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, 2008





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

                incorporation
      or organization)
            
            (I.R.S.
      Employer Identification No.)







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 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 October 31, 2008
was 69,564,663.




















ARIAD
PHARMACEUTICALS, INC.
 
 TABLE
OF CONTENTS
   PagePART
      I.
                FINANCIAL
      INFORMATION
                1ITEM
      1.
                UNAUDITED
      FINANCIAL STATEMENTS
                1Condensed
      Consolidated Balance Sheets – September 30, 2008 andDecember 31,
      2007
                1Condensed
      Consolidated Statements of Operations for the ThreeMonths
      and Nine Months Ended September 30, 2008 and 2007
                2Condensed
      Consolidated Statements of Cash Flows for theNine
      Months Ended September 30, 2008 and 2007
                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
                25ITEM
      4.
                CONTROLS AND
      PROCEDURES
                26PART
      II.
                OTHER
      INFORMATION
                27ITEM
      1.
                LEGAL
      PROCEEDINGS
                27ITEM
      1A.
                RISK
      FACTORS
                27ITEM
      2.
                UNREGISTERED
      SALES OF EQUITY SECURITIES ANDUSE
      OF PROCEEDS
                30ITEM
      6.
                EXHIBITS
                31SIGNATURES
                32EXHIBIT
      INDEX
                33











PART
I.            FINANCIAL
INFORMATION
 
 ITEM 1. UNAUDITED FINANCIAL
STATEMENTS
  ARIAD
      PHARMACEUTICALS, INC. AND SUBSIDIARIES
                CONDENSED
      CONSOLIDATED BALANCE SHEETSIn
      thousands, except share and per share data
              
              September
      30,
                2008
              
              
              December
      31,
                2007(Unaudited)ASSETSCurrent
      assets:Cash
      and cash equivalents
              
              $
              35,134
              
              
              $
              67,864Marketable
      securities
              
              
              17,575
              
              
              
              17,334Amounts
      due under collaboration agreement
              
              
              8,447
              
              
              
              4,588Inventory
      and other current assets
              
              
              2,834
              
              
              
              2,374Total
      current assets
              
              
              63,990
              
              
              
              92,160Property
      and equipment:Leasehold
      improvements
              
              
              21,497
              
              
              
              18,400Equipment
      and furniture
              
              
              14,513
              
              
              
              11,749Total
              
              
              36,010
              
              
              
              30,149Less
      accumulated depreciation and amortization
              
              
              (26,685
              )
              
              
              (25,134
              )Property
      and equipment, net
              
              
              9,325
              
              
              
              5,015Intangible
      and other assets, net
              
              
              9,899
              
              
              
              3,930Total
      assets
              
              $
              83,214
              
              
              $
              101,105LIABILITIES
      AND STOCKHOLDERS’ EQUITY (DEFICIT)Current
      liabilities:Current
      portion of long-term debt
              
              $
              1,400
              
              
              $
              3,815Accounts
      payable
              
              
              4,452
              
              
              
              5,049Accrued
      compensation and benefits
              
              
              1,098
              
              
              
              523Accrued
      product development expenses
              
              
              9,747
              
              
              
              7,287Other
      accrued expenses
              
              
              5,253
              
              
              
              4,331Current
      portion of deferred executive compensation
              
              
              831
              
              
              
              745Current
      portion of deferred revenue
              
              
              6,869
              
              
              
              5,819Current
      portion of capital lease payable
              
              
              70
              
              
              
              ---Accrued
      merger consideration
              
              
              5,912
              
              
              
              ---Total
      current liabilities
              
              
              35,632
              
              
              
              27,569Long-term
      debt
              
              
              11,900
              
              
              
              ---Capital
      lease payable
              
              
              87
              
              
              
              ---Deferred
      revenue
              
              
              91,996
              
              
              
              80,026Deferred
      executive compensation
              
              
              1,177
              
              
              
              1,410Stockholders’
      equity (deficit):Common
      stock, $.001 par value; authorized, 145,000,000 shares;
issued
                and outstanding, 69,537,867
      shares in 2008 and 69,241,490 shares in 2007
              
              
              70
              
              
              
              69Additional
      paid-in capital
              
              
              364,161
              
              
              
              359,576Accumulated
      other comprehensive income
              
              
              10
              
              
              
              3Accumulated
      deficit
              
              
              (421,819
              )
              
              
              (367,548
              )Total
      stockholders’ deficit
              
              
              (57,578
              )
              
              
              (7,900
              )Total
      liabilities and stockholders’ equity (deficit)
              
              $
              83,214
              
              
              $
              101,105


See
notes to unaudited condensed consolidated financial
statements.




1




ARIAD
      PHARMACEUTICALS, INC. AND SUBSIDIARIESCONDENSED
      CONSOLIDATED STATEMENTS OF OPERATIONS(Unaudited)Three
      Months Ended
              
              
              Nine
      Months EndedSeptember
      30,
              
              
              September
      30,In
      thousands, except share and per share data
              
              2008
              
              
              2007
              
              
              2008
              
              
              2007License
      and collaboration revenue
              
              $
              1,536
              
              
              $
              1,602
              
              
              $
              4,481
              
              
              $
              1,981Operating
      expenses:Research
      and development
              
              
              13,365
              
              
              
              8,242
              
              
              
              36,067
              
              
              
              29,805General
      and administrative
              
              
              8,255
              
              
              
              5,006
              
              
              
              23,431
              
              
              
              16,307Total
      operating expenses
              
              
              21,620
              
              
              
              13,248
              
              
              
              59,498
              
              
              
              46,112Loss
      from operations
              
              
              (20,084
              )
              
              
              (11,646
              )
              
              
              (55,017
              )
              
              
              (44,131
              )Other
      income (expense):Interest
      income
              
              
              238
              
              
              
              878
              
              
              
              1,166
              
              
              
              1,609Interest
      expense
              
              
              (147
              )
              
              
              (82
              )
              
              
              (419
              )
              
              
              (284
              )Total other income,
      net
              
              
              91
              
              
              
              796
              
              
              
              747
              
              
              
              1,325Net
      loss
              
              $
              (19,993
              )
              
              $
              (10,850
              )
              
              $
              (54,270
              )
              
              $
              (42,806
              )Net
      loss per share
              
              $
              (.29
              )
              
              $
              (.16
              )
              
              $
              (.78
              )
              
              $
              (.63
              )Weighted-average
      number of shares ofcommon stock outstanding
              
              
              69,429,185
              
              
              
              69,160,289
              
              
              
              69,369,602
              
              
              
              67,870,622




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
              
              2008
              
              
              2007Cash
      flows from operating activities:Net
      loss
              
              $
              (54,270
              )
              
              $
              (42,806
              )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      and amortization
              
              
              2,043
              
              
              
              1,765Accretion
      of discount on marketable securities
              
              
              (342
              )
              
              
              (609
              )Deferred
      executive compensation expense
              
              
              515
              
              
              
              745Stock-based
      compensation
              
              
              4,256
              
              
              
              4,487Increase
      (decrease) from:Inventory
      and other current assets
              
              
              (460
              )
              
              
              (599
              )Amounts
      due under collaboration agreement
              
              
              (3,859
              )
              
              
              (3,421
              )Other
      assets
              
              
              13
              
              
              
              (4
              )Accounts
      payable
              
              
              (597
              )
              
              
              (1,900
              )Accrued
      compensation and benefits
              
              
              575
              
              
              
              344Accrued
      product development expenses
              
              
              2,460
              
              
              
              (133
              )Other
      accrued expenses
              
              
              922
              
              
              
              3,220Deferred
      revenue
              
              
              13,020
              
              
              
              73,344Deferred
      executive compensation paid
              
              
              (662
              )
              
              
              (508
              )Net
      cash used in operating activities
              
              
              (36,386
              )
              
              
              33,925Cash
      flows from investing activities:Proceeds
      from maturities of marketable securities
              
              
              42,599
              
              
              
              43,377Purchases
      of marketable securities
              
              
              (42,491
              )
              
              
              (51,916
              )Investment
      in property and equipment
              
              
              (5,666
              )
              
              
              (725
              )Investment
      in intangible assets
              
              
              (562
              )
              
              
              (371
              )Net
      cash used in investing activities
              
              
              (6,120
              )
              
              
              (9,635
              )Cash
      flows from financing activities:Proceeds
      from long-term borrowings
              
              
              10,505
              
              
              
              ---Repayment
      of borrowings
              
              
              (1,020
              )
              
              
              (1,440
              )Principal
      payments under capital lease obligations
              
              
              (38
              )
              
              
              ---Proceeds
      from the issuance of stock, net of issuance costs
              
              
              ---
              
              
              
              12,300Proceeds
      from issuance of stock pursuant to stock option and purchase
      plans
              
              
              329
              
              
              
              1,997Net
      cash provided by financing activities
              
              
              9,776
              
              
              
              12,857Net
      decrease in cash and cash equivalents
              
              
              (32,730
              )
              
              
              37,147Cash
      and cash equivalents, beginning of period
              
              
              67,864
              
              
              
              31,728Cash
      and cash equivalents, end of period
              
              $
              35,134
              
              
              $
              68,875Supplemental
      disclosure of non-cash activities:Purchase
      of minority interest in subsidiary for common stock (Note
    7)
              
              $
              5,912




See notes
to unaudited condensed consolidated financial statements.
  3




ARIAD
PHARMACEUTICALS, INC. AND SUBSIDIARIES
 NOTESTO UNAUDITED CONDENSED CONSOLIDATED
 FINANCIAL
STATEMENTS
 
 1.      Management
Statement
 
 The
accompanying unaudited condensed consolidated financial statements include the
accounts of ARIAD Pharmaceuticals, Inc. (“ARIAD”) and its subsidiaries
(collectively, the “Company”).  ARIAD Gene Therapeutics, Inc., an
80%-owned subsidiary of ARIAD, was merged with and into ARIAD on September 12,
2008 (see Note 7).  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, 2008, the results of
operations for the three-month and nine-month periods ended September 30, 2008
and 2007 and cash flows for the nine-month periods ended September 30, 2008 and
2007.  The results of operations for the three-month and nine-month
periods ended September 30, 2008 are not necessarily indicative of the results
to be expected for the full year.  These financial statements should
be read in conjunction with the Company’s Annual Report on Form 10-K for the
year ended December 31, 2007, which includes consolidated financial statements
and notes thereto for the years ended December 31, 2007, 2006 and
2005.
 
 At
September 30, 2008, the Company has cash, cash equivalents and marketable
securities totaling $52.7 million.  The Company believes that the
combination of its cash, cash equivalents and marketable securities, together
with funding available pursuant to its collaboration with Merck & Co., Inc.
(Note 2) provide sufficient resources for the Company to satisfy its operating
and capital requirements through mid third quarter of 2009.  See
further discussion in Management’s Discussion and Analysis of Financial
Condition and Results of Operations under the heading “Liquidity”.
 
 2.      Collaboration
Agreement with Merck & Co., Inc.
 
 In July
2007, the Company entered into a collaboration agreement with Merck & Co.,
Inc. (“Merck”) for the joint global development and commercialization of
deforolimus, 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% of the global development costs, except that Merck will fund 100% of
any cost of development that is specific to development or commercialization of
deforolimus outside the United States.  The Collaboration Agreement
provides that, in certain circumstances, either party may opt out of conducting
and funding certain late-stage clinical trials, which would result in changes in
development and commercialization responsibilities and compensation
arrangements.  The Company is responsible for supplying the active
pharmaceutical ingredient used in the product and Merck is responsible for the
formulation of the finished product, all under a separate supply agreement
between the parties entered into in May 2008.
 
 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% 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.
  4




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 of which $28.5 million has been paid through September 30,
2008, based on the successful development of deforolimus in multiple cancer
indications, and up to $200 million 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.  All
amounts to be paid to the Company by Merck, with the exception of any
development cost advances, are non-refundable.
 
 Through
September 30, 2008, ARIAD has received the following up-front and milestone
payments under the Collaboration Agreement.  These up-front and
milestone payments have been deferred and are being recognized as revenue on a
straight-line basis through 2023, the estimated expiration of the patents
related to the underlying technology.




Amount
                (in
      millions)
              Period
                Received
              Event$75.0
              3Q2007
              Up-front
      payment13.5
              4Q2007
              Initiation
      of Phase 3 clinical trial in patients withmetastatic
      soft-tissue and bone sarcomas15.0
              3Q2008
              Initiation
      of Phase 2 clinical trial in patients with advanced breast
      cancer$103.5




In
addition, ARIAD has announced the initiation of additional clinical trials for
which it has received or expects to receive additional milestone payments under
the Collaboration Agreement upon treatment of the first patient in each of the
trials, as follows:




Amount
              (in
      millions)
            Period
              Received
            Event$2.5
            4Q2008
            Initiation
      of Phase 2 clinical trial in patients with advanced endometrial
      cancer12.5
            Expected
      4Q08
            Initiation
      of Phase 2 clinical trial in patients with advanced prostate
      cancer$15.0




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, 2008, the Company has recorded an amount due from Merck under the
collaboration agreement of $8.4 million.
  5




3.      Long-Term
Debt
 
 Long-term
debt was comprised of the following at September 30, 2008 and December 31,
2007:
  In
      thousands
                
                September
      30,
                  2008
                
                
                December
      31, 2007Bank
      term note
                
                $
                13,300
                
                
                $
                3,815Less
      current portion
                
                
                (1,400
                )
                
                
                (3,815
                )$
                11,900
                
                
                $
                ---






In March
2008, the Company amended its term loan with the bank, increasing the balance
due to $14.0 million, extending the maturity date from March 2008 to March 2013
and providing for repayment of the loan in quarterly payments of principal,
increasing from 2.5% of the total loan amount in the second quarter of 2008 to
8.75% of the total loan amount in the first quarter of 2013, together with
interest.  The loan as amended bears interest at LIBOR plus 1.25% to
2.25%, depending on the percentage of the Company’s liquid assets on deposit
with or invested through the bank, or at the prime rate, as provided in the
amendment.  The loan is secured by a lien on all assets of the Company
excluding intellectual property, which the Company has agreed not to pledge to
any other party.  The loan, as amended, also requires the Company to
maintain a minimum of $15.0 million in unrestricted cash, cash equivalents and
investments.  The agreement also contains certain covenants that
restrict additional indebtedness, additional liens and sales of assets, and
dividends, distributions or repurchases of common stock.
 
 The annual
aggregate future principal payments of the above loan, as amended, are $350,000
for the remainder of 2008, $1.4 million in 2009, $1.9 million in 2010, $3.7
million in 2011, $4.7 million in 2012 and $1.2 million in 2013.
  4.
     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 total compensation cost from share-based payments for the three-month
and nine-month periods ended September 30, 2008 and 2007 as
follows:
  Three
      Months Ended
                    September
      30,
                  
                  
                  Nine
      Months Ended
                    September
      30,In
      thousands
                  
                  2008
                  
                  
                  2007
                  
                  
                  2008
                  
                  
                  2007Compensation
      cost from:Stock options
                  
                  $
                  1,067
                  
                  
                  $
                  1,170
                  
                  
                  $
                  3,552
                  
                  
                  $
                  3,862Stock and stock
      units
                  
                  
                  292
                  
                  
                  
                  91
                  
                  
                  
                  651
                  
                  
                  
                  571Purchases of common stock at a
      discount
                  
                  
                  17
                  
                  
                  
                  18
                  
                  
                  
                  53
                  
                  
                  
                  54$
                  1,376
                  
                  
                  $
                  1,279
                  
                  
                  $
                  4,256
                  
                  
                  $
                  4,487






Three
      Months Ended
                September
      30,
              
              
              Nine
      Months Ended
                September
      30,In
      thousands
              
              2008
              
              
              2007
              
              
              2008
              
              
              2007Compensation
      cost included in:Research and development
      expenses
              
              $
              753
              
              
              $
              752
              
              
              $
              2,393
              
              
              $
              2,292General and administrative
      expenses
              
              
              623
              
              
              
              527
              
              
              
              1,863
              
              
              
              2,195$
              1,376
              
              
              $
              1,279
              
              
              $
              4,256
              
              
              $
              4,487




6
  During the
nine-month periods ended September 30, 2008 and 2007, 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:
  Nine
      Months Ended September 30,2008
                
                
                2007Weighted-Average
                  Grant-Date
                  Fair
      Value
                
                
                
                
                
                
                
                
                Weighted-Average
                  Grant-Date
                  Fair
      ValueTotal
                  Fair
      Value
                
                
                
                
                
                Total
                  Fair
      ValueShares
                
                
                Shares(Per
      Share)
                
                
                (in
      000’s)
                
                
                
                
                
                (Per
      Share)
                
                
                (in
      000’s)Stock
      options
                
                
                899,465
                
                
                $
                2.07
                
                
                $
                1,862
                
                
                
                2,092,220
                
                
                $
                3.28
                
                
                $
                6,862Stock
      and stock units
                
                
                612,500
                
                
                
                3.57
                
                
                
                2,187
                
                
                
                134,000
                
                
                
                4.94
                
                
                
                662Purchases
      of common stock at a discount
                
                
                77,018
                
                
                
                .69
                
                
                
                53
                
                
                
                39,041
                
                
                
                1.41
                
                
                
                551,588,983
                
                
                
                
                
                
                
                
                
                
                
                2,265,261




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 periods ended
September 30, 2008 and 2007 were as follows:
  Nine
      Months Ended
                  September
      30,2008
                
                
                2007Expected
      life of options granted (in years)
                
                
                6.91
                
                
                
                7.60Expected
      volatility
                
                
                69.0
                %
                
                
                68.02
                %Risk
      free interest rate
                
                
                3.29
                %
                
                
                4.47
                %Expected
      annual dividends
                
                
                0
                %
                
                
                0
                %




Stock and
stock unit grants are valued based on the closing price of the Company’s common
stock on the date of grant and compensation expense is recognized over the
requisite service period or period during which restrictions remain on the
common stock or stock units granted.  Compensation expense related to
purchases of common stock by employees under the Company’s employee stock
purchase plan is recognized in the period of grant.
 
 5.      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.
  7




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.  The Company accrues a liability based on the awards
ratably over the vesting period.  The recorded balances of such awards
are increased or decreased based on the actual total return and quoted market
prices of specified mutual funds.  In April 2008 and 2007, the Company
made awards in the aggregate amount of $908,000 and $1,403,000 to thirteen and
to eleven officers, respectively.  Total expense related to these
plans amounted to $515,000 and $745,000 for the nine-month periods ended
September 30, 2008 and 2007, respectively.
 
 6.      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 periods ended September 30, 2008 and 2007, options to
purchase 7,740,087 and 7,416,794 shares of common stock, respectively, were not
included in the computation of net loss per share, because the effect would be
anti-dilutive.
 
 7.      Merger
of AGTI into ARIAD Pharmaceuticals, Inc.
 
 On
September 11, 2008, ARIAD and ARIAD Gene Therapeutics, Inc. (“AGTI”) entered
into a merger agreement, pursuant to which AGTI was merged with and into ARIAD
on September 12, 2008 with ARIAD as the surviving company.  Prior to
the merger, AGTI was an 80 percent-owned subsidiary of ARIAD.  The
minority stockholders of AGTI included Harvey J. Berger, M.D., the Company’s
Chairman and Chief Executive Officer, Jay R. LaMarche, the Company’s former
Chief Financial Officer and a member of the Board of Directors of the Company,
several of the Company’s current and former officers and scientific advisors,
Harvard University, and Stanford University.  ARIAD effectuated the
merger to eliminate conflicts of interest between ARIAD and AGTI, to ensure that
ARIAD will receive benefits from the successful commercialization of its
products proportionate to its investment and to create additional value for its
stockholders.
 
 Under the
terms of the merger agreement, each outstanding share of AGTI common stock owned
by AGTI’s minority stockholders, except for shares held by AGTI stockholders who
properly demanded appraisal rights, was converted into the right to receive two
shares of ARIAD common stock.  The shares of ARIAD common stock issued
in the merger were not registered under the Securities Act of 1933, as amended,
and were issued in reliance on an exemption from registration related to sales
by an issuer not involving a public offering.  Not taking into account
the exercise of any appraisal rights, (i) a total of 2,252,128 shares of ARIAD
common stock, representing approximately 3.1 percent of the outstanding common
stock of ARIAD following the transaction, would have been issued, and (ii) the
total value of the acquisition of the minority interest of AGTI was
approximately $5.9 million, based on the closing market price of ARIAD common
stock on September 12, 2008 discounted to reflect the fact that the ARIAD shares
issued were not registered with the U.S. Securities and Exchange
Commission.
 
 The
minority stockholders of AGTI had the right until October 12, 2008 to demand
appraisal of their shares and seek a judicial determination of the fair value of
such shares in accordance with the provisions of the Delaware General
Corporation Law.  Stockholders owning a total of 226,426 shares of
AGTI common stock have notified ARIAD of their intention to demand appraisal of
their shares.  Under such provisions, a dissenting stockholder must
file a petition with the Delaware Court of Chancery within 120 days of the
merger date or else the appraisal rights of all dissenting stockholder will
terminate.  If a petition for an appraisal is filed in a timely
manner, at a hearing on the petition, the Delaware Court of Chancery will
determine which AGTI stockholders have complied with the Delaware statute and
who have become entitled to appraisal rights; then it will appraise the shares
of AGTI common stock owned by those AGTI stockholders.  The court will
determine the fair value of those shares, taking into account all relevant
factors, exclusive of any element of value arising from the accomplishment or
expectation of the merger, together with interest, to be paid, if any, upon the
fair value.  Unless the court, in its sole discretion, determines
otherwise, interest from the effective date of the merger through the date of
payment of the judgment shall be compounded quarterly and shall accrue at 5%
over the Federal Reserve discount rate (including any surcharge) as established
from time to time during the period between the effective date of the merger and
the date of payment of the judgment.  Any additional consideration
provided upon judgment or settlement will be recorded as an adjustment to the
intangible asset.
  8




Upon
expiration of the appraisal period in October 2008, an aggregate of 1,799,276
shares of ARIAD common stock were issued to former AGTI stockholders who had not
exercised appraisal rights.  The shares were not registered under the
Securities Act of 1933, as amended, and will become eligible for sale under Rule
144 in six months.
 
 As of
September 30, 2008, the cost of the acquisition of the 20-percent minority
interest of $5.9 million was accounted for using the purchase method of
accounting.  The cost has been allocated to intangible assets and will
be amortized over approximately fifteen years, the remaining life of the patents
related to AGTI’s technology.  The value of ARIAD’s obligation to the
minority stockholders of AGTI has been recorded as a liability until shares of
ARIAD common stock are issued to former AGTI stockholders or the outcome of the
process to determine the fair value of AGTI shares owned by dissenting
stockholders is finalized.
 
 The
following table presents pro forma results of operations data as if the
acquisition of the 20-percent minority interest of AGTI had occurred at the
beginning of the periods presented.
  Three
      Months Ended
                  September
      30, 2008
                
                
                Nine
      Months Ended
                  September
      30, 2008In
      thousands, except per share data
                
                Historical
                
                
                Pro
      Forma
                
                
                Historical
                
                
                Pro
      FormaRevenue
                
                $
                1,536
                
                
                $
                1,536
                
                
                $
                4,481
                
                
                $
                4,481Operating
      expenses
                
                $
                21,620
                
                
                $
                21,716
                
                
                $
                59,498
                
                
                $
                59,786Net
      loss
                
                $
                (19,993
                )
                
                $
                (20,089
                )
                
                $
                (54,270
                )
                
                $
                (54,558
                )Net
      loss per share
                
                $
                (0.29
                )
                
                $
                (0.28
                )
                
                $
                (0.78
                )
                
                $
                (0.76
                )




8.      Litigation
 
 NF-κB Patent
Infringement Litigation and Reexamination
 
 Lilly
Litigation
 
 As
disclosed in the Company’s Form 10-K as of December 31, 2007 and Form 10-Q as of
March 31, 2008, 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 “U.S. District Court“) against Eli Lilly and Company
(“Lilly”) alleging infringement of fourclaims (the “NF-κB ‘516
Claims”) of the Plaintiffs’ U.S. Patent No. 6,410,516 (the “‘516 Patent”),
covering methods of treating human disease by regulating NF-κB cell-signaling
activity 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% of U.S.
sales of Evista and Xigris from February 28, 2006 through the year 2019, when
the patent expires.  Lilly filed a notice of appeal on March 10, 2008 of
the jury’s verdict and other rulings by the U.S. District Court with the U.S.
Court of Appeals for the Federal Circuit (the “CAFC”).
 
 Lilly
filed its opening brief with the CAFC on June 18, 2008.  On June 27,
2008, Wyeth Corp. (“Wyeth”) filed in the CAFC an amicus curiae or “friends of
the court” brief in support of Lilly’s arguments, along with a motion seeking
the CAFC’s permission to file its brief, which was denied by the CAFC on August
18, 2008. Plaintiff’s opposition to Lilly’s brief was filed on September 26,
2008, and Lilly’s reply brief is due on November 11, 2008, after which the CAFC
will schedule oral argument on the issues presented for
appeal.




9




Amgen
Litigation
 
 Also as
disclosed in the Company’s Form 10-K as of December 31, 2007 and Form 10-Q as of
March 31, 2008, 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, and joining Wyeth Corp. 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.
In December 2007, the Company agreed to dismiss its claims against Wyeth pending
final resolution of the litigation against Amgen.
 
 The claim
construction hearing was held and arguments on the pending dispositive motions
were heard on June 19, 2008.  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 activities related to Enbrel, (ii) granted the
Company’s motion seeking to dismiss for lack of jurisdiction under the
Declaratory Judgment Act Amgen’s challenges to the validity of claims of the
‘516 Patent that are not being asserted against Enbrel,  and (iii)
granted in part and denied in part the Company’s motion for partial summary
judgment with respect to Amgen’s inequitable conduct defense.  With
respect to its summary judgment ruling of non-infringement, the Delaware Court
found that the administration of Enbrel falls outside the scope of the asserted
claims based on its interpretation of these claims to exclude extracellular
methods of reducing NF-κB
activity.
 
 On October
3, 2008, the Delaware Court granted the Company’s motion to permit an immediate
appeal to the CAFC of its claim construction order and summary judgment ruling
of non-infringement by Enbrel  of the asserted seven (7) claims of the
‘516 Patent.  The Delaware Court also cancelled the trial scheduled to
commence on November 3, 2008 with respect to Amgen’s challenges to the validity
and enforceability of the ‘516 Patent Claims and administratively closed the
case.  The Company filed its notice of appeal on October 6, 2008 in
order to seek reinterpretation of the asserted ‘516 Patent claims by the CAFC so
that the Company’s infringement case against Amgen may proceed in the Delaware
Court. Amgen’s challenges to the validity and enforceability of the ‘516 Patent
Claims would likely be considered by the Delaware Court at that
time.  The Company’s opening brief is due to be filed in the CAFC by
December 16, 2008.  Amgen’s opposition to the Company’s brief is be
due on January 26, 2009, and the Company’s reply brief is due on February 9,
2009, after which the CAFC will schedule oral argument on the issues presented
for appeal.
 
 PTO
Reexamination
 
 On April
4, 2005, Lilly filed a request in the PTO to reexamine the patentability of
certain claims of the ‘516 Patent.  An unrelated third party filed a similar request in
the PTO on December 2, 2005 to reexamine the patentability of certain claims of
the ‘516 Patent.  These two requests have been granted and were merged
by the PTO into a single reexamination proceeding.
 
 On October
16, 2008, the PTO issued a final office action confirming as patentable 53
claims of the ‘516 patent, while rejecting 45 of the
remaining  claims, including claims relating to the Lilly litigation
and claims relating to the Amgen litigation, and also rejecting the eight new
claims filed by the Company on October 22, 2007.  The Company’s
response to the final office action is due on December 16, 2008.
  10




Timing
and Outcome of Litigation and Reexamination Proceedings
 
 The timing
and ultimate outcome of the Lilly and Amgen litigations and the reexamination
proceedings in the PTO regarding the ‘516 Patent cannot be determined at this
time. Consequently, no determination can be made with respect to allowance
of the claims of the ‘516 Patent pending before the PTO and/or asserted against
Lilly and Amgen, nor can any final determination be made with respect to the
validity or infringement of the claims asserted in the Lilly and the Amgen
litigations, nor can the Company predict whether the damages awarded by the jury
in the U.S. District Court in the Lilly litigation in 2006 will be upheld,
eliminated or limited. Although the Company has prevailed in both the jury
and bench trials in the Lilly litigation, along with receiving a favorable
ruling on Lilly’s post-trial renewed motion for judgment as a matter of law, the
CAFC may reverse one or more of these rulings and/or remand one or more issues
in the Lilly litigation for retrial in the U.S. District
Court.  Consequently, the damages the Company was awarded by the jury
in the Lilly litigation may be eliminated or limited by adverse findings upon
appeal, or in the event that the claims of the ‘516 Patent are invalidated by
the PTO.  There can be no assurance that the Company will ultimately
prevail in its litigations against Lilly and Amgen or that the claims of the
‘516 Patent relevant to these actions will not be finally rejected as a result
of the reexamination proceedings in the PTO.
 
 9.      Recently
Adopted or Issued Accounting Pronouncements
 
 In
September 2006, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standard No. 157 (“SFAS No. 157”), Fair Value
Measurements.  SFAS No. 157 defines fair value, establishes a
framework for measuring fair value in accordance with accounting principles
generally accepted in the United States, and expands disclosures about fair
value measurements. The Company has adopted the provisions of SFAS No. 157 as of
January 1, 2008, for financial instruments. Although the adoption of SFAS No.
157 did not materially impact its financial condition, results of operations, or
cash flow, the Company is now required to provide additional disclosures as part
of its financial statements.
 
 SFAS No.
157 establishes a valuation hierarchy for disclosure of the inputs to valuation
used to measure fair value.  This hierarchy prioritizes the inputs into
three broad levels as follows.  Level 1 inputs are quoted prices
(unadjusted) in active markets for identical assets or liabilities.  Level
2 inputs are quoted prices for similar assets and liabilities in active markets
or inputs that are observable for the asset or liability, either directly or
indirectly through market corroboration, for substantially the full term of the
financial instrument.  Level 3 inputs are unobservable inputs based on our
own assumptions used to measure assets and liabilities at fair value.  A
financial asset’s or liability’s classification within the hierarchy is
determined based on the lowest level input that is significant to the fair value
measurement. The Company's marketable securities are classified as
available for sale and are stated at fair value based on quoted market prices
which are considered Level 1 inputs within the fair value
hierarchy.
 
 In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities, which provides companies with the
option to measure specified financial instruments and certain other items at
fair value.  SFAS No. 159 is effective for financial statements issued
for fiscal years beginning after November 15, 2007 and interim periods within
those fiscal years.  The Company did not elect to apply the fair value
method to any of its financial instruments at January 1, 2008.
 
 In June
2007, the Emerging Issues Task Force (“EITF”) issued EITF No. 07-3, Accounting for Nonrefundable Advance
Payments for Goods or Services Received for Use in Future Research and
Development Activities.  EITF No. 07-3 states that
nonrefundable advance payments for goods or services that will be used for
future research and development activities should be deferred and capitalized
and that such amounts should be recognized as an expense as the goods are
delivered or the services are performed.  EITF No. 07-3 is effective
for fiscal years beginning after December 15, 2007.  The adoption of
EITF No. 07-3 did not have a material impact on the Company’s financial
statements.




11




In
December 2007, the EITF issued EITF No. 07-1, Accounting for Collaborative
Arrangements.  EITF No. 07-1 provides guidance on the
determination of a collaborative arrangement, reporting of costs incurred and
revenue generated on sales to third parties in the statement of operations, and
classification of payments made between participants in a collaborative
arrangement in the statement of operations.  EITF No. 07-1 is
effective for fiscal years beginning after December 15, 2008.  The
adoption of this EITF is not expected to have a material impact on the Company’s
financial statements.
 
 In April
2008, the FASB issued FASB Staff Position (“FSP”) No. FAS 142-3, Determination of the Useful Life of
Intangible Assets, which requires companies, in estimating the useful
life of a recognized intangible asset, to consider the company’s historical
experience in renewing or extending similar arrangements.  In the
absence of historical experience, the company shall consider assumptions that
market participants would use that are consistent with the highest and best use
of the asset. FSP No. FAS 142-3 is effective for financial statements
issued for fiscal years beginning after December 15, 2008 and interim periods
within those fiscal years.  The Company does not expect the impact of
FSP No. FAS 142-3 to have a material impact on its consolidated financial
statements.








12




ITEM 2. MANAGEMENTS’
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
 
 Unless stated otherwise, references in this Quarterly Report on Form
10-Q to “we,” “us,” or “our” refer to ARIAD Pharmaceuticals, Inc., a Delaware
corporation, and our subsidiaries unless the context requires
otherwise.
 
 Overview
 
 We are
engaged in the discovery and development of breakthrough medicines to treat
cancers by regulating cell signaling with small molecules.  We are
developing a comprehensive approach to patients with cancer that addresses the
greatest medical need – aggressive and advanced-stage cancers for which current
treatments 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, deforolimus, previously known as AP23573, 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
deforolimus for use in cancer.  We initiated patient enrollment in our
initial Phase 3 clinical trial of deforolimus in patients with metastatic
sarcoma in the third quarter of 2007.  In addition, in 2008 we or
Merck initiated patient enrollment in Phase 2 clinical trials in patients with
metastatic breast cancer, advanced endometrial cancer and advanced prostate
cancer.
 
 Our
collaboration with Merck for the global development and commercialization of
deforolimus anticipates that we together with Merck will conduct a broad-based
development program in multiple indications.  The collaboration
agreement provides that each party will fund 50% of global development costs,
except for certain specific costs to be funded 100% 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
deforolimus in multiple cancer indications, of which $28.5 million has been paid
to us through the third quarter of 2008, 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.  The
collaboration agreement provides that each party will receive 50% of the profit
from the sales of deforolimus in the United States, and Merck will pay us tiered
double-digit royalties on sales of deforolimus outside the United
States.
 
 Our second
product candidate, AP24534, has entered clinical development.  We
filed an Investigational New Drug application, or IND, for this product
candidate with the U.S. Food and Drug Administration, or FDA, in the fourth
quarter of 2007 and initiated a Phase 1 clinical trial in patients with
hematologic cancers in the second quarter of 2008.
 
 In
addition to our lead development programs, we have a focused drug discovery
program centered on small-molecule, molecularly targeted therapies and
cell-signaling pathways implicated in cancer.  We also have an
exclusive license to a family of patents, three in the United States and one in
Europe, including a pioneering U.S. patent covering methods of treating human
disease by regulating NF-kB 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.
  13




Since our
inception in 1991, we have devoted substantially all of our resources to our
research and development programs.  We receive no revenue from the
sale of pharmaceutical products, and most of our revenue to date was received in
connection with a joint venture we had with a major pharmaceutical company from
1997 to 1999.  Except for the gain on the sale of our fifty percent
interest in that joint venture in December 1999, which resulted in net income
for fiscal 1999, we have not been profitable since inception.  As a
result of our collaboration with Merck for the development and commercialization
of deforolimus, 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 development and
commercialization of deforolimus.  We expect that losses will
fluctuate from quarter to quarter and that these fluctuations may be
substantial.
 
 On
September 11, 2008, we entered into a merger agreement with our eighty-percent
owned subsidiary, ARIAD Gene Therapeutics, Inc., or AGTI, pursuant to which AGTI
was merged with and into ARIAD on September 12, 2008, as described in more
detail in Note 7 to the accompanying financial statements.
 
 As of
September 30, 2008, we had an accumulated deficit of $421.8 million and cash,
cash equivalents and marketable securities of $52.7 million and working capital
of $28.4 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 the NF-kB
patent litigation.
 
 Historically,
we have relied primarily on the capital markets as our source of
funding.  We may also obtain funding from collaborations with
pharmaceutical, biotechnology and/or medical device companies for development
and commercialization of our product candidates, such as our collaboration with
Merck for the global development and commercialization of
deforolimus.  These collaborations can take the form of licensing
arrangements, co-development or joint venture arrangements or other
structures.  In addition, we utilize long-term debt to supplement our
funding, particularly as a means of funding investment in property and equipment
and infrastructure needs.  If funding from these various sources is
unavailable on reasonable terms, we may be required to reduce our operating
expenses in order to conserve cash and capital by delaying, scaling back or
eliminating one or more of our product development programs.




14




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, deferred compensation benefits for
executives, and stock-based compensation.
 
 For the
nine-month period ended September 30, 2008, we reported license and
collaboration revenue of $4.5 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 deforolimus, as of September 30, 2008, we have received
an up-front payment of $75 million and we have received and/or earned milestone
payments totaling $31.0 million.  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, 2008, we reported $9.9 million of intangible assets, consisting of
the recorded value of the technology associated with the Company’s acquisition
in September 2008 of the 20-percent minority interest of ARIAD Gene
Therapeutics, Inc. that it did not previously own, as well as capitalized costs
related primarily to purchased and issued patents, patent applications and
licenses, net of accumulated amortization.  These costs are being
amortized over the estimated useful lives of the underlying technology, patents
or licenses.  Changes in these lives or a decision to discontinue
using the technologies could result in material changes to our balance sheet and
statements of operations.  We have concluded that the carrying value
of our intangible assets is not currently impaired because such carrying value
does not exceed the future net cash flows expected to be generated by such
intangible assets.  If we were to abandon the underlying 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, 2008 of intangible
assets related to our NF-κB technology is
$386,000.  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.
 
 Under our
deferred executive compensation plans, we are required to adjust our recorded
obligations to our employees on a periodic basis based on the quoted market
value of certain underlying mutual funds.  Fluctuations in the quoted
market value of such mutual funds can result in uneven expense charges or
credits to our statements of operations.  If, for example, the quoted
market prices of the underlying mutual funds were 10% higher at September 30,
2008, we would have recognized an additional $104,000 in compensation expense in
the nine-month period ended September 30, 2008.
 
 In
determining expense related to stock-based compensation, we utilize the
Black-Scholes valuation model to estimate the fair value of stock options
granted to employees, consultants and directors.  Application of the
Black-Scholes option valuation model requires the use of factors such as the
market value and volatility of our common stock, a risk-free discount rate and
an estimate of the life of the option contract.  Fluctuations in these
factors can result in adjustments to our statements of
operations.  If, for example, the market value of our common stock,
its volatility, or the expected life of stock options granted during the
nine-month period ended September 30, 2008 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 $453,000, $283,000, or $168,000
respectively.




15




Results
of Operations
 
 For
the three months ended September 30, 2008 and 2007
 
 Revenue
 
 We
recognized license and collaboration revenue of $1.5 million in the three-month
period ended September 30, 2008, compared to $1.6 million in the corresponding
period in 2007.  License and collaboration revenue consists primarily
of revenue recognized from the Merck collaboration of $1.5 million, based on the
non-refundable up-front and milestone payments totaling $103.5 million received
from Merck through September 30, 2008, in accordance with our revenue
recognition policy.
 
 Operating
Expenses
 
 Research
and Development Expenses
 
 Research
and development expenses increased by $5.1 million, or 62%, to $13.4 million in
the three-month period ended September 30, 2008, compared to $8.2 million in the
corresponding period in 2007, as described in further detail below.
 
 The
research and development process necessary to develop a pharmaceutical product
for commercialization is subject to extensive regulation by numerous
governmental authorities in the United States and other
countries.  This process typically takes years to complete and
requires the expenditure of substantial resources.  Current
requirements include:
 
 ·
              preclinical
      toxicology, pharmacology and metabolism studies, as well as in vivo efficacy
      studies in relevant animal models of
disease;
 
 ·
              manufacturing
      of drug product for preclinical studies and clinical trials and ultimately
      for commercial supply;
 
 ·
              submission
      of the results of preclinical studies and information regarding
      manufacturing and control and proposed clinical protocol to the FDA in an
      IND (or similar filings with regulatory agencies outside the United
      States);
 
 ·
              conduct
      of clinical trials and supporting non-clinical studies 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 and include our share of the external and internal costs
of Merck related to the development of deforolimus.  These costs are
accumulated and tracked by product candidate.  All other R&D
expenses consist of our costs to compensate personnel, to purchase lab supplies
and services, to maintain our facility, equipment and overhead and similar costs
of our R&D efforts and are net of Merck’s share of our internal costs
related to the development of deforolimus.  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.




16




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, 2008, as
compared to the corresponding period in 2007, were as
follows:




Three
      months ended September 30,
              
              
              Increase/In
      thousands
              
              2008
              
              
              2007
              
              
              (decrease)Direct
      external expenses:Clinical
      programs
              
              $
              6,303
              
              
              $
              1,721
              
              
              $
              4,582Preclinical
      programs
              
              
              ---
              
              
              
              508
              
              
              
              (508
              )All
      other R&D expenses
              
              
              7,062
              
              
              
              6,013
              
              
              
              1,049$
              13,365
              
              
              $
              8,242
              
              
              $
              5,123




Our
clinical programs consist of deforolimus, our lead product candidate, and
AP24534, our kinase inhibitor program for which we filed an IND in late
2007.  Commencing in the third quarter of 2007, the direct external
expenses for deforolimus reflect our share of such expenses pursuant to the
cost-sharing arrangements of our collaboration with Merck.  Direct
external expenses for deforolimus were $5.3 million in the three-month period
ended September 30, 2008, an increase of $3.6 million, as compared to the
corresponding period in 2007.  This increase is due primarily to
increases in clinical trial costs of $2.5 million, contract manufacturing costs
of $361,000 and costs of non-clinical studies of $946,000 in the three-month
period ended September 30, 2008 as compared to the corresponding period in 2007,
offset in part by an increase in Merck’s share of such expenses in the third
quarter of 2008 of $1.9 million.  In addition, costs for Merck’s
services provided to the collaboration increased by $1.4 million in the
three-month period ended September 30, 2008, as compared to the corresponding
period in 2007.  Clinical trial costs and manufacturing costs
increased due to increasing enrollment in our Phase 3 clinical trial of
deforolimus in patients with metastatic sarcomas and the initiation of
enrollment in the quarter ended September 30, 2008 in Phase 2 clinical trials of
deforolimus in patients with breast cancer and endometrial
cancer.  Costs of non-clinical studies increased due to the initiation
and conduct of toxicology studies of deforolimus required to support regulatory
filings with the FDA.  Through September 30, 2008, we have incurred a
total of approximately $84.1 million in direct external expenses for deforolimus
from the date it became a clinical program, net of Merck’s share of such
expenses.  We expect that our direct external costs for deforolimus,
net of Merck’s share of such costs, will increase in the fourth quarter of 2008
as we continue enrollment of patients in our on-going clinical trials for this
product candidate, initiate enrollment in additional clinical trials and expand
other clinical and non-clinical development activities with Merck.
 
 Direct
external expenses for our second clinical program, AP24534, were $1.0 million
for the three-month period ended September 30, 2008 which consisted primarily of
clinical costs of $406,000, contract manufacturing costs of $302,000 and costs
of non-clinical studies of $251,000 as we continued enrollment in our first
Phase 1 clinical trial of this product candidate.  We expect that our
direct external costs for AP24534 will increase in the fourth quarter of 2008 as
we continue to enroll patients in this clinical trial and continue development
of this product candidate.




17




We
incurred no direct external expenses for preclinical programs in the three-month
period ended September 30, 2008 as, at the current time, no R&D programs are
designated as preclinical programs.  All programs other than clinical
programs are designated as discovery research and are included in “all other
R&D expenses” in the above table.  Direct external expenses for
preclinical programs for the period ended September 30, 2007 relate primarily to
costs for toxicology and contract manufacturing studies for AP24534 in support
of the filing of the IND in late 2007.
 
 All other
R&D expenses increased by $1.0 million in the three-month period ended
September 30, 2008 as compared to the corresponding period in
2007.  This increase is due to an increase in personnel expenses of
$1.0 million related primarily to the hiring of additional R&D personnel and
related expenses, an increase in overhead expenses of $403,000 due primarily to
the expiration of a sub-lease agreement for a portion of our office and
laboratory facility in July 2007 and an increase in professional fees of
$350,000 related to support of our development activities.  Merck’s
allocated share of such expenses under the terms of the collaboration agreement
was $2.1 million in the three-month period ended September 30, 2008 as compared
to $975,000 in the corresponding period in 2007.  We expect that all
other R&D expenses may increase slightly in the fourth quarter of 2008 to
support our R&D programs.
 
 The
successful development of our product candidates is uncertain and subject to a
number of risks.  We cannot be certain that any of our product
candidates will prove to be safe and effective or will meet all of the
applicable regulatory requirements needed to receive and maintain marketing
approval.  Data from preclinical studies and clinical trials are
susceptible to varying interpretations that could delay, limit or prevent
regulatory clearance.  We, the FDA or other regulatory authorities may
suspend clinical trials at any time if we or they believe that the subjects
participating in such trials are being exposed to unacceptable risks or if such
regulatory agencies find deficiencies in the conduct of the trials or other
problems with our products under development.  Delays or rejections
may be encountered based on additional governmental regulation, legislation,
administrative action or changes in FDA or other regulatory policy during
development or the review process.  Other risks associated with our
product development programs are described under the heading “Risk Factors” in
our Annual Report on Form 10-K for the fiscal year ended December 31, 2007, as
updated from time to time in our subsequent periodic reports and current reports
filed with the SEC.  Due to these uncertainties, accurate and
meaningful estimates of the ultimate cost to bring a product to market, the
timing of completion of any of our drug development programs and the period in
which material net cash inflows from any of our drug development programs will
commence are unavailable.
 
 General
and Administrative Expenses
 
 General
and administrative expenses increased by $3.2 million, or 65%, to $8.3 million
in the three-month period ended September 30, 2008, compared to $5.0 million in
the corresponding period in 2007.  The increase in expenses was due
primarily to an increase in personnel expenses of $755,000 to $2.1 million in
the three-month period ended September 30, 2008, compared to $1.3 million in the
corresponding period in 2007 resulting from the hiring of additional general and
administrative personnel and related expenses, and an increase in professional
services of $2.1 million.  The increase in professional services was
related to an increase in legal fees associated with our patent litigation and
an increase in our expenses related to commercial operations
initiatives.  We expect that our general and administrative expenses
will decrease slightly in the fourth quarter of 2008 reflecting a decrease in
activities related to our patent litigation.
 
 We expect
that our operating expenses in total, net of Merck’s share of development costs
of deforolimus, will increase slightly in the fourth quarter of 2008 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 planned increase in clinical trials and
other studies related to deforolimus pursuant to our collaboration with Merck,
the enrollment of patients in, and initiation of additional clinical trials and
the required manufacturing for AP24534, and the status of our patent
infringement litigation with Lilly and Amgen.




18




Interest
Income/Expense
 
 Interest
income decreased to $238,000 in the three-month period ended September 30, 2008
from $878,000 in the corresponding period in 2007, as a result of lower interest
yields from our investments and a lower average balance of funds invested in
2008.
 
 Interest
expense increased to $147,000 in the three-month period ended September 30, 2008
from $82,000 in the corresponding period in 2007, as a result of higher average
loan balances in 2008 offset in part by lower interest rates on our long-term
debt.
 
 Operating
Results
 
 We
reported a loss from operations of $20.1 million in the three-month period ended
September 30, 2008 compared to a loss from operations of $11.6 million in the
corresponding period in 2007, an increase of $8.4 million, or 72%.  We
expect that our loss from operations will increase slightly in the fourth
quarter of 2008 due to the various factors discussed above under “Revenue” and
“Operating Expenses.”  Losses in future periods may fluctuate
depending on the progress of our product development programs and the status of
our patent infringement litigation.  The extent of operating losses
will also depend on the sufficiency of funds on hand or available from time to
time, which will influence the amount we will spend on R&D and the
development timelines for our product candidates.
 
 We
reported a net loss of $20.0 million in the three-month period ended September
30, 2008, compared to a net loss of $10.9 million in the corresponding period in
2007, an increase in net loss of $9.1 million or 84%, and a net loss per share
of $0.29 and $0.16, respectively.
 
 Results
of Operations
 
 For
the nine months ended September 30, 2008 and 2007
 
 Revenue
 
 We
recognized license and collaboration revenue of $4.5 million in the nine-month
period ended September 30, 2008, compared to $2.0 million in the corresponding
period in 2007.  The increase in license and collaboration revenue was
due primarily to an increase in the revenue recognized from the Merck
collaboration of $2.9 million, based on the non-refundable up-front and
milestone payments totaling $103.5 million received from Merck through September
30, 2008, in accordance with our revenue recognition policy.
 
 Operating
Expenses
 
 Research
and Development Expenses
 
 Research
and development expenses increased by $6.3 million, or 21%, to $36.1 million in
the nine-month period ended September 30, 2008, compared to $29.8 million in the
corresponding period in 2007.
 
 Our
R&D expenses for the nine-month period ended September 30, 2008, as compared
to the corresponding period in 2007, were as follows:




Nine
      months ended September 30,
              
              
              Increase/In
      thousands
              
              2008
              
              
              2007
              
              
              (decrease)Direct
      external expenses:Clinical programs
              
              $
              16,069
              
              
              $
              7,516
              
              
              $
              8,553Preclinical
      programs
              
              
              ---
              
              
              
              3,344
              
              
              
              (3,344
              )All
      other R&D expenses
              
              
              19,998
              
              
              
              18,945
              
              
              
              1,053$
              36,067
              
              
              $
              29,805
              
              
              $
              6,262






19




Direct
external expenses for deforolimus were $13.4 million in the nine-month period
ended September 30, 2008, an increase of $5.9 million, as compared to the
corresponding period in 2007.  This increase is due to an increase in
clinical trial costs of $6.1 million, costs of non-clinical studies of $2.1
million and manufacturing costs of $1.5 million in the nine-month period ended
September 30, 2008, as compared to the corresponding period in 2007, offset in
part by an increase in Merck’s share of expenses of $8.0 million for the
nine-month period ended September 30, 2008.  In addition, costs for
Merck’s services provided to the collaboration increased by $3.4 million in the
nine-month period ended September 30, 2008, as compared to the corresponding
period in 2007.  Clinical trial costs and contract manufacturing costs
increased due to increasing enrollment in our Phase 3 clinical trial of
deforolimus in patients with metastatic sarcomas and initiation of enrollment in
2008 in Phase 2 clinical trials of deforolimus in patients with breast cancer
and endometrial cancer.  Costs of non-clinical studies increased due
to the initiation and conduct of toxicology studies of deforolimus required to
support regulatory filings with the FDA.
 
 Direct
external expenses for our second clinical program, AP24534, were $2.7 million
for the nine-month period ended September 30, 2008, which consisted primarily of
clinical trial costs of $760,000 and contract manufacturing costs of $1.4
million as we initiated enrollment in our first Phase 1 clinical trial of this
product candidate.
 
 We
incurred no direct external expenses for preclinical programs in the nine-month
period ended September 30, 2008 as, at the current time, no R&D programs are
designated as preclinical programs.  All programs other than clinical
programs are designated as discovery research and are included in “all other
R&D expenses” in the above table.  Direct external expenses for
preclinical programs for the period ended September 30, 2007 relate primarily to
costs for toxicology and contract manufacturing studies for AP24534 in support
of the filing of the IND in late 2007.
 
 All other
R&D expenses increased by $1.1 million in the nine-month period ended
September 30, 2008 as compared to the corresponding period in
2007.  This increase is due primarily to an increase in personnel
expenses of $2.7 million related to the hiring of additional R&D personnel
and related expenses, and an increase in overhead expenses of $1.6 million due
to the expiration of a sub-lease agreement for a portion of our office and
laboratory facility in July 2007 and miscellaneous increases in lab supplies and
services and professional services.  These variances were offset in
part by an increase in Merck’s allocated share of such expenses under the terms
of the collaboration agreement of $4.7 million in the nine-month period ended
September 30, 2008.
 
 General
and Administrative Expenses
 
 General
and administrative expenses increased by $7.1 million, or 44%, to $23.4 million
in the nine-month period ended September 30, 2008, compared to $16.3 million in
the corresponding period in 2007.  Professional fees increased by $6.7
million to $17.1 million in the nine-month period ended September 30, 2008,
compared to $10.4 million in the corresponding period in 2007, due primarily to
costs related to corporate and commercial development initiatives that support
our expanding product development activities and to our patent litigation, as
well as miscellaneous increases in various general and overhead expenses of
$646,000.
 
 Interest
Income/Expense
 
 Interest
income decreased to $1.2 million in the nine-month period ended September 30,
2008 from $1.6 million in the corresponding period in 2007, as a result of lower
interest yields from our investments offset in part by a higher average balance
of funds invested in 2008.




20




Interest
expense increased to $419,000 in the nine-month period ended September 30, 2008
from $284,000 in the corresponding period in 2007, as a result of higher average
loan balances in 2008 offset in part by lower interest rates on our long-term
debt.
 
 Operating
Results
 
 We
reported a loss from operations of $55.0 million in the nine-month period ended
September 30, 2008 compared to a loss from operations of $44.1 million in the
corresponding period in 2007, an increase of $10.9 million, or 25%.
 
 We
reported a net loss of $54.3 million in the nine-month period ended September
30, 2008, compared to a net loss of $42.8 million in the corresponding period in
2007, an increase in net loss of $11.5 million or 27%, and a net loss per share
of $0.78 and $0.63, respectively.
 
 Liquidity
and Capital Resources
 
 We have
financed our operations and investments to date primarily through sales of our
common stock to institutional investors and, to a lesser extent, through
issuances of our common stock pursuant to our stock option and employee stock
purchase plans, supplemented by the issuance of long-term debt.  We
sell securities and incur debt when the terms of such transactions are deemed
favorable to us and as necessary to fund our current and projected cash
needs.  In addition, our collaboration with Merck for the development
and commercialization of deforolimus provides for additional funding in the form
of up-front and potential milestone payments, as well as the sharing of
development costs for deforolimus.  Under the collaboration, we also
have access to up to $200 million in interest-bearing, repayable development
cost advances after we have paid $150 million in global development
costs.  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-month and nine-month periods ended September 30, 2008 and 2007, our
sources of funds were as follows:




Three
      Months Ended
                September
      30,
              
              
              Nine
      Months Ended
                September
      30,In
      thousands
              
              2008
              
              
              2007
              
              
              2008
              
              
              2007Up-front
      payment from Merck, included in cash provided by operating
      activities
              
              
              
              
              $
              75,000
              
              
              
              
              
              $
              75,000Proceeds
      from issuance of common stock pursuant to stock option and purchase
      plans
              
              $
              191
              
              
              
              877
              
              
              $
              330
              
              
              
              1,997Proceeds
      from long-term borrowings
              
              
              
              
              
              
              
              
              
              
              10,505Proceeds
      from issuance of common stock, net of issuance costs
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              12,300$
              191
              
              
              $
              75,877
              
              
              $
              10,835
              
              
              $
              89,297




Our
up-front payment from Merck of $75 million was received pursuant to our
collaboration agreement for the development and commercialization of
deforolimus.  This up-front payment is included in cash provided by
operating activities in our consolidated statement of cash flows for the nine
months ended September 30, 2007 but is presented separately in this analysis due
to the non-recurring nature of this payment.  The agreement also
provides for, among other things, the payment by Merck of up to $452 million in
development and regulatory milestones during the remaining development of
deforolimus. Milestone payments received from Merck are reflected as a reduction
of cash used in operating activities in ”Uses of Funds” later in this
analysis.
  21




In March,
2008, we amended our existing term loan with a bank.  The amendment
provided for an increase of $10.5 million in our loan balance to $14.0 million,
the extension of the maturity date from March 31, 2008 to March 31, 2013 and
changes to the repayment provisions.  The amended terms of the loan
require us to maintain at least $15.0 million in unrestricted cash, cash
equivalents and investments.  The agreement also contains certain
covenants that restrict additional indebtedness, additional liens, and sales of
assets, and dividends, distributions or repurchases of common
stock.
 
 We have
filed shelf registration statements with the 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.
 
 In March
2007, we sold 3,072,393 shares of our common stock to Azimuth Opportunity Ltd.
pursuant to an equity financing facility between the parties dated February 14,
2007.  We received aggregate gross proceeds from this sale of $12.5
million, or $12.3 million net of issuance expenses.  These shares were
registered under our shelf registration statement filed on January 30,
2007.  The equity financing facility expired on September 1, 2008. As
of September 30, 2008, we had $87.5 million of securities available for sale
under our shelf registration statement.
 
 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.
 
 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 prosecution and enforcement, including our NF-kB patent litigation and
reexamination proceedings, and to invest in our property and equipment as needed
for our business.  For the three months and nine months ended
September 30, 2008 and 2007, our uses of funds were as
follows:




Three
      Months Ended
                September
      30,
              
              
              Nine
      Months Ended
                September
      30,In
      thousands
              
              2008
              
              
              2007
              
              
              2008
              
              
              2007Net
      cash used in (provided by) operating activities
              
              $
              4,672
              
              
              $
              (60,292
              )
              
              $
              36,388
              
              
              $
              (33,925
              )Less
      up-front payment from Merck
              
              
              ---
              
              
              
              75,000
              
              
              
              ---
              
              
              
              75,000Adjusted net cash used in
      operating activities
              
              
              4,672
              
              
              
              14,708
              
              
              
              36,388
              
              
              
              41,075Purchases
      of marketable securities, net of maturities
              
              
              (10
              )
              
              
              (2,922
              )
              
              
              (108
              )
              
              
              8,539Repayment
      of borrowings
              
              
              350
              
              
              
              480
              
              
              
              1,020
              
              
              
              1,440Principal
      payments under capital lease obligation
              
              
              15
              
              
              
              ---
              
              
              
              37
              
              
              
              ---Investment
      in intangible assets
              
              
              210
              
              
              
              72
              
              
              
              562
              
              
              
              371Investment
      in property and equipment
              
              
              2,387
              
              
              
              431
              
              
              
              5,665
              
              
              
              725$
              7,624
              
              
              $
              12,769
              
              
              $
              43,564
              
              
              $
              52,150






22




Net cash
used in (provided by) operating activities is comprised of our net losses,
adjusted for non-cash expenses, milestone payments received from Merck and
working capital requirements.  Adjusted net cash used in operating
activities excludes the favorable impact of the up-front payment from Merck of
$75 million in the third quarter of 2007 pursuant to our collaboration
agreement.  As noted above, our net loss for the nine months ended
September 30, 2008 increased by $11.5 million, as compared to the corresponding
period in 2007, due primarily to increased operating expenses.  As a
result of milestone payments of $15.0 million received from Merck in 2008 and
changes in our working capital requirements, our adjusted net cash used in
operations decreased by $4.7 million in the nine-month period ended September
30, 2008 as compared to the corresponding period in 2007.
 
 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, 2008 and 2007, purchases of marketable securities, proceeds from maturities
of marketable securities, and the resulting net amount reinvested or retained as
cash for payment of obligations were as follows:




Three
      Months Ended
                September
      30,
              
              
              Nine
      Months Ended
                September
      30,In
      thousands
              
              2008
              
              
              2007
              
              
              2008
              
              
              2007Purchases
      of marketable securities
              
              $
              12,039
              
              
              $
              17,112
              
              
              $
              42,491
              
              
              $
              51,916Proceeds
      from sales and maturities of marketable securities
              
              
              (12,049
              )
              
              
              (20,034
              )
              
              
              (42,599
              )
              
              
              (43,377
              )Net
      amount reinvested (retained as cash)
              
              $
              (10
              )
              
              $
              (2,922
              )
              
              $
              (108
              )
              
              $
              8,539




As noted
above, we expect that our net loss will increase slightly in the fourth quarter
of 2008 due to continued progress in development of our product
candidates.  However, we expect that we will receive an additional $15
million in milestone payments from Merck in the fourth quarter of 2008
consistent with our global development plan for deforolimus; such milestone
payments, if received, will have a favorable impact on our cash used in
operations.  We expect that our investments in intangible assets,
consisting of our intellectual property, and property and equipment will
decrease in the fourth quarter of 2008.
 
 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, 2008, 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.
   23




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, 2008:




Payments
      Due By PeriodIn
      thousands
              
              Total
              
              
              In
                2008
              
              
              2009
                through
                2011
              
              
              2012
                through
                2013
              
              
              After
                2013Long-term
      debt
              
              $
              13,300
              
              
              $
              350
              
              
              $
              7,000
              
              
              $
              5,950
              
              
              $
              ---Operating
      leases
              
              
              8,198
              
              
              
              539
              
              
              
              6,436
              
              
              
              1,223
              
              
              
              ---Employment
      agreements
              
              
              15,030
              
              
              
              1,273
              
              
              
              12,451
              
              
              
              1,306
              
              
              
              ---Other
      long-term obligations
              
              
              4,733
              
              
              
              70
              
              
              
              2,718
              
              
              
              1,550
              
              
              
              395Total
      fixed contractual obligations
              
              $
              41,261
              
              
              $
              2,232
              
              
              $
              28,605
              
              
              $
              10,029
              
              
              $
              395




Long-term
debt obligations above include only scheduled principal payments on such
debt.  Interest on our long-term debt is based on variable interest
rates.  Assuming a constant interest rate of 5.0%, our average
interest rate on our debt at September 30, 2008, over the remaining term of the
debt, our interest expense would total approximately $164,000 for the remainder
of 2008, $1.6 million in the period 2009 through 2011, and $280,000 in the
period 2012 through 2013.
 
 Other
long-term obligations are comprised primarily of obligations under our deferred
executive compensation plans and license agreements.  The license
agreements generally provide for payment by us of annual license fees, milestone
payments and royalties upon successful commercialization of
products.  All license agreements are cancelable by us.  The
above table reflects remaining license fees for the lives of the agreements but
excludes milestone and royalty payments, as such amounts are not probable or
estimable at this time.
 
 Liquidity
 
 At
September 30, 2008, we had cash, cash equivalents and marketable securities
totaling $52.7 million and working capital of $28.4 million, compared to cash,
cash equivalents and marketable securities totaling $85.2 million and working
capital of $64.6 million at December 31, 2007.
 
 Based on
our current levels of spending and taking into account the impact of the Merck
collaboration, we believe that our cash, cash equivalents and marketable
securities on hand at September 30, 2008 should be sufficient to satisfy our
capital and operating requirements through mid third quarter of
2009.  There are numerous factors that are likely to affect our
spending levels, including the extent of clinical trials and other development
activities for deforolimus 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 deforolimus and AP24534, the progress of our discovery
research programs, the impact of potential business development activities, and
developments in our NF-kB patent litigation and
reexamination proceedings, among other factors.  These variables could
result in higher or lower spending levels which could impact the sufficiency of
our current funds if we are to continue operations in accordance with our
current plans and achieve our intended timelines for development.  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 partnerships for our product candidates,
and/or (4) license our cell-signaling technologies, including our ARGENT and
NF-κB intellectual property portfolios.  There can be no assurance,
however, that adequate resources will be available when needed or on terms
acceptable to us, if at all.
  24




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 and patent office proceedings concerning our NF-kB patent portfolio, the
potential costs and additional consideration that may be payable in any
appraisal proceeding instituted in connection with our acquisition of the
minority interest of AGTI in September 2008, future capital needs, risks related
to key employees, markets, economic conditions, prices, reimbursement rates,
competition and other factors detailed under the heading “Risk Factors” in Part
I, Item 1A of our Annual Report on Form 10-K for the year ended December 31,
2007, as updated in this Quarterly Report on Form 10-Q and in our other public
filings with the U.S. Securities and Exchange Commission.  The
information contained in this document is believed to be current as of the date
of original issue.  We do not intend to update any of the
forward-looking statements after the date of this document to conform these
statements to actual results or to changes in our expectations, except as
required by law.
 
 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 market value with unrealized gains or losses reported as a
separate component of stockholders’ equity (accumulated other comprehensive
income or loss).  Realized gains and losses on marketable security
transactions are reported on the specific-identification
method.  Interest income is recognized when earned.  A
decline in the market 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.




25




Our
investments are sensitive to interest rate risk.  We believe, however,
that the effect, if any, of reasonable possible near-term changes in interest
rates on our financial position, results of operations and cash flows generally
would not be material due to the current short-term nature of these
investments.  In particular, at September 30, 2008, because our
available funds are invested solely in short-term securities with remaining
maturities of six months or less, our risk of loss due to changes in interest
rates is not material.
 
 We have a
deferred executive compensation program which provides participants with
deferred compensation based on the value of certain designated mutual
funds.  The fair value of our obligations under this program is
reflected as a liability on our balance sheet.  In the event of a
hypothetical 10% increase in the fair market value of the underlying mutual
funds as of September 30, 2008, we would have incurred approximately $104,000 of
additional compensation expense in the nine-month period ended September 30,
2008.
 
 At
September 30, 2008, we had $13.3 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 (40.8 basis points at September 30, 2008), we would incur approximately
$51,000 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.
 
 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.




26




PART
II.          OTHER
INFORMATION
 
 ITEM 1. LEGAL
PROCEEDINGS
 
 The
information contained in Note 8 to the Notes to our Unaudited Condensed
Consolidated Financial Statements found elsewhere in this Quarterly Report on
Form 10-Q is incorporated herein by reference.
 
 ITEM
1A.         RISK
FACTORS
 
 There have
been no material changes to the risk factors included in our Annual Report on
Form 10-K for the fiscal year ended December 31, 2007, other than as set forth
in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2008 and as
set forth below:
 
 The following risk factors
are deleted in their entirety from the risk factors set forth in our Annual
Report on Form 10-K for the fiscal year ended December 31,
2007:
 
 Because
we do not own all of the outstanding stock of our subsidiary, AGTI, we will not
realize all of the potential future economic benefit from products developed
based on technology licensed to or owned by AGTI.
 
 Our
80%-owned subsidiary, AGTI, holds licenses from Harvard University, Stanford
University and other universities relating to the ARGENT cell-signaling
regulation technology, and owns the intellectual property on mTOR inhibitors
derived from the ARGENT programs, including deforolimus.  The two
directors of AGTI, Harvey J. Berger, M.D., our Chief Executive Officer, and Jay
R. LaMarche, our former Chief Financial Officer, are also members of our Board
of Directors.  Minority stockholders of AGTI, including Harvard
University, Stanford University, Dr. Berger, Mr. LaMarche, several of our
scientific advisors, and several other current and former members of our
management own 20% of the issued and outstanding common stock of
AGTI.
 
 We do not
have a license agreement with AGTI that provides us with rights to commercialize
product candidates based on the ARGENT cell-signaling regulation technology or
mTOR inhibitors derived from AGTI’s programs, solely for our benefit, as opposed
to the benefit of AGTI.  All of the research and development
activities of AGTI, including the development of deforolimus, have been
conducted by us on behalf of AGTI pursuant to a research and development
agreement.  The purpose of the agreement is to allow AGTI to develop
products based on its technology, and AGTI owns all improvements to its
technology developed by us.  The agreement provides that, upon demand
by us, AGTI will either advance funds to us or reimburse us, on a cost plus 10%
basis, for all funds advanced by us associated with the cost of our research and
development activities on its behalf.  However, AGTI has no
independent funding or capital resources, and we have funded all research and
development services on AGTI’s behalf since its inception in 1994.  As
a result, we have accrued an inter-company receivable totaling approximately
$129 million as of December 31, 2007.
 
 The
inter-company receivable on our books and records and the related payable on the
books of AGTI are eliminated in accordance with generally accepted accounting
principles in our consolidated financial statements.  We expect our
inter-company receivable from AGTI to continue to increase as we seek to further
advance the development of deforolimus.  In addition, we have spent
approximately $6.8 million through December 31, 2007, and expect to spend
significant additional amounts, on pre-launch and other
commercialization-related activities for deforolimus.  The research
and development agreement does not provide a mechanism for establishing a
marketing plan or undertaking commercial activities on behalf of AGTI or for the
reimbursement by AGTI to us of expenditures for such
activities.  Other than repayment of the amounts advanced by us on a
cost plus 10% fee basis, we are not entitled to receive from AGTI any rights or
other remuneration under the research and development agreement, and,
accordingly, our future economic benefit from the commercialization of such
products on behalf of AGTI will only be in the form of dividends or other
payments received in respect of our 80% ownership interest in
AGTI.




27




Consequently,
as the inter-company receivable has increased to fund the development of
deforolimus, in order to maximize the value of ARIAD for our stockholders and to
mitigate or eliminate the conflicts of interest which currently exist between
ARIAD and AGTI, the independent members of our Board of Directors (all of
ARIAD’s Board members other than Dr. Berger and Mr. LaMarche) are currently
engaged in evaluating a variety of strategic alternatives with respect to
acquiring the 20% minority interest of AGTI that we do not own and have hired
independent legal counsel and financial consultants to assist them in their
evaluation.  Considerations being taken into account by the
independent members of the Board in determining whether to acquire the 20%
minority interest include the magnitude of our receivable from AGTI, which is
expected to continue to increase, the expectation that the perceived value of
the 20% minority interest of AGTI will likely increase as the clinical
development of deforolimus progresses, the conflicts of interest that exist
between ARIAD and AGTI, and the fact that we advance 100% of the research and
development costs for deforolimus to AGTI but are only entitled to receive
reimbursement of costs plus a 10% fee, together with whatever benefit may be
received through our 80% ownership of AGTI.  We anticipate that in the
context of valuing the 20% minority interest in AGTI for purposes of a possible
acquisition of the stock of the minority shareholders, the inter-company
receivable from AGTI will be taken into consideration.
 
 If ARIAD’s
independent and disinterested directors determine it to be in the best interests
of ARIAD’s stockholders to commercialize these product candidates solely for
ARIAD’s own benefit, ARIAD may seek to negotiate with AGTI and/or its minority
stockholders to obtain a license, on terms to be determined, granting ARIAD the
rights to commercialize such product candidates and technologies.  If
we were to enter into such a license, the future economic benefit to ARIAD from
the commercialization of such products, if any, will be diminished by any
royalties or other payments paid under a future agreement with
AGTI.  If ARIAD does not enter into such a license, then the future
economic benefit to ARIAD from the commercialization of such products on behalf
of AGTI will only be in the form of dividends or other payments received in
respect of ARIAD’s 80% ownership interest in AGTI.
 
 Alternatively,
if ARIAD’s independent and disinterested directors determine it to be in the
best interests of ARIAD’s stockholders, ARIAD may seek to acquire some or all of
the interests of the minority stockholders in AGTI for cash, shares of ARIAD’s
common stock, or other securities in a merger, exchange offer or other
transaction.  If ARIAD acquires all of the interests of the minority
stockholders in AGTI, then ARIAD will receive all of the future economic benefit
from the commercialization of such products on its own behalf to the extent that
the securities or other consideration exchanged by ARIAD in the transaction do
not entitle the minority stockholders of AGTI to continue to receive payments on
a contingent and/or installment basis.  If ARIAD acquires these
minority interests, we anticipate that this transaction will require the
incurrence of significant transaction costs, which are currently unknown, and if
the consideration exchanged for these minority interests is in the form of
equity of ARIAD, we anticipate that this transaction will result in dilution to
ARIAD’s stockholders.  On January 13, 2004, ARIAD acquired an
additional 351,909 shares of AGTI common stock, representing approximately 6% of
AGTI’s outstanding common stock, for a total purchase price of approximately
$8.8 million, effected through the reduction of inter-company debt, subject to
adjustment in certain circumstances, in order to maintain ARIAD’s 80% interest
in AGTI.  While such valuation was recommended by the Company and
approved based on a good-faith determination made by the independent and
disinterested members of ARIAD’s Board of Directors as of that date, the
economic value of the minority stockholders’ interests is difficult to quantify
in the absence of a public market.  If ARIAD acquires all of the
interests of the minority stockholders in AGTI, a variety of valuation
methodologies may be employed to determine the value per share of AGTI common
stock.  Factors impacting this valuation would include the progress,
likelihood and cost of development and commercialization of deforolimus and
other product candidates and technologies, potential future income streams
therefrom, availability of funding and other factors.  If ARIAD
acquires the minority interests for consideration valued in excess of the value
implicitly attributed to such AGTI shares by the market, which implicit value is
difficult to determine, this could result in a decline in ARIAD’s stock
price.  If ARIAD chooses to acquire some or all of these minority
interests through a merger in which ARIAD does not solicit the consent of all of
the minority stockholders of AGTI, ARIAD could become subject to litigation or
an appraisal procedure, which would result in additional expense and diversion
of management resources.
  28




As noted
above, the independent and disinterested members of ARIAD’s Board of Directors
have engaged legal counsel and financial consultants to help them evaluate
strategic alternatives with respect to acquiring the 20% minority interest of
AGTI that ARIAD does not own, and ARIAD’s independent and disinterested
directors may engage other advisors to assist them with such
evaluation.  While this evaluation is currently ongoing, there can be
no assurance that ARIAD will, at any time, enter into a transaction with AGTI as
a result of this evaluation.  If any of these strategic options is
pursued as a result of the evaluation by ARIAD’s independent and disinterested
directors, there can be no assurance as to the timing of any such transaction,
the form of such transaction, the particular transaction terms such as the form,
amount or timing of payment of consideration offered or provided by ARIAD to the
minority stockholders in AGTI, ARIAD’s ability to effectuate any such
transaction, or the consequences of any such proposed or completed transaction
to ARIAD or the AGTI minority stockholders.
 
 Because
members of ARIAD’s management team and/or Board of Directors beneficially own a
material percentage of the capital stock of its subsidiary, AGTI, and ARIAD has
agreements with AGTI, there are conflicts of interest present in dealings
between ARIAD and AGTI.
 
 Three
members of ARIAD’s management team and/or Board of Directors own approximately
5.4% of the outstanding capital stock of AGTI.  Harvey J. Berger,
M.D., Chairman and Chief Executive Officer, owns 3.2%, John D. Iuliucci, Ph.D.,
Senior Vice President and Chief Development Officer, owns 0.6% and Jay R.
LaMarche, one of ARIAD’s directors and former Chief Financial Officer, owns
1.6%.  These same individuals beneficially own an aggregate of
approximately 3.1% of ARIAD’s outstanding common stock.  David L.
Berstein, Esq., our former Chief Patent Counsel and current consultant to ARIAD,
owns 0.3% of the outstanding capital stock of AGTI.  Dr. Stuart L.
Schreiber, a Harvard professor who is one of our scientific founders, owns
approximately 3.2% of the outstanding capital stock of AGTI.  Dr.
David Baltimore, the former president of the California Institute of Technology
and one of our consultants and scientific founders, owns approximately 0.6% of
the capital stock of AGTI.  Additionally, Dr. Berger and Mr. LaMarche
are the two ARIAD board members who are also the sole members of the Board of
Directors of AGTI.  All of the research and development activities of
AGTI, including the development of deforolimus, have been conducted by us on
behalf of AGTI pursuant to a research and development agreement.  As a
result, conflicts of interest exist in dealings between AGTI and ARIAD,
including those relating to allocation of funds and resources between ARIAD and
AGTI and the prioritization of research and development programs.  In
addition, these conflicts of interest create the risk that any transaction
between ARIAD and AGTI will not provide terms as favorable to ARIAD as could be
achieved in an arms-length negotiation.  Moreover, even if the
conflicts of interest do not influence a particular transaction between ARIAD
and AGTI, because of the apparent conflicts of interest, the market may be more
inclined to perceive the terms of any transaction between ARIAD and AGTI as
being unfair to ARIAD.
 
 The following risk factor is
added to the risk factors included in our annual Report on Form 10-K for the
fiscal year ended December 31, 2007:
 
 In
connection with our merger with ARIAD Gene Therapeutics, Inc., or AGTI, certain
stockholders of AGTI have notified us of their intent to exercise appraisal
rights, which may result in substantial liabilities to us.
  29




On
September 11, 2008, our Board of Directors approved and we entered into an
agreement and plan of merger, or the Merger Agreement, pursuant to which our 80%
owned subsidiary, AGTI, was merged with and into ARIAD effective as of September
12, 2008. Pursuant to the Merger Agreement, each of the 1,126,064 outstanding
shares of AGTI common stock owned by AGTI’s minority stockholders was converted
into the right to receive two shares of ARIAD common stock.  The
exchange ratio was determined by the independent members of our Board of
Directors based on analyses received from an investment banking firm retained by
the independent directors.  However, in accordance with the provisions
of section 262 of the Delaware General Corporation Law, or DGCL, any of the AGTI
minority stockholders who properly demanded appraisal of their AGTI shares are
entitled to seek a judicial determination of the fair value of such
shares.  We have received notification that AGTI stockholders holding
an aggregate of 226,426 shares of AGTI common stock intend to exercise their
appraisal rights.
  To the
extent that the AGTI stockholders who have notified us of their intent to
exercise appraisal rights satisfy the remaining requirements of the DGCL for
assertion of such rights, such holders would be entitled to receive payment
equal to the fair value of their AGTI common stock determined in accordance with
the DGCL.  We cannot assure you how the Delaware court will determine
the fair value of the AGTI common stock, and the values determined in an
appraisal proceeding could result in substantial liabilities to
us.  If the fair value of each share of AGTI common stock were
determined in such an appraisal proceeding to be equal to two shares of ARIAD
common stock, the fair value of all of the AGTI common stock of the AGTI
stockholders that have notified us of their intent to exercise appraisal rights
would be approximately $1.2 million (based on the closing market price of
ARIAD’s common stock on September 12, 2008, the effective date of the merger
discounted to reflect the fact that the ARIAD shares in the transaction would
not be registered) which amount has been recorded as a liability on our balance
sheet as of September 30, 2008.  Our actual liability could be more or
less than that amount, because the Chancery Court would not be bound by our
Board’s determination of the merger consideration.
 
 ITEM 2. UNREGISTERED SALES OF
EQUITY SECURITIES AND USE OF PROCEEDS
 
 On
September 11, 2008, our Board of Directors approved and we entered into an
agreement and plan of merger, or the Merger Agreement, pursuant to which our 80%
owned subsidiary, AGTI, was merged with and into ARIAD effective as of September
12, 2008.  Pursuant to the Merger Agreement, each of the 1,126,064
outstanding shares of AGTI common stock owned by AGTI’s minority stockholders
was converted into the right to receive two shares of ARIAD common stock. In
accordance with the provisions of section 262 of the DGCL, any of the AGTI
minority stockholders who properly demanded appraisal of their AGTI shares are
entitled to seek a judicial determination of the fair value of such shares. We
have received notification that AGTI stockholders holding an aggregate of
226,426 shares of AGTI common stock intend to exercise their appraisal
rights.  Upon expiration of the appraisal period in October 2008, an
aggregate of 1,799,276 shares of ARIAD common stock were issued to former AGTI
stockholders who had not exercised appraisal rights.  The shares of
ARIAD common stock issued in the merger were not registered under the Securities
Act of 1933, as amended (the “Securities Act”), and were issued in reliance on
the exemption from registration provided by Section 4(2) of the Securities Act
(and the regulations promulgated thereunder, including Regulation D)
relating to sales by an issuer not involving a public offering.
   30




ITEM 6. EXHIBITS
  2.1*
              Agreement
      and Plan of Merger, dated September 11, 2008, by and between ARIAD
      Pharmaceuticals, Inc. and ARIAD Gene Therapeutics, Inc.10.1+*
              Indemnity
      Agreement, dated September 11, 2008, by and between ARIAD Pharmaceuticals,
      Inc. and Laurie A. Allen, Esq.10.2+*
              Indemnity
      Agreement, dated September 11, 2008, by and between ARIAD Gene
      Therapeutics, Inc. and Laurie A. Allen, Esq.10.3+*
              Amendment
      to Employment Agreement, dated September 11, 2008, by and between ARIAD
      Pharmaceuticals, Inc. and Laurie A. Allen, Esq.10.4+*
              Guarantee,
      dated September 11, 2008, by and between ARIAD Gene Therapeutics, Inc. and
      Laurie A. Allen, Esq.10.5+*
              Consulting
      Agreement, dated September 11, 2008, by and between ARIAD Gene
      Therapeutics, Inc. and Laurie A. Allen, Esq.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.




(+)       
Management contract or compensatory plan or arrangement.
 *          Incorporated
by reference from the Registrant’s Current Report on Form 8-K filed
on September
17, 2008.
 
 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.
   31




SIGNATURES
 
 Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
  ARIAD
      Pharmaceuticals, Inc.By:
                /s/ Harvey J. Berger,
      M.D.Harvey
      J. Berger, M.D.Chairman
      and Chief Executive Officer






By:
              /s/ Edward M.
      FitzgeraldEdward
      M. FitzgeraldSenior
      Vice President,

                  Chief
      Financial Officer(Principal
      financial officer

                    and
      chief accounting officer)Date:  November
      10, 2008








32




EXHIBIT INDEX




Exhibit

                  No.
              Title2.1*
              Agreement
      and Plan of Merger, dated September 11, 2008, by and between ARIAD
      Pharmaceuticals, Inc. and ARIAD Gene Therapeutics, Inc.10.1+*
              Indemnity
      Agreement, dated September 11, 2008, by and between ARIAD Pharmaceuticals,
      Inc. and Laurie A. Allen, Esq.10.2+*
              Indemnity
      Agreement, dated September 11, 2008, by and between ARIAD Gene
      Therapeutics, Inc. and Laurie A. Allen, Esq.10.3+*
              Amendment
      to Employment Agreement, dated September 11, 2008, by and between ARIAD
      Pharmaceuticals, Inc. and Laurie A. Allen, Esq.10.4+*
              Guarantee,
      dated September 11, 2008, by and between ARIAD Gene Therapeutics, Inc. and
      Laurie A. Allen, Esq.10.5+*
              Consulting
      Agreement, dated September 11, 2008, by and between ARIAD Gene
      Therapeutics, Inc. and Laurie A. Allen, Esq.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.


(+)       
Management contract or compensatory plan or arrangement.
 *          Incorporated
by reference from the Registrant’s Current Report on Form 8-K filed
on September
17, 2008.






33