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 September 30, 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 November 6, 2009
was 108,957,565.











ARIAD
PHARMACEUTICALS, INC.





TABLE
OF CONTENTS


PagePART I.
            FINANCIAL INFORMATION
            
            
            1ITEM 1.
            UNAUDITED FINANCIAL STATEMENTS
            
            
            1Condensed Consolidated Balance Sheets – September 30, 2009
      andDecember 31, 2008
            
            
            1Condensed Consolidated Statements of Operations for the
      ThreeMonths and Nine Months Ended September 30, 2009 and
      2008
            
            
            2Condensed Consolidated Statements of Cash Flows for
      theNine Months Ended September 30, 2009 and
      2008
            
            
            3Notes to Unaudited Condensed Consolidated Financial
      Statements
            
            
            4ITEM 2.
            MANAGEMENT’S DISCUSSION AND ANALYSIS OF
      FINANCIALCONDITION AND RESULTS OF OPERATIONS
            
            
            13ITEM 3.
            QUANTITATIVE AND QUALITATIVE DISCLOSURES
      ABOUTMARKET RISK
            
            
            27ITEM 4.
            CONTROLS AND PROCEDURES
            
            
            27PART II.
            OTHER INFORMATION
            
            
            29ITEM 1.
            LEGAL PROCEEDINGS
            
            
            29ITEM 1A.
            RISK
      FACTORS
            
            
            29ITEM 5.
            OTHER INFORMATION
            
            
            29ITEM 6.
            EXHIBITS
            
            
            29SIGNATURES
            
            
            30EXHIBIT INDEX
            
            
            31










PART I.
              FINANCIAL
      INFORMATIONITEM 1.
              UNAUDITED
      FINANCIAL STATEMENTS




ARIAD
PHARMACEUTICALS, INC. AND SUBSIDIARIES
 CONDENSED CONSOLIDATED BALANCE SHEETS


In
      thousands, except share and per share data
            
            September
      30,
              2009
            
            
            December
      31,
              2008(Unaudited)ASSETSCurrent
      assets:Cash
      and cash equivalents
            
            $
            57,473
            
            
            $
            24,243Marketable
      securities
            
            
            ---
            
            
            
            14,825Amounts
      due under collaboration agreement
            
            
            5,169
            
            
            
            5,580Inventory
      and other current assets
            
            
            3,408
            
            
            
            4,055Total
      current assets
            
            
            66,050
            
            
            
            48,703Property
      and equipment:Leasehold
      improvements
            
            
            22,027
            
            
            
            22,004Equipment
      and furniture
            
            
            17,242
            
            
            
            14,991Total
            
            
            39,269
            
            
            
            36,995Less
      accumulated depreciation and amortization
            
            
            (29,821
            )
            
            
            (27,402
            )Property
      and equipment, net
            
            
            9,448
            
            
            
            9,593Intangible
      and other assets, net
            
            
            9,735
            
            
            
            9,892Total
      assets
            
            $
            85,233
            
            
            $
            68,188LIABILITIES
      AND STOCKHOLDERS’ DEFICITCurrent
      liabilities:Current
      portion of long-term debt
            
            $
            1,750
            
            
            $
            1,400Accounts
      payable
            
            
            3,060
            
            
            
            9,370Accrued
      compensation and benefits
            
            
            1,362
            
            
            
            817Accrued
      product development expenses
            
            
            9,878
            
            
            
            9,936Other
      accrued expenses
            
            
            3,338
            
            
            
            3,990Current
      portion of deferred revenue
            
            
            8,480
            
            
            
            6,982Current
      portion of deferred executive compensation
            
            
            865
            
            
            
            941Other
      current liabilities
            
            
            234
            
            
            
            1,093Total
      current liabilities
            
            
            28,967
            
            
            
            34,529Long-term
      debt
            
            
            10,150
            
            
            
            11,550Deferred
      revenue
            
            
            105,136
            
            
            
            90,282Deferred
      executive compensation
            
            
            1,441
            
            
            
            953Other
      long-term liabilities
            
            
            619
            
            
            
            72Warrant
      liability
            
            
            11,229
            
            
            
            ---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, 108,883,540
      shares in 2009 and 71,365,339 shares in 2008
            
            
            109
            
            
            
            71Additional
      paid-in capital
            
            
            428,182
            
            
            
            369,313Accumulated
      other comprehensive income
            
            
            ---
            
            
            
            18Accumulated
      deficit
            
            
            (500,600
            )
            
            
            (438,600
            )Total
      stockholders’ deficit
            
            
            (72,309
            )
            
            
            (69,198
            )Total
      liabilities and stockholders’ deficit
            
            $
            85,233
            
            
            $
            68,188


See notes
to unaudited condensed consolidated financial statements.




1


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


Three
      Months Ended
            
            
            Nine
      Months EndedSeptember
      30,
            
            
            September
      30,In
      thousands, except share and per share data
            
            2009
            
            
            2008
            
            
            2009
            
            
            2008License
      and collaboration revenue
            
            $
            2,155
            
            
            $
            1,536
            
            
            $
            6,148
            
            
            $
            4,481Operating
      expenses:Research
      and development
            
            
            14,384
            
            
            
            13,365
            
            
            
            47,939
            
            
            
            36,067General
      and administrative
            
            
            3,472
            
            
            
            8,255
            
            
            
            12,412
            
            
            
            23,431Total
      operating expenses
            
            
            17,856
            
            
            
            21,620
            
            
            
            60,351
            
            
            
            59,498Loss
      from operations
            
            
            (15,701
            )
            
            
            (20,084
            )
            
            
            (54,203
            )
            
            
            (55,017
            )Other
      income (expense):Interest
      income
            
            
            29
            
            
            
            238
            
            
            
            98
            
            
            
            1,166Interest
      expense
            
            
            (65
            )
            
            
            (147
            )
            
            
            (225
            )
            
            
            (419
            )Revaluation
      of warrant liability
            
            
            (5,072
            )
            
            
            ---
            
            
            
            (7,670
            )
            
            
            ---Total
      other income (expense), net
            
            
            (5,108
            )
            
            
            91
            
            
            
            (7,797
            )
            
            
            747Net
      loss
            
            $
            (20,809
            )
            
            $
            (19,993
            )
            
            $
            (62,000
            )
            
            $
            (54,270
            )Net
      loss per share – basic and diluted
            
            $
            (.21
            )
            
            $
            (.29
            )
            
            $
            (.70
            )
            
            $
            (.78
            )Weighted-average
      number of shares of
              common stock outstanding – basic
              and diluted
            
            
            100,274,893
            
            
            
            69,429,185
            
            
            
            88,119,741
            
            
            
            69,369,602





See notes
to unaudited condensed consolidated financial statements.




2





ARIAD
PHARMACEUTICALS, INC. AND SUBSIDIARIES


CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


(Unaudited)





Nine
      Months Ended
              September
      30,In
      thousands
            
            2009
            
            
            2008Cash
      flows from operating activities:Net
      loss
            
            $
            (62,000
            )
            
            $
            (54,270
            )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation and
      amortization
            
            
            3,190
            
            
            
            2,043Accretion of discount on
      marketable securities
            
            
            (18
            )
            
            
            (342
            )Stock-based
      compensation
            
            
            3,222
            
            
            
            4,256Deferred executive
      compensation expense
            
            
            858
            
            
            
            515Revaluation of warrant
      liability
            
            
            7,670
            
            
            
            ---Increase (decrease)
      from:Inventory and other current
      assets
            
            
            647
            
            
            
            (460
            )Amounts due under
      collaboration agreement
            
            
            411
            
            
            
            (3,859
            )Other assets
            
            
            (21
            )
            
            
            13Accounts
    payable
            
            
            (6,310
            )
            
            
            (597
            )Accrued compensation and
      benefits
            
            
            545
            
            
            
            575Accrued product development
      expenses
            
            
            (58
            )
            
            
            2,460Other accrued
      expenses
            
            
            (652
            )
            
            
            922Other
    liabilities
            
            
            592
            
            
            
            ---Deferred
    revenue
            
            
            16,352
            
            
            
            13,020Deferred executive
      compensation paid
            
            
            (446
            )
            
            
            (662
            )Net
      cash used in operating activities
            
            
            (36,018
            )
            
            
            (36,386
            )Cash
      flows from investing activities:Acquisitions
      of marketable securities
            
            
            (7,599
            )
            
            
            (42,491
            )Proceeds
      from maturities of marketable securities
            
            
            22,426
            
            
            
            42,599Investment
      in property and equipment
            
            
            (2,095
            )
            
            
            (5,666
            )Investment
      in intangible assets
            
            
            (1,144
            )
            
            
            (562
            )Net cash provided by (used in)
      investing activities
            
            
            11,588
            
            
            
            (6,120
            )Cash
      flows from financing activities:Proceeds
      from long-term borrowings
            
            
            ---
            
            
            
            10,505Repayment
      of long-term borrowings
            
            
            (1,050
            )
            
            
            (1,020
            )Principal
      payments under capital lease obligation
            
            
            (59
            )
            
            
            (38
            )Proceeds
      from issuance of common stock, net of issuance costs
            
            
            58,370
            
            
            
            ---Proceeds
      from issuance of common stock pursuant to stock
              option and purchase
      plans
            
            
            399
            
            
            
            329Net
      cash provided by financing activities
            
            
            57,660
            
            
            
            9,776Net
      increase (decrease) in cash and cash equivalents
            
            
            33,230
            
            
            
            (32,730
            )Cash
      and cash equivalents, beginning of period
            
            
            24,243
            
            
            
            67,864Cash
      and cash equivalents, end of period
            
            $
            57,473
            
            
            $
            35,134Supplemental
      cash flow informationAssets acquired under capital
      lease
            
            $
            179





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 September 30, 2009, and the results of operations for the
three-month and nine-month periods ended September 30, 2009 and 2008 and cash
flows for the nine-month periods ended September 30, 2009 and
2008.  The results of operations for the three-month and nine-month
periods ended September 30, 2009 are not necessarily indicative of the results
to be expected for the full year.  The Company considers events or
transactions that occur after the balance sheet date but before the financial
statements are issued to provide additional evidence relative to certain
estimates or to identify matters that require additional
disclosure.  Subsequent events have been evaluated through November 6,
2009, the date prior to the issuance of these financial
statements.  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.





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 September 30, 2009, the Company had $57.5 million of cash and
cash equivalents.





The
Company expects to continue to incur significant operating expenses and net
losses related to its research and development programs and supporting
activities through at least 2010.  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, including AP26113,
and the impact of business development activities, among other
factors.





The
Company is pursuing various potential sources of additional funding to further
support its development programs and related activities, including partnering of
its earlier stage product candidates, AP24534 and AP26113, and licensing of its
ARGENT technology for research and laboratory applications.  In
addition, the Company and Merck are currently engaged in the annual process of
updating the global development plan for ridaforolimus.  This updated
global development plan will establish the scope, timing and costs of ongoing
development, including which Phase 3 clinical trials will be pursued and when
they will likely be initiated, and the expected timing of related milestone
payments as defined in the collaboration agreement, including the timing of
anticipated milestone payments for filing for and obtaining regulatory approval
of ridaforolimus in patients with sarcomas.  The Company and Merck are
also discussing possible revisions to the terms of the collaboration agreement
designed to address funding of the updated global development plan for, and
preparation for possible commercial launch of, ridaforolimus.  The
scope and costs of ongoing development of ridaforolimus, to be defined in the
updated global development plan, will be determined in part by the outcome of
these discussions.





There can
be no assurance that the actions the Company may take to provide additional
funding will generate sufficient resources to fund operations for at least
twelve months.  If the Company is not successful in its efforts to
secure additional funding from these or other sources or otherwise reduce
spending to conserve cash and capital, its cash and cash equivalents as of
September 30, 2009, may not be sufficient to fund operations for at least the
next twelve months.




4





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 after
demonstration of clinical proof of concept, which would result in changes in
development and commercialization responsibilities and compensation
arrangements.  The Company is responsible for supplying the active
pharmaceutical ingredient used in the product and Merck is responsible for the
formulation of the finished product, all under a separate supply agreement
between the parties entered into in May 2008.





The
Collaboration Agreement provides that, in the United States, the Company and
Merck will co-promote the product, the Company will distribute and sell the
product for all cancer indications and record all sales, and each party will
receive 50 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 U.S. Food and Drug Administration
(“FDA”) 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 nine-month period ended
September 30, 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, and a milestone payment of $10 million related to the
start of a Phase 2 clinical trial in patients with metastatic non-small–cell
lung cancer.  For financial accounting purposes, 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.  At September 30, 2009, the Company’s balance
sheet included total deferred revenue of $113.6 million, of which $8.5 million
is included in current liabilities.




5





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
September 30, 2009, the Company had recorded an amount due from Merck under the
Collaboration Agreement of $5.2 million.





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





3.
            Marketable
      Securities and Total Comprehensive
Loss





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 September 30, 2009, the Company had no marketable
securities.





Total
comprehensive loss includes net loss and changes in unrealized gain or loss on
marketable securities.  Total comprehensive loss was $20.8 million and
$62.0 million for the three-month and nine- month periods ended September 30,
2009 and $20.0 million and $54.3 million for the three-month and nine-month
periods ended September 30, 2008.





4.
            Intangible
      and Other Assets, Net





Intangible
and other assets, net, were comprised of the following at September 30, 2009 and
December 31, 2008:





In
      thousands
            
            September
      30,
              2009
            
            
            December
      31,
              2008Capitalized
      patent and license costs
            
            $
            11,654
            
            
            $
            11,107Purchased
      technology
            
            
            5,901
            
            
            
            5,90117,555
            
            
            
            17,008Less
      accumulated amortization
            
            
            (7,866
            )
            
            
            (7,142
            )9,689
            
            
            
            9,866Other
            
            
            46
            
            
            
            26$
            9,735
            
            
            $
            9,892





Amortization
expense for intangible assets amounted to $770,000 and $461,000 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 September 30, 2009 and December 31,
2008:





In
      thousands
            
            September
      30,
              2009
            
            
            December
      31,
              2008Bank
      term note
            
            $
            11,900
            
            
            $
            12,950Less
      current portion
            
            
            (1,750
            )
            
            
            (1,400
            )$
            10,150
            
            
            $
            11,550




6


The loan
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.  The effective interest rate on the loan was 1.73%
and 3.65% at September 30, 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 also requires the Company to
maintain a minimum of $15.0 million in unrestricted cash, cash equivalents or
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 are $350,000 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 and Warrants





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 $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 at the time of any such event, if the consideration received by
the stockholders from such transaction is less than $2.15 per
share.  The warrants became exercisable on August 25, 2009 and will
expire on February 25, 2012 if not exercised by that date.  No
warrants have yet been exercised.





The
warrants are classified as a derivative liability as the warrants do not qualify
to be classified as an equity instrument 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 such fair value is adjusted 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 there is no indication that a merger, tender offer or
similar transaction is probable.





On August
7, 2009, the Company sold 21,850,000 shares of its common stock in an
underwritten public offering, including 2,850,000 shares of common stock upon
exercise by the underwriters of their over-allotment option, at a purchase price
of $1.75 per share.  Net proceeds of this offering, after underwriting
discounts and commissions and direct expenses, were $35.6
million.  Harvey J. Berger, M.D., the Company’s chairman and chief
executive officer, purchased 1,714,286 shares of common stock for $3 million in
this offering.  Following this offering, the Company has approximately
$1.8 million of securities remaining available under its shelf registration
statement which can be sold prior to February 6, 2010, subject to extension
under SEC rules.





7.
            Fair
      Value of Financial Instruments





The
carrying amounts of cash, cash equivalents, accounts payable and accrued
liabilities approximate fair value because of their short-term
nature.  The carrying amount of the Company’s bank term note of $11.9
million at September 30, 2009 approximates fair value due to its variable
interest rate.  The Company’s obligation under its executive
compensation plans is based in part on the current fair market value of
underlying securities, which is therefore stated at its estimated fair
value.




7





The
Company provides disclosure of financial assets and financial liabilities that
are carried at fair value based on the price that would be received upon sale of
an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date.  Fair value measurements
may be classified based on the inputs 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 estimates of 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 is classified as Level
3 in the fair value hierarchy due to the use of significant unobservable
inputs.  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 September 30, 2009, the fair value of the warrants was
determined to be $11.2 million using the Black-Scholes option valuation model
applying the following assumptions: (i) a risk-free rate of 1.15%, (ii) an
expected term of 2.4 years, (iii) no dividend yield and (iv) a volatility of
78%.  The increase in the fair value of the warrants was recognized in
other income (expense).  The change in the fair value of the warrant
liability since its initial measurement was as follows (in
thousands):





Initial
      measurement
            
            $
            3,559Revaluation
      of warrant liability
            
            
            7,670Balance
      at September 30, 2009
            
            $
            11,229





8.
            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 and
nine-month periods ended September 30, 2009 and 2008 as follows:





Three
      Months Ended
              September
      30,
            
            
            Nine
      Months Ended
              September
      30,In
      thousands
            
            2009
            
            
            2008
            
            
            2009
            
            
            2008Compensation
      cost from:Stock options
            
            $
            741
            
            
            $
            1,067
            
            
            $
            2,278
            
            
            $
            3,552Stock and stock
      units
            
            
            301
            
            
            
            292
            
            
            
            787
            
            
            
            651Purchases of common stock at a
      discount
            
            
            37
            
            
            
            17
            
            
            
            157
            
            
            
            53$
            1,079
            
            
            $
            1,376
            
            
            $
            3,222
            
            
            $
            4,256Compensation
      cost included in:Research and development
      expenses
            
            $
            522
            
            
            $
            753
            
            
            $
            1,605
            
            
            $
            2,393General and administrative
      expenses
            
            
            557
            
            
            
            623
            
            
            
            1,617
            
            
            
            1,863$
            1,079
            
            
            $
            1,376
            
            
            $
            3,222
            
            
            $
            4,256





8





During the
nine-month period ended September 30, 2009, 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:





Underlying
                Shares
              
              
              Weighted-
                Average
                Grant-Date
                Fair
      Value
              
              
              Total
                Fair
      Value(Per
      Share)
              
              
              (in
      000’s)Stock
      options
              
              
              1,235,140
              
              
              $
              0.95
              
              
              $
              1,170Stock
      and stock units
              
              
              1,123,000
              
              
              
              1.33
              
              
              
              1,496Purchases
      of common stock at a discount
              
              
              306,625
              
              
              
              0.51
              
              
              
              1572,664,765





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 nine-month period ended
September 30, 2009 were as follows:





Expected
      life of options granted (in years)
            
            
            7.04Expected
      volatility
            
            
            70.9
            %Risk
      free interest rate
            
            
            2.74
            %Expected
      annual dividends
            
            
            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.





9.
            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
$858,000 and $515,000 for the nine-month periods ended September 30, 2009 and
2008, respectively.




9




10.
            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 and nine-month periods ended September 30, 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:





2009
            
            
            2008Outstanding
      stock options
            
            
            7,752,770
            
            
            
            7,740,087Outstanding
      restricted stock units
            
            
            1,234,000
            
            
            
            489,0008,986,770
            
            
            
            8,229,087Warrants
      to purchase common stock
            
            
            10,784,024
            
            
            
            ---





11.
            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
claimscover 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 CAFC
granted Plaintiffs subsequent petition requesting en banc rehearing of this
matter before the full CAFC. The scheduled period for submitting briefs
concludes in late November, and a hearing has been scheduled for December 7,
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.




10





On June 1,
2009, the CAFC affirmed the Delaware Court’s claim interpretation and summary
judgment of non-infringement with respect to Enbrel. Plaintiffs did not file a
petition for rehearing in this case.





PTO
Reexamination





A
reexamination at the United States Patent and Trademark Office (“PTO”) of
aspects of patentability of the ‘516 Patent had been initiated by Lilly in April
2005.  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.  The Company
has appealed that decision to the Patent Office Board of Appeals and
Interferences and filed its appeal brief on May 18, 2009.





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 and has filed a motion to
dismiss the complaint which is pending.  The Company and its directors
intend to vigorously oppose the lawsuit.





12.
            Recent
      Accounting Pronouncements





In April
2009, the Financial Accounting Standards Board (“FASB”) issued authoritative
guidance that requires disclosures about fair value of financial instruments in
interim reporting periods as well as in annual financial
statements.  The effective date is June 15, 2009 and accordingly, the
Company is now required to provide additional disclosures, which are included in
Note 7.





Also in
April 2009, FASB issued authoritative guidance to amend the other-than-temporary
impairment guidance for debt securities for evaluation when an
other-than-temporary impairment has occurred and the related presentation and
disclosure of such presentation in the financial statements.  This
guidance is effective for periods ended after June 15, 2009 and did not have a
material impact on the Company’s financial statements.





In May
2009, FASB issued authoritative guidance that defines subsequent events and
establishes general standards of accounting for and disclosure of events that
occur after the balance sheet date but before financial statements are issued or
are available to be issued.  The Company has adopted these provisions
and the adoption did not materially impact its financial condition, results of
operations, or cash flow.  The Company provided the additional
disclosures in Note 1.




11





In
September 2009, FASB issued authoritative guidance that modifies the accounting
for multiple element arrangements.  This guidance requires an entity
to allocate revenue to each unit of accounting in multiple deliverable
arrangements based on the relative selling price of each
deliverable.  It also changes the level of evidence of stand-alone
selling prices required to separate deliverables by allowing an entity to make
its best estimate of the stand-alone selling price of the deliverables when more
objective evidence of selling price is not available.  Implementation
of this guidance is required no later than fiscal years beginning after June 15,
2010 and this guidance may be applied prospectively to new or materially
modified arrangements after the effective date or
retrospectively.  Early application is permitted.  The
Company has not yet evaluated the impact that this guidance may have on its
financial statements.




12





ITEM 2.
              MANAGEMENTS’
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS
      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.  We expect to complete patient
enrollment in this Phase 3 clinical trial by approximately year-end
2009.  We also expect to obtain the results of the second interim
analysis of the primary endpoint of this trial, progression-free survival or
PFS, by approximately the end of the first quarter of 2010 and the final
analysis of PFS by approximately the end of the third quarter of
2010.  In addition, in 2008 and 2009 we and Merck initiated patient
enrollment in Phase 2 clinical trials in patients with metastatic breast cancer,
metastatic endometrial cancer, metastatic non-small-cell lung cancer and
advanced prostate cancer, and Phase 1 clinical trials of ridaforolimus in
combination with other agents, all as part of our joint global development plan
with Merck.  These various trials are ongoing at this
time.





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





In
addition to cost-sharing provisions, the collaboration agreement provides for an
up-front payment by Merck of $75 million, which was paid to us in July 2007, up
to $452 million in milestone payments based on the successful development of
ridaforolimus in multiple potential cancer indications, of which $53.5 million
has been paid to us through September 30, 2009, and up to $200 million in
milestone payments based on achievement of specified product sales
thresholds.  The upfront payment and milestone payments, when earned
by us and paid by Merck, are non-refundable.  Merck has also agreed to
provide us with up to $200 million in interest-bearing, repayable, development
cost advances to cover a portion of our share of global development costs, after
we have paid $150 million in global development costs and have obtained
regulatory approval to market ridaforolimus from the FDA in the United States or
similar regulatory authorities in Europe or Japan.  The collaboration
agreement provides that each party will receive 50 percent of the profit from
the sales of ridaforolimus in the United States, and Merck will pay us tiered
double-digit royalties on sales of ridaforolimus outside the United
States.





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




13





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.





Since our
inception in 1991, we have devoted substantially all of our resources to our
research and development programs.  We receive no revenue from the
sale of pharmaceutical products, and most of our revenue to date has been
received in connection with a joint venture we had with a major pharmaceutical
company from 1997 to 1999 and under our collaboration agreement with Merck
signed in July 2007.  Except for the gain on the sale of our 50
percent interest in that joint venture in December 1999, which resulted in net
income for the year ended December 31, 1999, we have not been profitable since
inception.  Under our collaboration with Merck for the development and
commercialization of ridaforolimus, we have received up-front and milestone
payments since July 2007 in the aggregate of $128.5 million and we expect that
our license and collaboration revenue will increase in future
periods.  However, we expect to incur substantial and increasing
operating losses for the foreseeable future, primarily due to costs associated
with our pharmaceutical product development programs, including costs for
clinical trials and product manufacturing, pre-commercial activities, personnel
and our intellectual property.  We expect such costs and operating
losses will be offset in part by development cost-sharing provisions and license
revenue from our collaboration with Merck for the development and
commercialization of ridaforolimus.





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





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





As of
September 30, 2009, we had cash and cash equivalents of $57.5 million, working
capital of $37.1 million, deferred revenue of $113.6 million related to
non-refundable up-front and milestone payments from Merck, and total
stockholders’ deficit of $72.3 million.





General





Our
operating losses are primarily due to the costs associated with our
pharmaceutical product development programs, personnel and intellectual property
protection and enforcement.  As our product development programs
progress, we incur significant costs for toxicology and pharmacology studies,
product development, manufacturing, clinical trials and regulatory
support.  We also incur costs related to planning for potential
regulatory approval and commercial launch of products, including market research
and assessment.  These costs can vary significantly from quarter to
quarter depending on the number of product candidates in development, the stage
of development of each product candidate, the number of patients enrolled in and
complexity of clinical trials and other factors.  Costs associated
with our intellectual property include legal fees and other costs to prosecute,
maintain, protect and enforce our intellectual property, which can fluctuate
from quarter to quarter depending on the status of patent issues being pursued,
including our on-going patent litigation.




14





Historically,
we have relied primarily on the capital markets as our source of
funding.  We may also obtain funding from collaborations with
pharmaceutical, biotechnology and/or medical device companies for development
and commercialization of our product candidates, such as our collaboration with
Merck for the global development and commercialization of
ridaforolimus.  These collaborations can take the form of licensing
arrangements, co-development or joint venture arrangements or other
structures.  In addition, we utilize long-term debt and leases to
supplement our funding, particularly as a means of funding investment in
property and equipment and infrastructure needs.  If funding from
these various sources is unavailable on reasonable terms, we may be required to
reduce our operations in order to conserve cash and capital by delaying, scaling
back or eliminating one or more of our product development programs or enter
into licenses or other arrangements with third parties on terms that may be
unfavorable to us.  Please see additional information under the
caption “Liquidity and Capital Resources” below.





Critical
Accounting Policies and Estimates





Our
financial position and results of operations are affected by subjective and
complex judgments, particularly in the areas of revenue recognition, the
carrying value of intangible assets, stock-based compensation and the fair value
of warrants to purchase our common stock.





For the
nine-month period ended September 30, 2009, we reported license and
collaboration revenue of $6.1 million.  License and collaboration
revenue is recorded based on up-front payments, periodic license payments and
milestone payments received or deemed probable of receipt, spread over the
estimated performance period of the license or collaboration
agreement.  Regarding our collaboration with Merck for the development
and commercialization of ridaforolimus, as of September 30, 2009, we have
received an up-front payment of $75 million and milestone payments of $53.5
million related to the start of Phase 2 and Phase 3 clinical trials of
ridaforolimus.  We are recognizing revenues related to such payments
on a straight-line basis through 2023, the estimated patent life of the
underlying technology.  Changes in development plans could impact the
probability of receipt of future milestone payments on which revenue recognition
is based.  In addition, changes in estimated performance periods,
including changes in patent lives of underlying technology, could impact the
rate of revenue recognition in any period.  Such changes in revenue
could have a material impact on our statement of operations.





At
September 30, 2009, we reported $9.7 million of intangible assets, consisting of
capitalized costs related primarily to purchased and issued patents, patent
applications and licenses and the recorded value of the technology associated
with our acquisition in September 2008 of the 20-percent minority interest of
ARIAD Gene Therapeutics, Inc. that we did not previously own, net of accumulated
amortization.  These costs are being amortized over the estimated
useful lives of the underlying technology, patents or
licenses.  Changes in these lives or a decision to discontinue using
the technologies could result in material changes to our balance sheet and
statements of operations.  If we were to abandon the ongoing
development of the underlying product candidates or technologies or terminate
our efforts to pursue collaborations or license agreements, we may be required
to write off a portion of the carrying value of our intangible
assets.  The net book value as of September 30, 2009 of intangible
assets related to our NF-κB technology is
$332,000.  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.




15





In
determining expense related to stock-based compensation, we utilize the
Black-Scholes option valuation model to estimate the fair value of stock options
granted to employees, consultants and directors.  Application of the
Black-Scholes option valuation model requires the use of factors such as the
market value and volatility of our common stock, a risk-free discount rate and
an estimate of the life of the option contract.  Fluctuations in these
factors can result in adjustments to our statements of
operations.  If, for example, the volatility of our common stock, or
the expected life of stock options granted during the nine-month period ended
September 30, 2009 were 10% higher or lower than used in the valuation of such
stock options, our valuation of, and total stock-based compensation expense to
be recognized for, such awards would have increased or decreased by up to
$77,000, or $45,000 respectively.





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





Results
of Operations





For
the three months ended September 30, 2009 and 2008





Revenue





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





Operating
Expenses





Research
and Development Expenses





Research
and development expenses increased by $1.0 million, or 8%, to $14.4 million in
the three-month period ended September 30, 2009, compared to $13.4 million in
the corresponding period in 2008, as described in further detail
below.





The
research and development process necessary to develop a pharmaceutical product
for commercialization is subject to extensive regulation by numerous
governmental authorities in the United States and other
countries.  This process typically takes years to complete and
requires the expenditure of substantial resources.  Current
requirements include:





·
            preclinical
      toxicology, pharmacology and metabolism studies, as well as in vivo efficacy
      studies in relevant animal models of
disease;




16




·
            manufacturing
      of drug product for preclinical studies and clinical trials and ultimately
      for commercial supply;





·
            submission
      of the results of preclinical studies and information regarding
      manufacturing and control and proposed clinical protocol to the U.S. Food
      and Drug Administration, or FDA, in an Investigational New Drug
      application, or IND (or similar filings with regulatory agencies outside
      the United States);





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





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





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





We group
our research and development, or R&D, expenses into two major categories:
direct external expenses and all other R&D expenses.  Direct
external expenses consist of costs of outside parties to conduct laboratory
studies, to develop manufacturing processes and manufacture product candidates,
to conduct and manage clinical trials and similar costs related to our clinical
and preclinical studies.  These costs are accumulated and tracked by
product candidate.  All other R&D expenses consist of costs to
compensate personnel, to purchase lab supplies and services, to lease, operate
and maintain our facility, equipment and overhead and similar costs of our
research and development efforts.  These costs apply to work on our
clinical and preclinical candidates as well as our discovery research
efforts.  These costs have not been tracked by product candidate
because the number of product candidates and projects in R&D may vary from
time to time and because we utilize internal resources across multiple projects
at the same time.





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





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





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





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




17


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





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





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





The
successful development of our product candidates is uncertain and subject to a
number of risks.  We cannot be certain that any of our product
candidates will prove to be safe and effective or will meet all of the
applicable regulatory requirements needed to receive and maintain marketing
approval.  Data from preclinical studies and clinical trials are
susceptible to varying interpretations that could delay, limit or prevent
regulatory clearance.  We, the FDA or other regulatory authorities may
suspend clinical trials at any time if we or they believe that the subjects
participating in such trials are being exposed to unacceptable risks or if such
regulatory agencies find deficiencies in the conduct of the trials or other
problems with our products under development.  Delays or rejections
may be encountered based on additional governmental regulation, legislation,
administrative action or changes in FDA or other regulatory policy during
development or the review process.  Other risks associated with our
product development programs are described under the heading “Risk Factors”
incorporated by reference into Part II, Item 1A of our Quarterly Report on Form
10-Q for the fiscal period ended June 30, 2009 as updated from time to time in
our subsequent periodic reports and current reports filed with the
SEC.  Due to these uncertainties, accurate and meaningful estimates of
the ultimate cost to bring a product to market, the timing of completion of any
of our drug development programs and the period in which material net cash
inflows from any of our drug development programs will commence are
unavailable.




18





General
and Administrative Expenses





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





We expect
that our operating expenses in total, net of Merck’s share of development costs
of ridaforolimus, will increase slightly during the fourth quarter of 2009 for
the reasons described above.   Operating expenses may fluctuate
from quarter to quarter.  The actual amount of any change in operating
expenses will depend on, among other things, the progress of our product
development programs, including the rate of enrollment in clinical trials and
the status of other studies related to ridaforolimus pursuant to our
collaboration with Merck and the conduct of our clinical trial and the required
manufacturing for AP24534.





Other
Income (Expense)





Interest
Income/Expense





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





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





Revaluation
of Warrant Liability





The fair
value at September 30, 2009 of our warrant liability was $5.1 million higher
than its fair value at June 30, 2009, resulting in a charge of $5.1 million for
the three-month period ended September 30, 2009.  The increase in
value of the warrant liability is primarily due to the impact of the increase in
the market price of our common stock during the three months ended September 30,
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 charges or credits, recognized in our consolidated statement of
operations in future periods. Such charges or credits will not have any impact
on our cash balances, current liquidity or cash flows from
operations.





Operating
Results





We
reported a loss from operations of $15.7 million in the three-month period ended
September 30, 2009 compared to a loss from operations of $20.1 million in the
corresponding period in 2008, a decrease of $4.4 million, or 22%.  We
also reported a net loss of $20.8 million in the three-month period ended
September 30, 2009, compared to a net loss of $20.0 million in the corresponding
period in 2008, an increase in net loss of $816,000 or 4%, and a net loss per
share of $0.21 and $0.29, respectively.  We expect that our loss from
operations and our net loss, excluding the impact of the revaluation of our
warrant liability, will increase slightly during the fourth quarter of 2009 due
to the various factors discussed under “Revenue” and “Operating Expenses”
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 other
activities and the development timelines for our product
candidates.




19





Results
of Operations





For
the nine months ended September 30, 2009 and 2008





Revenue





We
recognized license and collaboration revenue of $6.1 million in the nine-month
period ended September 30, 2009, compared to $4.5 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 $1.7 million, based on the non-refundable up-front and milestone payments
totaling $128.5 million received from Merck to date, in accordance with our
revenue recognition policy.





Operating
Expenses





Research
and Development Expenses





Research
and development expenses increased by $11.9 million, or 33%, to $47.9 million in
the nine-month period ended September 30, 2009, compared to $36.1 million in the
corresponding period in 2008.





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





Nine
      months ended September 30,
            
            
            Increase/In
      thousands
            
            2009
            
            
            2008
            
            
            (decrease)Direct
      external expenses:Clinical
      programs
            
            $
            27,468
            
            
            $
            16,069
            
            
            $
            11,399Preclinical
      programs
            
            
            61
            
            
            
            ---
            
            
            
            61All
      other R&D expenses
            
            
            20,410
            
            
            
            19,998
            
            
            
            412$
            47,939
            
            
            $
            36,067
            
            
            $
            11,872





Direct
external expenses for ridaforolimus were $23.3 million in the nine-month period
ended September 30, 2009, an increase of $9.9 million, as compared to the
corresponding period in 2008, primarily reflecting our share of increases in
clinical trial costs ($6.1 million), manufacturing costs ($2.0 million), and
Merck’s services provided to the collaboration ($1.2
million).  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 in Phase 2 clinical
trials of ridaforolimus in patients with breast cancer, endometrial cancer,
prostate cancer and non-small cell lung cancer.  Merck’s services
provided to the collaboration increased as a result of Merck’s increasing
activities in support of clinical trial and other activities for which Merck is
responsible.





Direct
external expenses for our second clinical program, AP24534, were $4.2 million
for the nine-month period ended September 30, 2009, an increase of $1.5 million
as compared to the corresponding period in 2008.  The increase is due
primarily to an increase in clinical costs of $274,000 and toxicology costs of
$1.8 million offset in part by a decrease in contract manufacturing costs of
$611,000.  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.  Manufacturing costs decreased due primarily to a decrease
in product and process development activities in 2009 relative to
2008.




20





The direct
external expenses incurred from our preclinical program relate to costs for
toxicology studies for our third clinical candidate, AP26113.  We
incurred no direct external expenses for preclinical programs in the
corresponding period in 2008.  Prior to the designation of our third
clinical candidate, all programs other than clinical programs are designated as
discovery research and are included in “all other R&D expenses” in the above
table.





All other
R&D expenses increased by $412,000 in the nine-month period ended September
30, 2009 as compared to the corresponding period in 2008.  This
increase is due to an increase in 2009 in personnel expenses of $2.0 million
related to the hiring of additional R&D personnel, an increase in overhead
and general expenses of $1.0 million due to increased depreciation and
amortization related to capital expenditures, and an increase in amortization of
intangible assets of $417,000 related to the purchase in 2008 of the 20
percent  minority interest of ARIAD Gene Therapeutics, Inc., offset in
part by a decrease in lab supplies and services of $467,000 and legal and
consulting costs of $805,000 due to a focus on cost reduction and an increase in
Merck’s allocated share of our internal expenses under the terms of the
collaboration agreement of $1.8 million.





General
and Administrative Expenses





General
and administrative expenses decreased by $11.0 million, or 47%, to $12.4 million
in the nine-month period ended September 30, 2009, compared to $23.4 million in
the corresponding period in 2008.  Professional fees decreased by
$11.7 million to $5.4 million in the nine-month period ended September 30, 2009,
compared to $17.1 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 Lilly
and Amgen.





Other
Income (Expense)





Interest
Income/Expense





Interest
income decreased to $98,000 in the nine-month period ended September 30, 2009
from $1.2 million 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 decreased to $225,000 in the nine-month period ended September 30, 2009
from $419,000 in the corresponding period in 2008, as a result of lower average
loan balances in 2009 and lower interest rates on our long-term
debt.





Revaluation
of Warrant Liability





The fair
value at September 30, 2009 of our warrant liability was $7.7 million higher
than its fair value at inception, resulting in a loss of $7.7 million for the
nine-month period ended September 30, 2009.  The increase in the value
of the warrant liability is primarily due to the impact of the increase in the
market price of our common stock since inception of the warrant in February
2009.





Operating
Results





We
reported a loss from operations of $54.2 million in the nine-month period ended
September 30, 2009 compared to a loss from operations of $55.0 million in the
corresponding period in 2008, a decrease of $814,000, or 1%.  We also
reported a net loss of $62.0 million in the nine-month period ended September
30, 2009, compared to a net loss of $54.3 million in the corresponding period in
2008, an increase in net loss of $7.7 million or 14%, and a net loss per share
of $0.70 and $0.78 respectively.




21





Our
operating results for 2009 reflect the favorable impact of initiatives we have
implemented to reduce our operating expenses announced in July
2009.  Through September 30, 2009, such initiatives have reduced
operating expenses by $7.3 million as compared to total estimated operating
expenses as factored into our financial guidance provided in January
2009.  We expect to achieve total reductions in operating expenses of
approximately $7.5 million through December 31, 2009, as planned.





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 use of bank 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.





Sources
of Funds





For the
three months and nine months ended September 30, 2009 and 2008, our sources of
funds were as follows:





Three
      Months Ended
              
              
              Nine
      Months EndedSeptember
      30,
              
              
              September
      30,In
      thousands
              
              2009
              
              
              2008
              
              
              2009
              
              
              2008Sales/issuances
      of common stock:In
      common stock offerings, net of issuance costs
              
              $
              35,551
              
              
              $
              
              
              
              $
              58,370
              
              
              $Pursuant
      to stock option and purchase plans
              
              
              165
              
              
              
              190
              
              
              
              399
              
              
              
              329Proceeds
      from long-term borrowings
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              10,505$
              35,716
              
              
              $
              190
              
              
              $
              58,769
              
              
              $
              10,834





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.  On August 7, 2009, we raised net proceeds of $35.6 million
from the sale of 21,850,000 shares of our common stock in an underwritten public
offering under our existing shelf registration statement.  Following
this offering, we have approximately $1.8 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 SEC
rules.




22





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.  At September 30, 2009, we had $11.9 million outstanding under
this term loan.





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 and nine months ended September
30, 2009 and 2008, our uses of funds were as follows:





Three
      Months Ended
              September
      30,
            
            
            Nine
      Months Ended
              September
      30,In
      thousands
            
            2009
            
            
            2008
            
            
            2009
            
            
            2008Net
      cash used in operating activities
            
            $
            17,105
            
            
            $
            4,670
            
            
            $
            36,018
            
            
            $
            36,386Repayment
      of borrowings
            
            
            350
            
            
            
            350
            
            
            
            1,050
            
            
            
            1,020Investment
      in intangible assets
            
            
            156
            
            
            
            210
            
            
            
            1,144
            
            
            
            562Principal
      payments under lease obligations
            
            
            23
            
            
            
            15
            
            
            
            59
            
            
            
            38Investment
      in property and equipment
            
            
            144
            
            
            
            2,388
            
            
            
            2,095
            
            
            
            5,666$
            17,778
            
            
            $
            7,633
            
            
            $
            40,366
            
            
            $
            43,672





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
changes.  As noted above, our net loss for the nine months ended
September 30, 2009 increased by $7.7 million, as compared to the corresponding
period in 2008, due primarily to non-cash charges related to the revaluation of
our warrant liability.  As a result of changes in our working capital,
our net cash used in operating activities decreased by $368,000 in the
nine-month period ended September 30, 2009 as compared to the corresponding
period in 2008.  As noted above, we expect that our loss from
operations will increase slightly in the fourth quarter of 2009 due to the
various factors discussed above.  We also expect that our investments
in intangible assets, consisting of our intellectual property, and property and
equipment will decrease in the fourth quarter of 2009.





Management
of Marketable Securities





We manage
our marketable securities portfolio to provide cash for payment of our
obligations.  We purchase marketable securities to enhance our yield
on invested funds and when such amounts are not needed for near-term payment of
obligations.  We generally hold our marketable securities to
maturity.  Upon maturity of such marketable securities, a portion may
be retained as cash to provide for payment of current obligations while the
remainder will be reinvested in accordance with our investment
policy.  For the three-month and nine-month periods ended September
30, 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 retained for reinvestment was as follows:




23




Three
      Months Ended
              September
      30,
            
            
            Nine
      Months Ended
              September
      30,In
      thousands
            
            2009
            
            
            2008
            
            
            2009
            
            
            2008Purchases
      of marketable securities
            
            $
            —
            
            
            $
            (12,039
            )
            
            $
            (7,599
            )
            
            $
            (42,491
            )Proceeds
      from sales and maturities of marketable
              securities
            
            
            7,300
            
            
            
            12,049
            
            
            
            22,426
            
            
            
            42,599$
            7,300
            
            
            $
            10
            
            
            $
            14,827
            
            
            $
            108





Off-Balance
Sheet Arrangements





As part of
our ongoing business, we do not participate in transactions that generate
relationships with unconsolidated entities for financial partnerships, such as
entities often referred to as structured finance or special purpose entities
which would have been established for the purpose of facilitating off-balance
sheet arrangements or other contractually narrow or limited
purposes.  As of September 30, 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.





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 September 30, 2009:





Payments
      Due By PeriodIn
      thousands
            
            Total
            
            
            In
              2009
            
            
            2010
              through
              2012
            
            
            2013
              through
              2014
            
            
            After
              2014Long-term
      debt
            
            $
            11,900
            
            
            $
            350
            
            
            $
            10,325
            
            
            $
            1,225
            
            
            $
            —Leases
            
            
            6,204
            
            
            
            551
            
            
            
            5,638
            
            
            
            15
            
            
            
            —Employment
      agreements
            
            
            12,421
            
            
            
            1,594
            
            
            
            10,219
            
            
            
            608
            
            
            
            —Other
      long-term obligations
            
            
            5,354
            
            
            
            565
            
            
            
            2,473
            
            
            
            1,921
            
            
            
            395Total
      fixed contractual obligations
            
            $
            35,879
            
            
            $
            3,060
            
            
            $
            28,655
            
            
            $
            3,769
            
            
            $
            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 1.73%, our average interest rate on our debt at
September 30, 2009, over the remaining term of the debt, our interest expense
would total approximately $51,000 for the remainder of 2009, $402,000 in the
period 2010 through 2012, and $5,000 in 2013.





Leases
consist of payments to be made on our lease for our office and laboratory
facility, the term of which extends to July 2012, and on agreements for certain
assets acquired under capital leases which expire at various dates into
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.




24





Liquidity





At
September 30, 2009, we had cash and cash equivalents totaling $57.5 million and
working capital of $37.1 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.  On August 7, 2009, we raised net proceeds of $35.6
million from an underwritten public offering and sale of 21,850,000 shares of
our common stock, including 2,850,000 shares of common stock from the exercise
by the underwriters of their over-allotment option, at $1.75 per
share.  Following these transactions, we have approximately $1.8
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 SEC rules.





As of
September 30, 2009, we had a warrant liability recorded of $11.2 million which
relates to warrants issued in February 2009 that are accounted for as a
liability.  The warrants are classified as a derivative as the
warrants do not qualify to be classified as an equity instrument as a result of
the potential for cash settlement of the warrants.  Our accounts
payable balance is $6.3 million lower at September 30, 2009 than December 31,
2008 as a result of the timing of payments made to our vendors.





In the
first nine months of 2009, we incurred a net loss of $62.0 million and reported
cash used in operating activities of $36.0 million which reflects the favorable
impact of $22.5 million in milestone payments received from Merck related to the
start of Phase 2 clinical trials of ridaforolimus in patients with advanced
prostate cancer and metastatic non-small-cell lung cancer.  However,
we expect to continue to incur significant operating expenses and net losses
through at least 2010 as we advance our product development programs through
clinical trials and non-clinical studies.  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,
including activities related to AP26113, and the impact of potential business
development activities, among other factors.  We are pursuing various
potential sources of additional funding to further support our development
programs and related activities.  These include partnering of our
earlier stage product candidates, AP24534 and AP26113, which could generate
up-front and milestone payments, as well as funding of on-going development
costs, and licensing of our ARGENT technology for research and laboratory
applications.  In addition, we and Merck are engaged in the annual
process of updating the global development plan for
ridaforolimus.  This updated global development plan will establish
the scope, timing and costs of ongoing development, including which Phase 3
clinical trials will be pursued and when they will likely be initiated, and the
expected timing of related milestone payments as defined in the collaboration
agreement, including the timing of anticipated milestone payments for filing for
and obtaining regulatory approval of ridaforolimus in patients with
sarcomas.  The Company and Merck are also discussing possible
revisions to the terms of the collaboration agreement designed to address
funding of the updated global development plan for, and preparation for possible
commercial launch of, ridaforolimus.  The scope and costs of ongoing
development of ridaforolimus, to be defined in the updated global development
plan, will be determined in part by the outcome of these
discussions.





There can
be no assurance that we will receive any further milestone payments under our
collaboration agreement with Merck or any payments through other business
development activities in the timeframes we have identified, or at
all.  If we are not successful in our efforts to secure additional
funding from these or other sources or otherwise reduce spending to conserve
cash and capital, our cash and cash equivalents as of September 30, 2009 may not
be sufficient to fund operations for at least the next twelve
months.




25





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 ARGENT 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; (3) amend partnership agreements for development and
commercialization of our product candidates on terms that may be unfavorable to
us; or (4) delay, limit, reduce or terminate our establishment of sales and
marketing capabilities or other activities that may be necessary to
commercialize our product candidates.





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” incorporated by reference in
Part II, Item 1A of our Quarterly Report on Form 10-Q for the period ended June
30, 2009, filed with the SEC on August 10, 2009, as updated from time to time in
our subsequent periodic reports and current reports filed with the
SEC.  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.




26





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 September 30, 2009, because our available funds are invested
solely in short-term securities with remaining maturities of ninety days 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 among other factors.  In the event of a hypothetical 10%
increase in the market price ($0.22 based on the market price of our stock at
September 30, 2009) of our common stock on which the September 30, 2009
valuation was based, the value would have increased by $1.8
million.  Such increase would have been reflected as additional loss
on revaluation of the warrant liability in our statement of
operations.





At
September 30, 2009, we had $11.9 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 (17.3 basis points at September 30, 2009), we would incur approximately
$19,000 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.




27





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.


28




PART II.
              OTHER
      INFORMATIONITEM 1.
              LEGAL
      PROCEEDINGS





The
information contained in Note 11 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
      FACTORSIn
      connection with the Company’s underwritten public offering completed on
      August 7, 2009, the Company filed a prospectus supplement and a Current
      Report on Form 8-K on August 3, 2009 with the SEC that contained updated
      risk factors relating to the Company’s business, which risk factors were
      incorporated by reference into the Company’s Quarterly Report on Form 10-Q
      for the period ended June 30, 2009 filed with the SEC on August 10,
      2009.  There have been no material changes to the risk factors
      included in these filings.ITEM
      5.
              OTHER
      INFORMATION





On
August 25, 2009, the Company’s Board of Directors  adopted the Amended
and Restated Bylaws of ARIAD Pharmaceuticals, Inc. to implement additional
informational and other procedures for stockholder nominations and proposals to
enable the Board of Directors to better analyze, evaluate and make
recommendations to the Company’s stockholders with respect to such nominations
and proposals and to increase the information that can be made available to
stockholders if nominations and proposals are submitted for stockholder
approval, and to clarify certain items.  For a summary of the changes
with respect to the procedures by which stockholders may recommend nominees to
the Company’s Board of Directors, among other changes to the Company’s previous
bylaws, see Item 5.03 of the Company’s Current Report on Form 8-K (File No.
000-21696) filed with the SEC on August 27, 2009.


ITEM 6.
                EXHIBITSExhibitNo.
                Title3.1
                ARIAD
      Pharmaceuticals, Inc. Amended and Restated Bylaws (filed in Exhibit 3.1 to
      the Registrant’s Current Report on Form 8-K (File No. 000-21696) filed
      with the Securities and Exchange Commission on August 27, 2009 and
      incorporated herein by reference).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.
  29





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 OfficerBy:
              
              /s/ Edward M. FitzgeraldEdward
      M. FitzgeraldSenior
      Vice President,Chief
      Financial Officer(Principal
      financial officerDate:  November
      6, 2009
              
              
              
              and
      chief accounting officer)




30




EXHIBIT INDEX






ExhibitNo.
            Title3.1
            ARIAD
      Pharmaceuticals, Inc. Amended and Restated Bylaws (filed in Exhibit 3.1 to
      the Registrant’s Current Report on Form 8-K (File No. 000-21696) filed
      with the Securities and Exchange Commission on August 27, 2009 and
      incorporated herein by reference).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.





31