a5825792.htm

ARIAD PHARMACEUTICALS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
In thousands, except share and per share data	September 30, 2008			December 31, 2007
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	35,134		$	67,864
Marketable securities		17,575			17,334
Amounts due under collaboration agreement		8,447			4,588
Inventory and other current assets		2,834			2,374

Total current assets		63,990			92,160

Property and equipment:
Leasehold improvements		21,497			18,400
Equipment and furniture		14,513			11,749

Total		36,010			30,149
Less accumulated depreciation and amortization		(26,685	)		(25,134	)

Property and equipment, net		9,325			5,015

Intangible and other assets, net		9,899			3,930

Total assets	$	83,214		$	101,105

LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current liabilities:
Current portion of long-term debt	$	1,400		$	3,815
Accounts payable		4,452			5,049
Accrued compensation and benefits		1,098			523
Accrued product development expenses		9,747			7,287
Other accrued expenses		5,253			4,331
Current portion of deferred executive compensation		831			745
Current portion of deferred revenue		6,869			5,819
Current portion of capital lease payable		70			---
Accrued merger consideration		5,912			---

Total current liabilities		35,632			27,569

Long-term debt		11,900			---

Capital lease payable		87			---

Deferred revenue		91,996			80,026

Deferred executive compensation		1,177			1,410

Stockholders’ equity (deficit):
Common stock, $.001 par value; authorized, 145,000,000 shares; issued and outstanding, 69,537,867 shares in 2008 and 69,241,490 shares in 2007		70			69
Additional paid-in capital		364,161			359,576
Accumulated other comprehensive income		10			3
Accumulated deficit		(421,819	)		(367,548	)

Total stockholders’ deficit		(57,578	)		(7,900	)

Total liabilities and stockholders’ equity (deficit)	$	83,214		$	101,105

ARIAD PHARMACEUTICALS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
	Nine Months Ended September 30,
In thousands	2008			2007

Cash flows from operating activities:
Net loss	$	(54,270	)	$	(42,806	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		2,043			1,765
Accretion of discount on marketable securities		(342	)		(609	)
Deferred executive compensation expense		515			745
Stock-based compensation		4,256			4,487
Increase (decrease) from:
Inventory and other current assets		(460	)		(599	)
Amounts due under collaboration agreement		(3,859	)		(3,421	)
Other assets		13			(4	)
Accounts payable		(597	)		(1,900	)
Accrued compensation and benefits		575			344
Accrued product development expenses		2,460			(133	)
Other accrued expenses		922			3,220
Deferred revenue		13,020			73,344
Deferred executive compensation paid		(662	)		(508	)

Net cash used in operating activities		(36,386	)		33,925

Cash flows from investing activities:
Proceeds from maturities of marketable securities		42,599			43,377
Purchases of marketable securities		(42,491	)		(51,916	)
Investment in property and equipment		(5,666	)		(725	)
Investment in intangible assets		(562	)		(371	)

Net cash used in investing activities		(6,120	)		(9,635	)

Cash flows from financing activities:
Proceeds from long-term borrowings		10,505			---
Repayment of borrowings		(1,020	)		(1,440	)
Principal payments under capital lease obligations		(38	)		---
Proceeds from the issuance of stock, net of issuance costs		---			12,300
Proceeds from issuance of stock pursuant to stock option and purchase plans		329			1,997

Net cash provided by financing activities		9,776			12,857

Net decrease in cash and cash equivalents		(32,730	)		37,147
Cash and cash equivalents, beginning of period		67,864			31,728

Cash and cash equivalents, end of period	$	35,134		$	68,875

Supplemental disclosure of non-cash activities:
Purchase of minority interest in subsidiary for common stock (Note 7)	$	5,912

ARIAD PHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

1. Management Statement

The accompanying unaudited condensed consolidated financial statements include the accounts of ARIAD Pharmaceuticals, Inc. (“ARIAD”) and its subsidiaries (collectively, the “Company”). ARIAD Gene Therapeutics, Inc., an 80%-owned subsidiary of ARIAD, was merged with and into ARIAD on September 12, 2008 (see Note 7). In the opinion of the Company’s management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting of items of a normal and recurring nature) necessary to present fairly the financial position as of September 30, 2008, the results of operations for the three-month and nine-month periods ended September 30, 2008 and 2007 and cash flows for the nine-month periods ended September 30, 2008 and 2007. The results of operations for the three-month and nine-month periods ended September 30, 2008 are not necessarily indicative of the results to be expected for the full year. These financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2007, which includes consolidated financial statements and notes thereto for the years ended December 31, 2007, 2006 and 2005.

At September 30, 2008, the Company has cash, cash equivalents and marketable securities totaling $52.7 million. The Company believes that the combination of its cash, cash equivalents and marketable securities, together with funding available pursuant to its collaboration with Merck & Co., Inc. (Note 2) provide sufficient resources for the Company to satisfy its operating and capital requirements through mid third quarter of 2009. See further discussion in Management’s Discussion and Analysis of Financial Condition and Results of Operations under the heading “Liquidity”.

2. Collaboration Agreement with Merck & Co., Inc.

In July 2007, the Company entered into a collaboration agreement with Merck & Co., Inc. (“Merck”) for the joint global development and commercialization of deforolimus, the Company’s lead product candidate, for use in cancer (the “Collaboration Agreement”).

Under the terms of the Collaboration Agreement, Merck and the Company will conduct a broad-based development program in multiple types of cancer, pursuant to a global development plan agreed upon by the parties. Each party will fund 50% of the global development costs, except that Merck will fund 100% of any cost of development that is specific to development or commercialization of deforolimus outside the United States. The Collaboration Agreement provides that, in certain circumstances, either party may opt out of conducting and funding certain late-stage clinical trials, which would result in changes in development and commercialization responsibilities and compensation arrangements. The Company is responsible for supplying the active pharmaceutical ingredient used in the product and Merck is responsible for the formulation of the finished product, all under a separate supply agreement between the parties entered into in May 2008.

The Collaboration Agreement provides that, in the United States, the Company and Merck will co-promote the product, the Company will distribute and sell the product for all cancer indications and record all sales, and each party will receive 50% of the profit from such sales. Outside the United States, Merck will distribute, sell and promote the product and book all sales, and Merck will pay the Company tiered double-digit royalties on such sales. Royalties are payable by Merck, on a country by country basis, until the later of (i) the expiration of the last valid claim of any patent rights owned by either the Company or Merck that cover the product, (ii) a specified number of years from first commercial sale, or (iii) the last date upon which the Company supplies the active pharmaceutical ingredient to Merck under the supply agreement, subject to partial reduction in certain circumstances.

Under the terms of the Collaboration Agreement, Merck paid the Company an initial up-front payment of $75 million in July 2007, and has agreed to pay up to $452 million in milestone payments of which $28.5 million has been paid through September 30, 2008, based on the successful development of deforolimus in multiple cancer indications, and up to $200 million based on achievement of specified product sales thresholds. Merck has also agreed to provide the Company with up to $200 million in interest-bearing, repayable, development cost advances to cover a portion of the Company’s share of global development costs, after the Company has paid $150 million in global development costs. All amounts to be paid to the Company by Merck, with the exception of any development cost advances, are non-refundable.

Through September 30, 2008, ARIAD has received the following up-front and milestone payments under the Collaboration Agreement. These up-front and milestone payments have been deferred and are being recognized as revenue on a straight-line basis through 2023, the estimated expiration of the patents related to the underlying technology.

In March 2008, the Company amended its term loan with the bank, increasing the balance due to $14.0 million, extending the maturity date from March 2008 to March 2013 and providing for repayment of the loan in quarterly payments of principal, increasing from 2.5% of the total loan amount in the second quarter of 2008 to 8.75% of the total loan amount in the first quarter of 2013, together with interest. The loan as amended bears interest at LIBOR plus 1.25% to 2.25%, depending on the percentage of the Company’s liquid assets on deposit with or invested through the bank, or at the prime rate, as provided in the amendment. The loan is secured by a lien on all assets of the Company excluding intellectual property, which the Company has agreed not to pledge to any other party. The loan, as amended, also requires the Company to maintain a minimum of $15.0 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 annual aggregate future principal payments of the above loan, as amended, are $350,000 for the remainder of 2008, $1.4 million in 2009, $1.9 million in 2010, $3.7 million in 2011, $4.7 million in 2012 and $1.2 million in 2013.

4. Stock-Based Compensation

The Company awards stock options and other equity-based instruments to its employees, directors and consultants and provides employees the right to purchase common stock (collectively “share-based payments”) pursuant to stockholder approved plans. The Company’s statement of operations included total compensation cost from share-based payments for the three-month and nine-month periods ended September 30, 2008 and 2007 as follows:

	Three Months Ended September 30,				Nine Months Ended September 30,
In thousands	2008		2007		2008		2007

Compensation cost from:
Stock options	$	1,067	$	1,170	$	3,552	$	3,862
Stock and stock units		292		91		651		571
Purchases of common stock at a discount		17		18		53		54
	$	1,376	$	1,279	$	4,256	$	4,487

Effective in October 2005, the Company adopted a new deferred executive compensation plan that defers the payment of annual bonus awards to future periods as specified in each award. The Company accrues a liability based on the awards ratably over the vesting period. The recorded balances of such awards are increased or decreased based on the actual total return and quoted market prices of specified mutual funds. In April 2008 and 2007, the Company made awards in the aggregate amount of $908,000 and $1,403,000 to thirteen and to eleven officers, respectively. Total expense related to these plans amounted to $515,000 and $745,000 for the nine-month periods ended September 30, 2008 and 2007, respectively.

6. Net Loss Per Share

Net loss per share amounts have been computed based on the weighted-average number of common shares outstanding during each period. Because of the net loss reported in each period, diluted and basic net loss per share amounts are the same. For the periods ended September 30, 2008 and 2007, options to purchase 7,740,087 and 7,416,794 shares of common stock, respectively, were not included in the computation of net loss per share, because the effect would be anti-dilutive.

7. Merger of AGTI into ARIAD Pharmaceuticals, Inc.

On September 11, 2008, ARIAD and ARIAD Gene Therapeutics, Inc. (“AGTI”) entered into a merger agreement, pursuant to which AGTI was merged with and into ARIAD on September 12, 2008 with ARIAD as the surviving company. Prior to the merger, AGTI was an 80 percent-owned subsidiary of ARIAD. The minority stockholders of AGTI included Harvey J. Berger, M.D., the Company’s Chairman and Chief Executive Officer, Jay R. LaMarche, the Company’s former Chief Financial Officer and a member of the Board of Directors of the Company, several of the Company’s current and former officers and scientific advisors, Harvard University, and Stanford University. ARIAD effectuated the merger to eliminate conflicts of interest between ARIAD and AGTI, to ensure that ARIAD will receive benefits from the successful commercialization of its products proportionate to its investment and to create additional value for its stockholders.

Under the terms of the merger agreement, each outstanding share of AGTI common stock owned by AGTI’s minority stockholders, except for shares held by AGTI stockholders who properly demanded appraisal rights, was converted into the right to receive two shares of ARIAD common stock. The shares of ARIAD common stock issued in the merger were not registered under the Securities Act of 1933, as amended, and were issued in reliance on an exemption from registration related to sales by an issuer not involving a public offering. Not taking into account the exercise of any appraisal rights, (i) a total of 2,252,128 shares of ARIAD common stock, representing approximately 3.1 percent of the outstanding common stock of ARIAD following the transaction, would have been issued, and (ii) the total value of the acquisition of the minority interest of AGTI was approximately $5.9 million, based on the closing market price of ARIAD common stock on September 12, 2008 discounted to reflect the fact that the ARIAD shares issued were not registered with the U.S. Securities and Exchange Commission.

The minority stockholders of AGTI had the right until October 12, 2008 to demand appraisal of their shares and seek a judicial determination of the fair value of such shares in accordance with the provisions of the Delaware General Corporation Law. Stockholders owning a total of 226,426 shares of AGTI common stock have notified ARIAD of their intention to demand appraisal of their shares. Under such provisions, a dissenting stockholder must file a petition with the Delaware Court of Chancery within 120 days of the merger date or else the appraisal rights of all dissenting stockholder will terminate. If a petition for an appraisal is filed in a timely manner, at a hearing on the petition, the Delaware Court of Chancery will determine which AGTI stockholders have complied with the Delaware statute and who have become entitled to appraisal rights; then it will appraise the shares of AGTI common stock owned by those AGTI stockholders. The court will determine the fair value of those shares, taking into account all relevant factors, exclusive of any element of value arising from the accomplishment or expectation of the merger, together with interest, to be paid, if any, upon the fair value. Unless the court, in its sole discretion, determines otherwise, interest from the effective date of the merger through the date of payment of the judgment shall be compounded quarterly and shall accrue at 5% over the Federal Reserve discount rate (including any surcharge) as established from time to time during the period between the effective date of the merger and the date of payment of the judgment. Any additional consideration provided upon judgment or settlement will be recorded as an adjustment to the intangible asset.

Upon expiration of the appraisal period in October 2008, an aggregate of 1,799,276 shares of ARIAD common stock were issued to former AGTI stockholders who had not exercised appraisal rights. The shares were not registered under the Securities Act of 1933, as amended, and will become eligible for sale under Rule 144 in six months.

As of September 30, 2008, the cost of the acquisition of the 20-percent minority interest of $5.9 million was accounted for using the purchase method of accounting. The cost has been allocated to intangible assets and will be amortized over approximately fifteen years, the remaining life of the patents related to AGTI’s technology. The value of ARIAD’s obligation to the minority stockholders of AGTI has been recorded as a liability until shares of ARIAD common stock are issued to former AGTI stockholders or the outcome of the process to determine the fair value of AGTI shares owned by dissenting stockholders is finalized.

The following table presents pro forma results of operations data as if the acquisition of the 20-percent minority interest of AGTI had occurred at the beginning of the periods presented.

	Three Months Ended September 30, 2008						Nine Months Ended September 30, 2008
In thousands, except per share data	Historical			Pro Forma			Historical			Pro Forma

Revenue	$	1,536		$	1,536		$	4,481		$	4,481
Operating expenses	$	21,620		$	21,716		$	59,498		$	59,786
Net loss	$	(19,993	)	$	(20,089	)	$	(54,270	)	$	(54,558	)

Net loss per share	$	(0.29	)	$	(0.28	)	$	(0.78	)	$	(0.76	)

8. Litigation

NF-κB Patent Infringement Litigation and Reexamination

Lilly Litigation

As disclosed in the Company’s Form 10-K as of December 31, 2007 and Form 10-Q as of March 31, 2008, in 2002, the Company, together with Massachusetts Institute of Technology (“MIT”), The Whitehead Institute for Biomedical Research (“Whitehead”) and Harvard University (“Harvard”) (collectively, the Plaintiffs) filed a lawsuit in the United States District Court for the District of Massachusetts (the “U.S. District Court“) against Eli Lilly and Company (“Lilly”) alleging infringement of four claims (the “NF-κB ‘516 Claims”) of the Plaintiffs’ U.S. Patent No. 6,410,516 (the “‘516 Patent”), covering methods of treating human disease by regulating NF-κB cell-signaling activity through sales of Lilly’s drugs, Evista® and Xigris®. In 2006, a jury rendered a verdict in favor of the Plaintiffs and awarded damages of $65.2 million to the Plaintiffs, plus further damages equal to 2.3% of U.S. sales of Evista and Xigris from February 28, 2006 through the year 2019, when the patent expires. Lilly filed a notice of appeal on March 10, 2008 of the jury’s verdict and other rulings by the U.S. District Court with the U.S. Court of Appeals for the Federal Circuit (the “CAFC”).

Lilly filed its opening brief with the CAFC on June 18, 2008. On June 27, 2008, Wyeth Corp. (“Wyeth”) filed in the CAFC an amicus curiae or “friends of the court” brief in support of Lilly’s arguments, along with a motion seeking the CAFC’s permission to file its brief, which was denied by the CAFC on August 18, 2008. Plaintiff’s opposition to Lilly’s brief was filed on September 26, 2008, and Lilly’s reply brief is due on November 11, 2008, after which the CAFC will schedule oral argument on the issues presented for appeal.

Amgen Litigation

Also as disclosed in the Company’s Form 10-K as of December 31, 2007 and Form 10-Q as of March 31, 2008, in April 2006, Amgen Inc. and certain affiliated entities (“Amgen“) filed a lawsuit against the Company in the U.S. District Court for the District of Delaware (the “Delaware Court“) seeking a declaratory judgment that each of the claims contained in the ‘516 Patent is 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®. In April 2007, the Company, together with MIT, Whitehead, and Harvard, filed a counterclaim against Amgen, and joining Wyeth Corp. alleged infringement of the ‘516 Patent based on activities related to Enbrel and Kineret, as well as the Company’s answer to Amgen’s complaint, counter-claim and demand for jury trial. In December 2007, the Company agreed to dismiss its claims against Wyeth pending final resolution of the litigation against Amgen.

The claim construction hearing was held and arguments on the pending dispositive motions were heard on June 19, 2008. On September 19, 2008, the Delaware Court issued a series of rulings that, among other things: (i) granted Amgen’s motion for summary judgment of non-infringement of the asserted seven (7) claims of the ‘516 Patent based on activities related to Enbrel, (ii) granted the Company’s motion seeking to dismiss for lack of jurisdiction under the Declaratory Judgment Act Amgen’s challenges to the validity of claims of the ‘516 Patent that are not being asserted against Enbrel, and (iii) granted in part and denied in part the Company’s motion for partial summary judgment with respect to Amgen’s inequitable conduct defense. With respect to its summary judgment ruling of non-infringement, the Delaware Court found that the administration of Enbrel falls outside the scope of the asserted claims based on its interpretation of these claims to exclude extracellular methods of reducing NF-κB activity.

On October 3, 2008, the Delaware Court granted the Company’s motion to permit an immediate appeal to the CAFC of its claim construction order and summary judgment ruling of non-infringement by Enbrel of the asserted seven (7) claims of the ‘516 Patent. The Delaware Court also cancelled the trial scheduled to commence on November 3, 2008 with respect to Amgen’s challenges to the validity and enforceability of the ‘516 Patent Claims and administratively closed the case. The Company filed its notice of appeal on October 6, 2008 in order to seek reinterpretation of the asserted ‘516 Patent claims by the CAFC so that the Company’s infringement case against Amgen may proceed in the Delaware Court. Amgen’s challenges to the validity and enforceability of the ‘516 Patent Claims would likely be considered by the Delaware Court at that time. The Company’s opening brief is due to be filed in the CAFC by December 16, 2008. Amgen’s opposition to the Company’s brief is be due on January 26, 2009, and the Company’s reply brief is due on February 9, 2009, after which the CAFC will schedule oral argument on the issues presented for appeal.

PTO Reexamination

On April 4, 2005, Lilly filed a request in the 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.

On October 16, 2008, the PTO issued a final office action confirming as patentable 53 claims of the ‘516 patent, while rejecting 45 of the remaining claims, including claims relating to the Lilly litigation and claims relating to the Amgen litigation, and also rejecting the eight new claims filed by the Company on October 22, 2007. The Company’s response to the final office action is due on December 16, 2008.

Timing and Outcome of Litigation and Reexamination Proceedings

The timing and ultimate outcome of the Lilly and Amgen litigations and the reexamination proceedings in the PTO regarding the ‘516 Patent cannot be determined at this time. Consequently, no determination can be made with respect to allowance of the claims of the ‘516 Patent pending before the PTO and/or asserted against Lilly and Amgen, nor can any final determination be made with respect to the validity or infringement of the claims asserted in the Lilly and the Amgen litigations, nor can the Company predict whether the damages awarded by the jury in the U.S. District Court in the Lilly litigation in 2006 will be upheld, eliminated or limited. Although the Company has prevailed in both the jury and bench trials in the Lilly litigation, along with receiving a favorable ruling on Lilly’s post-trial renewed motion for judgment as a matter of law, the CAFC may reverse one or more of these rulings and/or remand one or more issues in the Lilly litigation for retrial in the U.S. District Court. Consequently, the damages the Company was awarded by the jury in the Lilly litigation may be eliminated or limited by adverse findings upon appeal, or in the event that the claims of the ‘516 Patent are invalidated by the PTO. There can be no assurance that the Company will ultimately prevail in its litigations against Lilly and Amgen or that the claims of the ‘516 Patent relevant to these actions will not be finally rejected as a result of the reexamination proceedings in the PTO.

9. Recently Adopted or Issued Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard No. 157 (“SFAS No. 157”), Fair Value Measurements. SFAS No. 157 defines fair value, establishes a framework for measuring fair value in accordance with accounting principles generally accepted in the United States, and expands disclosures about fair value measurements. The Company has adopted the provisions of SFAS No. 157 as of January 1, 2008, for financial instruments. Although the adoption of SFAS No. 157 did not materially impact its financial condition, results of operations, or cash flow, the Company is now required to provide additional disclosures as part of its financial statements.

SFAS No. 157 establishes a valuation hierarchy for disclosure of the inputs to valuation used to measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument. Level 3 inputs are unobservable inputs based on our own assumptions used to measure assets and liabilities at fair value. A financial asset’s or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement. The Company's marketable securities are classified as available for sale and are stated at fair value based on quoted market prices which are considered Level 1 inputs within the fair value hierarchy.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, which provides companies with the option to measure specified financial instruments and certain other items at fair value. SFAS No. 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. The Company did not elect to apply the fair value method to any of its financial instruments at January 1, 2008.

In June 2007, the Emerging Issues Task Force (“EITF”) issued EITF No. 07-3, Accounting for Nonrefundable Advance Payments for Goods or Services Received for Use in Future Research and Development Activities. EITF No. 07-3 states that nonrefundable advance payments for goods or services that will be used for future research and development activities should be deferred and capitalized and that such amounts should be recognized as an expense as the goods are delivered or the services are performed. EITF No. 07-3 is effective for fiscal years beginning after December 15, 2007. The adoption of EITF No. 07-3 did not have a material impact on the Company’s financial statements.

In December 2007, the EITF issued EITF No. 07-1, Accounting for Collaborative Arrangements. EITF No. 07-1 provides guidance on the determination of a collaborative arrangement, reporting of costs incurred and revenue generated on sales to third parties in the statement of operations, and classification of payments made between participants in a collaborative arrangement in the statement of operations. EITF No. 07-1 is effective for fiscal years beginning after December 15, 2008. The adoption of this EITF is not expected to have a material impact on the Company’s financial statements.

In April 2008, the FASB issued FASB Staff Position (“FSP”) No. FAS 142-3, Determination of the Useful Life of Intangible Assets, which requires companies, in estimating the useful life of a recognized intangible asset, to consider the company’s historical experience in renewing or extending similar arrangements. In the absence of historical experience, the company shall consider assumptions that market participants would use that are consistent with the highest and best use of the asset. FSP No. FAS 142-3 is effective for financial statements issued for fiscal years beginning after December 15, 2008 and interim periods within those fiscal years. The Company does not expect the impact of FSP No. FAS 142-3 to have a material impact on its consolidated financial statements.

ITEM 2. MANAGEMENTS’ DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 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, deforolimus, previously known as AP23573, is being studied in multiple clinical trials in patients with various types of cancers. In July 2007, we entered into a global collaboration with Merck & Co., Inc., or Merck, to jointly develop and commercialize deforolimus for use in cancer. We initiated patient enrollment in our initial Phase 3 clinical trial of deforolimus in patients with metastatic sarcoma in the third quarter of 2007. In addition, in 2008 we or Merck initiated patient enrollment in Phase 2 clinical trials in patients with metastatic breast cancer, advanced endometrial cancer and advanced prostate cancer.

Our collaboration with Merck for the global development and commercialization of deforolimus anticipates that we together with Merck will conduct a broad-based development program in multiple indications. The collaboration agreement provides that each party will fund 50% of global development costs, except for certain specific costs to be funded 100% by Merck. The collaboration agreement establishes responsibilities for supply of the product for development and commercial purposes, promotion, distribution and sales of the product, governance of the collaboration, termination provisions and other matters.

In addition to cost-sharing provisions, the collaboration agreement provides for an up-front payment by Merck of $75 million, which was paid to us in July 2007, up to $452 million in milestone payments based on the successful development of deforolimus in multiple cancer indications, of which $28.5 million has been paid to us through the third quarter of 2008, and up to $200 million in milestone payments based on achievement of specified product sales thresholds. The upfront payment and milestone payments, when earned by us and paid by Merck, are non-refundable. Merck has also agreed to provide us with up to $200 million in interest-bearing, repayable, development cost advances to cover a portion of our share of global development costs, after we have paid $150 million in global development costs. The collaboration agreement provides that each party will receive 50% of the profit from the sales of deforolimus in the United States, and Merck will pay us tiered double-digit royalties on sales of deforolimus outside the United States.

Our second product candidate, AP24534, has entered clinical development. We filed an Investigational New Drug application, or IND, for this product candidate with the U.S. Food and Drug Administration, or FDA, in the fourth quarter of 2007 and initiated a Phase 1 clinical trial in patients with hematologic cancers in the second quarter of 2008.

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 United States and one in Europe, including a pioneering U.S. patent covering methods of treating human disease by regulating NF-kB 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. 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. As a result of our collaboration with Merck for the development and commercialization of deforolimus, we expect that our license and collaboration revenue will increase in future periods. However, 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, pre-commercial activities, personnel and our intellectual property. We expect such costs and operating losses will be offset in part by development cost-sharing provisions and license revenue from our collaboration with Merck for development and commercialization of deforolimus. We expect that losses will fluctuate from quarter to quarter and that these fluctuations may be substantial.

On September 11, 2008, we entered into a merger agreement with our eighty-percent owned subsidiary, ARIAD Gene Therapeutics, Inc., or AGTI, pursuant to which AGTI was merged with and into ARIAD on September 12, 2008, as described in more detail in Note 7 to the accompanying financial statements.

As of September 30, 2008, we had an accumulated deficit of $421.8 million and cash, cash equivalents and marketable securities of $52.7 million and working capital of $28.4 million.

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. We also incur costs related to planning for potential regulatory approval and commercial launch of products, including market research and assessment. 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, including the NF-kB patent litigation.

Historically, we have relied primarily on the capital markets as our source of funding. We may also obtain funding from collaborations with pharmaceutical, biotechnology and/or medical device companies for development and commercialization of our product candidates, such as our collaboration with Merck for the global development and commercialization of deforolimus. These collaborations can take the form of licensing arrangements, co-development or joint venture arrangements or other structures. In addition, we utilize long-term debt to supplement our funding, particularly as a means of funding investment in property and equipment and infrastructure needs. 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 revenue recognition, the carrying value of intangible assets, deferred compensation benefits for executives, and stock-based compensation.

For the nine-month period ended September 30, 2008, we reported license and collaboration revenue of $4.5 million. License and collaboration revenue is recorded based on up-front payments, periodic license payments and milestone payments received or deemed probable of receipt, spread over the estimated performance period of the license or collaboration agreement. Regarding our collaboration with Merck for the development and commercialization of deforolimus, as of September 30, 2008, we have received an up-front payment of $75 million and we have received and/or earned milestone payments totaling $31.0 million. We are recognizing revenues related to such payments on a straight-line basis through 2023, the estimated patent life of the underlying technology. Changes in development plans could impact the probability of receipt of future milestone payments on which revenue recognition is based. In addition, changes in estimated performance periods, including changes in patent lives of underlying technology, could impact the rate of revenue recognition in any period. Such changes in revenue could have a material impact on our statement of operations.

At September 30, 2008, we reported $9.9 million of intangible assets, consisting of the recorded value of the technology associated with the Company’s acquisition in September 2008 of the 20-percent minority interest of ARIAD Gene Therapeutics, Inc. that it did not previously own, as well as 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 technology, 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 September 30, 2008 of intangible assets related to our NF-κB technology is $386,000. If the patentability of our NF-κB patents, one of which is currently the subject of litigation and reexamination 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 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 September 30, 2008, we would have recognized an additional $104,000 in compensation expense in the nine-month period ended September 30, 2008.

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 during the nine-month period ended September 30, 2008 were 10% higher or lower than used in the valuation of such stock options, our valuation of, and total stock-based compensation expense to be recognized for, such awards would have increased or decreased by up to $453,000, $283,000, or $168,000 respectively.

Results of Operations

For the three months ended September 30, 2008 and 2007

Revenue

We recognized license and collaboration revenue of $1.5 million in the three-month period ended September 30, 2008, compared to $1.6 million in the corresponding period in 2007. License and collaboration revenue consists primarily of revenue recognized from the Merck collaboration of $1.5 million, based on the non-refundable up-front and milestone payments totaling $103.5 million received from Merck through September 30, 2008, in accordance with our revenue recognition policy.

Operating Expenses

Research and Development Expenses

Research and development expenses increased by $5.1 million, or 62%, to $13.4 million in the three-month period ended September 30, 2008, compared to $8.2 million in the corresponding period in 2007, as described in further detail below.

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 and supporting non-clinical studies 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 product candidates, to conduct and manage clinical trials and similar costs related to our clinical and preclinical studies and include our share of the external and internal costs of Merck related to the development of deforolimus. These costs are accumulated and tracked by product candidate. All other R&D expenses consist of our costs to compensate personnel, to purchase lab supplies and services, to maintain our facility, equipment and overhead and similar costs of our R&D efforts and are net of Merck’s share of our internal costs related to the development of deforolimus. These costs apply to work on our clinical and preclinical candidates as well as our discovery research efforts. These costs have not been 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.

Our clinical programs consist of deforolimus, our lead product candidate, and AP24534, our kinase inhibitor program for which we filed an IND in late 2007. Commencing in the third quarter of 2007, the direct external expenses for deforolimus reflect our share of such expenses pursuant to the cost-sharing arrangements of our collaboration with Merck. Direct external expenses for deforolimus were $5.3 million in the three-month period ended September 30, 2008, an increase of $3.6 million, as compared to the corresponding period in 2007. This increase is due primarily to increases in clinical trial costs of $2.5 million, contract manufacturing costs of $361,000 and costs of non-clinical studies of $946,000 in the three-month period ended September 30, 2008 as compared to the corresponding period in 2007, offset in part by an increase in Merck’s share of such expenses in the third quarter of 2008 of $1.9 million. In addition, costs for Merck’s services provided to the collaboration increased by $1.4 million in the three-month period ended September 30, 2008, as compared to the corresponding period in 2007. Clinical trial costs and manufacturing costs increased due to increasing enrollment in our Phase 3 clinical trial of deforolimus in patients with metastatic sarcomas and the initiation of enrollment in the quarter ended September 30, 2008 in Phase 2 clinical trials of deforolimus in patients with breast cancer and endometrial cancer. Costs of non-clinical studies increased due to the initiation and conduct of toxicology studies of deforolimus required to support regulatory filings with the FDA. Through September 30, 2008, we have incurred a total of approximately $84.1 million in direct external expenses for deforolimus from the date it became a clinical program, net of Merck’s share of such expenses. We expect that our direct external costs for deforolimus, net of Merck’s share of such costs, will increase in the fourth quarter of 2008 as we continue enrollment of patients in our on-going clinical trials for this product candidate, initiate enrollment in additional clinical trials and expand other clinical and non-clinical development activities with Merck.

Direct external expenses for our second clinical program, AP24534, were $1.0 million for the three-month period ended September 30, 2008 which consisted primarily of clinical costs of $406,000, contract manufacturing costs of $302,000 and costs of non-clinical studies of $251,000 as we continued enrollment in our first Phase 1 clinical trial of this product candidate. We expect that our direct external costs for AP24534 will increase in the fourth quarter of 2008 as we continue to enroll patients in this clinical trial and continue development of this product candidate.

We incurred no direct external expenses for preclinical programs in the three-month period ended September 30, 2008 as, at the current time, no R&D programs are designated as preclinical programs. All programs other than clinical programs are designated as discovery research and are included in “all other R&D expenses” in the above table. Direct external expenses for preclinical programs for the period ended September 30, 2007 relate primarily to costs for toxicology and contract manufacturing studies for AP24534 in support of the filing of the IND in late 2007.

All other R&D expenses increased by $1.0 million in the three-month period ended September 30, 2008 as compared to the corresponding period in 2007. This increase is due to an increase in personnel expenses of $1.0 million related primarily to the hiring of additional R&D personnel and related expenses, an increase in overhead expenses of $403,000 due primarily to the expiration of a sub-lease agreement for a portion of our office and laboratory facility in July 2007 and an increase in professional fees of $350,000 related to support of our development activities. Merck’s allocated share of such expenses under the terms of the collaboration agreement was $2.1 million in the three-month period ended September 30, 2008 as compared to $975,000 in the corresponding period in 2007. We expect that all other R&D expenses may increase slightly in the fourth quarter of 2008 to support our R&D 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, 2007, 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 increased by $3.2 million, or 65%, to $8.3 million in the three-month period ended September 30, 2008, compared to $5.0 million in the corresponding period in 2007. The increase in expenses was due primarily to an increase in personnel expenses of $755,000 to $2.1 million in the three-month period ended September 30, 2008, compared to $1.3 million in the corresponding period in 2007 resulting from the hiring of additional general and administrative personnel and related expenses, and an increase in professional services of $2.1 million. The increase in professional services was related to an increase in legal fees associated with our patent litigation and an increase in our expenses related to commercial operations initiatives. We expect that our general and administrative expenses will decrease slightly in the fourth quarter of 2008 reflecting a decrease in activities related to our patent litigation.

We expect that our operating expenses in total, net of Merck’s share of development costs of deforolimus, will increase slightly in the fourth quarter of 2008 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, among other things, the progress of our product development programs, including the planned increase in clinical trials and other studies related to deforolimus pursuant to our collaboration with Merck, the enrollment of patients in, and initiation of additional clinical trials and the required manufacturing for AP24534, and the status of our patent infringement litigation with Lilly and Amgen.

Interest Income/Expense

Interest income decreased to $238,000 in the three-month period ended September 30, 2008 from $878,000 in the corresponding period in 2007, as a result of lower interest yields from our investments and a lower average balance of funds invested in 2008.

Interest expense increased to $147,000 in the three-month period ended September 30, 2008 from $82,000 in the corresponding period in 2007, as a result of higher average loan balances in 2008 offset in part by lower interest rates on our long-term debt.

Operating Results

We reported a loss from operations of $20.1 million in the three-month period ended September 30, 2008 compared to a loss from operations of $11.6 million in the corresponding period in 2007, an increase of $8.4 million, or 72%. We expect that our loss from operations will increase slightly in the fourth quarter of 2008 due to the various factors discussed above under “Revenue” and “Operating Expenses.” Losses in future periods may fluctuate depending on the progress of our product development programs and the status of our patent infringement litigation. The extent of operating losses will also depend on the sufficiency of funds on hand or available from time to time, which will influence the amount we will spend on R&D and the development timelines for our product candidates.

We reported a net loss of $20.0 million in the three-month period ended September 30, 2008, compared to a net loss of $10.9 million in the corresponding period in 2007, an increase in net loss of $9.1 million or 84%, and a net loss per share of $0.29 and $0.16, respectively.

Results of Operations

For the nine months ended September 30, 2008 and 2007

Revenue

We recognized license and collaboration revenue of $4.5 million in the nine-month period ended September 30, 2008, compared to $2.0 million in the corresponding period in 2007. The increase in license and collaboration revenue was due primarily to an increase in the revenue recognized from the Merck collaboration of $2.9 million, based on the non-refundable up-front and milestone payments totaling $103.5 million received from Merck through September 30, 2008, in accordance with our revenue recognition policy.

Operating Expenses

Research and Development Expenses

Research and development expenses increased by $6.3 million, or 21%, to $36.1 million in the nine-month period ended September 30, 2008, compared to $29.8 million in the corresponding period in 2007.

Our R&D expenses for the nine-month period ended September 30, 2008, as compared to the corresponding period in 2007, were as follows:

Direct external expenses for deforolimus were $13.4 million in the nine-month period ended September 30, 2008, an increase of $5.9 million, as compared to the corresponding period in 2007. This increase is due to an increase in clinical trial costs of $6.1 million, costs of non-clinical studies of $2.1 million and manufacturing costs of $1.5 million in the nine-month period ended September 30, 2008, as compared to the corresponding period in 2007, offset in part by an increase in Merck’s share of expenses of $8.0 million for the nine-month period ended September 30, 2008. In addition, costs for Merck’s services provided to the collaboration increased by $3.4 million in the nine-month period ended September 30, 2008, as compared to the corresponding period in 2007. Clinical trial costs and contract manufacturing costs increased due to increasing enrollment in our Phase 3 clinical trial of deforolimus in patients with metastatic sarcomas and initiation of enrollment in 2008 in Phase 2 clinical trials of deforolimus in patients with breast cancer and endometrial cancer. Costs of non-clinical studies increased due to the initiation and conduct of toxicology studies of deforolimus required to support regulatory filings with the FDA.

Direct external expenses for our second clinical program, AP24534, were $2.7 million for the nine-month period ended September 30, 2008, which consisted primarily of clinical trial costs of $760,000 and contract manufacturing costs of $1.4 million as we initiated enrollment in our first Phase 1 clinical trial of this product candidate.

We incurred no direct external expenses for preclinical programs in the nine-month period ended September 30, 2008 as, at the current time, no R&D programs are designated as preclinical programs. All programs other than clinical programs are designated as discovery research and are included in “all other R&D expenses” in the above table. Direct external expenses for preclinical programs for the period ended September 30, 2007 relate primarily to costs for toxicology and contract manufacturing studies for AP24534 in support of the filing of the IND in late 2007.

All other R&D expenses increased by $1.1 million in the nine-month period ended September 30, 2008 as compared to the corresponding period in 2007. This increase is due primarily to an increase in personnel expenses of $2.7 million related to the hiring of additional R&D personnel and related expenses, and an increase in overhead expenses of $1.6 million due to the expiration of a sub-lease agreement for a portion of our office and laboratory facility in July 2007 and miscellaneous increases in lab supplies and services and professional services. These variances were offset in part by an increase in Merck’s allocated share of such expenses under the terms of the collaboration agreement of $4.7 million in the nine-month period ended September 30, 2008.

General and Administrative Expenses

General and administrative expenses increased by $7.1 million, or 44%, to $23.4 million in the nine-month period ended September 30, 2008, compared to $16.3 million in the corresponding period in 2007. Professional fees increased by $6.7 million to $17.1 million in the nine-month period ended September 30, 2008, compared to $10.4 million in the corresponding period in 2007, due primarily to costs related to corporate and commercial development initiatives that support our expanding product development activities and to our patent litigation, as well as miscellaneous increases in various general and overhead expenses of $646,000.

Interest Income/Expense

Interest income decreased to $1.2 million in the nine-month period ended September 30, 2008 from $1.6 million in the corresponding period in 2007, as a result of lower interest yields from our investments offset in part by a higher average balance of funds invested in 2008.

Interest expense increased to $419,000 in the nine-month period ended September 30, 2008 from $284,000 in the corresponding period in 2007, as a result of higher average loan balances in 2008 offset in part by lower interest rates on our long-term debt.

Operating Results

We reported a loss from operations of $55.0 million in the nine-month period ended September 30, 2008 compared to a loss from operations of $44.1 million in the corresponding period in 2007, an increase of $10.9 million, or 25%.

We reported a net loss of $54.3 million in the nine-month period ended September 30, 2008, compared to a net loss of $42.8 million in the corresponding period in 2007, an increase in net loss of $11.5 million or 27%, and a net loss per share of $0.78 and $0.63, respectively.

Liquidity and Capital Resources

We have financed our operations and investments to date 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. In addition, our collaboration with Merck for the development and commercialization of deforolimus provides for additional funding in the form of up-front and potential milestone payments, as well as the sharing of development costs for deforolimus. Under the collaboration, we also have access to up to $200 million in interest-bearing, repayable development cost advances after we have paid $150 million in global development costs. 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-month and nine-month periods ended September 30, 2008 and 2007, our sources of funds were as follows:

In March, 2008, we amended our existing term loan with a bank. The amendment provided for an increase of $10.5 million in our loan balance to $14.0 million, the extension of the maturity date from March 31, 2008 to March 31, 2013 and changes to the repayment provisions. The amended terms of the loan require us to maintain at least $15.0 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.

We have filed shelf registration statements with the SEC, from time to time, to register shares of our common stock or other securities 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 for the issuance of common stock, preferred stock, various series of debt securities and/or warrants to purchase any of such securities, either individually or in units, with a total value of up to $100 million, from time to time at prices and on terms to be determined at the time of any such offerings. This filing was declared effective on February 6, 2007.

In March 2007, we sold 3,072,393 shares of our common stock to Azimuth Opportunity Ltd. pursuant to an equity financing facility between the parties dated February 14, 2007. 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. The equity financing facility expired on September 1, 2008. As of September 30, 2008, we had $87.5 million of securities available for sale under our shelf registration statement.

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.

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 prosecution and enforcement, including our NF-kB patent litigation and reexamination proceedings, and to invest in our property and equipment as needed for our business. For the three months and nine months ended September 30, 2008 and 2007, our uses of funds were as follows:

Net cash used in (provided by) operating activities is comprised of our net losses, adjusted for non-cash expenses, milestone payments received from Merck and working capital requirements. Adjusted net cash used in operating activities excludes the favorable impact of the up-front payment from Merck of $75 million in the third quarter of 2007 pursuant to our collaboration agreement. As noted above, our net loss for the nine months ended September 30, 2008 increased by $11.5 million, as compared to the corresponding period in 2007, due primarily to increased operating expenses. As a result of milestone payments of $15.0 million received from Merck in 2008 and changes in our working capital requirements, our adjusted net cash used in operations decreased by $4.7 million in the nine-month period ended September 30, 2008 as compared to the corresponding period in 2007.

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 and nine-month periods ended September 30, 2008 and 2007, purchases of marketable securities, proceeds from maturities of marketable securities, and the resulting net amount reinvested or retained as cash for payment of obligations were as follows:

As noted above, we expect that our net loss will increase slightly in the fourth quarter of 2008 due to continued progress in development of our product candidates. However, we expect that we will receive an additional $15 million in milestone payments from Merck in the fourth quarter of 2008 consistent with our global development plan for deforolimus; such milestone payments, if received, will have a favorable impact on our cash used in operations. We expect that our investments in intangible assets, consisting of our intellectual property, and property and equipment will decrease in the fourth quarter of 2008.

Off-Balance Sheet Arrangements

As part of our ongoing business, we do not participate in transactions that generate relationships with unconsolidated entities for financial partnerships, such as entities often referred to as structured finance or special purpose entities which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As of September 30, 2008, we maintained an outstanding letter of credit of $699,000 in accordance with the terms of our long-term lease for our office and laboratory facility.

Long-term debt obligations above include only scheduled principal payments on such debt. Interest on our long-term debt is based on variable interest rates. Assuming a constant interest rate of 5.0%, our average interest rate on our debt at September 30, 2008, over the remaining term of the debt, our interest expense would total approximately $164,000 for the remainder of 2008, $1.6 million in the period 2009 through 2011, and $280,000 in the period 2012 through 2013.

Other long-term obligations are comprised primarily of obligations under 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 September 30, 2008, we had cash, cash equivalents and marketable securities totaling $52.7 million and working capital of $28.4 million, compared to cash, cash equivalents and marketable securities totaling $85.2 million and working capital of $64.6 million at December 31, 2007.

Based on our current levels of spending and taking into account the impact of the Merck collaboration, we believe that our cash, cash equivalents and marketable securities on hand at September 30, 2008 should be sufficient to satisfy our capital and operating requirements through mid third quarter of 2009. There are numerous factors that are likely to affect our spending levels, including the extent of clinical trials and other development activities for deforolimus in collaboration with Merck, the timing and amount of milestone payments to be received from Merck, the rate of enrollment of patients in clinical trials for deforolimus and AP24534, the progress of our discovery research programs, the impact of potential business development activities, and developments in our NF-kB patent litigation and reexamination proceedings, among other factors. These variables could result in higher or lower spending levels which could impact the sufficiency 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 will require substantial additional funding for our R&D programs, including preclinical 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 our securities through public or private offerings as market conditions permit, (2) enter into new long-term debt or other credit agreements, (3) enter into partnerships for our product candidates, and/or (4) license our cell-signaling technologies, including our ARGENT and NF-κB intellectual property portfolios. 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: This Quarterly Report on Form 10-Q, contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements in connection with any discussion of future operations or financial performance 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. Such statements are based on management’s 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 statements. These risks and uncertainties include, but are not limited to, the costs associated with our research, development, manufacturing and other activities, the conduct and results of pre-clinical and clinical studies of our product candidates, difficulties or delays in obtaining regulatory approvals to market products resulting from our development efforts, our reliance on strategic partners and licensees and other key parties for the successful development, manufacturing and commercialization of products, the adequacy of our capital resources and the availability of additional funding, patent protection and third-party intellectual property claims relating to our and any partner's product candidates, the timing, scope, cost and outcome of legal and patent office proceedings concerning our NF-kB patent portfolio, the potential costs and additional consideration that may be payable in any appraisal proceeding instituted in connection with our acquisition of the minority interest of AGTI in September 2008, future capital needs, risks related to key employees, markets, economic conditions, prices, reimbursement rates, competition and other factors 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, 2007, as updated in this Quarterly Report on Form 10-Q and in our other public filings with the U.S. Securities and Exchange Commission. The information contained in this document is believed to be current as of the date of original issue. We do not intend to update any of the forward-looking statements after the date of this document to conform these statements to actual results or to changes in our expectations, except as required by law.

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 September 30, 2008, 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 September 30, 2008, we would have incurred approximately $104,000 of additional compensation expense in the nine-month period ended September 30, 2008.

At September 30, 2008, we had $13.3 million outstanding under a bank term note which bears interest at prime or, alternatively, LIBOR + 1.25% to 2.25%. 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 (40.8 basis points at September 30, 2008), we would incur approximately $51,000 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

The information contained in Note 8 to the Notes to our Unaudited Condensed Consolidated Financial Statements found elsewhere in this Quarterly Report on Form 10-Q is incorporated herein by reference.

ITEM 1A. RISK FACTORS

There have been no material changes to the risk factors included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2007, other than as set forth in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2008 and as set forth below:

The following risk factors are deleted in their entirety from the risk factors set forth in our Annual Report on Form 10-K for the fiscal year ended December 31, 2007:

Because we do not own all of the outstanding stock of our subsidiary, AGTI, we will not realize all of the potential future economic benefit from products developed based on technology licensed to or owned by AGTI.

Our 80%-owned subsidiary, AGTI, holds licenses from Harvard University, Stanford University and other universities relating to the ARGENT cell-signaling regulation technology, and owns the intellectual property on mTOR inhibitors derived from the ARGENT programs, including deforolimus. The two directors of AGTI, Harvey J. Berger, M.D., our Chief Executive Officer, and Jay R. LaMarche, our former Chief Financial Officer, are also members of our Board of Directors. Minority stockholders of AGTI, including Harvard University, Stanford University, Dr. Berger, Mr. LaMarche, several of our scientific advisors, and several other current and former members of our management own 20% of the issued and outstanding common stock of AGTI.

We do not have a license agreement with AGTI that provides us with rights to commercialize product candidates based on the ARGENT cell-signaling regulation technology or mTOR inhibitors derived from AGTI’s programs, solely for our benefit, as opposed to the benefit of AGTI. All of the research and development activities of AGTI, including the development of deforolimus, have been conducted by us on behalf of AGTI pursuant to a research and development agreement. The purpose of the agreement is to allow AGTI to develop products based on its technology, and AGTI owns all improvements to its technology developed by us. The agreement provides that, upon demand by us, AGTI will either advance funds to us or reimburse us, on a cost plus 10% basis, for all funds advanced by us associated with the cost of our research and development activities on its behalf. However, AGTI has no independent funding or capital resources, and we have funded all research and development services on AGTI’s behalf since its inception in 1994. As a result, we have accrued an inter-company receivable totaling approximately $129 million as of December 31, 2007.

The inter-company receivable on our books and records and the related payable on the books of AGTI are eliminated in accordance with generally accepted accounting principles in our consolidated financial statements. We expect our inter-company receivable from AGTI to continue to increase as we seek to further advance the development of deforolimus. In addition, we have spent approximately $6.8 million through December 31, 2007, and expect to spend significant additional amounts, on pre-launch and other commercialization-related activities for deforolimus. The research and development agreement does not provide a mechanism for establishing a marketing plan or undertaking commercial activities on behalf of AGTI or for the reimbursement by AGTI to us of expenditures for such activities. Other than repayment of the amounts advanced by us on a cost plus 10% fee basis, we are not entitled to receive from AGTI any rights or other remuneration under the research and development agreement, and, accordingly, our future economic benefit from the commercialization of such products on behalf of AGTI will only be in the form of dividends or other payments received in respect of our 80% ownership interest in AGTI.

Consequently, as the inter-company receivable has increased to fund the development of deforolimus, in order to maximize the value of ARIAD for our stockholders and to mitigate or eliminate the conflicts of interest which currently exist between ARIAD and AGTI, the independent members of our Board of Directors (all of ARIAD’s Board members other than Dr. Berger and Mr. LaMarche) are currently engaged in evaluating a variety of strategic alternatives with respect to acquiring the 20% minority interest of AGTI that we do not own and have hired independent legal counsel and financial consultants to assist them in their evaluation. Considerations being taken into account by the independent members of the Board in determining whether to acquire the 20% minority interest include the magnitude of our receivable from AGTI, which is expected to continue to increase, the expectation that the perceived value of the 20% minority interest of AGTI will likely increase as the clinical development of deforolimus progresses, the conflicts of interest that exist between ARIAD and AGTI, and the fact that we advance 100% of the research and development costs for deforolimus to AGTI but are only entitled to receive reimbursement of costs plus a 10% fee, together with whatever benefit may be received through our 80% ownership of AGTI. We anticipate that in the context of valuing the 20% minority interest in AGTI for purposes of a possible acquisition of the stock of the minority shareholders, the inter-company receivable from AGTI will be taken into consideration.

If ARIAD’s independent and disinterested directors determine it to be in the best interests of ARIAD’s stockholders to commercialize these product candidates solely for ARIAD’s own benefit, ARIAD may seek to negotiate with AGTI and/or its minority stockholders to obtain a license, on terms to be determined, granting ARIAD the rights to commercialize such product candidates and technologies. If we were to enter into such a license, the future economic benefit to ARIAD from the commercialization of such products, if any, will be diminished by any royalties or other payments paid under a future agreement with AGTI. If ARIAD does not enter into such a license, then the future economic benefit to ARIAD from the commercialization of such products on behalf of AGTI will only be in the form of dividends or other payments received in respect of ARIAD’s 80% ownership interest in AGTI.

Alternatively, if ARIAD’s independent and disinterested directors determine it to be in the best interests of ARIAD’s stockholders, ARIAD may seek to acquire some or all of the interests of the minority stockholders in AGTI for cash, shares of ARIAD’s common stock, or other securities in a merger, exchange offer or other transaction. If ARIAD acquires all of the interests of the minority stockholders in AGTI, then ARIAD will receive all of the future economic benefit from the commercialization of such products on its own behalf to the extent that the securities or other consideration exchanged by ARIAD in the transaction do not entitle the minority stockholders of AGTI to continue to receive payments on a contingent and/or installment basis. If ARIAD acquires these minority interests, we anticipate that this transaction will require the incurrence of significant transaction costs, which are currently unknown, and if the consideration exchanged for these minority interests is in the form of equity of ARIAD, we anticipate that this transaction will result in dilution to ARIAD’s stockholders. On January 13, 2004, ARIAD acquired an additional 351,909 shares of AGTI common stock, representing approximately 6% of AGTI’s outstanding common stock, for a total purchase price of approximately $8.8 million, effected through the reduction of inter-company debt, subject to adjustment in certain circumstances, in order to maintain ARIAD’s 80% interest in AGTI. While such valuation was recommended by the Company and approved based on a good-faith determination made by the independent and disinterested members of ARIAD’s Board of Directors as of that date, the economic value of the minority stockholders’ interests is difficult to quantify in the absence of a public market. If ARIAD acquires all of the interests of the minority stockholders in AGTI, a variety of valuation methodologies may be employed to determine the value per share of AGTI common stock. Factors impacting this valuation would include the progress, likelihood and cost of development and commercialization of deforolimus and other product candidates and technologies, potential future income streams therefrom, availability of funding and other factors. If ARIAD acquires the minority interests for consideration valued in excess of the value implicitly attributed to such AGTI shares by the market, which implicit value is difficult to determine, this could result in a decline in ARIAD’s stock price. If ARIAD chooses to acquire some or all of these minority interests through a merger in which ARIAD does not solicit the consent of all of the minority stockholders of AGTI, ARIAD could become subject to litigation or an appraisal procedure, which would result in additional expense and diversion of management resources.

As noted above, the independent and disinterested members of ARIAD’s Board of Directors have engaged legal counsel and financial consultants to help them evaluate strategic alternatives with respect to acquiring the 20% minority interest of AGTI that ARIAD does not own, and ARIAD’s independent and disinterested directors may engage other advisors to assist them with such evaluation. While this evaluation is currently ongoing, there can be no assurance that ARIAD will, at any time, enter into a transaction with AGTI as a result of this evaluation. If any of these strategic options is pursued as a result of the evaluation by ARIAD’s independent and disinterested directors, there can be no assurance as to the timing of any such transaction, the form of such transaction, the particular transaction terms such as the form, amount or timing of payment of consideration offered or provided by ARIAD to the minority stockholders in AGTI, ARIAD’s ability to effectuate any such transaction, or the consequences of any such proposed or completed transaction to ARIAD or the AGTI minority stockholders.

Because members of ARIAD’s management team and/or Board of Directors beneficially own a material percentage of the capital stock of its subsidiary, AGTI, and ARIAD has agreements with AGTI, there are conflicts of interest present in dealings between ARIAD and AGTI.

Three members of ARIAD’s management team and/or Board of Directors own approximately 5.4% of the outstanding capital stock of AGTI. Harvey J. Berger, M.D., Chairman and Chief Executive Officer, owns 3.2%, John D. Iuliucci, Ph.D., Senior Vice President and Chief Development Officer, owns 0.6% and Jay R. LaMarche, one of ARIAD’s directors and former Chief Financial Officer, owns 1.6%. These same individuals beneficially own an aggregate of approximately 3.1% of ARIAD’s outstanding common stock. David L. Berstein, Esq., our former Chief Patent Counsel and current consultant to ARIAD, owns 0.3% of the outstanding capital stock of AGTI. Dr. Stuart L. Schreiber, a Harvard professor who is one of our scientific founders, owns approximately 3.2% of the outstanding capital stock of AGTI. Dr. David Baltimore, the former president of the California Institute of Technology and one of our consultants and scientific founders, owns approximately 0.6% of the capital stock of AGTI. Additionally, Dr. Berger and Mr. LaMarche are the two ARIAD board members who are also the sole members of the Board of Directors of AGTI. All of the research and development activities of AGTI, including the development of deforolimus, have been conducted by us on behalf of AGTI pursuant to a research and development agreement. As a result, conflicts of interest exist in dealings between AGTI and ARIAD, including those relating to allocation of funds and resources between ARIAD and AGTI and the prioritization of research and development programs. In addition, these conflicts of interest create the risk that any transaction between ARIAD and AGTI will not provide terms as favorable to ARIAD as could be achieved in an arms-length negotiation. Moreover, even if the conflicts of interest do not influence a particular transaction between ARIAD and AGTI, because of the apparent conflicts of interest, the market may be more inclined to perceive the terms of any transaction between ARIAD and AGTI as being unfair to ARIAD.

The following risk factor is added to the risk factors included in our annual Report on Form 10-K for the fiscal year ended December 31, 2007:

In connection with our merger with ARIAD Gene Therapeutics, Inc., or AGTI, certain stockholders of AGTI have notified us of their intent to exercise appraisal rights, which may result in substantial liabilities to us.

On September 11, 2008, our Board of Directors approved and we entered into an agreement and plan of merger, or the Merger Agreement, pursuant to which our 80% owned subsidiary, AGTI, was merged with and into ARIAD effective as of September 12, 2008. Pursuant to the Merger Agreement, each of the 1,126,064 outstanding shares of AGTI common stock owned by AGTI’s minority stockholders was converted into the right to receive two shares of ARIAD common stock. The exchange ratio was determined by the independent members of our Board of Directors based on analyses received from an investment banking firm retained by the independent directors. However, in accordance with the provisions of section 262 of the Delaware General Corporation Law, or DGCL, any of the AGTI minority stockholders who properly demanded appraisal of their AGTI shares are entitled to seek a judicial determination of the fair value of such shares. We have received notification that AGTI stockholders holding an aggregate of 226,426 shares of AGTI common stock intend to exercise their appraisal rights.

To the extent that the AGTI stockholders who have notified us of their intent to exercise appraisal rights satisfy the remaining requirements of the DGCL for assertion of such rights, such holders would be entitled to receive payment equal to the fair value of their AGTI common stock determined in accordance with the DGCL. We cannot assure you how the Delaware court will determine the fair value of the AGTI common stock, and the values determined in an appraisal proceeding could result in substantial liabilities to us. If the fair value of each share of AGTI common stock were determined in such an appraisal proceeding to be equal to two shares of ARIAD common stock, the fair value of all of the AGTI common stock of the AGTI stockholders that have notified us of their intent to exercise appraisal rights would be approximately $1.2 million (based on the closing market price of ARIAD’s common stock on September 12, 2008, the effective date of the merger discounted to reflect the fact that the ARIAD shares in the transaction would not be registered) which amount has been recorded as a liability on our balance sheet as of September 30, 2008. Our actual liability could be more or less than that amount, because the Chancery Court would not be bound by our Board’s determination of the merger consideration.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

On September 11, 2008, our Board of Directors approved and we entered into an agreement and plan of merger, or the Merger Agreement, pursuant to which our 80% owned subsidiary, AGTI, was merged with and into ARIAD effective as of September 12, 2008. Pursuant to the Merger Agreement, each of the 1,126,064 outstanding shares of AGTI common stock owned by AGTI’s minority stockholders was converted into the right to receive two shares of ARIAD common stock. In accordance with the provisions of section 262 of the DGCL, any of the AGTI minority stockholders who properly demanded appraisal of their AGTI shares are entitled to seek a judicial determination of the fair value of such shares. We have received notification that AGTI stockholders holding an aggregate of 226,426 shares of AGTI common stock intend to exercise their appraisal rights. Upon expiration of the appraisal period in October 2008, an aggregate of 1,799,276 shares of ARIAD common stock were issued to former AGTI stockholders who had not exercised appraisal rights. The shares of ARIAD common stock issued in the merger were not registered under the Securities Act of 1933, as amended (the “Securities Act”), and were issued in reliance on the exemption from registration provided by Section 4(2) of the Securities Act (and the regulations promulgated thereunder, including Regulation D) relating to sales by an issuer not involving a public offering.

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

Large accelerated filer	[ ]		Accelerated filer [ X ]
Non-accelerated filer	[ ]	(Do not check if a smaller reporting company)	Smaller reporting company [ ]

ARIAD PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
In thousands, except share and per share data	2008			2007			2008			2007

License and collaboration revenue	$	1,536		$	1,602		$	4,481		$	1,981


Operating expenses:
Research and development		13,365			8,242			36,067			29,805
General and administrative		8,255			5,006			23,431			16,307

Total operating expenses		21,620			13,248			59,498			46,112


Loss from operations		(20,084	)		(11,646	)		(55,017	)		(44,131	)


Other income (expense):
Interest income		238			878			1,166			1,609
Interest expense		(147	)		(82	)		(419	)		(284	)

Total other income, net		91			796			747			1,325


Net loss	$	(19,993	)	$	(10,850	)	$	(54,270	)	$	(42,806	)


Net loss per share	$	(.29	)	$	(.16	)	$	(.78	)	$	(.63	)


Weighted-average number of shares ofcommon stock outstanding		69,429,185			69,160,289			69,369,602			67,870,622

Amount (in millions)	Period Received	Event

$75.0	3Q2007	Up-front payment

13.5	4Q2007	Initiation of Phase 3 clinical trial in patients with metastatic soft-tissue and bone sarcomas

15.0	3Q2008	Initiation of Phase 2 clinical trial in patients with advanced breast cancer
$103.5

Amount (in millions)	Period Received	Event

$2.5	4Q2008	Initiation of Phase 2 clinical trial in patients with advanced endometrial cancer

12.5	Expected 4Q08	Initiation of Phase 2 clinical trial in patients with advanced prostate cancer
$15.0

		Page

PART I.	FINANCIAL INFORMATION	1

ITEM 1.	UNAUDITED FINANCIAL STATEMENTS	1

	Condensed Consolidated Balance Sheets – September 30, 2008 and
	December 31, 2007	1

	Condensed Consolidated Statements of Operations for the Three
	Months and Nine Months Ended September 30, 2008 and 2007	2

	Condensed Consolidated Statements of Cash Flows for the
	Nine Months Ended September 30, 2008 and 2007	3

	Notes to Unaudited Condensed Consolidated Financial Statements	4

ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
	CONDITION AND RESULTS OF OPERATIONS	13

ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
	MARKET RISK	25

ITEM 4.	CONTROLS AND PROCEDURES	26

PART II.	OTHER INFORMATION	27

ITEM 1.	LEGAL PROCEEDINGS	27

ITEM 1A.	RISK FACTORS	27

ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND
	USE OF PROCEEDS	30

ITEM 6.	EXHIBITS	31

	SIGNATURES	32

	EXHIBIT INDEX	33

In thousands	September 30, 2008			December 31, 2007
Bank term note	$	13,300		$	3,815
Less current portion		(1,400	)		(3,815	)
	$	11,900		$	---

	Nine Months Ended September 30,
	2008						2007
			Weighted-Average Grant-Date Fair Value						Weighted-Average Grant-Date Fair Value
					Total Fair Value						Total Fair Value
	Shares				Total Fair Value		Shares				Total Fair Value
			(Per Share)		(in 000’s)				(Per Share)		(in 000’s)

Stock options		899,465	$	2.07	$	1,862		2,092,220	$	3.28	$	6,862
Stock and stock units		612,500		3.57		2,187		134,000		4.94		662
Purchases of common stock at a discount		77,018		.69		53		39,041		1.41		55
		1,588,983						2,265,261

	Three months ended September 30,				Increase/
In thousands	2008		2007		(decrease)
Direct external expenses:
Clinical programs	$	6,303	$	1,721	$	4,582
Preclinical programs		---		508		(508	)
All other R&D expenses		7,062		6,013		1,049
	$	13,365	$	8,242	$	5,123

			Payments Due By Period
In thousands	Total		In 2008		2009 through 2011		2012 through 2013		After 2013

Long-term debt	$	13,300	$	350	$	7,000	$	5,950	$	---
Operating leases		8,198		539		6,436		1,223		---
Employment agreements		15,030		1,273		12,451		1,306		---
Other long-term obligations		4,733		70		2,718		1,550		395
Total fixed contractual obligations	$	41,261	$	2,232	$	28,605	$	10,029	$	395

2.1*	Agreement and Plan of Merger, dated September 11, 2008, by and between ARIAD Pharmaceuticals, Inc. and ARIAD Gene Therapeutics, Inc.

10.1+*	Indemnity Agreement, dated September 11, 2008, by and between ARIAD Pharmaceuticals, Inc. and Laurie A. Allen, Esq.

10.2+*	Indemnity Agreement, dated September 11, 2008, by and between ARIAD Gene Therapeutics, Inc. and Laurie A. Allen, Esq.

10.3+*	Amendment to Employment Agreement, dated September 11, 2008, by and between ARIAD Pharmaceuticals, Inc. and Laurie A. Allen, Esq.

10.4+*	Guarantee, dated September 11, 2008, by and between ARIAD Gene Therapeutics, Inc. and Laurie A. Allen, Esq.

10.5+*	Consulting Agreement, dated September 11, 2008, by and between ARIAD Gene Therapeutics, Inc. and Laurie A. Allen, Esq.

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 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
		Senior Vice President, Chief Financial Officer (Principal financial officer and chief accounting officer)
Date: November 10, 2008

Exhibit No.	Title

2.1*	Agreement and Plan of Merger, dated September 11, 2008, by and between ARIAD Pharmaceuticals, Inc. and ARIAD Gene Therapeutics, Inc.

10.1+*	Indemnity Agreement, dated September 11, 2008, by and between ARIAD Pharmaceuticals, Inc. and Laurie A. Allen, Esq.

10.2+*	Indemnity Agreement, dated September 11, 2008, by and between ARIAD Gene Therapeutics, Inc. and Laurie A. Allen, Esq.

10.3+*	Amendment to Employment Agreement, dated September 11, 2008, by and between ARIAD Pharmaceuticals, Inc. and Laurie A. Allen, Esq.

10.4+*	Guarantee, dated September 11, 2008, by and between ARIAD Gene Therapeutics, Inc. and Laurie A. Allen, Esq.

10.5+*	Consulting Agreement, dated September 11, 2008, by and between ARIAD Gene Therapeutics, Inc. and Laurie A. Allen, Esq.

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.

	By:	/s/ Harvey J. Berger, M.D.
Date: November 10, 2008		Harvey J. Berger, M.D. Chairman and Chief Executive Officer

	By:	/s/ Edward M. Fitzgerald
Date: November 10, 2008		Edward M. Fitzgerald Senior Vice President, Chief Financial Officer (Principal financial officer and chief accounting officer)