan is payable in monthly installments of $160,000 plus interest beginning in January 2005 with a final payment of $3.5 million due in March 2008. The terms of the loan require us to maintain at least $13.0 million in unrestricted cash, cash equivalents and investments. The agreement also contains certain covenants that restrict additional indebtedness, additional liens, and sales of assets, and dividends, distributions or repurchases of common stock. The balance outstanding as of March 31, 2007 was $5,255,000.

Uses of Funds

The primary uses of our cash are to fund our operations and working capital requirements and, to a lesser degree, to repay our long-term debt, to invest in intellectual property and to invest in our property and equipment as needed for our business. For the three months ended March 31, 2007 and 2006, our uses of funds were as follows:

	Three Months Ended March 31,
*In thousands*	2007		2006

Net cash used in operating activities	$	12,637	$	13,945
Repayment of borrowings		480		480
Investment in intangible assets		200		208
Investment in property and equipment		80		354
	$	13,397	$	14,987

The net cash used in operating activities is comprised of our net losses, adjusted for non-cash expenses and working capital requirements. As noted above, our net loss for the three months ended March 31, 2007 decreased by $407,000, as compared to the corresponding period in 2006, due primarily to decreased research and development expenses. As a result of changes in our working capital requirements offset in part by decreases in non-cash expenses, including depreciation and amortization expense, our net cash used in operating activities decreased by $1.6 million for the three months ended March 31, 2007, as compared with the corresponding period in 2006. Also, as noted above, we expect that our loss from operations will increase in the remainder of 2007 due to continued progress in development of our product candidates, and we expect that our net cash used in operations will increase accordingly. We also expect that our investment in intangible assets, consisting of our intellectual property, will increase in support of our product development activities.

Contractual Obligations

We have substantial fixed contractual obligations under various research and licensing agreements, consulting and employment agreements, lease agreements and long-term debt instruments. These contractual obligations were comprised of the following as of March 31, 2007:

			Payments Due By Period
*In thousands*	Total		In 2007		2008 through 2010		2011 through 2012		After 2012

Long-term debt	$	5,255	$	1,440	$	3,815	$	—	$	—

Operating leases, net of sub-leases		10,770		1,057		6,358		3,355		—

Employment agreements		6,646		3,218		3,428		—		—

Other long-term obligations		4,318		596		3,037		290		395

Total fixed contractual obligations	$	26,989	$	6,311	$	16,638	$	3,645	$	395

Long-term debt consists of scheduled principal payments on such debt. Interest on our long-term debt is based on variable interest rates. Assuming a constant interest rate of 7.4%, our average interest rate on our debt at March 31, 2007, over the remaining term of the debt, our interest expense would total approximately $252,000 for the remainder of 2007 and $66,000 in 2008.

Other long-term obligations are comprised primarily of our deferred executive compensation plans and license agreements. The license agreements generally provide for payment by us of annual license fees, milestone payments and royalties upon successful commercialization of products. All license agreements are cancelable by us. The above table reflects remaining license fees for the lives of the agreements but excludes milestone and royalty payments, as such amounts are not probable or estimable at this time.

Liquidity

At March 31, 2007, we had cash, cash equivalents and marketable securities totaling $39.1 million and working capital of $21.4 million, compared to cash, cash equivalents and marketable securities totaling $39.8 million and working capital of $25.9 million at December 31, 2006.

We will require substantial additional funding for our research and development programs, including pre-clinical development and clinical trials, for operating expenses including intellectual property protection and enforcement, for the pursuit of regulatory approvals, and for establishing manufacturing, marketing and sales capabilities. In order to fund our needs, we may, among other things, (1) sell securities of the Company through public or private offerings as market conditions permit or to Azimuth under the equity financing facility, (2) enter into partnerships for our product candidates, and/or (3) license our cell-signaling technologies, including our ARGENT and NF-kB intellectual property portfolios.

We believe that our cash, cash equivalents and marketable securities, should be sufficient to satisfy our capital and operating requirements approximately through the fourth quarter of 2007. If we fully utilize the remaining $37.5 million remaining under our equity financing facility, we could extend the sufficiency of our cash, cash equivalents and marketable securities to at least mid-2008. However, there are numerous factors that are likely to affect our spending levels, including the timing of the start of, and the rate of patient enrollment in, our initial Phase 3 clinical trial for AP23573, the timing of product and process development work for AP23573, the manufacture of drug product for clinical trials and potential product launch, if approved, developments in our ongoing clinical trials, the timing and terms of a partnership, if any, to develop and commercialize AP23573, the status of our in-house efforts to prepare for the potential launch of AP23573, the progress of our preclinical programs, the potential acquisition of or other strategic transaction regarding the minority stockholders’ interests in AGTI, and developments in our NF-kB litigation, among other factors. These variables could result in earlier depletion of our current funds if we are to continue operations in accordance with our current plans and achieve our intended timelines for development. In any event, we expect to need additional capital in order to pursue our business plan, which we will seek to raise through the sale of additional securities, including the possible sale of common stock to Azimuth under our equity financing facility, collaborative partnerships, and possible additional credit arrangements. There can be no assurance, however, that adequate resources will be available when needed or on terms acceptable to us, if at all.

Securities Litigation Reform Act

Safe harbor statement under the Private Securities Litigation Reform Act of 1995: Except for the historical information contained in this Quarterly Report on Form 10-Q, some of the matters discussed herein are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are identified by the use of words such as “may,” “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,” and other words and terms of similar meaning in connection with any discussion of future operating or financial performance. Such statements are based on management’s current expectations and are subject to certain factors, risks and uncertainties that may cause actual results, outcome of events, timing and performance to differ materially from those expressed or implied by such forward-looking statements. These risks include, but are not limited to, risks and uncertainties regarding our ability to accurately estimate the timing and actual research and development expenses and other costs associated with the preclinical and clinical development and manufacture of our product candidates, the adequacy of our capital resources and the availability of additional funding, risks and uncertainties regarding our ability to successfully recruit centers, enroll patients and conduct clinical studies of product candidates, risks and uncertainties regarding our ability to manufacture or have manufactured our product candidates on a commercial scale or to supply our product candidates to partners, risks and uncertainties that clinical trial results at any phase of development may be adverse or may not be predictive of future results or lead to regulatory approval of any of our or any partner’s product candidates, risks and uncertainties of third-party intellectual property claims relating to our and any partner’s product candidates, risks and uncertainties related to the potential acquisition of or other strategic transaction regarding the minority stockholders’ interests in AGTI, and risks and uncertainties relating to regulatory oversight, the timing, scope, cost and outcome of legal and patent office proceedings, litigation, prosecution and reexamination proceedings concerning our NF-kB patent portfolio, future capital needs, key employees, dependence on collaborators and manufacturers, markets, economic conditions, products, services, prices, reimbursement rates, competition and other risks detailed under the heading “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2006, as updated from time to time in our subsequent periodic and current reports filed with the SEC. As a result of these and other factors, actual events or results could differ materially from those described herein. We are not under any obligation, and we expressly disclaim any obligation, to update or alter any forward-looking statements, whether as a result of new information, future events or otherwise.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We invest our available funds in accordance with our investment policy to preserve principal, maintain proper liquidity to meet operating needs and maximize yields. Our investment policy specifies credit quality standards for our investments and limits the amount of credit exposure to any single issue, issuer or type of investment.

We invest cash balances in excess of operating requirements first in short-term, highly liquid securities, with maturities of 90 days or less, and money market accounts. Depending on our level of available funds and our expected cash requirements, we may invest a portion of our funds in marketable securities, consisting generally of corporate debt and U.S. government and agency securities. Maturities of our marketable securities are generally limited to periods necessary to fund our liquidity needs and may not in any case exceed three years. These securities are classified as available-for-sale. Available-for-sale securities are recorded on the balance sheet at fair market value with unrealized gains or losses reported as a separate component of stockholders’ equity (accumulated other comprehensive income or loss). Realized gains and losses on marketable security transactions are reported on the specific-identification method. Interest income is recognized when earned. A decline in the market value of any available-for-sale security below cost that is deemed other than temporary results in a charge to earnings and establishes a new cost basis for the security.

Our investments are sensitive to interest rate risk. We believe, however, that the effect, if any, of reasonable possible near-term changes in interest rates on our financial position, results of operations and cash flows generally would not be material due to the current short-term nature of these investments. In particular, at March 31, 2007, because our available funds are invested solely in short-term securities with remaining maturities of six months or less, our risk of loss due to changes in interest rates is not material.

We have a deferred executive compensation program which provides participants with deferred compensation based on the value of certain designated mutual funds. The fair value of our obligations under this program is reflected as a liability on our balance sheet. In the event of a hypothetical 10% increase in the fair market value of the underlying mutual funds as of March 31, 2007, we would have incurred approximately $97,000 of additional compensation expense in the three-month period ended March 31, 2007.

At March 31, 2007, we had $5.3 million outstanding under a bank term note which bears interest at prime or, alternatively, LIBOR + 2%. This note is sensitive to interest rate risk. In the event of a hypothetical 10% increase in the interest rate on which the loan is based (73.7 basis points), we would incur approximately $19,000 of additional interest expense per year based on expected balances over the next twelve months.

ITEM 4. CONTROLS AND PROCEDURES

(a) Evaluation of Disclosure Controls and Procedures. Our principal executive officer and principal financial officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in paragraph (e) of Rules 13a-15 and 15d-15 under the Securities Exchange Act of 1934) as of the end of the period covered by this Quarterly Report on Form 10-Q, have concluded that, based on such evaluation, our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure, particularly during the period in which this Quarterly Report on Form 10-Q was being prepared.

In designing and evaluating our disclosure controls and procedures, our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

(b) Changes in Internal Controls. There were no changes in our internal control over financial reporting, identified in connection with the evaluation of such internal control that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

NF-κB Patent Infringement Litigation and Reexamination

Lilly Litigation

In 2002, we, together with Massachusetts Institute of Technology, The Whitehead Institute for Biomedical Research and Harvard University (collectively, the Plaintiffs) filed a lawsuit in the United States District Court for the District of Massachusetts, or the U.S. District Court, against Eli Lilly and Company, or Lilly, alleging infringement of certain claims, or the NF-κB ‘516 Claims, of the Plaintiffs’ U.S. Patent No. 6,410,516, or the ‘516 Patent, covering methods of treating human disease by regulating NF-κB cell-signaling activity through sales of Lilly’s osteoporosis drug, Evista^®, and Lilly’s septic shock drug, Xigris^®, and seeking monetary damages from Lilly.

This case was tried before a jury in the U.S. District Court from April 10, 2006 through April 28, 2006. After deliberations, on May 4, 2006, the jury rendered a verdict in favor of the Plaintiffs by finding that the NF-κB ‘516 Claims asserted in the lawsuit are valid and infringed by Lilly through sales of Evista and Xigris in the United States. One defense regarding validity was not submitted to the jury and was instead the subject of a bench trial, as addressed below. The jury awarded damages to the Plaintiffs in the amount of approximately $65.2 million, based on the jury’s determination of a reasonable royalty rate of 2.3% to be paid by Lilly to the Plaintiffs based on U.S. sales of Evista and Xigris from the date of the filing of the lawsuit on June 25, 2002 through February 28, 2006. The jury awarded further damages on an ongoing basis, in amounts to be determined, equal to 2.3% of U.S. sales of Evista and Xigris through the year 2019, when the patent expires. If the verdict is upheld, damages paid by Lilly will be applied first to reimburse us for any unreimbursed legal fees and expenses relating to the litigation. We will receive 91% of the remainder, and the co-plaintiffs will receive 9%.

A separate trial, or bench trial, was held in the U.S. District Court from August 7, 2006 through August 9, 2006 on certain defenses asserted by Lilly relating to the enforceability of the NF-κB ‘516 Claims and one defense related to the validity of these claims. We are currently awaiting the judge’s ruling on the issues tried in the bench trial before a final judgment may be entered in this lawsuit. Lilly has the right to file motions challenging the jury’s verdict in this lawsuit, and, upon the entry of a final judgment by the U.S. District Court, to file an appeal of the jury’s verdict and other rulings by the U.S. District Court with the Court of Appeals for the Federal Circuit.

Amgen Litigation

On April 20, 2006, Amgen Inc. and certain affiliated entities, hereinafter referred to as Amgen, filed a lawsuit against us in the U.S. District Court for the District of Delaware, or the Delaware Court, seeking a declaratory judgment that each of the claims contained in the ‘516 Patent are invalid and that Amgen has not infringed any of the claims of the ‘516 Patent based on activities related to Amgen’s products, Enbrel^® and Kineret^®. We filed a motion to dismiss this case in the Delaware Court on June 14, 2006, which was, after a hearing held on September 11, 2006, denied in an order dated September 13, 2006.

On September 25, 2006, the Company filed a motion requesting the judge to certify the Delaware Court’s September 13, 2006 order denying our motion to dismiss for immediate appeal to the Court of Appeals for the Federal Circuit, or CAFC. On October 5, 2006, we also filed a renewed motion to dismiss the Amgen litigation for failure to name the university patentees as necessary and indispensable parties or, in the alternative, to transfer this case to the U.S. District Court for the District of Massachusetts, or the Massachusetts Court.

At a hearing on these motions held on November 3, 2006, the Delaware Court granted our motion certifying the Delaware Court’s September 13, 2006 order for immediate appeal and denied, as moot and without prejudice, our renewed motion to dismiss or transfer the case. The Delaware Court also stayed discovery in the case pending a ruling on our petition for permission to appeal the Delaware Court’s September 13, 2006 order, or the Petition, to be filed with the CAFC. We filed our Petition with the CAFC on November 16, 2006, which was denied by the CAFC on December 29, 2006. As a result of the CAFC’s denial of our Petition, the temporary stay issued by the Delaware Court expired.

On February 20, 2007, a hearing was held before the Delaware Court on our renewed motion to dismiss the Amgen litigation, or in the alternative, to transfer this case to the Massachusetts Court. The Delaware Court issued an order on March 27, 2007 denying our renewed motion to dismiss or alternatively to transfer this case. In its Order, the Delaware Court found that the university patentees are necessary, but not indispensable, parties to the action, and ordered Amgen to join The Whitehead Institute for Biomedical Research as a party. In addition, the Delaware Court ordered ARIAD to inform the Delaware Court, by April 13, 2007, whether Harvard University and Massachusetts Institute of Technology would voluntarily join the action.

On April 13, 2007, Amgen filed an Amended Complaint for Declaratory Judgment of Patent Invalidity and Non-Infringement against us and The Whitehead Institute and requested leave from the Delaware Court to file a Second Amended Complaint to add a claim for inequitable conduct. On the same day, we together with the university patentees filed a lawsuit against Amgen and Wyeth alleging infringement of the ‘516 Patent based on activities related to Enbrel and Kineret, as well as our Answer to Amended Complaint, Counter-claim and Demand for Jury Trial.

Re-examination Proceedings in PTO

On April 4, 2005, Lilly filed a request in the United States Patent and Trademark Office, or PTO, to reexamine the patentability of certain claims of the ‘516 Patent. An unrelated third party filed a similar request in the PTO on December 2, 2005 to reexamine the patentability of certain claims of the ‘516 Patent. These two requests have been granted and were merged by the PTO into a single reexamination proceeding. We petitioned the PTO to vacate or stay the grant of these requests, but our petitions were rejected. We (with the Plaintiffs) also filed a complaint in the U.S. District Court in the Eastern District of Virginia requesting that the court enjoin the PTO from continuing with the reexamination proceedings, along with a motion for summary judgment, both of which were denied by the Court in an order dated October 3, 2006 granting the PTO’s motion to dismiss this action. We filed a motion to dismiss our appeal in this case on November 8, 2006.

The PTO issued its first office action on August 2, 2006. In this first office action, 160 of the 203 claims of the ‘516 Patent were rejected by the PTO, including the claims asserted by us in the Lilly litigation and claims which may be asserted by us in the Amgen litigation. Our response to the first office action was filed on November 9, 2006, and we await receipt of a final office action from the PTO. Accordingly, we can provide no assurance that the PTO will not invalidate some of the claims of the ‘516 Patent in this reexamination process, including the claims which were asserted against Lilly or might be asserted against Amgen, or that we will ultimately prevail in either of these litigations.

The timing and ultimate outcome of the Lilly litigation (including the pending bench trial and any appeal of the jury verdict and court’s ruling in the bench trial), the Amgen litigation (including pending motion to dismiss, or in the alternative, to transfer the case to the Massachusetts Court) and the reexamination proceedings cannot be determined at this time, and, as a result, no determination can be made with respect to allowance of the claims of the ‘516 Patent, nor can any final determination be made with respect to the validity or infringement of the claims of the ‘516 Patent in the Lilly litigation and the Amgen litigation, nor can we predict whether the damages awarded by the jury in the U.S. District Court in the Lilly litigation will be upheld, eliminated or limited. Although we have prevailed at jury trial in the Lilly litigation, the damages we were awarded by the jury may be eliminated or limited by an adverse finding in the bench trial, on post-trial motions, upon appeal or in the event that the claims of the ‘516 Patent are invalidated by the PTO.

ITEM 6. EXHIBITS

10.1	Common Stock Purchase Agreement dated February 14, 2007, by and between ARIAD Pharmaceuticals, Inc. and Azimuth Opportunity Ltd. (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the U.S. Securities and Exchange Commission on February 15, 2007).

10.2	Executive compensation arrangements (incorporated by reference to Exhibit 10.52 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2006).

10.3	Director compensation arrangements (incorporated by reference to Exhibit 10.53 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2006).

31.1	Certification of the Chief Executive Officer.

31.2	Certification of the Chief Financial Officer.

32.1	Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

ARIAD and the ARIAD logo are our registered trademarks and ARGENT is our trademark. The domain name and website address www.ariad.com, and all rights thereto, are registered in the name of, and owned by, ARIAD. The information in our website is not intended to be part of this Quarterly Report on Form 10-Q. We include our website address herein only as an inactive textual reference and do not intend it to be an active link to our website.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


	ARIAD Pharmaceuticals, Inc.

	By:	/s/ Harvey J. Berger, M.D.
		Harvey J. Berger, M.D.
		Chairman and Chief Executive Officer



	By:	/s/ Edward M. Fitzgerald
		Edward M. Fitzgerald
Date: May 10, 2007		Senior Vice President, Finance and Corporate Operations, and Chief Financial Officer (Principal financial officer and chief accounting officer)

EXHIBIT INDEX

Exhibit

No.

Title

10.1	Common Stock Purchase Agreement dated February 14, 2007, by and between ARIAD Pharmaceuticals, Inc. and Azimuth Opportunity Ltd. (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the U.S. Securities and Exchange Commission on February 15, 2007).

10.2	Executive compensation arrangements (incorporated by reference to Exhibit 10.52 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2006).

10.3	Director compensation arrangements (incorporated by reference to Exhibit 10.53 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2006).

31.1	Certification of the Chief Executive Officer.

31.2	Certification of the Chief Financial Officer.

32.1	Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Delaware	22-3106987
(State or other jurisdiction of	(I.R.S. Employer Identification No.)
incorporation or organization)

ARIAD PHARMACEUTICALS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
*In thousands, except share and per share data*	March 31, 2007			December 31, 2006
	(Unaudited)

ASSETS
Current assets:
Cash and cash equivalents	$	23,947		$	31,728
Marketable securities		15,127			8,076
Inventory and other current assets		2,408			1,839

Total current assets		41,482			41,643

Property and equipment:
Leasehold improvements		18,126			18,126
Equipment and furniture		10,757			10,677

Total		28,883			28,803
Less accumulated depreciation and amortization		(24,086	)		(23,721	)

Property and equipment, net		4,797			5,082

Intangible and other assets, net		4,316			4,318

Total assets	$	50,595		$	51,043

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt	$	5,255		$	1,920
Accounts payable		3,619			4,003
Accrued compensation and benefits		766			428
Accrued product development expenses		6,916			6,612
Other accrued expenses		2,706			1,841
Current portion of deferred executive compensation		536			528
Current portion of deferred revenue		264			452

Total current liabilities		20,062			15,784

Long-term debt					3,815

Deferred revenue					2

Deferred executive compensation		1,390			1,180

Stockholders’ equity:
Common stock, $.001 par value; authorized, 145,000,000 shares; issued and outstanding, 68,632,137 shares in 2007 and 65,391,347 shares in 2006		69			65
Additional paid-in capital		353,050			339,220
Accumulated other comprehensive income		1			3
Accumulated deficit		(323,977	)		(309,026	)

Total stockholders’ equity		29,143			30,262

Total liabilities and stockholders’ equity	$	50,595		$	51,043

See notes to unaudited condensed consolidated financial statements.

ARIAD PHARMACEUTICALS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
	Three Months Ended
*In thousands, except share and per share data*	March 31,
	2007			2006

License revenue	$	190		$	229


Operating expenses:
Research and development		11,023			11,674
General and administrative		4,403			4,456

Total operating expenses		15,426			16,130


Loss from operations		(15,236	)		(15,901	)


Other income (expense):
Interest income		390			664
Interest expense		(105	)		(121	)

Total other income, net		285			543


Net loss	$	(14,951	)	$	(15,358	)


Net loss per share	$	(.23	)	$	(.25	)


Weighted-average number of shares of common stock outstanding		65,625,902			61,728,913

See notes to unaudited condensed consolidated financial statements.

ARIAD PHARMACEUTICALS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
	Three Months Ended March 31,
*In thousands*	2007			2006

Cash flows from operating activities:
Net loss	$	(14,951	)	$	(15,358	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		572			1,240
Accretion of discount on marketable securities		(121	)		(539	)
Deferred executive compensation expense		218			220
Stock-based compensation		1,287			1,176
Increase (decrease) from:
Inventory and other current assets		(569	)		(84	)
Other assets		(6	)		6
Accounts payable		(384	)		(522	)
Accrued compensation and benefits		338			347
Accrued product development expenses		304			241
Other accrued expenses		865			(556	)
Deferred revenue		(190	)		96
Deferred executive compensation paid					(212	)

Net cash used in operating activities		(12,637	)		(13,945	)

Cash flows from investing activities:
Proceeds from maturities of marketable securities		8,107			22,831
Purchases of marketable securities		(15,038	)		(11,640	)
Investment in property and equipment		(80	)		(354	)
Investment in intangible assets		(200	)		(208	)

Net cash (used in) provided by investing activities		(7,211	)		10,629

Cash flows from financing activities:
Repayment of borrowings		(480	)		(480	)
Proceeds from the issuance of stock , net of issuance costs		12,300
Proceeds from issuance of stock pursuant to stock option and purchase plans		247			986

Net cash provided by financing activities		12,067			506

Net decrease in cash and cash equivalents		(7,781	)		(2,810	)
Cash and cash equivalents, beginning of period		31,728			25,453

Cash and cash equivalents, end of period	$	23,947		$	22,643

See notes to unaudited condensed consolidated financial statements.

	Three Months Ended March 31,
*In thousands*	2007		2006

Compensation cost from:
Stock options	$	886	$	984
Stock and stock units		388		184
Purchases of common stock at a discount		13		8
	$	1,287	$	1,176

The Company made awards of stock options, common stock and stock units to employees and directors, and sold common stock to employees at a discount pursuant to the Company’s employee stock purchase plan, during the three-month periods ended March 31, 2007 and 2006 as follows:

PART I.	FINANCIAL INFORMATION	1

ITEM 1.	UNAUDITED FINANCIAL STATEMENTS	1

	Condensed Consolidated Balance Sheets - March 31, 2007 and December 31, 2006	1

	Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2007 and 2006	2

	Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2007 and 2006	3

	Notes to Unaudited Condensed Consolidated Financial Statements	4

ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	10

ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	20

ITEM 4.	CONTROLS AND PROCEDURES	20

PART II.	OTHER INFORMATION	22

ITEM 1.	LEGAL PROCEEDINGS	22

ITEM 6.	EXHIBITS	25

	SIGNATURES	26

	EXHIBIT INDEX	27