With its lead candidate AP23573 poised to begin Phase III trials in metastatic sarcoma, Ariad Pharmaceuticals Inc. signed a global development and commercialization partnership for the small-molecule mTOR inhibitor with Merck and Co. Inc.

The deal includes $75 million up front to Ariad and $652 million in potential milestones, as well as additional development support, royalties and co-promotion clauses.

Yet shares of Cambridge, Mass.-based Ariad (NASDAQ:ARIA) dipped as low as 7 percent in early trading Thursday before closing down 28 cents, or 4.6 percent, at $5.77.

Analyst Phil Nadeau of Cowen & Co. attributed the stock reaction to the news being "priced in." He told BioWorld Today that Ariad "had been talking about the fact that they were going to sign a large pharma partnership" for several months. Indeed, Ariad's share price has climbed about $2 over the past four months.

Overall, Nadeau called the partnership a "good deal." Analyst Terence Flynn, of Lazard Capital Markets, also liked the arrangement, noting in a research report that the "favorable terms exceeded our conservative projections."

Those terms include $75 million up front and up to $652 million in milestones, including $13.5 million for the initiation of the Phase III sarcoma trial, $114.5 million for the initiation of other Phase II and Phase III trials, $324 million tied to additional milestones and $200 million based on the achievement of predetermined sales thresholds.

The companies will evenly split the costs of global development with the exception of ex-U.S. development designed to support ex-U.S. commercialization, for which Merck will pick up the tab. Merck also will contribute at least $200 million to the cost of global development and, once Ariad has spent $150 million, Merck will fork over another $200 million in interest-bearing repayable development-cost advances.

An interesting aspect to the cost sharing is that both partners may choose to opt out of conducting and funding certain late-stage clinical trials of AP23573. During a conference call, Ariad Chairman and CEO Harvey Berger explained that the clause is intended to provide either party with the freedom to explore new directions for the drug, even if the direction in question is not of interest to both partners.

In the U.S., Ariad and Merck would co-promote AP23573 for all cancer indications. Ariad will take the lead on advancing the sarcoma indication, given its prior history and experience, while the partners will share development responsibility for all future indications. Ariad will handle distribution and book all sales, with both companies evenly splitting that income.

Outside the U.S., Merck would distribute, sell, promote and book all sales of AP23573, paying Ariad a tiered double-digit royalty. Merck also will have primary responsibility for ex-U.S. development in all cancer indications. Ariad will manufacture the active pharmaceutical ingredient to support global sales, while Merck will manage formulation of the finished product.

Ariad has called the protein mTOR, or mammalian target of rapamycin, a "master switch" in cancer cells. Blocking mTOR, it said, creates a starvation-like effect in cancer cells by interfering with cell growth, division, metabolism and angiogenesis.

Given the extensive amount of collaboration involved, Ariad Vice President and Chief Commercial Officer Richard Pascoe said the companies have established joint development, manufacturing, commercialization and steering committees to "ensure open and consensus-driven decision making."

Moving forward, the first Phase III trial in metastatic sarcoma is expected to begin in the next month or two. In April, the company announced that a meeting with the FDA had resulted in a change in the primary endpoint for that trial from progression-free survival, which Ariad had demonstrated in a Phase II trial, to overall survival.

Berger said the final trial design would be made available prior to the trial's initiation and will reflect input from the FDA, the European Agency for the Evaluation of Medicinal Products and Merck. He added that he anticipates a "single successful Phase III trial will be sufficient for approval in the U.S., Europe and most of the world." (See BioWorld Today, April 9, 2007.)

Berger declined to specify a timeline to the initiation of additional trials, although he did say that the partners will run multiple trials in multiple indications in parallel, and that there will be "a lot of activity in the first three years" of the partnership. He also said that one of Ariad's goals is to be in a position to initiate a second registration trial within the next 12 months.

Flynn predicted that hormone-refractory prostate cancer, breast cancer and endometrial cancer likely will be areas of focus.

Following the announcement of the deal, Ariad revised its financial guidance for 2007. The company now expects to end the year with between $72 million and $76 million in cash.

Cash used in operations during the year, net of Merck's share of the development expenses but before the impact of the up-front and milestone payments, is estimated at $57 million to $62 million. Once all payments are factored in, Ariad predicted a positive cash flow from operating activities in the range of $30 million to $35 million.