UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549





FORM
10-Q





|X|   QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d)


OF THE
SECURITIES EXCHANGE ACT OF 1934


For
the quarterly period ended March 31, 2009





OR





|  |   TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15 (d)


OF THE
SECURITIES EXCHANGE ACT OF 1934


For the
transition period from _____ to _____





Commission
File Number:  0-21696





ARIAD
Pharmaceuticals, Inc.


(Exact
name of registrant as specified in its charter)





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


26
Landsdowne Street, Cambridge, Massachusetts 02139


(Address
of principal executive offices) (Zip Code)





Registrant’s
Telephone Number, Including Area Code: (617) 494-0400





Former
Name, Former Address and Former Fiscal Year,


If Changed
Since Last Report:  Not Applicable





Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.  Yes
|X|  No  |  |





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Website, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).  Yes
|  |  No  |  |





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting
company.  See definition of “large accelerated filer,” “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act.  Check one:





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


Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b
- 2 of the Exchange Act).  Yes |  |  No
|X|




The number
of shares of the registrant’s common stock outstanding as of April 30, 2009 was
86,850,616.

















ARIAD
PHARMACEUTICALS, INC.





TABLE
OF CONTENTS





PagePART I.
                                    FINANCIAL INFORMATION
                                    1ITEM 1.
                                    UNAUDITED FINANCIAL STATEMENTS
                                    1Condensed Consolidated Balance Sheets – March 31, 2009 and
      December 31, 2008
                                    1Condensed Consolidated Statements of Operations for the
      Three Months Ended March 31, 2009 and 2008
                                    2Condensed Consolidated Statements of Cash Flows for the Three
      Months Ended March 31, 2009 and 2008
                                    3Notes to Unaudited Condensed Consolidated Financial
      Statements
                                    4ITEM 2.
                                    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND
      RESULTS OF OPERATIONS
                                    12ITEM 3.
                                    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
      RISK
                                    24ITEM 4.
                                    CONTROLS AND PROCEDURES
                                    24PART II.
                                    OTHER INFORMATION
                                    26ITEM 1.
                                    LEGAL PROCEEDINGS
                                    26ITEM 1A.
                                    RISK
      FACTORS
                                    26ITEM 2.
                                    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
      PROCEEDS
                                    26ITEM 6.
                                    EXHIBITS
                                    27SIGNATURES
                                    28EXHIBIT INDEX
                                    29









PART
I.            FINANCIAL
INFORMATION
 
 ITEM
1.            UNAUDITED
FINANCIAL STATEMENTS


ARIAD
      PHARMACEUTICALS, INC. AND SUBSIDIARIES
                                            CONDENSED CONSOLIDATED BALANCE SHEETSIn
      thousands, except share and per share data
                                          
                                          March
      31,
                                            2009
                                          
                                          
                                          December
      31,
                                            2008(Unaudited)ASSETSCurrent
      assets:Cash
      and cash equivalents
                                          
                                          $
                                          42,541
                                          
                                          
                                          $
                                          24,243Marketable
      securities
                                          
                                          
                                          7,600
                                          
                                          
                                          
                                          14,825Amounts
      due under collaboration agreement
                                          
                                          
                                          6,359
                                          
                                          
                                          
                                          5,580Inventory
      and other current assets
                                          
                                          
                                          3,755
                                          
                                          
                                          
                                          4,055Total
      current assets
                                          
                                          
                                          60,255
                                          
                                          
                                          
                                          48,703Property
      and equipment:Leasehold
      improvements
                                          
                                          
                                          22,008
                                          
                                          
                                          
                                          22,004Equipment
      and furniture
                                          
                                          
                                          16,059
                                          
                                          
                                          
                                          14,991Total
                                          
                                          
                                          38,067
                                          
                                          
                                          
                                          36,995Less
      accumulated depreciation and amortization
                                          
                                          
                                          (28,175
                                          )
                                          
                                          
                                          (27,402
                                          )Property
      and equipment, net
                                          
                                          
                                          9,892
                                          
                                          
                                          
                                          9,593Intangible
      and other assets, net
                                          
                                          
                                          10,026
                                          
                                          
                                          
                                          9,892Total
      assets
                                          
                                          $
                                          80,173
                                          
                                          
                                          $
                                          68,188LIABILITIES
      AND STOCKHOLDERS’ DEFICITCurrent
      liabilities:Current
      portion of long-term debt
                                          
                                          $
                                          1,400
                                          
                                          
                                          $
                                          1,400Accounts
      payable
                                          
                                          
                                          10,345
                                          
                                          
                                          
                                          9,370Accrued
      compensation and benefits
                                          
                                          
                                          1,289
                                          
                                          
                                          
                                          817Accrued
      product development expenses
                                          
                                          
                                          8,045
                                          
                                          
                                          
                                          9,936Other
      accrued expenses
                                          
                                          
                                          2,863
                                          
                                          
                                          
                                          3,990Current
      portion of deferred revenue
                                          
                                          
                                          7,832
                                          
                                          
                                          
                                          6,982Current
      portion of deferred executive compensation
                                          
                                          
                                          895
                                          
                                          
                                          
                                          941Current
      portion of capital lease payable
                                          
                                          
                                          70
                                          
                                          
                                          
                                          70Accrued
      merger consideration
                                          
                                          
                                          ---
                                          
                                          
                                          
                                          1,023Total
      current liabilities
                                          
                                          
                                          32,739
                                          
                                          
                                          
                                          34,529Long-term
      debt
                                          
                                          
                                          11,200
                                          
                                          
                                          
                                          11,550Deferred
      revenue
                                          
                                          
                                          100,032
                                          
                                          
                                          
                                          90,282Deferred
      executive compensation
                                          
                                          
                                          930
                                          
                                          
                                          
                                          953Capital
      lease payable
                                          
                                          
                                          56
                                          
                                          
                                          
                                          72Warrant
      liability
                                          
                                          
                                          3,774
                                          
                                          
                                          
                                          ---Stockholders’
      deficit:Preferred
      stock, $.01 par value, authorized 10,000,000 shares, none issued and
      outstandingCommon
      stock, $.001 par value; authorized, 145,000,000 shares,
issued
                                            and outstanding, 86,620,781
      shares in 2009 and 71,365,339 shares in 2008
                                          
                                          
                                          87
                                          
                                          
                                          
                                          71Additional
      paid-in capital
                                          
                                          
                                          390,185
                                          
                                          
                                          
                                          369,313Accumulated
      other comprehensive income
                                          
                                          
                                          4
                                          
                                          
                                          
                                          18Accumulated
      deficit
                                          
                                          
                                          (458,834
                                          )
                                          
                                          
                                          (438,600
                                          )Total
      stockholders’ deficit
                                          
                                          
                                          (68,558
                                          )
                                          
                                          
                                          (69,198
                                          )Total
      liabilities and stockholders’ deficit
                                          
                                          $
                                          80,173
                                          
                                          
                                          $
                                          68,188





See notes
to unaudited condensed consolidated financial statements.




1




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




Three
      Months EndedMarch
      31,In
      thousands, except share and per share data
                        
                        2009
                        
                        
                        2008License
      and collaboration revenue
                        
                        $
                        1,900
                        
                        
                        $
                        1,495Operating
      expenses:Research
      and development
                        
                        
                        17,749
                        
                        
                        
                        10,875General
      and administrative
                        
                        
                        4,126
                        
                        
                        
                        8,148Total
      operating expenses
                        
                        
                        21,875
                        
                        
                        
                        19,023Loss
      from operations
                        
                        
                        (19,975
                        )
                        
                        
                        (17,528
                        )Other
      income (expense):Interest
      income
                        
                        
                        37
                        
                        
                        
                        596Interest
      expense
                        
                        
                        (81
                        )
                        
                        
                        (79
                        )Revaluation
      of warrant liability
                        
                        
                        (215
                        )
                        
                        
                        ---Other
      income, net
                        
                        
                        (259
                        )
                        
                        
                        517Net
      loss
                        
                        $
                        (20,234
                        )
                        
                        $
                        (17,011
                        )Net
      loss per share
                        
                        $
                        (0.26
                        )
                        
                        $
                        (0.25
                        )Weighted-average
      number of shares of common stock outstanding
                        
                        
                        77,237,551
                        
                        
                        
                        69,315,236




See notes
to unaudited condensed consolidated financial statements.




2




ARIAD
PHARMACEUTICALS, INC. AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF CASH FLOWS


(Unaudited)





Three
      Months Ended
                        March
      31,In
      thousands
                      
                      2009
                      
                      
                      2008Cash
      flows from operating activities:Net
      loss
                      
                      $
                      (20,234
                      )
                      
                      $
                      (17,011
                      )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation and
      amortization
                      
                      
                      976
                      
                      
                      
                      577Accretion of discount on
      marketable securities
                      
                      
                      (15
                      )
                      
                      
                      (151
                      )Stock-based
      compensation
                      
                      
                      1,016
                      
                      
                      
                      1,348Deferred executive
      compensation expense
                      
                      
                      204
                      
                      
                      
                      186Revaluation of warrant
      liability
                      
                      
                      215
                      
                      
                      
                      ---Increase (decrease)
      from:Inventory and other current
      assets
                      
                      
                      300
                      
                      
                      
                      (315
                      )Amounts due under
      collaboration agreement
                      
                      
                      (779
                      )
                      
                      
                      362Other assets
                      
                      
                      1
                      
                      
                      
                      (10
                      )Accounts
    payable
                      
                      
                      974
                      
                      
                      
                      1,098Accrued compensation and
      benefits
                      
                      
                      473
                      
                      
                      
                      337Accrued product development
      expenses
                      
                      
                      (1,891
                      )
                      
                      
                      1,190Other accrued
      expenses
                      
                      
                      (1,677
                      )
                      
                      
                      730Deferred
    revenue
                      
                      
                      10,600
                      
                      
                      
                      (1,495
                      )Deferred executive
      compensation paid
                      
                      
                      (273
                      )
                      
                      
                      (120
                      )Net
      cash used in operating activities
                      
                      
                      (10,110
                      )
                      
                      
                      (13,274
                      )Cash
      flows from investing activities:Acquisitions
      of marketable securities
                      
                      
                      (7,599
                      )
                      
                      
                      (13,020
                      )Proceeds
      from maturities of marketable securities
                      
                      
                      14,826
                      
                      
                      
                      14,356Investment
      in property and equipment
                      
                      
                      (1,071
                      )
                      
                      
                      (1,879
                      )Investment
      in intangible assets
                      
                      
                      (339
                      )
                      
                      
                      (229
                      )Net cash provided by (used in)
      investing activities
                      
                      
                      5,817
                      
                      
                      
                      (772
                      )Cash
      flows from financing activities:Proceeds
      from long-term borrowings
                      
                      
                      ---
                      
                      
                      
                      10,505Repayment
      of long-term borrowings
                      
                      
                      (350
                      )
                      
                      
                      (320
                      )Principal
      payments under capital lease obligation
                      
                      
                      (15
                      )
                      
                      
                      ---Proceeds
      from issuance of common stock, net of issuance costs
                      
                      
                      22,819
                      
                      
                      
                      ---Proceeds
      from issuance of common stock pursuant to stock
                        option and purchase
      plans
                      
                      
                      137
                      
                      
                      
                      77Net
      cash provided by financing activities
                      
                      
                      22,591
                      
                      
                      
                      10,262Net
      increase (decrease) in cash and cash equivalents
                      
                      
                      18,298
                      
                      
                      
                      (3,784
                      )Cash
      and cash equivalents, beginning of period
                      
                      
                      24,243
                      
                      
                      
                      67,864Cash
      and cash equivalents, end of period
                      
                      $
                      42,541
                      
                      
                      $
                      64,080





See notes
to unaudited condensed consolidated financial statements.




3




ARIAD
PHARMACEUTICALS, INC. AND SUBSIDIARIES
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED
 FINANCIAL
STATEMENTS
 
 1.
              Management
      Statement
 
 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 March 31, 2009, and the results of operations and cash flows for
the three-month periods ended March 31, 2009 and 2008.  The results of
operations for the three-month period ended March 31, 2009 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, 2008, which includes
consolidated financial statements and notes thereto for the years ended December
31, 2008, 2007 and 2006.
 
 Since its
inception, the Company has incurred significant operating losses related to its
research and development programs and supporting activities.  The
Company has funded its losses through the sale of equity securities, debt and
cash received pursuant to collaboration agreements, including its collaboration
agreement with Merck & Co., Inc. (“Merck”) for the development and
commercialization of ridaforolimus, previously known as deforolimus (see Note
2).  At March 31, 2009, the Company had $50.1 million of cash, cash
equivalents and marketable securities.
 
 There are
numerous factors that affect the Company’s level of spending on its research and
development programs and supporting activities, including the extent of clinical
trials and other development activities for ridaforolimus 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 ridaforolimus and
AP24534, the progress of its discovery research and preclinical programs, and
the impact of business development activities, among other factors. On May 7, 2009, the Company
reported that Phase 3 clinical trials of ridaforolimus that had been planned to
start in the fourth quarter of 2009 will now likely start in the first or second
quarter of 2010, and therefore milestone payments associated with those trials
are also expected to move from the fourth quarter of 2009 to the first or second
quarter of 2010. The
Company is evaluating and will implement measures to reduce spending in 2009 and
is pursing options to generate incremental funding.  In addition, the
Company is engaged in discussions with Merck regarding the scope, costs and
timing of development of ridaforolimus to address the change in the timing of
expected receipt of the milestone payments, as provided for in the governance
provisions of the collaboration agreement. Depending on the success of the
Company's efforts to reduce spending and generate additional funding, its cash,
cash equivalents and marketable securities may not be sufficient to fund its
operations for at least the next twelve months. There can
be no assurance that such actions will generate sufficient resources to fund
operations for at least twelve months.
 
 2.
              Collaboration
      Agreement with Merck & Co.,
Inc.
 
 In July
2007, the Company entered into a collaboration agreement with Merck for the
joint global development and commercialization of ridaforolimus, 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 percent of the global development costs, except that Merck will fund 100
percent of any cost of development that is specific to development or
commercialization of ridaforolimus 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.
  4
 
 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 percent 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 based on the successful development of ridaforolimus in
multiple potential cancer indications, and up to $200 million in milestone
payments 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 and has obtained regulatory
approval to market ridaforolimus from the FDA in the United States or similar
regulatory authorities in Europe or Japan.  All amounts to be paid to
the Company by Merck, with the exception of any development cost advances, are
non-refundable.
 
 Through
December 31, 2008, in addition to the up-front payment of $75 million, Merck had
paid the Company $31 million in milestone payments related to the start of Phase
2 and Phase 3 clinical trials.  In the three-month period ended March
31, 2009, Merck paid the Company an additional milestone payment of $12.5
million related to the start of a Phase 2 clinical trial in patients with
advanced prostate cancer.  In addition, the Company expects to receive
a milestone payment of $10 million in the first half of 2009 related to the
initiation of a Phase 2 clinical trial in patients with non-small–cell lung
cancer.  Up-front and milestone payments are deferred and are
recognized as revenue on a straight-line basis through 2023, the estimated
expiration of the patents related to the underlying technology.
 
 Development
costs under the Collaboration Agreement are aggregated and split between the
Company and Merck in accordance with the terms of the agreement.  The
Company’s share of such development costs are reflected in operating expenses in
the Company’s statement of operations.  Any amounts due to or from
Merck in respect of such development costs and milestone payments earned but not
received are recorded as such on the Company’s balance sheet.  At
March 31, 2009, the Company had recorded an amount due from Merck under the
Collaboration Agreement of $6.4 million.
 
 3.     Marketable
Securities
 
 The
Company has classified its marketable securities that are not included in cash
equivalents as available-for-sale and, accordingly, carries such securities at
fair value.  At March 31, 2009, all of the Company’s marketable
securities consisted of United States government or agency
securities.
 
 At March
31, 2009, the aggregate fair value and amortized cost of the Company’s
marketable securities were $7,600,000 and 7,596,000,
respectively.  Gross unrealized gains and losses were $4,000 and $0,
respectively, at March 31, 2009.
 
 At
December 31, 2008, the aggregate fair value and amortized cost of the Company’s
marketable securities were $14,825,000 and $14,807,000,
respectively.  Gross unrealized gains and losses were $18,000 and $0
respectively, at December 31, 2008.
  5
  4.
              Intangible
      and Other Assets, Net
 
 Intangible
and other assets, net, were comprised of the following at March 31, 2009 and
December 31, 2008:
 
 In
      thousands
                            
                            March
      31,
                              2009
                            
                            
                            December
      31,
                              2008Capitalized
      patent and license costs
                            
                            $
                            11,445
                            
                            
                            $
                            11,107Purchased
      technology
                            
                            
                            5,901
                            
                            
                            
                            5,90117,346
                            
                            
                            
                            17,008Less
      accumulated amortization
                            
                            
                            (7,345
                            )
                            
                            
                            (7,142
                            )10,001
                            
                            
                            
                            9,866Other
                            
                            
                            25
                            
                            
                            
                            26$
                            10,026
                            
                            
                            $
                            9,892
 
 Amortization
expense for intangible assets amounted to $203,000 and $148,000 in 2009 and
2008, respectively.  The weighted average amortization period for
intangible assets was 15.3 years in 2009 and 14.8 years in 2008,
respectively.
 
 5.
              Long-Term
      Debt
 
 Long-term
debt was comprised of the following at March 31, 2009 and December 31,
2008:
 
 In
      thousands
                              
                              March
      31,
                                2009
                              
                              
                              December
      31,
                                2008Bank
      term note
                              
                              $
                              12,600
                              
                              
                              $
                              12,950Less
      current portion
                              
                              
                              (1,400
                              )
                              
                              
                              (1,400
                              )$
                              11,200
                              
                              
                              $
                              11,550
 
 The loan,
as amended, bears interest at LIBOR plus 1.25 to 2.25 percent, 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
effective interest rate on the loan was 2.33% and 3.65% at March 31, 2009 and
December 31, 2008, respectively.  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 $1.1
million for the remainder of 2009, $1.9 million in 2010, $3.7 million in 2011,
$4.7 million in 2012, and $1.2 million in 2013.
 
 6.
              Stockholders’
Equity
 
 Sale
of Common Stock and Warrants
 
 On
February 25, 2009, the Company sold 14,378,698 shares of its common stock in a
registered direct offering to institutional investors, at a purchase price of
$1.69 per share, resulting in net proceeds after fees and expenses of
approximately $22.8 million.  The investors also received warrants to
purchase an additional 10,784,024 shares of the Company’s common stock
exercisable at a price of $2.15 per share in cash or pursuant to the net
exercise provisions of the warrants.  At the election of the warrant
holder, upon certain transactions, including a merger, tender offer or sale of
all or substantially all of the assets of the Company, the holder may receive
cash in exchange for the warrant, in an amount determined by application of the
Black-Scholes option valuation model, if the consideration received by the
stockholders from such transaction is less than $2.15 per share.  The
warrants have a three-year term from the date of issuance and are exercisable
beginning six months after the date of issuance.  Following this
offering, the Company has approximately $40.0 million of securities remaining
available under its shelf registration statement.
  6
 
 The
warrants are classified as a derivative liability pursuant to Statement of
Financial Accounting Standards (“SFAS”) No. 133, Accounting for Derivative
Instruments and Hedging Activities, as the warrants do not qualify to be
classified as an equity instrument under the guidance of Emerging Issues Task
Force (“EITF”) No. 00-19, Accounting for Derivative Financial
Instruments Indexed to, and potentially Settled in, a Company's Own
Stock, as a result of the potential cash settlement of the
warrants.  Accordingly, the fair value of the warrants was recorded on
the condensed consolidated balance sheet as a liability upon issuance and is
adjusted to its fair value at each financial reporting date with the adjustment
reflected in the consolidated statement of operations.  The Company
has classified the warrant obligation as a long-term liability as it expires in
greater than one year and there is no indication that a merger, tender offer or
similar transaction is probable.
 
 Warrant
Valuation
 
 The fair
value of the warrants on the date of their issuance was determined to be $3.6
million using the Black-Scholes option valuation model applying the following
assumptions: (i) a risk-free rate of 1.5%, (ii) an expected term of 3 years,
(iii) no dividend yield, and (iv) a volatility of 66%.  As of March
31, 2009, the fair value of the warrants was determined to be $3.8 million using
the Black-Scholes option valuation model applying the following assumptions: (i)
a risk-free rate of 1.12%, (ii) an expected term of 2.9 years, (iii) no dividend
yield and (iv) a volatility of 69%.  The increase in the fair value of
the warrants was recognized in other income (expense).
 
 The
Company provides disclosure of financial assets and financial liabilities that
are carried at fair value based on the price that would be received to sell an
asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date.  SFAS No. 157, Fair Value Measurements,
outlines a valuation framework and creates a fair value hierarchy using the
following three levels:
 
 Level 1—Inputs
are unadjusted quoted prices in active markets for identical assets or
liabilities that the company has the ability to access at the measurement
date.
 
 Level 2—Inputs
include quoted prices for similar assets and liabilities in active markets,
quoted prices for identical or similar assets or liabilities in markets that are
not active, inputs other than quoted prices that are observable for the asset or
liability (i.e., interest rates, yield curves, etc.) and inputs that are
derived principally from or corroborated by observable market data by
correlation or other means (market corroborated inputs).
 
 Level 3—Unobservable
inputs that reflect the Company's assumptions about the assumptions that market
participants would use in pricing the asset or liability. The Company develops
these inputs based on the best information available, including its own
data.
 
 The
Company’s warrant liability is carried at fair value and would be classified as
level 3 in the fair value hierarchy due to the use of significant unobservable
inputs.  The changes in the fair value of the warrant liability during
the quarter ended March 31, 2009 were as follows (in 000’s):
 
 Initial
      measurement
                            
                            $
                            3,559Revaluation
      of warrant liability
                            
                            
                            215Balance
      at March 31, 2009
                            
                            $
                            3,774
  7
 7.
              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 compensation cost from share-based payments for the three-month periods
ended March 31, 2009 and 2008 as follows:
 
 Three
      Months Ended
                          March
      31,In
      thousands
                        
                        2009
                        
                        
                        2008Compensation
      cost from:Stock options
                        
                        $
                        753
                        
                        
                        $
                        1,262Stock and stock
      units
                        
                        
                        190
                        
                        
                        
                        68Purchases of common stock at a
      discount
                        
                        
                        73
                        
                        
                        
                        18$
                        1,016
                        
                        
                        $
                        1,348
 
 Three
      Months Ended
                        March
      31,In
      thousands
                      
                      2009
                      
                      
                      2008Compensation
      cost included in:Research
      and development expenses
                      
                      $
                      525
                      
                      
                      $
                      805General
      and administrative expenses
                      
                      
                      491
                      
                      
                      
                      543$
                      1,016
                      
                      
                      $
                      1,348
 
 During the
three-month periods ended March 31, 2009 and 2008, the Company made awards of
stock options, common stock and stock units to employees and directors, and sold
common stock to employees at a discount pursuant to the Company’s employee stock
purchase plan, as follows:
  Three
      Months Ended March 31,2009
                    
                    
                    2008Weighted-Average
                      Grant-Date
                      Fair
      Value
                    
                    
                    
                    
                    
                    
                    
                    
                    Weighted-Average
                      Grant-Date
                      Fair
      ValueTotal
                      Fair
      Value
                    
                    
                    
                    
                    
                    Total
                      Fair
      ValueUnderlying
                      Shares
                    
                    
                    Underlying
                      Shares(Per
      Share)
                    
                    
                    (in
      000’s)
                    
                    
                    
                    
                    
                    (Per
      Share)
                    
                    
                    (in
      000’s)Stock
      options
                    
                    
                    1,010,540
                    
                    
                    $
                    0.87
                    
                    
                    $
                    879
                    
                    
                    
                    579,615
                    
                    
                    $
                    2.16
                    
                    
                    $
                    1,252Stock
      and stock units
                    
                    
                    978,000
                    
                    
                    
                    1.31
                    
                    
                    
                    1,281
                    
                    
                    
                    70,000
                    
                    
                    
                    3.89
                    
                    
                    
                    272Purchases
      of common stock at a discount
                    
                    
                    134,835
                    
                    
                    
                    0.54
                    
                    
                    
                    73
                    
                    
                    
                    20,975
                    
                    
                    
                    0.86
                    
                    
                    
                    182,123,375
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    670,590
 
 Stock
options are granted with an exercise price equal to the closing price of the
Company’s common stock on the date of grant and have a term of ten
years.  Stock options generally vest 25% per year over four
years.  Stock options are valued using the Black-Scholes option
valuation model and compensation expense is recognized based on such fair value,
net of the impact of forfeitures, over the vesting period on a straight-line
basis.  The weighted average assumptions used in the Black-Scholes
model to value stock options granted during the three-month periods ended March
31, 2009 and 2008 were as follows:
 
 8




Three
      Months Ended
                          March
      31,2009
                        
                        
                        2008Expected
      life of options granted (in years)
                        
                        
                        7.14
                        
                        
                        
                        6.60Expected
      volatility
                        
                        
                        70.4
                        %
                        
                        
                        68.3
                        %Risk
      free interest rate
                        
                        
                        1.62
                        %
                        
                        
                        3.21
                        %Expected
      annual dividends
                        
                        
                        0
                        %
                        
                        
                        0
                        %
  Stock and
stock unit grants are valued based on the closing price of the Company’s common
stock on the date of grant and compensation expense is recognized over the
requisite service period or period during which restrictions remain on the
common stock or stock units granted.  Compensation expense related to
purchases of common stock by employees under the Company’s employee stock
purchase plan is recognized in the period of grant.
 
 8.
              Executive
      Compensation Plans
 
 Under the
Company’s deferred executive compensation plan established in 1997, participants
were granted options to purchase shares of certain designated mutual funds at a
discount equal to the amount of the award.  The options vested equally
over four years.  The awards were recognized as expense ratably over
the vesting period.
 
 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.  These awards generally vest over four years and the
Company accrues a liability over the vesting period.  The liability is
increased or decreased based on changes in the fair value of the underlying
securities designated in the awards.  The plan is not
funded.  In March 2009 and April 2008, the Company made awards in the
aggregate amount of $1,121,000 and $908,000 to fifteen and to thirteen officers,
respectively.  Total expense related to these plans amounted to
$204,000 and $186,000 for the three-month periods ended March 31, 2009 and 2008,
respectively.
 
 9.
              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 three months ended March 31, 2009 and 2008, the
following potentially dilutive securities were not included in the computation
of net loss per share because the effect would be anti-dilutive:
 
 Three
      Months Ended
                          March
      31,2009
                        
                        
                        2008Outstanding
      stock options and restricted stock units
                        
                        
                        9,141,227
                        
                        
                        
                        8,368,498Warrants
      to purchase common stock
                        
                        
                        10,784,024
                        
                        
                        
                        ---
 
 9
  10.
              Legal
      Proceedings
  NF-κB
Patent Infringement Litigation and Reexamination
 
 Lilly
Litigation
 
 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 “District Court“)
against Eli Lilly and Company (“Lilly”) alleging infringement of four claims of
the Plaintiffs’ U.S. Patent No. 6,410,516 (the “‘516 Patent”).  Those
claims cover methods of treating human disease by regulating NF-κB cell-signaling
activityand were alleged to be infringed 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 percent of
U.S. sales of Evista and Xigris from February 28, 2006 through the year 2019,
when the patent expires.
 
 Lilly
appealed several of the District Court’s rulings to the U.S. Court of
Appeals for the Federal Circuit (the “CAFC”) and, on April 3, 2009, the CAFC
ruled in Lilly’s favor, finding that the four claims of the ‘516 Patent asserted
in this lawsuit are not supported by adequate written description and are
therefore invalid.  The CAFC did not rule on other validity issues
raised by Lilly or on the findings of infringement.  In addition, the
CAFC affirmed the District Court’s ruling that the patent’s enforceability is
not impaired by inequitable conduct during its prosecution.  The
Plaintiffs plan to file a petition requesting an en banc rehearing of this
matter before the full CAFC.  The deadline for submitting such a
petition is currently June 2, 2009.
  Amgen
Litigation
  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, 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.
 
 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
the Delaware Court’s interpretation of these claims to exclude extracellular
methods of reducing NF-κB activity,
(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 leave
of the Delaware Court, on October 6, 2008, the Company filed in the CAFC a
notice of appeal of the Delaware Court’s summary judgment ruling 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.  Oral argument before the CAFC was heard on May 6,
2009.  In addition, on April 21, 2009, Amgen filed a motion with the
CAFC for judgment in its favor based on application of a collateral estoppel
effect of the CAFC’s judgment in the Lilly litigation.  The Company
has filed its opposition to that motion and the motions are
pending.
 
 10
 PTO
Reexamination
 
 In April
2005, Lilly filed a request that the PTO reexamine the patentability of the ‘516
Patent.  An unrelated third party filed a similar
reexamination request in the PTO in December 2005.  These two requests
were granted and were merged by the PTO into a single reexamination
proceeding.
 
 On October
16, 2008, the PTO issued a final office action confirming that 53 claims of the
‘516 patent are patentable, while rejecting 45 of the
remaining  claims, including claims relating to the Lilly litigation
and claims relating to the Amgen litigation.  As indicated in an April
21, 2009 communication from the PTO, the Company’s responses and submissions to
the PTO did not result in allowance of any of the 45 still-rejected
claims.  That outcome is appealable to the Patent Office Board of
Appeals and Interferences, and if it chooses to do so, the Company has until May
16, 2009 to file an appeal brief.
 
 Shareholder
Derivative Suit
 
 On
February 13, 2009, a shareholder derivative complaint alleging breaches of
fiduciary duties was filed in the Delaware Court of Chancery, naming each member
of the Company's board of directors at that time as a defendant and the Company
as a nominal defendant.  The complaint, filed by a stockholder of the
Company, alleges breaches of fiduciary duties by the defendants related to the
merger of AGTI with and into ARIAD, the departure of the Company’s former chief
legal officer and changes in the by-laws of the Company and roles and
responsibilities of members of the Board of Directors, and seeks unspecified
damages plus reimbursement of the legal and other costs of the
plaintiffs.  The Company believes that the claims are without merit
and that the complaint constitutes a frivolous lawsuit.  The Company
and its directors intend to vigorously oppose the lawsuit.
 
 The timing
and ultimate outcome of the legal proceedings described above cannot be
determined at this time.
 
 11.
              Recently
      Adopted or Issued Accounting
Pronouncements
 
 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 did not have an impact on the Company’s financial
statements.
 
 11
 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
 
 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.  In addition, in 2008 we and
Merck initiated patient enrollment in Phase 2 clinical trials in patients with
metastatic breast cancer, advanced endometrial cancer and advanced prostate
cancer, and Phase 1 clinical trials of ridaforolimus in combination with other
agents.
 
 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 $43.5 million
has been paid to us through March 31, 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, has entered clinical development.  We
filed an Investigational New Drug application, or IND, for this product
candidate with the 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-κB cell-signaling activity.  Additionally, we
have developed a proprietary portfolio of cell-signaling regulation
technologies, our ARGENT technology, to control intracellular processes with
small molecules, which may be useful in the development of therapeutic vaccines
and gene and cell therapy products and which provide versatile tools for
applications in cell biology, functional genomics and drug discovery
research.
 
 12
 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 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.  As a result of our collaboration with Merck for the
development and commercialization of ridaforolimus, 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.  We expect that losses will fluctuate from quarter to
quarter and that these fluctuations may be substantial.
 
 As of
March 31, 2009, we had cash, cash equivalents and marketable securities of $50.1
million, working capital of $27.5 million, deferred revenue of $107.9 million
related to non-refundable up-front and milestone payments from Merck and total
stockholders’ deficit of $68.6 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 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, stock-based compensation and the fair value
of warrants to purchase our common stock.
 
 13
 For the
three-month period ended March 31, 2009, we reported license and collaboration
revenue of $1.9 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 March 31, 2009, we have received
an up-front payment of $75 million and milestone payments of $43.5 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 March
31, 2009, we reported $10.0 million of intangible assets, consisting of 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, 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 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 March 31, 2009 of intangible assets related to our NF-κB technology is
$385,000.  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.
 
 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 market value of our common stock,
its volatility, or the expected life of stock options granted during the
three-month period ended March 31, 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 $121,000, $82,000, or $44,000 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 pursuant to SFAS No.
133.  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 can 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 market value of our common stock or
its volatility at March 31, 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 $755,000 or $647,000, respectively, with such difference
reflected in our statement of operations.
  14
 Results
of Operations
 
 For
the three months ended March 31, 2009 and 2008
 
 Revenue
 
 We
recognized license and collaboration revenue of $1.9 million in the three-month
period ended March 31, 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 $400,000, based on the non-refundable up-front and milestone payments
totaling $118.5 million received from Merck to date, in accordance with our
revenue recognition policy.  We expect that our license and
collaboration revenue will increase during the remainder of 2009 based on the
expected receipt of additional milestone payments in accordance with the Merck
collaboration agreement.
 
 Operating
Expenses
 
 Research
and Development Expenses
 
 Research
and development expenses increased by $6.9 million, or 63%, to $17.7 million in
the three-month period ended March 31, 2009, compared to $10.9 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.
 
 15
 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 March 31, 2009, as compared to
the corresponding period in 2008, were as follows:
 
 Three
      months ended March 31,
                        
                        
                        Increase/In
      thousands
                        
                        2009
                        
                        
                        2008
                        
                        
                        (decrease)Direct
      external expenses:Clinical
      programs
                        
                        $
                        10,887
                        
                        
                        $
                        4,614
                        
                        
                        $
                        6,273Preclinical
      programs
                        
                        
                        0
                        
                        
                        
                        0
                        
                        
                        
                        0All
      other R&D expenses
                        
                        
                        6,862
                        
                        
                        
                        6,261
                        
                        
                        
                        601$
                        17,749
                        
                        
                        $
                        10,875
                        
                        
                        $
                        6,874
 
 Our
clinical programs consist of ridaforolimus, our lead product candidate, and
AP24534, our kinase inhibitor program for which we filed an IND in late
2007.  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 $8.9 million in the three-month period ended March 31, 2009, an increase of
$5.0 million, as compared to the corresponding period in 2008.  This
increase is due to an increase in clinical costs of $5.2 million, contract
manufacturing costs of $678,000, and supporting non-clinical costs of $475,000,
offset in part by an increase in Merck’s share of expenses of $3.0 million in
the three-month period ended March 31, 2009, as compared to the corresponding
period in 2008.  In addition, costs for Merck’s services provided to
the collaboration increased by $1.7 million in the three-month period ended
March 31, 2009, as compared to the corresponding period in 2008 as a result of
an increase in Merck’s activities under the global development
plan.  Clinical trial costs and contract manufacturing costs increased
due primarily to increasing enrollment in our Phase 3 clinical trial of
ridaforolimus in patients with metastatic sarcomas and the initiation of
enrollment in Phase 2 clinical trials of ridaforolimus in patients with breast
cancer, endometrial cancer, prostate cancer and non-small cell lung
cancer.  Costs of non-clinical studies increased due to the initiation
and conduct of toxicology studies of ridaforolimus required to support
regulatory filings with the FDA.  Subject to reductions in spending we may
implement in 2009 as discussed in Note 1 to the condensed consolidated financial
statements and under the caption "Liquidity" in this Management's
Discussion and Analysis of Financial Condition and Results of Operations, we expect
that our direct external costs for ridaforolimus, net of Merck’s share of such
costs, will increase during the remainder of 2009 as we continue enrollment in
our Phase 2 and Phase 3 clinical trials for this product candidate and expand
other clinical and non-clinical development activities with Merck.
 
 Direct
external expenses for our second clinical program, AP24534, were $2.0 million
for the three-month period ended March 31, 2009, an increase of $1.3 million as
compared to the corresponding period in 2008. The increase is due to an increase
in clinical costs of $179,000 and toxicology costs of $1.1
million.  Clinical costs increased due to increasing enrollment in our
Phase 1 clinical trial in patients with hematologic
malignancies.  Toxicology costs increased due to the conduct of
long-term toxicology studies necessary to support development of this product
candidate.  We expect that our direct external costs for AP24534 will
increase during the remainder of 2009, subject to reductions in spending we may
implement in 2009 as discussed in Note 1 and under the caption "Liquidity",
as we enroll patients in our Phase 1 trial and continue related manufacturing
and non-clinical studies for this product candidate.
 
 16
 We
incurred no direct external expenses for preclinical programs in the three-month
periods ended March 31, 2009 and 2008 as, during those periods, no R&D
programs were 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.  We expect to
nominate our next clinical candidate, an anaplastic lymphoma kinase, or ALK,
inhibitor, and move it into preclinical testing in 2009.  The direct
external expenses to be incurred from the point in time we nominate this
clinical candidate will be reflected in this analysis as a preclinical
program.
 
 All other
R&D expenses increased by $601,000 in the three-month period ended March 31,
2009 as compared to the corresponding period in 2008.  This increase
is due to an increase in 2009 in personnel expenses of $643,000 related to the
hiring of additional R&D personnel, and an increase in overhead and general
expenses of $628,000, offset in part by an increase in Merck’s allocated share
of such expenses under the terms of the collaboration agreement of
$666,000.  We expect that all other R&D expenses will increase
during the remainder of 2009, subject to reductions in spending we may implement
in 2009 as discussed in Note 1 and under the caption "Liquidity", 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, 2008 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 $4.0 million, or 49%, to $4.1 million
in the three-month period ended March 31, 2009, compared to $8.1 million in the
corresponding period in 2008.  Professional fees decreased by $4.0
million to $2.1 million in the three-month period ended March 31, 2009, compared
to $6.1 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 increase slightly over the remainder of
the year, subject to reductions in spending we may implement in 2009 as
discussed in Note 1 and under the caption "Liquidity", reflecting an increase in
commercial planning activities and required support of our research and
development programs.
 
 We expect
that our operating expenses in total, net of Merck’s share of development costs
of ridaforolimus, will increase during the remainder of 2009 for the reasons
described above and subject to reductions in spending we may implement in 2009
as noted 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
ridaforolimus pursuant to our collaboration with Merck and the conduct of our
clinical trial and the required manufacturing for AP24534.
 
 17
 
 Other
Income (Expense)
 
 Interest
Income/Expense
 
 Interest
income decreased to $37,000 in the three-month period ended March 31, 2009 from
$596,000 in the corresponding period in 2008, as a result of a lower average
balance of funds invested in 2009 and lower interest yields from our
investments.
 
 Interest
expense remained relatively unchanged at $81,000 in the three-month period ended
March 31, 2009 and $79,000 in the corresponding period in 2008.
 
 Revaluation
of Warrant Liability
 
 The fair
value at March 31, 2009 of our warrant liability was $215,000 higher than its
fair value at inception, resulting in a loss of $215,000 for the three-month
period ended March 31, 2009.  Potential future increases or decreases
in our stock price, or other changes in the factors that impact the valuation of
the warrant liability, will result in losses or gains, respectively, being
recognized in our consolidated statement of operations in future periods. Such
gains or losses will not have any impact on our cash balances, liquidity or cash
flows from operations.
 
 Operating
Results
 
 We
reported a loss from operations of $20.0 million in the three-month period ended
March 31, 2009 compared to a loss from operations of $17.5 million in the
corresponding period in 2008, an increase of $2.4 million, or 14%.  We
also reported a net loss of $20.2 million in the three-month period ended March
31, 2009, compared to a net loss of $17.0 million in the corresponding period in
2008, an increase in net loss of $3.2 million or 19%, and a net loss per share
of $0.26 and $0.25, respectively.  We expect that our loss from
operations and our net loss will increase during the remainder of 2009 due to
the various factors discussed under “Revenue” and “Operating Expenses” above and
subject to reductions in spending we may implement in 2009, as noted
above.  Actual losses will depend on the progress of our product
development programs, the progress of our discovery research programs, the
impact of commercial and business development activities and developments in our
legal proceedings, among other factors.  The extent of such 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.
 
 Liquidity
and Capital Resources
 
 We have
financed our operations and investments to date primarily through sales of our
common stock to institutional investors and through funding from research and
development collaboration agreements 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.  Our collaboration with Merck for the development and
commercialization of ridaforolimus provides for additional funding in the form
of up-front and potential milestone payments, as well as the sharing of
development costs for ridaforolimus.  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.
 
 18
  Sources
of Funds
 
 For the
three months ended March 31, 2009 and 2008, our sources of funds were as
follows:
 
 Three
      Months Ended
                          March
      31,In
      thousands
                        
                        2009
                        
                        
                        2008Sales/issuances
      of common stock:In common stock offerings, net
      of issuance costs
                        
                        $
                        22,819
                        
                        
                        $
                        ---Pursuant to stock option and
      purchase plans
                        
                        
                        137
                        
                        
                        
                        77Proceeds
      from long-term borrowings
                        
                        
                        ---
                        
                        
                        
                        10,505Maturities
      of marketable securities, net of purchases
                        
                        
                        7,227
                        
                        
                        
                        1,336$
                        30,183
                        
                        
                        $
                        11,918
 
 The amount
of funding we raise through sales of our common stock depends on many factors,
including, but not limited to, the status and progress of our product
development programs, projected cash needs, availability of funding from other
sources, our stock price and the status of the capital markets.
 
 We have
filed shelf registration statements with the U.S. Securities and Exchange
Commission (“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.
 
 On
February 25, 2009, we raised net proceeds of $22.8 million from the sale of
14,378,698 shares of our common stock and warrants to purchase 10,784,024 shares
of our common stock from our existing shelf registration
statement.  Following this transaction, we have approximately $40.0
million of securities remaining available for issuance under our existing shelf
registration statement.
 
 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 manage
our marketable securities portfolio to provide cash for payment of our
obligations.  We purchase marketable securities to enhance our yield
on invested funds and when such amounts are not needed for near-term payment of
obligations.  We generally hold our marketable securities to
maturity.  Upon maturity of such marketable securities, a portion may
be retained as cash to provide for payment of current obligations while the
remainder will be reinvested in accordance with our investment
policy.  For the three-month periods ended March 31, 2009 and 2008,
proceeds from maturities of marketable securities, purchases of marketable
securities and the resulting net amount retained as cash for payment of
obligations or reinvested was as follows:
 
 Three
      Months Ended
                          March
      31,In
      thousands
                        
                        2009
                        
                        
                        2008Proceeds
      from sales and maturities of marketable securities
                        
                        $
                        14,826
                        
                        
                        $
                        14,356Purchases
      of marketable securities
                        
                        
                        (7,599
                        )
                        
                        
                        (13,020
                        )$
                        7,227
                        
                        
                        $
                        1,336
  19
  Uses
of Funds
 
 The
primary uses of our cash are to fund our operations and working capital
requirements and, to a lesser degree, to repay our long-term debt, to invest in
intellectual property and to invest in our property and equipment as needed for
our business.  For the three months ended March 31, 2009 and 2008, our
uses of funds were as follows:
 
 Three
      Months Ended
                          March
      31,In
      thousands
                        
                        2009
                        
                        
                        2008Net
      cash used in operating activities
                        
                        $
                        10,110
                        
                        
                        $
                        13,274Repayment
      of borrowings
                        
                        
                        350
                        
                        
                        
                        320Investment
      in intangible assets
                        
                        
                        339
                        
                        
                        
                        229Investment
      in property and equipment
                        
                        
                        1,071
                        
                        
                        
                        1,879$
                        11,870
                        
                        
                        $
                        15,702
 
 The net
cash used in operating activities is comprised of our net losses, adjusted for
non-cash expenses, deferred revenue, including deferrals of the up-front and
milestone payments received from Merck, and working capital
requirements.  As noted above, our net loss for the three months ended
March 31, 2009 increased by $3.2 million, as compared to the corresponding
period in 2008, due primarily to increased operating expenses.  As a
result of the receipt of a $12.5 million milestone payment from Merck, offset in
part by other changes in our working capital requirements, our net cash used in
operations decreased by $3.2 million in the three-month period ended March 31,
2009 as compared to the corresponding period in 2008.  As noted above,
we expect that our net loss will increase in the remainder of 2009 due to
continued progress in development of our product candidates.  However,
we expect that we will receive additional milestone payments from Merck in the
remainder of 2009 consistent with our global development plan for ridaforolimus;
such milestone payments will have a favorable impact on our cash used in
operations.  We also expect that our investments in intangible assets,
consisting of our intellectual property, and property and equipment will
decrease over the remainder of 2009.
 
 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 March 31, 2009, 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.
 
 20
 Contractual
Obligations
 
 We have
substantial fixed contractual obligations under various research and licensing
agreements, consulting and employment agreements, lease agreements and long-term
debt instruments.  These contractual obligations were comprised of the
following as of March 31, 2009:
 
 Payments
      Due By PeriodIn
      thousands
                    
                    Total
                    
                    
                    In
                      2009
                    
                    
                    2010
                      through
                      2012
                    
                    
                    2013
                      through
                      2014
                    
                    
                    After
                      2014Long-term
      debt
                    
                    $
                    12,600
                    
                    
                    $
                    1,050
                    
                    
                    $
                    10,325
                    
                    
                    $
                    1,225
                    
                    
                    $
                    —Operating
      leases
                    
                    
                    6,034
                    
                    
                    
                    535
                    
                    
                    
                    5,499
                    
                    
                    
                    —
                    
                    
                    
                    —Employment
      agreements
                    
                    
                    14,365
                    
                    
                    
                    4,554
                    
                    
                    
                    9,204
                    
                    
                    
                    607
                    
                    
                    
                    —Other
      long-term obligations
                    
                    
                    5,062
                    
                    
                    
                    821
                    
                    
                    
                    2,127
                    
                    
                    
                    1,719
                    
                    
                    
                    395Total
      fixed contractual obligations
                    
                    $
                    38,061
                    
                    
                    $
                    6,960
                    
                    
                    $
                    27,155
                    
                    
                    $
                    3,551
                    
                    
                    $
                    395
 
 Long-term
debt consists of scheduled principal payments on such debt.  Interest
on our long-term debt is based on variable interest rates.  Assuming a
constant interest rate of 2.33%, our average interest rate on our debt at March
31, 2009, over the remaining term of the debt, our interest expense would total
approximately $211,000 for the remainder of 2009, $577,000 in the period 2010
through 2012, and $5,000 in 2013.
 
 Other
long-term obligations are comprised primarily of our deferred executive
compensation plans and license agreements.  The license agreements
generally provide for payment by us of annual license fees, milestone payments
and royalties upon successful commercialization of products.  All
license agreements are cancelable by us.  The above table reflects
remaining license fees for the lives of the agreements but excludes milestone
and royalty payments, as such amounts are not probable or estimable at this
time.
 
 Liquidity
 
 At March
31, 2009, we had cash, cash equivalents and marketable securities totaling $50.1
million and working capital of $27.5 million, compared to cash, cash equivalents
and marketable securities totaling $39.1 million and working capital of $14.2
million at December 31, 2008.
 
 On
February 25, 2009, we raised net proceeds of $22.8 million from the sale of
14,378,698 shares of our common stock and warrants to purchase 10,784,024 shares
of our common stock from our existing shelf registration statement at a price of
$1.69 per unit.  Following this transaction, we have approximately
$40.0 million of securities remaining available for issuance under our existing
shelf registration statement which can be sold prior to February 6, 2010,
subject to extension under the rules and regulations applicable to shelf
registration statements promulgated by the SEC.
 
 In the
first quarter of 2009, we incurred a loss of $20.3 million and reported cash
used in operating activities of $10.1 million which reflects the favorable
impact of a $12.5 million milestone payment received from Merck related to the
start of a Phase 2 clinical trial of ridaforolimus in patients with advanced
prostate cancer.  On May 7, 2009, we reported that Phase 3 clinical
trials of ridaforolimus that had been planned to start in the fourth quarter of
2009 will now likely start in the first or second quarter of 2010, and therefore
an estimated $27 million in milestone payments associated with those trials are
also expected to move from the fourth quarter of 2009 to the first or second
quarter of 2010.  In order to mitigate the impact of the shift of
these expected milestone payments into 2010, we are evaluating and will
implement measures to reduce spending in 2009. In addition, we are engaged in
discussions with Merck regarding the scope, costs and timing of development of
ridaforolimus to address the change in the timing of expected receipt of the
milestone payments, as provided for in the governance provisions of the
collaboration agreement. We are
also pursuing options to provide incremental funding, including pursuing a
partnership for development and commercialization of AP24534.
 
 21
 There are
numerous factors that are likely to affect our spending levels, including the
extent of clinical trials and other development activities for ridaforolimus 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
ridaforolimus and AP24534, the progress of our discovery research and
preclinical programs, and the impact of potential business development
activities, among other factors.  Depending on the success of our
efforts to reduce spending and generate incremental funding sufficient to
mitigate the impact of the shift of expected milestone payments from Merck into
2010, our cash, cash equivalents and marketable securities as of March 31, 2009
may not be sufficient to fund operations through at least the next twelve
months.  There can be no assurance that actions we take to reduce
spending or provide incremental funding will generate sufficient resources to
fund operations for at least twelve months.
 
 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 or amend partnership agreements for development and commercialization of
our product candidates, and/or (4) license our cell-signaling
technologies.
 
 To the
extent that we raise additional capital through the sale of equity or
convertible debt securities, the ownership interest of our existing stockholders
will be diluted, and the terms may include liquidation or other preferences that
adversely affect the rights of our stockholders. Debt financing, if available,
may involve agreements that include covenants limiting or restricting our
ability to take specific actions, such as incurring debt, making capital
expenditures or declaring dividends. If we raise additional funds through
collaborations, strategic alliances and licensing arrangements with third
parties, we may have to relinquish valuable rights to our technologies or
product candidates, or grant licenses on terms that are not favorable to
us.
 
 There can
be no assurance that additional funds will be available when we need them on
terms that are acceptable to us, or at all.  If adequate funds are not
available to us on a timely basis, we may be required to: (1) delay, limit,
reduce or terminate preclinical studies, clinical trials or other clinical
development activities for one or more of our product candidates; (2) delay,
limit, reduce or terminate our discovery research or preclinical development
activities; or (3) delay, limit, reduce or terminate our establishment of
sales and marketing capabilities or other activities that may be necessary to
commercialize our product candidates.
 
 22
 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 proceedings, 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, 2008 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.
 
 23
 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 value with unrealized gains or losses reported as a
separate component of stockholders’ equity (accumulated other comprehensive
income).  Realized gains and losses on marketable security
transactions are reported using the specific-identification
method.  Interest income is recognized when earned.  A
decline in the fair 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 of reasonably possible near-term changes in interest rates on
our financial position, results of operations and cash flows would not be
material due to the short-term nature of these investments.  In
particular, at March 31, 2009, 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 record
as a liability the fair value of warrants to purchase 10,784,024 shares of our
common stock issued to investors in connection with a registered direct offering
of our common stock on February 25, 2009.  The fair value of this
warrant liability is determined using the Black-Scholes option valuation model
and is therefore sensitive to changes in the market price and volatility of our
common stock.  In the event of a hypothetical 10% increase in the
market price or volatility of our common stock on which the March 31, 2009
valuation was based, the value would have increased by $755,000 or $647,000,
respectively.  Such increase would have been reflected as additional
loss on revaluation of the warrant liability in our statement of
operations.
 
 At March
31, 2009, we had $12.6 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 (23
basis points at March 31, 2009), we would incur approximately $28,000 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.
  24
 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.
  25
 PART II.   OTHER INFORMATION
 
 ITEM
1. LEGAL PROCEEDINGS
 
 The
information contained in Note 10 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, 2008.
 
 ITEM
2.            UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
 
 On
September 11, 2008, we entered into an agreement and plan of merger, or the
Merger Agreement, pursuant to which our 80 percent 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 October 2008, pursuant
to the Merger Agreement, we issued an aggregate of 1,799,276 shares of ARIAD
common stock to former AGTI minority stockholders who had not exercised
appraisal rights under Delaware law.  In addition, in January 2009, we
reached a settlement with the former AGTI minority stockholders who had
exercised their appraisal rights, pursuant to which we issued an aggregate of
452,852 shares of ARIAD common stock and made cash payments of approximately
$2.43 in cash for each share of AGTI common stock they
owned.  Accordingly, a total of 2,252,128 shares of our common stock,
or approximately 3.1 percent of the outstanding common stock of ARIAD at the
time of the merger, were issued in connection with the AGTI
merger.  The shares of ARIAD common stock issued in connection with
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.
 
 26
 
 ITEM
6.            EXHIBITS
 
 4.1
              Form
      of Warrant to Purchase Common Stock (incorporated by reference to the
      Current Report on Form 8-K filed on February 20,
  2009).
 
 10.1
              Director
      Compensation Arrangements.
 
 31.1
              Certification
      of the Chief Executive Officer.
 
 31.2
              Certification
      of the Chief Financial Officer.
 
 32.1
              Certification
      pursuant to Section 906 of the Sarbanes-Oxley Act of
  2002.
 
 
 ARIAD and
the ARIAD logo are our registered trademarks and ARGENT is our
trademark.  The domain name and website address www.ariad.com, and all
rights thereto, are registered in the name of, and owned by,
ARIAD.  The information in our website is not intended to be part of
this Quarterly Report on Form 10-Q.  We include our website address
herein only as an inactive textual reference and do not intend it to be an
active link to our website.
 
 27
 
 SIGNATURES
 
 Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
   ARIAD
      Pharmaceuticals, Inc.By:
                    /s/ Harvey
      J. Berger, M.D.Harvey
      J. Berger, M.D.Chairman
      and Chief Executive Officer
  By:
                        /s/ Edward
      M. FitzgeraldEdward
      M. FitzgeraldSenior
      Vice President,Chief
      Financial Officer(Principal
      financial officerand
      chief accounting officer)
   Date:  May
11, 2009
  28
 EXHIBIT INDEX
 
 
 Exhibit                                                                   Title
 No.
 4.1
                Form
      of Warrant to Purchase Common Stock (incorporated by reference to the
      Current Report on Form 8-K filed on February 20,
  2009).
 
 10.1
                Director
      Compensation Arrangements.
 
 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.






29


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