a5752446.htm

10-Q 1 a5752446.htm ARIAD PHARMACEUTICALS, INC. 10-Q a5752446.htm

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 June 30, 2008

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

OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____ to _____

Commission File Number: 0-21696

ARIAD Pharmaceuticals, Inc.

(Exact name of registrant as specified in its charter)

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

26 Landsdowne Street, Cambridge, Massachusetts 02139

(Address of principal executive offices) (Zip Code)

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

Former Name, Former Address and Former Fiscal Year,

If Changed Since Last Report: Not Applicable

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

Indicate by check mark whether the registrant 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 July 31, 2008 was 69,476,467.

ARIAD PHARMACEUTICALS, INC.

TABLE OF CONTENTS

		Page

PART I.	FINANCIAL INFORMATION	1

ITEM 1.	UNAUDITED FINANCIAL STATEMENTS	1

	Condensed Consolidated Balance Sheets – June 30, 2008 and December 31, 2007	1

	Condensed Consolidated Statements of Operations for the Three Months and Six Months Ended June 30, 2008 and 2007	2

	Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2008 and 2007	3

	Notes to Unaudited Condensed Consolidated Financial Statements	4

ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	11

ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	23

ITEM 4.	CONTROLS AND PROCEDURES	23

PART II.	OTHER INFORMATION	25

ITEM 1.	LEGAL PROCEEDINGS	25

ITEM 1A.	RISK FACTORS	25

ITEM 4.	SUBMISSION OF MATTERS FOR VOTE OF SECURITY HOLDERS	25

ITEM 5.	OTHER INFORMATION	25

ITEM 6.	EXHIBITS	26

	SIGNATURES	27

	EXHIBIT INDEX	28

PART I. FINANCIAL INFORMATION

ITEM 1. UNAUDITED FINANCIAL STATEMENTS

ARIAD PHARMACEUTICALS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

In thousands, except share and per share data	June 30, 2008			December 31, 2007
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	42,567		$	67,864
Marketable securities		17,474			17,334
Amounts due under collaboration agreement		6,344			4,588
Inventory and other current assets		4,077			2,374

Total current assets		70,462			92,160

Property and equipment:
Leasehold improvements		19,191			18,400
Equipment and furniture		13,339			11,749
Construction in progress		1,092			---

Total		33,622			30,149
Less accumulated depreciation and amortization		(26,056	)		(25,134	)

Property and equipment, net		7,566			5,015

Intangible and other assets, net		3,978			3,930

Total assets	$	82,006		$	101,105

LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current liabilities:
Current portion of long-term debt	$	1,400		$	3,815
Accounts payable		6,864			5,049
Accrued compensation and benefits		712			523
Accrued product development expenses		8,083			7,287
Other accrued expenses		6,468			4,331
Current portion of deferred executive compensation		787			745
Current portion of deferred revenue		5,699			5,819
Current portion of capital lease payable		61			---

Total current liabilities		30,074			27,569

Long-term debt		12,250			---

Capital lease payable		111			---

Deferred revenue		77,202			80,026

Deferred executive compensation		1,533			1,410

Stockholders’ equity (deficit):
Common stock, $.001 par value; authorized, 145,000,000 shares; issued and outstanding, 69,447,220 shares in 2008 and 69,241,490 shares in 2007		69			69
Additional paid-in capital		362,595			359,576
Accumulated other comprehensive income		(2	)		3
Accumulated deficit		(401,826	)		(367,548	)

Total stockholders’ deficit		(39,164	)		(7,900	)

Total liabilities and stockholders’ equity (deficit)	$	82,006		$	101,105

See notes to unaudited condensed consolidated financial statements.

ARIAD PHARMACEUTICALS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
In thousands, except share and per share data	2008			2007			2008			2007

License and collaboration revenue	$	1,450		$	189		$	2,945		$	379


Operating expenses:
Research and development		11,827			10,540			22,702			21,563
General and administrative		7,029			6,898			15,178			11,301

Total operating expenses		18,856			17,438			37,880			32,864


Loss from operations		(17,406	)		(17,249	)		(34,935	)		(32,485	)


Other income (expense):
Interest income		331			341			928			731
Interest expense		(192	)		(97	)		(271	)		(202	)

Total other income, net		139			244			657			529


Net loss	$	(17,267	)	$	(17,005	)	$	(34,278	)	$	(31,956	)


Net loss per share	$	(.25	)	$	(.25	)	$	(.49	)	$	(.48	)


Weighted-average number of shares of common stock outstanding		69,363,731			68,786,835			69,339,484			67,215,100

See notes to unaudited condensed consolidated financial statements.

ARIAD PHARMACEUTICALS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
	Six Months Ended June 30,
In thousands	2008			2007

Cash flows from operating activities:
Net loss	$	(34,278	)	$	(31,956	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		1,229			1,150
Accretion of discount on marketable securities		(243	)		(395	)
Deferred executive compensation expense		390			496
Stock-based compensation		2,880			3,208
Increase (decrease) from:
Inventory and other current assets		(1,703	)		(1,047	)
Amounts due under collaboration agreement		(1,756	)		---
Other assets		(3	)		(7	)
Accounts payable		1,815			1,397
Accrued compensation and benefits		189			64
Accrued product development expenses		796			(416	)
Other accrued expenses		2,137			1,194
Deferred revenue		(2,944	)		(55	)
Deferred executive compensation paid		(225	)		---

Net cash used in operating activities		(31,716	)		(26,367	)

Cash flows from investing activities:
Proceeds from maturities of marketable securities		30,550			23,343
Purchases of marketable securities		(30,452	)		(34,804	)
Investment in property and equipment		(3,278	)		(294	)
Investment in intangible assets		(352	)		(299	)

Net cash used in investing activities		(3,532	)		(12,054	)

Cash flows from financing activities:
Proceeds from long-term borrowings		10,505			---
Repayment of borrowings		(670	)		(960	)
Principal payments under capital lease obligations		(23	)		---
Proceeds from the issuance of stock, net of issuance costs		---			12,300
Proceeds from issuance of stock pursuant to stock option and purchase plans		139			1,120

Net cash provided by financing activities		9,951			12,460

Net decrease in cash and cash equivalents		(25,297	)		(25,961	)
Cash and cash equivalents, beginning of period		67,864			31,728

Cash and cash equivalents, end of period	$	42,567		$	5,767

See notes to unaudited condensed consolidated financial statements.

ARIAD PHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

1. Management Statement

In the opinion of the Company’s management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting of items of a normal and recurring nature) necessary to present fairly the financial position as of June 30, 2008, the results of operations for the three-month and six-month periods ended June 30, 2008 and 2007 and cash flows for the six-month periods ended June 30, 2008 and 2007. The results of operations for the three-month and six-month periods ended June 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 June 30, 2008, the Company has cash, cash equivalents and marketable securities totaling $60.0 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 for more than twelve months.

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 will be responsible for supplying the active pharmaceutical ingredient used in the product and Merck will be responsible for the formulation of the finished product, all under a separate supply agreement between the parties.

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 active pharmaceutical ingredient to Merck under the supply agreement, subject to partial reduction in certain circumstances.

Under the terms of the Collaboration Agreement, Merck paid the Company an initial up-front payment of $75 million in July 2007, and has agreed to pay up to $452 million in milestone payments, including a $13.5 million milestone payment made in the fourth quarter of 2007, 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.

The up-front and milestone payments of $88.5 million received by the Company to date 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.

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 are recorded as such on the Company’s balance sheet. At June 30, 2008, the Company has recorded an amount due from Merck under the collaboration agreement of $6.3 million.

3. Long-Term Debt

Long-term debt was comprised of the following at June 30, 2008 and December 31, 2007:

In thousands	June 30, 2008			December 31, 2007
Bank term note	$	13,650		$	3,815
Less current portion		(1,400	)		(3,815	)
	$	12,250		$	---

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 $700,000 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 six-month periods ended June 30, 2008 and 2007 as follows:

	Three Months Ended June 30,				Six Months Ended June 30,
In thousands	2008		2007		2008		2007

Compensation cost from:
Stock options	$	1,223	$	1,806	$	2,485	$	2,691
Stock and stock units		291		91		359		480
Purchases of common stock at a discount		18		24		36		37
	$	1,532	$	1,921	$	2,880	$	3,208

	Three Months Ended June 30,				Six Months Ended June 30,
In thousands	2008		2007		2008		2007

Compensation cost included in:
Research and development expenses	$	835	$	960	$	1,640	$	1,540
General and administrative expenses		697		961		1,240		1,668
	$	1,532	$	1,921	$	2,880	$	3,208

During the six-month periods ended June 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:

	Six Months Ended June 30,
	2008						2007
			Weighted- Average Grant- Date Fair Value						Weighted- Average Grant- Date Fair Value
					Total Fair Value						Total Fair Value
	Shares				Total Fair Value		Shares				Total Fair Value
			(Per Share)		(in 000’s)				(Per Share)		(in 000’s)

Stock options		747,215	$	2.05	$	1,532		2,035,220	$	3.28	$	6,501
Stock and stock units		612,500		3.57		2,187		134,000		4.94		662
Purchases of commonstock at a discount		50,214		.71		36		23,412		1.57		37
		1,409,929						2,192,632

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 six-month periods ended June 30, 2008 and 2007 were as follows:

	Six Months Ended June 30,
	2008	2007

Expected life of options granted (in years)	6.81	7.60
Expected volatility	68.8%	68.02%
Risk free interest rate	3.37%	4.46%
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.

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 $437,000 and $496,000 for the six-month periods ended June 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 June 30, 2008 and 2007, options to purchase 7,996,942 and 7,737,833 shares of common stock, respectively, were not included in the computation of net loss per share, because the effect would be anti-dilutive.

7. 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 four claims (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. On July 14, 2008, the Plaintiffs filed their opposition to Wyeth’s motion. Plaintiff’s opposition to Lilly’s brief is due on August 27, 2008, and Lilly’s reply brief is due in September 2008, after which the CAFC will schedule oral argument on the issues presented for appeal.

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 are 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.

On May 29, 2008, the Delaware Court denied in part a motion filed by the Company and its co-defendants seeking to, among other things, clarify that the counterclaim filed by them encompasses claims for infringement relating to Amgen’s ex-US activities.

On April 25, 2008, the Company and its co-defendants provided Amgen a partial covenant not to sue covering Kineret and Enbrel (the “Covenant”). With respect to Kineret, the Covenant covers all claims of the ’516 Patent, as well as any claim of the ‘516 Patent that may reissue from the reexamination. With respect to Enbrel, the Covenant covers all claims of the ‘516 Patent, other than the seven (7) claims currently being asserted against Enbrel and claims of the ‘516 Patent that may issue from the reexamination in a form that is either substantially identical to the seven (7) claims currently being asserted or not substantially identical to a claim of the ‘516 Patent that issued on June 25, 2002. The Covenant does not abridge the Company’s rights to institute an action against Wyeth upon final resolution of the Amgen litigation.

On April 25, 2008, the Company and its co-defendants, filed a motion seeking to dismiss for lack of jurisdiction under the Declaratory Judgment Act Amgen’s challenges to the validity and enforceability of claims of the ‘516 Patent that are not being asserted against Enbrel. Also on April 25, 2008, the Company and its co-defendants filed (i) their opening brief on claim construction, (ii) a motion for partial summary judgment with respect to Amgen’s inequitable conduct defense, arguing, among other things, that certain of Amgen’s factual allegations in support of that defense are moot in light of the Company’s disclosures to the U.S. Patent and Trademark Office (the “PTO”), and (iii) motions seeking to preclude trial testimony from certain of Amgen’s expert witnesses. The amendments to their counterclaim, the Covenant and the motions for partial dismissal and summary judgment serve to focus the claims asserted by the Company and its co-defendants against Amgen to be tried before the jury in the nine-day trial in this case on their claim that Amgen infringes the ‘516 Patent based on activities relating to Enbrel. Amgen’s opposition to these motions was filed on May 22, 2008.

On April 25, 2008, Amgen filed its opening brief on claim construction, as well as three motions for summary judgment, arguing that (i) Enbrel does not infringe the ‘516 Patent, (ii) the ‘516 Patent is invalid, and (iii) Amgen’s infringement of the ‘516 Patent, if it exists, is not willful. Also on April 25, 2008, Amgen filed several motions seeking to preclude trial testimony from certain of the Company’s expert witnesses. The opposition of the Company and its co-defendants to Amgen’s motions was filed on May 22, 2008.

An amended scheduling order for this action has been issued by the Delaware Court. The claim construction hearing was held and arguments on the pending dispositive motions were heard on June 19, 2008. A pretrial conference is scheduled for October 15, 2008. Trial is scheduled to commence on November 3, 2008.

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.

8. 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.

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.

ITEM 2. MANAGEMENTS’ DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS OF OPERATIONS

Unless stated otherwise, references in this Quarterly Report on Form 10-Q to “we,” “us,” or “our” refer to ARIAD Pharmaceuticals, Inc., a Delaware corporation, and our subsidiaries including our 80% owned subsidiary, ARIAD Gene Therapeutics, Inc., or AGTI, 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, has been or is being studied in multiple clinical trials in patients with various types of cancers. We initiated patient enrollment in our initial Phase 3 clinical trial of deforolimus in patients with metastatic sarcoma in the third quarter of 2007. We discovered deforolimus in a research and development program conducted by us on behalf of ARIAD Gene Therapeutics, Inc., or AGTI, our 80%-owned subsidiary. 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.

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 $13.5 million was paid to us in the fourth quarter of 2007 upon commencement of our Phase 3 clinical trial of deforolimus in patients with metastatic sarcomas, and up to $200 million in milestone payments based on achievement of specified product sales thresholds. The upfront payment and milestone payments, when earned 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-κB cell-signaling activity. Additionally, we have developed a proprietary portfolio of cell-signaling regulation technologies, our ARGENT technology, to control intracellular processes with small molecules, which may be useful in the development of therapeutic vaccines and gene and cell therapy products and which provide versatile tools for applications in cell biology, functional genomics and drug discovery research.

Since our inception in 1991, we have devoted substantially all of our resources to our research and development programs, including those we conduct on behalf of AGTI. 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.

As of June 30, 2008, we had an accumulated deficit of $401.8 million and cash, cash equivalents and marketable securities of $60.0 million and working capital of $40.4 million. Since July 2007, pursuant to the terms of our collaboration agreement with Merck, we have been sharing with Merck ongoing global development costs for deforolimus on a 50/50 basis except that Merck is funding 100% of the cost of development that is specific to development or commercialization of deforolimus outside the United States. Under the collaboration agreement, Merck is also required to pay us up to $452 million in milestone payments based on successful development of deforolimus in multiple cancer indications, of which $13.5 million was paid in 2007.

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.

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 six-month period ended June 30, 2008, we reported license and collaboration revenue of $2.9 million. License and collaboration revenue is recorded based on up-front payments, periodic license payments and milestone payments received or deemed probable of receipt, spread over the estimated performance period of the license or collaboration agreement. Regarding our collaboration with Merck for the development and commercialization of deforolimus, as of June 30, 2008, we have received an up-front payment of $75 million and a milestone payment of $13.5 million related to the start of our Phase 3 clinical trial of deforolimus in patients with metastatic sarcomas. 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 June 30, 2008, we reported $4.0 million of intangible assets, consisting of 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 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 June 30, 2008 of intangible assets related to our NF-κB technology is $414,000. 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 June 30, 2008, we would have recognized an additional $119,000 in compensation expense in the six-month period ended June 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 six-month period ended June 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 $388,000, $242,000, or $145,000 respectively.

Results of Operations

For the three months ended June 30, 2008 and 2007

Revenue

We recognized license and collaboration revenue of $1.5 million in the three-month period ended June 30, 2008, compared to $189,000 in the corresponding period in 2007. The increase in license and collaboration revenue was due primarily to the revenue recognized from the Merck collaboration of $1.4 million, based on the non-refundable up-front and milestone payments totaling $88.5 million received from Merck to date, in accordance with our revenue recognition policy.

Operating Expenses

Research and Development Expenses

Research and development expenses increased by $1.3 million, or 12%, to $11.8 million in the three-month period ended June 30, 2008, compared to $10.5 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 designed to provide data and information regarding the safety and efficacy of the product candidate in humans; and

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

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

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

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

Our R&D expenses for the three-month period ended June 30, 2008, as compared to the corresponding period in 2007, were as follows:

	Three months ended June 30,				Increase/
In thousands	2008		2007		(decrease)
Direct external expenses:
Clinical programs	$	4,092	$	2,625	$	1,467
Preclinical programs		---		1,286		(1,286	)
All other R&D expenses		7,735		6,629		1,106
	$	11,827	$	10,540	$	1,287

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 $3.1 million in the three-month period ended June 30, 2008, an increase of $500,000, as compared to the corresponding period in 2007. This increase is due primarily to increases in clinical costs of $2.1 million and toxicology costs of $1.0 million in the three-month period ended June 30, 2008 as compared to the corresponding period in 2007, offset in part by the impact of Merck’s share of expenses in the second quarter of 2008 of $3.1 million. Clinical and toxicology costs increased due to increasing enrollment in our Phase 3 clinical trial of deforolimus in patients with metastatic sarcomas and expansion of development of deforolimus in accordance with our global development plan. Through June 30, 2008, we have incurred a total of approximately $76.1 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 during the remainder of 2008 as we accelerate enrollment in our initial Phase 3 clinical trial for this product candidate, initiate additional clinical trials and expand other clinical and non-clinical development activities with Merck.

Direct external expenses for our second clinical program, AP24534, were $967,000 for the three-month period ended June 30, 2008 which consisted primarily of clinical costs of $216,000 and contract manufacturing costs of $692,000 as we initiated enrollment in our first Phase 1 clinical trial of this product candidate. We expect that our direct external costs for AP24534 will increase during the remainder of 2008 as we enroll patients in this clinical trial and continue development of this product candidate.

We incurred no direct external expenses for preclinical programs in the three-month period ended June 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 June 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 three-month period ended June 30, 2008 as compared to the corresponding period in 2007. This increase is due to an increase in personnel expenses of $753,000 due to an increase in the number of personnel and related expenses, an increase in overhead expenses of $545,000 due primarily to the expiration of a sub-lease agreement for a portion of our office and laboratory facility in July 2007 and increased professional fees of $351,000 related to our development activities. These unfavorable impacts were offset in part by Merck’s allocated share of such expenses under the terms of the collaboration agreement of $753,000 in the three-month period ended June 30, 2008. We expect that all other R&D expenses will increase during the remainder 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 $131,000, or 2%, to $7.0 million in the three-month period ended June 30, 2008, compared to $6.9 million in the corresponding period in 2007. The increase in expenses was due primarily to an increase in personnel expenses of $164,000 to $1.9 million in the three-month period ended June 30, 2008, compared to $1.8 million in the corresponding period in 2007 resulting from an increase in the number of personnel and related expenses, and an increase in overhead and general expenses of $253,000, offset by a decrease in professional services of $265,000. The decrease in professional services is related to a decrease in legal fees associated with our patent litigation offset in part by an increase in our expenses related to commercial operations initiatives. We expect that our general and administrative expenses will increase slightly over the remainder of the year reflecting an increase in commercial planning activities, required support of our research and development programs and patent litigation.

We expect that our operating expenses in total, net of Merck’s share of development costs of deforolimus will increase during the remainder 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.

Interest Income/Expense

Interest income decreased to $331,000 in the three-month period ended June 30, 2008 from $341,000 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.

Interest expense increased to $192,000 in the three-month period ended June 30, 2008 from $97,000 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 $17.4 million in the three-month period ended June 30, 2008 compared to a loss from operations of $17.2 million in the corresponding period in 2007, an increase of $157,000, or 1%. We expect that our loss from operations will increase during the remainder of 2008 due to the various factors discussed under “Revenue” and “Operating Expenses” above. Losses 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 $17.3 million in the three-month period ended June 30, 2008, compared to a net loss of $17.0 million in the corresponding period in 2007, an increase in net loss of $262,000 or 2%, and a net loss per share of $0.25 and $0.25, respectively.

Results of Operations

For the six months ended June 30, 2008 and 2007

Revenue

We recognized license and collaboration revenue of $2.9 million in the six-month period ended June 30, 2008, compared to $379,000 in the corresponding period in 2007. The increase in license and collaboration revenue was due primarily to the revenue recognized from the Merck collaboration of $2.8 million, based on the non-refundable up-front and milestone payments totaling $88.5 million received from Merck to date, in accordance with our revenue recognition policy.

Operating Expenses

Research and Development Expenses

Research and development expenses increased by $1.1 million, or 5%, to $22.7 million in the six-month period ended June 30, 2008, compared to $21.6 million in the corresponding period in 2007.

Our R&D expenses for the six-month period ended June 30, 2008, as compared to the corresponding period in 2007, were as follows:

	Six months ended June 30,				Increase/
In thousands	2008		2007		(decrease)
Direct external expenses:
Clinical programs	$	7,706	$	5,795	$	1,911
Preclinical programs		---		2,836		(2,836	)
All other R&D expenses		14,996		12,932		2,064
	$	22,702	$	21,563	$	1,139

Direct external expenses for deforolimus were $6.1 million in the six-month period ended June 30, 2008, an increase of $272,000, as compared to the corresponding period in 2007. This increase is due to an increase in clinical costs of $3.6 million, toxicology costs of $1.2 million and contract manufacturing costs of $1.1 million in the six-month period ended June 30, 2008, as compared to the corresponding period in 2007 offset in part by the impact of Merck’s share of expenses of $6.1 million for the six-month period ended June 30, 2008. Clinical, toxicology and contract manufacturing costs increased due to increasing enrollment in our Phase 3 clinical trial of deforolimus in patients with metastatic sarcomas and expansion of development of deforolimus in accordance with our global development plan.

Direct external expenses for our second clinical program, AP24534, were $1.6 million for the six-month period ended June 30, 2008 which consisted primarily of clinical costs of $354,000 and contract manufacturing costs of $1.1 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 six-month period ended June 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 June 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 $2.1 million in the six-month period ended June 30, 2008 as compared to the corresponding period in 2007. This increase is due primarily to an increase in personnel expenses of $1.7 million related to an increase in the number of personnel and related expenses, and an increase in overhead expenses of $1.2 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 unfavorable impacts were offset in part by Merck’s allocated share of such expenses under the terms of the collaboration agreement of $1.5 million in the six-month period ended June 30, 2008.

General and Administrative Expenses

General and administrative expenses increased by $3.9 million, or 34% to $15.2 million in the six-month period ended June 30, 2008, compared to $11.3 million in the corresponding period in 2007. Professional fees increased by $3.7 million to $10.8 million in the six-month period ended June 30, 2008, compared to $7.1 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 $539,000.

Interest Income/Expense

Interest income increased to $928,000 in the six-month period ended June 30, 2008 from $731,000 in the corresponding period in 2007, as a result of a higher average balance of funds invested in 2008, offset in part by lower interest yields from our investments.

Interest expense increased to $271,000 in the six-month period ended June 30, 2008 from $202,000 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 $34.9 million in the six-month period ended June 30, 2008 compared to a loss from operations of $32.5 million in the corresponding period in 2007, an increase of $2.4 million, or 8%.

We reported a net loss of $34.3 million in the six-month period ended June 30, 2008, compared to a net loss of $32.0 million in the corresponding period in 2007, an increase in net loss of $2.3 million or 7%, and a net loss per share of $0.49 and $0.48, 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 the Company has 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 months and six months ended June 30, 2008 and 2007, our sources of funds were as follows:

	Three Months Ended June 30,				Six Months Ended June 30,
In thousands	2008		2007		2008		2007
Proceeds from issuance of common stock pursuant to stock option and purchase plans	$	62	$	873	$	139	$	1,120
Proceeds from long-term borrowings						10,505
Proceeds from issuance of common stock, net of issuance costs								12,300
	$	62	$	873	$	10,644	$	13,420

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.

On February 14, 2007, we entered into an agreement with Azimuth Opportunity Ltd., or Azimuth, under which we may offer and sell, at our sole discretion, and Azimuth is committed to purchase, subject to the terms and conditions set forth in the agreement, the lesser of up to $50 million of our common stock, or the number of shares which is one less than twenty percent of the issued and outstanding shares of our common stock as of the effective date of the agreement. These shares will be registered under the shelf registration statement we filed in January 30, 2007. The per share purchase price for these shares will equal the daily volume weighted average price of our common stock on such date, less a discount ranging from 3.5% to 5.5%, with a minimum purchase price of $3.00 per share below which Azimuth is not required to purchase shares of our common stock. The agreement expires on September 1, 2008.

In March 2007, we sold to Azimuth 3,072,393 shares of our common stock pursuant to this agreement. 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. As of June 30, 2008, we have $37.5 million available under our equity financing facility with Azimuth and $87.5 million of securities remaining for issuance 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 and to invest in our property and equipment as needed for our business. For the three months and six months ended June 30, 2008 and 2007, our uses of funds were as follows:

	Three Months Ended June 30,				Six Months Ended June 30,
In thousands	2008		2007		2008			2007

Net cash used in operating activities	$	18,442	$	13,730	$	31,716		$	26,367
Purchases of marketable securities, net of maturities		1,237		4,530		(98	)		11,461
Repayment of borrowings		350		480		670			960
Investment in intangible assets		123		99		352			299
Investment in property and equipment		1,399		214		3,278			294
	$	21,551	$	19,053	$	35,918		$	39,381

The net cash used in operating activities is comprised of our net losses, adjusted for non-cash expenses and working capital requirements. As noted above, our net loss for the six months ended June 30, 2008 increased by $2.3 million, as compared to the corresponding period in 2007, due primarily to increased operating expenses. As a result of changes in our working capital requirements, our net cash used in operations increased by $5.3 million in the six-month period ended June 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 six-month periods ended June 30, 2008 and 2007, purchase of marketable securities, proceeds from maturities of marketable securities, and the resulting net amount reinvested or retained as cash for payment of obligations was as follows:

	Three Months Ended June 30,						Six Months Ended June 30,
In thousands	2008			2007			2008			2007

Purchases of marketable securities	$	17,432		$	19,766		$	30,452		$	34,804
Proceeds from sales and maturities of marketable securities		(16,195	)		(15,236	)		(30,550	)		(23,343	)
	$	1,237		$	4,530		$	(98	)	$	11,461

As noted above, we expect that our net loss will increase in the remainder of 2008 due to continued progress in development of our product candidates. However, we expect that we will receive additional milestone payments from Merck in the remainder of 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 also expect that our investments in intangible assets, consisting of our intellectual property, and property and equipment will increase in support of our product development activities.

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 June 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.

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 June 30, 2008:

			Payments Due By Period
In thousands	Total		In 2008		2009 through 2011		2012 through 2013		After 2013

Long-term debt	$	13,650	$	700	$	7,000	$	5,950	$	---
Operating leases		8,566		1,049		6,294		1,223		---
Employment agreements		12,036		2,482		9,554		---		---
Other long-term obligations		5,638		556		2,934		1,352		796
Total fixed contractual obligations	$	39,890	$	4,787	$	25,782	$	8,525	$	796

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 June 30, 2008, over the remaining term of the debt, our interest expense would total approximately $505,000 for the remainder of 2008, $1.6 million in the period 2009 through 2011, and $221,000 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 June 30, 2008, we had cash, cash equivalents and marketable securities totaling $60.0 million and working capital of $40.4 million, compared to cash, cash equivalents and marketable securities totaling $85.2 million and working capital of $64.6 million at December 31, 2007.

Taking into account the impact of the Merck collaboration, we believe that our cash, cash equivalents and marketable securities on hand at June 30, 2008 should be sufficient to satisfy our capital and operating requirements for more than twelve months. There are numerous factors that are likely to affect our spending levels, including the planned expansion of clinical trials and other development activities for deforolimus in collaboration with Merck, the planned initiation of clinical trials for AP24534, the progress of our discovery research programs, the impact of potential business development activities, the potential acquisition of or other strategic transaction regarding the minority stockholders’ interests in AGTI, and developments in our NF-kB patent litigation, 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 may 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.

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 acquisition of or other strategic transaction regarding the minority stockholders' interests in our 80%-owned subsidiary, ARIAD Gene Therapeutics, Inc., 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 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.

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 June 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 June 30, 2008, we would have incurred approximately $119,000 of additional compensation expense in the six-month period ended June 30, 2008.

At June 30, 2008, we had $13.65 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 (50.0 basis points at June 30, 2008), we would incur approximately $65,000 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.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The information contained in Note 7 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, as supplemented in our Form 10-Q for the period ended March 31, 2008.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Our Annual Meeting of Stockholders was held on June 12, 2008. Of 69,446,170 shares of common stock issued and outstanding and eligible to vote as of the record date of April 21, 2008, a quorum of 52,415,383 shares, or 80% of the eligible shares, was present in person or represented by proxy. The following actions were taken at such meeting.

(a)	Reelection of the following Class 2 Directors of the Company.

	Voted For	Withheld Authority
Jay R. LaMarche	50,482,780	1,932,603
Sandford D. Smith	43,700,627	8,714,756
Elizabeth H. S. Wyatt	50,541,950	1,878,433

After the meeting, Harvey J. Berger, M.D., Michael D. Kishbauch and Burton E. Sobel, M.D., continued to serve as our Class 3 Directors for terms which expire in 2009 and until their successors are duly elected and qualified, and Athanase Lavidas, Ph.D. and Peter J. Nelson continued to serve as our Class 1 Directors for terms which expire in 2010 and until their successors are duly elected and qualified. On June 25, 2008, Peter J. Nelson notified us that he will resign from the Board of Directors, effective August 29, 2008, due to other work commitments.

(b)

Approval of an amendment to the ARIAD Pharmaceuticals, Inc. 1997 Employee Stock Purchase Plan and reservation of an additional 500,000 shares of common stock for issuance pursuant to this Plan. The voting results were 22,365,770 votes for, 1,292,597 votes against, and 129,736 votes abstaining, with 28,627,280 broker non-votes.

(c)	Ratification of the selection of the Audit Committee of the Board of Directors of Deloitte & Touche LLP as our independent registered public accounting firm for the year ending December 31, 2008. The voting results were 50,941,055 votes for, 1,126,421 votes against, and 347,906 votes abstaining.

ITEM 5. OTHER INFORMATION

On May 7, 2008, the Company and its 80%-owned subsidiary, ARIAD Gene Therapeutics, Inc., entered into an agreement with Merck & Co., Inc. (“Merck”) for the supply of active pharmaceutical ingredient (“API”) and drug product for the Company’s lead product candidate, deforolimus (the “Supply Agreement”). The Supply Agreement was entered into pursuant to the provisions of the Collaboration Agreement between Merck and the Company dated July 11, 2007 (the “Collaboration Agreement”). Under the terms of the Supply Agreement, the Company will be responsible for supplying the API and Merck will be responsible for supplying of the finished drug product for clinical trials and any commercialization of deforolimus by the parties under the Collaboration Agreement. The Supply Agreement also provides that sales of API and finished drug product between the parties will be made at their respective manufacturing costs. The term of the Supply Agreement coincides with the term of the Collaboration Agreement. The Supply Agreement provides for early termination upon termination or expiration of the Collaboration Agreement, upon mutual consent of the parties, for uncured breach of the terms of the agreement or for insolvency of either party.

ITEM 6. EXHIBITS

10.1	Amended and Restated ARIAD Pharmaceuticals, Inc., 1997 Employee Stock Purchase Plan (filed as Appendix A to the Registrant’s Definitive Proxy Statement on Schedule 14A (File No. 000-21696) filed with the Securities and Exchange Commission on April 29, 2008 and incorporated herein by reference).

10.2	Deforolimus API and Tablet Supply Agreement dated May 7, 2008 among ARIAD Pharmaceuticals, Inc., ARIAD Gene Therapeutics, Inc. and Merck & Co., Inc.*

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.

* Confidential treatment has been requested for portions of this exhibit.

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.

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. Fitzgerald
		Edward M. Fitzgerald
		Senior Vice President,
		Chief Financial Officer
		(Principal financial officer
Date: August 11, 2008		and chief accounting officer)

EXHIBIT INDEX

Exhibit	Title
No.

10.1	Amended and Restated ARIAD Pharmaceuticals, Inc., 1997 Employee Stock Purchase Plan (filed as Appendix A to the Registrant’s Definitive Proxy Statement on Schedule 14A (File No. 000-21696) filed with the Securities and Exchange Commission on April 29, 2008 and incorporated herein by reference).

10.2	Deforolimus API and Tablet Supply Agreement dated May 7, 2008 among ARIAD Pharmaceuticals, Inc., ARIAD Gene Therapeutics, Inc. and Merck & Co., Inc.*

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.

	* Confidential treatment has been requested for portions of this exhibit.