The information set forth below should be read in conjunction with the audited consolidated financial statements, and the notes thereto, and other financial information included herein.

Overview

ARIAD is a global oncology company whose 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. We are focused on commercializing our first approved cancer medicine, Iclusig™ (ponatinib), and developing additional molecularly targeted therapies to treat patients with blood cancers and solid tumors.

Iclusig and our product candidates, AP26113 and ridaforolimus, were discovered internally by our scientists based on our expertise in computational and structure-based drug design. Ridaforolimus is being developed by Merck & Co., Inc., or Merck, pursuant to a license agreement we entered into with Merck in 2010.

Iclusig (ponatinib)

On December 14, 2012, we obtained accelerated approval from the U.S. Food and Drug Administration, or FDA, to sell our first new cancer medicine, Iclusig. Iclusig is a tyrosine kinase inhibitor, or TKI, that is approved in the United States for the treatment of adult patients with chronic, accelerated or blast phase chronic myeloid leukemia, or CML, who are resistant or intolerant to prior TKI therapy, and the treatment of adult patients with Philadelphia chromosome-positive acute lymphoblastic leukemia, or Ph+ ALL, who are resistant or intolerant to prior TKI therapy.

We have commenced sales and marketing of Iclusig, and the medicine is now available for patients in the United States through specialty pharmacies and specialty distributors. We currently charge approximately $115,000, on a wholesale basis, for an annual supply of the recommended dose of Iclusig.

We have also filed for marketing authorization for Iclusig with the European Medicines Authority, or EMA, and we currently anticipate approval in the third quarter of 2013. We will need to obtain pricing and reimbursement approval in certain countries in Europe before it will be widely available for use, which approvals we anticipate obtaining beginning in 2014. We also plan to file for marketing authorization for Iclusig with regulatory authorities in other selected territories around the world, including Switzerland, Canada and Australia in the second half of 2013 and Japan in mid-2014. Each of these regulatory authorities has its own processes and timelines for the review and approval of marketing authorization applications.

We plan to commercialize Iclusig on our own in the United States and, subject to obtaining regulatory approval, in Europe and other selected territories worldwide. During the past year, we have been actively focused on preparing for the commercial launch of Iclusig in the United States, including establishing an experienced and trained sales force and other professional staff necessary for an effective launch, implementing systems and processes to support launch, developing tools and materials to be utilized during the commercialization of Iclusig and other activities, and arranging for Iclusig to be provided to patients through a network of specialty pharmacies and specialty distributors. We have also initiated operations in Europe, with headquarters in Switzerland, in preparation for potential EMA approval of Iclusig. We have hired management and other key personnel in Switzerland who are building our business infrastructure and capabilities in Europe.

We are also developing Iclusig for expanded indications in CML and in additional cancer indications. In July 2012, we initiated a randomized Phase 3 clinical trial of ponatinib, referred to as the EPIC (Evaluation of Ponatinib versus Imatinib in Chronic Myeloid Leukemia) trial, in adult patients with newly diagnosed CML in the chronic phase. We currently anticipate completion of enrollment by the end of 2013, with an interim analysis of the data in mid-2014. In August 2012, we initiated a multicenter Phase 1/2 clinical trial in Japan of Iclusig in Japanese patients with CML who have failed treatment with dasatinib or nilotinib or who have Ph+ ALL and have failed prior treatment with TKIs. This trial is designed to establish the recommended dose for Iclusig and confirm its anti-leukemic activity in Japanese patients. In January 2013, we announced an agreement with Newcastle University, U.K., on behalf of the U.K. National Cancer Research Institute, or NCRI, to collaborate on a multi-center, randomized Phase 3 trial, named SPIRIT 3, to assess the impact of switching patients with CML being treated with a first-line TKI, upon suboptimal response or treatment failure, to Iclusig. We expect that a total of approximately 1,000 patients will be enrolled in this trial, with enrollments beginning in the second quarter of 2013.

We believe that Iclusig has potential applications beyond CML in other blood cancers and solid tumors, such as gastrointestinal stromal tumors, or GIST, acute myeloid leukemia and certain forms of non-small cell lung cancer, or NSCLC. We plan to initiate additional clinical trials of Iclusig as we continue development of this product candidate.

AP26113

AP26113 is an investigational inhibitor of anaplastic lymphoma kinase, or ALK, epidermal growth factor receptor, or EGFR, and repressor of silencing-1, or ROS1, which are clinically validated targets in NSCLC. We initiated patient enrollment in a Phase 1/2 clinical trial of AP26113 in the third quarter of 2011. The protocol is designed to enroll approximately 50 to 60 patients in the Phase 1 portion of the trial and approximately 80 patients in the Phase 2 portion of the trial. We expect to commence the Phase 2 portion of the trial in the first half of 2013 and, subject to further discussions with the regulatory agencies, commence a pivotal trial of AP26113 in ALK-positive NSCLC patients in mid-2013 in parallel with the four cohorts of the Phase 2 portion of the trial.

Ridaforolimus

Ridaforolimus is an investigational inhibitor of the mammalian target of rapamycin, or mTOR, that we discovered and developed internally and later licensed in 2010 to Merck. Under the license agreement, Merck has assumed responsibility for all activities related to the development, manufacture and commercialization of ridaforolimus and funds 100 percent of all ridaforolimus costs incurred after January 1, 2010. The agreement provides that Merck will develop ridaforolimus in multiple oncology indications. We received an up-front payment of $50 million in 2010 and a $25 million milestone payment in 2011. Potential additional milestone payments to us include up to $289 million associated with potential regulatory filings and approvals for additional cancer indications and up to $200 million associated with the achievement of certain sales thresholds, although there can be no assurance that any future payments will be received under the agreement.

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, accrued product development expenses, the fair value of warrants to purchase our common stock, and inventory valuation.

Revenue Recognition

Revenue is recognized when there is persuasive evidence that an arrangement exists, delivery has occurred, the price is fixed and determinable and collection is reasonably assured.

License and Collaboration Revenue

We have historically generated revenue from license and collaboration agreements with third parties related to use of our technology and/or development and commercialization of product candidates. Such agreements may provide for payment to us of up-front payments, periodic license payments, milestone payments and royalties. We also generated revenue from services provided under license agreements.

Revenue arrangements with multiple elements are divided into separate units of accounting if certain criteria are met, including whether the delivered element has stand-alone value to the customer and is based on the selling price of the deliverables. When deliverables are separable, consideration received is allocated to the separate units of accounting based on the relative selling price of the elements and the appropriate revenue recognition principles are applied to each unit.

The assessment of multiple element arrangements requires judgment in order to determine the appropriate units of accounting and the points in time that, or periods over which, revenue should be recognized. Regarding our Collaboration Agreement with Merck for the development, manufacture and commercialization of ridaforolimus, in effect from July 2007 to May 2010, we determined the license and development deliverables constituted one unit of accounting and, therefore, the up-front and milestone payments were deferred and recognized over the performance period. Regarding our License Agreement with Merck entered into in May 2010 that replaced the Collaboration Agreement, we determined that the license and the services were separate units of accounting, and because the fair value of the undelivered services was known, the amounts received related to the license and the services are recognized in the period in which they are received or the services are rendered. Milestone payments under the License Agreement are recognized when earned. In the year ended December 31, 2010, the Company recognized $179 million under this arrangement, which reflected the receipt of a $50 million up-front payment and a $12.8 million payment for our share of ridaforolimus costs incurred from January 1, 2010 to May 4, 2010 from Merck pursuant to the terms of the License Agreement. License and collaboration revenue in 2010 also included $111.5 million representing the recognition in 2010 of revenue deferred as of December 31, 2009, which was recognized upon execution of the License Agreement. In the year ended December 31, 2011, the Company received and recorded as revenue a $25 million milestone payment. No milestone payments were received under the agreement in the year end December 31, 2012.

Net Product Revenues

Product sales of Iclusig are recorded net of estimated government-mandated rebates and chargebacks, distribution fees, copay assistance programs, product returns and other deductions. We reflect these estimated adjustments as either a reduction in the related account receivable from the specialty pharmacy or specialty distributor, or as an accrued liability depending on the nature of the sales deduction. We began shipping Iclusig in January 2013, and therefore we recognized no product revenues from the sale of Iclusig in the United States in the year ended December 31, 2012.

Although Iclusig has not been approved for commercial sale in the European Union by the EMA, patients are being treated with Iclusig both in the framework of our clinical trials and related studies and in named patient programs. The French regulatory authority had granted an Autorisation Temporaire d'Utilisation (ATU), or Temporary Authorization for Use, for Iclusig for the treatment of CML and Ph+ ALL under a nominative program on a patient-by-patient basis. The Company began shipping product under this program during the year ended December 31, 2012. Until all revenue recognition criteria are met, all amounts received by or due to the Company under this program (approximately $1.1 million as of December 31, 2012) have not been recorded as revenue.

Intangible Assets

At December 31, 2012, we reported $993,000 of intangible assets, consisting of capitalized costs related primarily to purchased and issued patents and patent applications, net of accumulated amortization. The

carrying value of these intangible assets is evaluated for possible impairment, and losses are recorded when the evaluation indicates that the carrying value is not recoverable. This evaluation involves estimates of future net cash flows expected to be generated by the asset. Such estimates require judgment regarding future events and expected cash flows. Changes in these estimates, including decisions to discontinue using the technologies, could result in material changes to our balance sheet and charges to our consolidated 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, or if our estimates of future net cash flows expected to be generated by the asset change, we may be required to write down or write off a portion of the carrying value of our intangible assets. In 2012, we recorded charges to operating expenses of $4.8 million in our consolidated statements of operations to reflect impairment of the intangible assets associated with ridaforolimus, our investigational oral mTOR inhibitor being developed by Merck for oncology indications pursuant to a license with the Company, following the decision in June 2012 by the FDA not to approve the NDA filed by Merck for ridaforolimus for the treatment of patients with soft tissue or bone sarcomas, stating that additional clinical trial(s) would need to be conducted to further assess safety and efficacy of ridaforolimus in this indication. In 2010, we recorded charges of $2.4 million in our consolidated statements of operations related to the discontinuation of efforts to pursue our NF-kB technology and to the assessment of the recoverability of our ARGENT technology and certain other technologies.

Accrued Product Development Expenses

We accrue expenses for our product development activities based on our estimates of services performed or progress achieved pursuant to contracts and agreements with multiple vendors including research laboratories, contract manufacturers, contract research organizations and clinical sites. These estimates are recorded in research and development expenses in our consolidated statements of operations and are reflected in accrued product development expenses on our balance sheet. At December 31, 2012, we reported accrued product development expenses of $14.1 million on our balance sheet.

Our estimates of services performed or progress achieved are based on all available information we have from reports, correspondence and discussions with our vendors. Our estimates of accrued expenses based on such information require judgment. Actual costs may vary from such estimates. When such variances become known, we adjust our expenses accordingly.

Fair Value of Warrants

Warrants outstanding at December 31, 2011 to purchase 5,805,843 shares of our common stock, issued on February 25, 2009 in connection with a registered direct offering of our common stock, were classified as a derivative liability. Accordingly, the fair value of the warrants was recorded on our balance sheet as a liability, and such fair value was adjusted in each financial reporting period with the adjustment to fair value reflected in our consolidated statements of operations. At December 31, 2011, we reported a warrant liability of $58.6 million on our balance sheet.

During the three-month period ended March 31, 2012, all 5,805,843 warrants that were outstanding at December 31, 2011 were exercised for proceeds to us of approximately $12.5 million. Upon the exercise of these remaining warrants, the balance of the warrant liability and the proceeds received upon exercise were credited to stockholders' equity and the liability was eliminated.

The fair value of the warrants was determined using the Black-Scholes option valuation model. Fluctuations in the assumptions and factors used in the Black-Scholes model resulted in adjustments to the fair value of the warrants recorded on our balance sheet reflected through charges or credits in our consolidated statements of operations. The primary factor in the Black-Scholes model that impacted the fair value of the warrants was the market value of our common stock on the date of the valuation.

Inventory

Inventory costs include the costs related to the manufacturing of Iclusig, including costs of contract manufacturing, quality control costs and shipping costs from the manufacturers to the final distribution warehouse. We value our inventories at the lower of cost or market. We determine the cost of our inventories on a first-in, first-out basis. If we identify excess, obsolete or unsalable items, inventories are written down to their realizable value in the period in which the impairment is identified. Estimates of excess inventory consider our projected sales of the product and the remaining shelf lives of the product.

Prior to receiving approval from the FDA in December 2012 to sell Iclusig, we expensed all costs incurred related to the manufacture of Iclusig as research and development costs because of the inherent risks associated with the development of a drug candidate, the uncertainty about the regulatory approval process and the lack of history for our Company of regulatory approval of drug candidates.

Much of the product produced prior to FDA approval is expected to be available for commercial or clinical use. Accordingly, we expect the manufacturing costs for Iclusig included in our future cost of sales to initially be insignificant, as most of these costs will have been recorded as research and development expenses in prior periods, and to increase as we begin to sell inventory that is produced after we began capitalizing Iclusig commercial inventory. We expect this lower cost to occur during the first six to twelve months of commercial sales of Iclusig; however, the time period over which this reduced-cost inventory is consumed will depend on a number of factors, including the amount of future sales, the ultimate use of this inventory in either commercial sales, clinical development or other research activities and the ability to utilize inventory prior to its expiration date. We expect that as this reduced-cost inventory is used, the cost of product sales, before consideration of any required inventory reserves, will be in the single digits as a percentage of net revenues. In addition, we may need to establish reserves for inventory in excess of our projected sales within the product's expiration period, which may impact the cost of product sales as a percentage of net revenues.

Results of Operations

Years Ended December 31, 2012 and 2011

Revenue

We recorded total revenue of $558,000 for the year ended December 31, 2012, compared to $25.3 million for the year ended December 31, 2011. Total revenue in 2012 consisted primarily of license revenue pursuant to a license agreement related to our ARGENT technology. Total revenue in 2011 consisted primarily of a $25 million milestone payment received pursuant to our license agreement with Merck for the acceptance of an application for regulatory approval in Europe of ridaforolimus for the treatment of patients with sarcoma, which was subsequently withdrawn by Merck in November 2012.

We expect that our revenue in 2013 will increase substantially due primarily to anticipated product sales of Iclusig in the U.S. and to a much lesser degree due to an increase in license revenue pursuant to license agreements related to our ARGENT technology. Product sales of Iclusig in 2013 are dependent in part on the success of our commercialization efforts in the United States and on the status of regulatory approval for Iclusig in Europe, which we currently anticipate in the third quarter of 2013. If applicable regulatory criteria are not met, the EMA could refuse to approve our application or delay the approval of Iclusig. In addition, we will need to obtain pricing and reimbursement approval in certain countries in Europe before it will be widely available for use. We currently anticipate receiving pricing and reimbursement approvals in Europe commencing in 2014. There can be no assurance that we will be successful in commercializing Iclusig in the United States or that Iclusig will receive marketing authorization approval in the European Union.

Operating Expenses

Research and Development Expenses

Research and development expenses increased by $67.0 million, or 86 percent, to $144.7 million in 2012, compared to $77.7 million in 2011. 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 our clinical and preclinical candidates as well as our discovery research efforts. 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 2012 as compared to 2011 were as follows:

                                      Year ended December 31,         Increase /
        In thousands                    2012              2011        (decrease)
        Direct external expenses:
        Clinical programs           $      60,622       $ 34,612     $     26,010
        Preclinical programs                   -           1,900           (1,900 )
        All other R&D expenses             84,087         41,231           42,856

                                    $     144,709       $ 77,743     $     66,966

In 2012 and 2011, our clinical programs consisted of (i) Iclusig (ponatinib), our pan BCR-ABL inhibitor, and (ii) AP26113, our ALK, EGFR and ROS1 inhibitor for which we filed an IND in June 2011 and commenced a Phase 1/2 clinical trial in the third quarter of 2011.

Direct external expenses for Iclusig were $54.6 million in 2012, an increase of $22.2 million, or 69 percent, compared to 2011 expenses of $32.4 million. The increase is due to an increase in clinical trial costs of $13.3 million, contract manufacturing costs of $3.3 million and supporting non-clinical costs of $5.6 million. Clinical trial costs increased primarily due to ongoing treatment of patients in our pivotal Phase 2 PACE clinical trial and increased enrollment and treatment of patients in our Phase 3 EPIC clinical trial in newly diagnosed CML patients, including purchases of the comparator drug, imatinib, for use in this trial, as well as costs related to initiation of a Phase 1/2 clinical trial of Iclusig in Japan, offset in part by a decrease in costs of our on-going Phase 1 clinical trial as treatment of patients and other activities in this trial have decreased over this time period. Contract manufacturing costs increased due primarily to the conduct of product and process development and qualification initiatives to support regulatory filings for Iclusig, as well as the production of Iclusig for use in our clinical trials and to provide for initial commercial supply in anticipation of regulatory approval of Iclusig. Supporting non-clinical costs increased due primarily to increased quality and stability studies and initiatives to develop and commercialize a companion diagnostic test to identify patients with the T315I mutation of the BCR-ABL gene. We collaborated with MolecularMD Corp. to establish this companion diagnostic test and MolecularMD had filed a PreMarketing Approval (PMA) application with the FDA. In September 2012, we and MolecularMD announced the voluntary withdrawal of the PMA following advice from the FDA that the FDA no longer considered this test to be a companion diagnostic test for ponatinib. We expect that our direct external expenses for Iclusig will increase in 2013 as we continue to treat more patients in our ongoing clinical trials, initiate additional clinical trials and conduct additional studies to support continued development of Iclusig.

Direct external expenses for AP26113 were $6.0 million for 2012, an increase of $1.9 million, or 46 percent, compared to 2011 expenses of $4.1 million, of which $2.2 million were included in clinical programs and $1.9 million were included in preclinical programs. The increase in expenses for AP26113 was due to an increase in clinical trial costs of $0.5 million and an increase of $2.0 million in contract manufacturing cost, offset in part by a decrease in supporting non-clinical costs of $0.6 million. The increase in clinical trial costs was due to costs of the Phase 1/2 clinical trial initiated in the third quarter of 2011. The increase in contract manufacturing costs was due to the manufacture of additional material to supply the phase 1/2 clinical trial and investment in product and process development. The decrease in supporting non-clinical costs was due primarily to the completion in 2011 of toxicology studies required for filing of the IND. We expect that our direct external expenses for AP26113 will increase in 2013 as we continue to enroll patients in our on-going clinical trial of this product candidate and conduct additional studies to support continued development and potential regulatory approval of AP26113.

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