CAMBRIDGE — When regulators approved Ariad Pharmaceuticals Inc.’s blood cancer drug in late 2012, it was a personal triumph for company chief executive Harvey J. Berger.
Berger, a Yale-educated doctor and biochemist, had accomplished a feat matched by only a handful of other biotechnology company founders. Over two decades, he had built Ariad from its inception, steered its early compounds through research and development, and won commercial approval of its first therapy, Iclusig, which treats thousands of people with chronic myeloid leukemia.
But the 64-year-old Berger did not have much time to enjoy his success. Eighteen months ago, Ariad pulled Iclusig from the US market after a Food and Drug Administration warning about toxic side effects. Since then, the company has laid off 160 workers, negotiated Iclusig’s return for a narrower patient population, and scaled back its plans for a new Kendall Square headquarters.
Now a Connecticut hedge fund — which began buying Ariad shares after the FDA’s warning sent them plunging more than 80 percent — is clamoring for Berger’s ouster from the company.
The move pits a veteran biotech chief with a stubborn streak against a protege of New York corporate raider Carl C. Icahn in a face-off that illustrates the risky nature of the drug industry and the growing role of self-styled “activist investors” focused on short-term returns.
“It’s been a rough ride for Ariad shareholders,” said biotech analyst Phil Nadeau, managing director at investment bank Cowen & Co. in New York. “That is what’s drawn the shareholder activists. They want a voice in the future of the company.”
Nadeau said the activists want to make sure the company’s spending is in line with the commercial potential of its drug. They also want to explore whether it makes sense to sell Ariad to a big drug company with an oncology sales force, he said.
Ariad’s managers fashioned a plan early this year to win approval of Iclusig for a broader patient population, bring an experimental lung cancer drug to market, and make the company profitable by 2018. And Berger, in an interview, said he is ready to carry it out.
“We’ve got really important work to do,” Berger said. “This is all about patients — lung cancer patients, leukemia patients. We’ve worked so hard to get Ariad almost to the finish line. . . . It’s an important time where we need stability to assure that people who know the products, know the patients, know the challenges can continue to work together to assure the company’s success.”
But in a Feb. 19 regulatory filing, Sarissa Capital Management LP, a 2-year-old Greenwich, Conn., hedge fund started by Icahn disciple Alexander J. Denner, went public with its plan to seek a change of control at Ariad.
Denner had been given a seat on Ariad’s board last year. But Sarissa indicated it would seek up to three additional seats on the eight-member board this year, including the one held by Berger, who is up for reelection. Sarissa also retains a veto right over a ninth director’s seat that has been approved by the board but never filled.
“The board as currently constructed (particularly in its leadership roles) is not up to the task of providing the stewardship necessary” at Ariad, the Sarissa filing said. It also promised to “undertake measures to effect and facilitate the imminent retirement of Harvey Berger.”
Sarissa’s filing did not elaborate on its contention of Berger’s shortcomings or lay out its own plan to take the company forward. Denner declined to discuss his moves at Ariad.
But three people close to events at Ariad said board members have been in active talks among themselves and with Berger in recent weeks, and some directors have sought to negotiate a settlement under which the chief executive would step down.
Many institutional investors that hold large blocks of the company’s stock are backing Sarissa’s effort to replace Berger, according to the sources, who spoke on the condition of anonymity because they weren’t authorized to discuss the talks.
Berger said he retains the support of many of Ariad’s large stock owners.
“No decisions have been made,” he said. “I’m planning to be here.”
While many Ariad employees continue to have affection for Berger, some fault him and other Ariad executives for how they handled the fallout from the FDA warning and the decision to pull Iclusig from the market in late 2013.
Ariad’s shareholder base changed dramatically as a result of those events and the sharp decline in the company’s stock. Many long-term investors bailed out or reduced their stakes and more hedge funds and other short-term investors accumulated shares.
Denner, who formerly led Icahn’s biotechnology investment team, has experience leaning on the top executives of life science companies. While working for Icahn, he pressed Biogen Idec Inc. to refocus its drug pipeline and for the sale of Genzyme to French drug giant Sanofi SA in earlier battles involving Cambridge drug makers.
His playbook has been to buy shares at a deep discount, often after a problem at the company, and lobby to replace management, sell the company, or take other steps that would push up the stock price quickly. Stock owners at Biogen and Genzyme benefitted from those campaigns, and both companies have continued to introduce drugs for multiple sclerosis and rare genetic disorders.
Still, the rise of shareholder activists at biopharma companies is being watched with concern among academic researchers and patients who depend on the companies’ life-extending drugs.
“I worry about the tendency to drive out long-term decision making,” said Harvard Business School professor Gary Pisano, noting that companies must be able to forgo profits for many years to make drugs for diseases such as cancer. “It’s a time horizon issue. Drugs take a long time to develop. And if you’re dealing with an activist who’s operating on a short-term scale, it can be a distraction and it can pressure management into not making certain investments.”
Beth Galliart, a leukemia patient who works at a California financial firm and began taking Iclusig in a 2009 clinical trial, said the management struggle at Ariad raises serious questions.
“I don’t understand why Ariad is constantly under fire,” Galliart said. “What is the [activists’] end goal? Are they just trying to make money? Are they just trying to bundle the drug and sell it to another company? This is a real company, and it’s got to have an impact on their drug development. It’s got to slow them down. This is the conundrum of for-profit medicine.”
Another patient, Hans Loland of Washington state, said he feared Sarissa’s move could prove to be disruptive as Ariad conducts trials to determine the most effective dose of Iclusig for patients.
“It’s important that we recognize that getting Iclusig to the market in the first place took over a decade of dedication and hard work by those at Ariad,” Loland wrote in an e-mail. “It’s a shame that the events of late 2013 may have potentially been seized as opportunities for those looking for a quick buck, rather than putting the lives of the [leukemia] patients first.”
Robert Weisman can be reached at email@example.com. Follow him on Twitter @GlobeRobW.