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

Our vision is to transform the lives of cancer patients with breakthrough medicines. Our mission is to discover, develop and commercialize small-molecule drugs to treat cancer in patients with the greatest and most urgent unmet medical need - aggressive cancers where current therapies 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, ridaforolimus, previously known as deforolimus, 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 ridaforolimus for use in cancer. We initiated patient enrollment in our initial Phase 3 clinical trial of ridaforolimus in patients with metastatic sarcoma in the third quarter of 2007. We expect to complete patient enrollment in this Phase 3 clinical trial by approximately year-end 2009. We also expect to obtain the results of the second interim analysis of the primary endpoint of this trial, progression-free survival or PFS, by approximately the end of the first quarter of 2010 and the final analysis of PFS by approximately the end of the third quarter of 2010. In addition, in 2008 and 2009 we and Merck initiated patient enrollment in Phase 2 clinical trials in patients with metastatic breast cancer, metastatic endometrial cancer, metastatic non-small-cell lung cancer and advanced prostate cancer, and Phase 1 clinical trials of ridaforolimus in combination with other agents, all as part of our joint global development plan with Merck. These various trials are ongoing at this time.

Our collaboration with Merck for the global development and commercialization of ridaforolimus anticipates that we together with Merck will conduct a broad-based development program in multiple potential indications. The collaboration agreement provides that each party will fund 50 percent of global development costs, except for certain specific costs to be funded 100 percent 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 ridaforolimus in multiple potential cancer indications, of which $53.5 million has been paid to us through September 30, 2009, 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 and have obtained regulatory approval to market ridaforolimus from the FDA in the United States or similar regulatory authorities in Europe or Japan. The collaboration agreement provides that each party will receive 50 percent of the profit from the sales of ridaforolimus in the United States, and Merck will pay us tiered double-digit royalties on sales of ridaforolimus outside the United States.

Our second product candidate, AP24534, is an investigational multi-targeted kinase inhibitor for which we initiated a Phase 1 clinical trial in the second quarter of 2008 in patients with chronic myeloid leukemia, or CML, acute myeloid leukemia, or AML, and other hematologic cancers, which is on-going at this time. Pending further analysis of the results of this trial and discussions with regulatory authorities, we believe that we will be able to proceed to a registration trial of this product candidate in 2010. In the second quarter of 2009, we designated our third product candidate, AP26113, an investigational anaplastic lymphoma kinase, or ALK, inhibitor, as a development candidate. We have commenced preclinical testing and investigational new drug, or IND, enabling studies of this product candidate.

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-?B 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 has been received in connection with a joint venture we had with a major pharmaceutical company from 1997 to 1999 and under our collaboration agreement with Merck signed in July 2007. Except for the gain on the sale of our 50 percent interest in that joint venture in December 1999, which resulted in net income for the year ended December 31, 1999, we have not been profitable since inception. Under our collaboration with Merck for the development and commercialization of ridaforolimus, we have received up-front and milestone payments since July 2007 in the aggregate of $128.5 million and 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 the development and commercialization of ridaforolimus.

In addition, we and Merck are currently engaged in the annual process of updating the global development plan for ridaforolimus and are discussing possible revisions to the terms of the collaboration agreement designed to address funding for the continued development and commercial launch of ridaforolimus. The outcome of these deliberations will determine the costs of and funding for development and commercialization of ridaforolimus going forward.

We expect that losses will fluctuate from quarter to quarter and that these fluctuations may be substantial. Each of our potential sources of funding is subject to numerous risks and uncertainties, and there is no assurance that such funding will become available in 2009 or 2010, or at all, as discussed further in the "Risk Factors" incorporated by reference into Part II, Item 1A of our Quarterly Report on Form 10-Q for the period ended June 30, 2009, under the heading "Risks Related to Our Business - Insufficient funding may jeopardize our research and development programs and may require us to reduce our operations or prevent commercialization of our products and technologies."

As of September 30, 2009, we had cash and cash equivalents of $57.5 million, working capital of $37.1 million, deferred revenue of $113.6 million related to non-refundable up-front and milestone payments from Merck, and total stockholders' deficit of $72.3 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 our on-going 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 ridaforolimus. 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 and leases 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 operations in order to conserve cash and capital by delaying, scaling back or eliminating one or more of our product development programs or enter into licenses or other arrangements with third parties on terms that may be unfavorable to us. Please see additional information under the caption "Liquidity and Capital Resources" below.

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, stock-based compensation and the fair value of warrants to purchase our common stock.

For the nine-month period ended September 30, 2009, we reported license and collaboration revenue of $6.1 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 ridaforolimus, as of September 30, 2009, we have received an up-front payment of $75 million and milestone payments of $53.5 million related to the start of Phase 2 and Phase 3 clinical trials of ridaforolimus. 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, 2009, we reported $9.7 million of intangible assets, consisting of capitalized costs related primarily to purchased and issued patents, patent applications and licenses and the recorded value of the technology associated with our acquisition in September 2008 of the 20-percent minority interest of ARIAD Gene Therapeutics, Inc. that we did not previously own, 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. If we were to abandon the ongoing development of the underlying product candidates or 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, 2009 of intangible assets related to our NF-?B technology is $332,000. If the patentability of our NF-?B 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.

In determining expense related to stock-based compensation, we utilize the Black-Scholes option 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 volatility of our common stock, or the expected life of stock options granted during the nine-month period ended September 30, 2009 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 $77,000, or $45,000 respectively.

Warrants to purchase 10,784,024 shares of our common stock, issued on February 25, 2009 in connection with a registered direct offering of 14,378,698 shares of our common stock, are classified as a derivative liability. Accordingly, the fair value of the warrants is recorded on our consolidated balance sheet as a liability, and such fair value is adjusted at each financial reporting date with the adjustment to fair value reflected in our consolidated statement of operations. The fair value of the warrants is determined using the Black-Scholes option valuation model. Fluctuations in the assumptions and factors used in the Black-Scholes model would result in adjustments to the fair value of the warrants reflected on our balance sheet and, therefore, our statement of operations. If, for example, the volatility of our common stock at September 30, 2009 were 10% higher or lower than used in the valuation of such warrants, our valuation of the warrants would have increased or decreased by up to $950,000 with such difference reflected in our statement of operations.

Results of Operations

For the three months ended September 30, 2009 and 2008

Revenue

We recognized license and collaboration revenue of $2.2 million in the three-month period ended September 30, 2009, compared to $1.5 million in the corresponding period in 2008. The increase in license and collaboration revenue was due primarily to the increase in revenue recognized from the Merck collaboration of $618,000, based on the non-refundable up-front and milestone payments totaling $128.5 million received from Merck to date, in accordance with our revenue recognition policy. We expect that our license and collaboration revenue will remain relatively unchanged for the fourth quarter of 2009.

Operating Expenses

Research and Development Expenses

Research and development expenses increased by $1.0 million, or 8%, to $14.4 million in the three-month period ended September 30, 2009, compared to $13.4 million in the corresponding period in 2008, 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 U.S. Food and Drug Administration, or FDA, in an Investigational New Drug application, or IND (or similar filings with regulatory agencies outside the United States);

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

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

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

We group our research and development, or R&D, expenses into two major categories: direct external expenses and all other R&D expenses. Direct external expenses consist of costs of outside parties to conduct laboratory studies, to develop manufacturing processes and manufacture product candidates, to conduct and manage clinical trials and similar costs related to our clinical and preclinical studies. These costs are accumulated and tracked by product candidate. All other R&D expenses consist of costs to compensate personnel, to purchase lab supplies and services, to lease, operate and maintain our facility, equipment and overhead and similar costs of our research and development efforts. These costs apply to work on our clinical and preclinical candidates as well as our discovery research efforts. These costs 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.

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

Our R&D expenses for the three-month period ended September 30, 2009, as compared to the corresponding period in 2008, were as follows:

                              Three months ended
                                 September 30,           Increase/
In thousands                   2009          2008       (decrease)
Direct external expenses:
Clinical programs           $    7,785     $  6,303     $     1,482
Preclinical programs               ---          ---             ---
All other R&D expenses           6,599        7,062            (463 )
                            $   14,384     $ 13,365     $     1,019

Our clinical programs consist of ridaforolimus, our lead product candidate, and AP24534, our kinase inhibitor program. The direct external expenses for ridaforolimus reflect our share of such expenses pursuant to the cost-sharing arrangements of our collaboration with Merck. Direct external expenses for ridaforolimus were $6.9 million in the three-month period ended September 30, 2009, an increase of $1.6 million, as compared to the corresponding period in 2008, reflecting our share of increases in clinical trial costs ($1.4 million) and manufacturing costs ($281,000), offset in part by decreases in supporting non-clinical costs of the program ($332,000). Clinical trial costs increased due primarily to increasing enrollment in our Phase 3 clinical trial of ridaforolimus in patients with metastatic sarcomas and in Phase 2 clinical trials of ridaforolimus in patients with breast cancer, endometrial cancer, prostate cancer and non-small cell lung cancer. Contract manufacturing costs increased primarily to provide supply of ridaforolimus to ongoing clinical trials. Costs of non-clinical studies decreased due to the completion of toxicology studies of ridaforolimus required to support regulatory filings with the FDA and certain other non-recurring support costs in 2008. We expect that our direct external costs for ridaforolimus, net of Merck's share of such costs, will remain relatively unchanged in the fourth quarter of 2009.

Direct external expenses for our second clinical program, AP24534, were $896,000 for the three-month period ended September 30, 2009, a decrease of $134,000 as compared to the corresponding period in 2008. The decrease is due primarily to a decrease in clinical costs of $66,000 and non-clinical support costs of $51,000. Clinical costs decreased due to the impact of start-up costs and supporting activities for the Phase 1 trial in patients with hematological malignancies incurred in 2008, offset in part by increasing enrollment in our Phase 1 clinical trial. Non-clinical support costs decreased due to the wind-down of long-term toxicology studies offset in part by the costs of stability studies for this product candidate. Manufacturing costs decreased due primarily to a decrease in product and process development activities in 2009 relative to 2008. We expect that our direct external costs for AP24534 will increase during the fourth quarter of 2009, due to additional manufacturing costs to support the Phase 1 clinical trial and prepare for the possible initiation of a registration trial in 2010.

We designated our third development candidate, AP26113, an anaplastic lymphoma kinase, or ALK, inhibitor and progressed it into preclinical testing and IND enabling studies during the second quarter of 2009. All such testing and studies were conducted internally during the three-month period ended September 30, 2009. We incurred no direct external expenses for preclinical programs during the three-month periods ended September 30, 2009 and 2008 and expect no such expenses for the fourth quarter of 2009. Prior to the nomination of AP26113 as our third development candidate in the second quarter of 2009, all programs other than clinical programs were designated as discovery research and are included in "all other R&D expenses" in the table above.

All other R&D expenses decreased by $463,000 in the three-month period ended September 30, 2009 as compared to the corresponding period in 2008. This decrease is due to decreases in professional services of $472,000 and lab supplies and services of $298,000, and an increase in Merck's allocated share of such expenses under the terms of the collaboration agreement of $358,000, offset in part by an increase in personnel expenses of $505,000 related to the hiring of additional research and development personnel. We expect that all other R&D expenses will remain relatively unchanged during the fourth quarter of 2009.

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" incorporated by reference into Part II, Item 1A of our Quarterly Report on Form 10-Q for the fiscal period ended June 30, 2009 as updated from time to time in our subsequent periodic reports and current reports filed with the SEC. Due to these uncertainties, accurate and meaningful estimates of the ultimate cost to bring a product to market, the timing of completion of any of our drug development programs and the period in which material net cash inflows from any of our drug development programs will commence are unavailable.

General and Administrative Expenses

General and administrative expenses decreased by $4.8 million, or 58%, to $3.5 million in the three-month period ended September 30, 2009, compared to $8.3 million in the corresponding period in 2008. Professional fees decreased by $4.7 million to $1.0 million in the three-month period ended September 30, 2009, compared to $5.7 million in the corresponding period in 2008, due primarily to reduction in activities and costs related to corporate and commercial development initiatives, and to our patent infringement litigation against Eli Lilly and Company, or Lilly, and Amgen Inc., or Amgen. We expect that our general and administrative expenses will remain relatively unchanged during the fourth quarter of 2009.

We expect that our operating expenses in total, net of Merck's share of development costs of ridaforolimus, will increase slightly during the fourth quarter of 2009 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 rate of enrollment in clinical trials and the status of other studies related to ridaforolimus pursuant to our collaboration with Merck and the conduct of our clinical trial and the required manufacturing for AP24534.

Other Income (Expense)

Interest Income/Expense

Interest income decreased to $29,000 in the three-month period ended September 30, 2009 from $238,000 in the corresponding period in 2008, as a result of a lower interest yields from our investments in 2009.

Interest expense decreased to $65,000 in the three-month period ended September 30, 2009 from $147,000 in the corresponding period in 2008, as a result of lower average loan balances in 2009 and lower interest rates on our long-term debt.

Revaluation of Warrant Liability

The fair value at September 30, 2009 of our warrant liability was $5.1 million higher than its fair value at June 30, 2009, resulting in a charge of $5.1 million for the three-month period ended September 30, 2009. The increase in value of the warrant liability is primarily due to the impact of the increase in . . .