Arqule’s Imminent Licensing Deal


The past year certainly was not an easy one for Arqule’s (ARQL) investors who saw their shares plummet more than 50%. Perhaps this kind of decline does not look too big of a deal for a small biotech company when compared with “solid” investments such as AIG (AIG) or Citi (C), but the current price level is certainly not what the institutionals who bought $55 million worth of stock for 7.75$ a share last year envisioned. The good news is that now, with a new management team and an imminent partnership deal for Arqule’s lead compound, ARQ-197, the stock represents an opportunity for an aggressive upward move in 2009.


The company has been talking about licensing ARQ-197 for some time now, but based on remarks made by its new CEO, there are active discussions with potential partners that could mature into a deal in the near future. Last month, the Oppenheimer & Co healthcare team issued an insightful report titled “Collaborations as Catalysts” which mentioned ARQ-197 as a potential licensing candidate. According to Oppenheimer, although such a licensing deal could happen already this year, it is more likely to happen next year following the release of clinical data from ongoing clinical trials.


Such a licensing deal will have two commercial aspects. First, it will provide Arqule with an immediate non-dilutive source of cash, which is extremely important under the current conditions in the equity markets. Second, and equally important, it will offload the high cost of advancing the drug onto a large partner. ARQ-197 is currently in two phase II trials, which account for a large chunk of Arqule’s expenses, so transferring this liability to a partner will help the company keep cash burn lower.

On top of the obvious financial merits, a licensing deal for ARQ-197 may also have important strategic implications for Arqule,. At the moment, Arqule has only one candidate in the clinic, following the discontinuation of the ARQ-171 clinical program. Thus, the most important task the company has is broadening its clinical pipeline by promoting more drugs into clinical trials and getting more partners that will finance earlier drug discovery activities. The company is planning to achieve the latter by building a discovery platform that will rely on ARQ-197’s unique mode of action (I’ll touch on that later on). Investors can expect the company to announce several new compounds from this intriguing platform during 2009, as the company is already assessing potential candidates. In order to pursue this path, Arqule must free up financial and managerial resources that are currently being consumed by the ARQ-197 program and the best way to do that is letting a big pharma take control over the compound’s clinical development.


Arqule already licensed the rights for ARQ-197 in Asia to Japan-based Kyowa Hakko for a $30 million cash upfront licensing payment, $90 million in milestone payments and double digit royalties on future sales. One would expect a deal that includes the U.S and Europe will involve even higher numbers, given the large commercial opportunity and the more advanced stage of ARQ-197. The Oppenheimer analysts estimate that the deal will involve an upfront payment of $40-60 million and milestone payments of $200 million, on top of “low double digit royalties”.


ARQ-197 is a kinase inhibitor, a drug that is designed to disrupt signals in cancer cells. ARQ-197 targets the c-MET receptor, which is currently one of the hottest targets in cancer research and is regarded by many as the “next big thing” in oncology.

Like many other cancer associated targets, c-MET plays an important role in embryonic development and tissue repair, mediating processes such as growth and motility of cells. These processes, which are essential for the proper development of the human body, are also important in the development of tumors, which “kidnap” them in order to grow and advance.  Paradoxically, the important role in embryonic development and tissue repair renders c-MET an excellent target for inhibition.

The improper activation of c-MET has been observed and shown to be correlated with aggressive disease and poor prognosis in a plethora of tumor types, including lung, colon, gastric and breast cancers, so hitting this target may be relevant in a very large number of patients. Moreover, c-MET is believed to be implicated in resistance to available therapies such as Tarceva and Gemzar, which further increases the potential use of c-MET inhibitors, this time in combination or following relapse with other agents.

It is therefore easy to understand why c-MET is receiving so much attention from the industry, with over ten drugs currently in clinical trials and many more in pre-clinical stages. The lengthening list of companies that are developing drugs against c-MET include Pfizer (PFE), Johnson & Johnson (JNJ), Amgen (AMGN), GlaxoSmithKline (GSK), Genentech (DNA), Merck (MRK)  and Exelixis (EXEL).


As everybody agrees on the importance of c-MET as a cancer target, it is very easy to see lines of resemblance between this receptor and other receptors that have already been validated as excellent targets for targeted therapies, such as EGFR and Her2,. The basis for the comparison is clear: all three targets are present across a wide array of tumors, they facilitate growth and are relatively restricted to tumors as opposed to healthy tissues.

Such targets can potentially be hit by two different approaches, which divide the targeted therapy field into two camps: monoclonal antibodies and kinase inhibitors. In some cases, both approaches work very well, like in the case of  EGFR, which is the target of four approved drugs, two antibodies (Erbitux and Vectibix) and two kinase inhibitors (Tarceva and Iressa). In c-MET, however, most attempts to develop antibodies with anti-tumor activity failed (for reasons that are beyond the scope of this article), whereas developing kinase inhibitors against c-MET turned out to be a relatively easy task, which explains why there is only one antibody that directly targets c-MET in the clinic versus nine kinase inhibitors. This has led even antibody fanatics like myself to side with the kinase inhibitor camp this time.    


To date, only three c-MET kinase inhibitors managed to show some sort of activity in humans:  XL184 (Exelixis), XL880 (GSK/Exelixis) and ARQ197 (Arqule). Although the data for these drugs is very preliminary, they clearly demonstrate the potential of c-MET inhibitors in various types of cancers, including thyroid, renal, ovarian, colorectal and pancreatic. Equally important, the three agents demonstrated their activity with no significant side effects. This proof of concept surely stimulates the rest of the market to launch or accelerate other c-MET projects.


ARQ-197 has two unique properties that may distinguish it from its competitors.


1) Selectivity


ARQ-197 is very selective for c-Met, in contrast to Exelixis’ compounds, which inhibit additional kinases as well. ARQ-197 and the Exelixis compounds represent two different approaches in the field of kinase inhibitors, as each approach has its merits. This issue as well as the promise of kinase inhibitor market are discussed in my previous article on Exelixis.

It is highly unlikely that one approach will be superior to the other in all cases and conditions, however, there are several reasons why a selective inhibitor might be more suitable some cases.

Based on clinical results from ongoing trials, c-MET inhibitors demonstrated signs of activity but they were not as potent as some had hoped. Coupled with the potential synergy with other drugs, this led many researchers to suggest that the way forward with c-MET inhibitors is in combination with other agents. Since anti-cancer drugs are often associated with strong side–effects, combining more than one drug increases the overall toxicity. Selective inhibitors are believed to be safer than multi-targeted inhibitors, so a benign safety profile can be a big advantage when several drugs are needed to be combined.  


Another potential advantage for a compound that hits a single target is that there is a high likelihood that the clinical effect is a direct result of hitting that specific target. In the case of XL184 and XL880, there is no way of knowing which target contributes to the effect and to what extent. It is possible, for example, that the clinical effect seen with these agents has nothing to do with c-Met inhibition. Of course, when a drug leads to tumor shrinkage, it does not really matter to the patient what is the exact mechanism, but when a large pharma decides to license a compound and commit to a costly clinical program, such lack of clarity could be problematic, for example, in picking the right patients based on the targets expressed by their tumors.

  2) Unique Mechanism of Action 

An even more important differentiator ARQ-197 has over the rest of the compounds is its unique mechanism of action. Most kinase inhibitors in development are “ATP-competitive”, i.e.  they disrupt signaling by binding to a specific region called “ATP-pocket” and prevent kinases to pass the signal. ARQ-197 disrupts c-MET signaling by binding a different region of the protein, therefore, as a non- ATP competitive kinase inhibitor, ARQ-197 is thought to be more specific and consequently safer than other agents. In addition, it may overcome common resistance mechanisms and may be used in combination with ATP-competitive c-MET inhibitors. In fact, this property can turn other c-MET kinase inhibitors from competing compounds into a combination opportunity for ARQ-197.

 Clinical data for ARQ-197


Arqule published results from two phase I studies, where ARQ-197 demonstrated excellent safety profile and encouraging activity. Like most phase I trials, they were dose escalation studies, where only a portion of the patients receive a sufficient amount of drug. The first study included results of fifty patients of whom three achieved a partial response (PR- tumor shrinkage of more than 30%), leading to a modest response rate of only 6%. However, thirty (60%) additional patients achieved minor tumor shrinkage or disease stabilization. Importantly, the benefit was seen across several tumor types including a prostate cancer patient who achieved a PR and patients with ovarian, renal and colorectal cancers who saw their tumors shrink by more than 10%.

The second study took place in the UK and included only eleven patients, seven of whom had stable disease, including one gastric cancer patient who had a tumor regression. In this study, the actual activity of c-MET was shown to be inhibited in tissue samples taken from tumors after treatment with ARQ-197.   


Results were not dramatic, but taking the heterogeneous patient population, the fact patients had not been pre-selected, the potential synergy with approved therapies and the broad spectrum of activity, ARQ-197 is certainly an interesting option for a company seeking to take part in the c-MET race.

 Potential Partners 

Judging by management remarks at investor conferences, there are serious partnership discussions that may even result in a deal already this year. The analysts at Oppenheimer believe that the companies that are already developing drugs against c-MET are the most likely potential partners for ARQ-197,  “as  they  have  shown  a  commitment  to  the  space  and  likely  have  internal champions for the biological rationale behind c-Met inhibition.”  They suggest GlaxoSmithKline, Bristol-Myers  Squibb,  Pfizer,  Johnson  &  Johnson,  Merck, and Amgen  as possibilities.


GSK already licensed a c-MET multi-targeted kinase inhibitor from Exelixis and judging by its decision not to extend the research collaboration between the two companies; it may not be interested in Exelixis’ second c-MET inhibitor. Nevertheless, it might be interested in addressing the market with a selective c-MET inhibitor as well in order to keep its options open, especially for combination regimens. By licensing ARQ-197, GSK would become the undisputed leader in the c-MET arena, with 6 active phase II trials while other giants such as Pfizer and Johnson & Johnson are still in phase I.

Pfizer also seems very serious with respect to c-MET, as it recently promoted a second kinase inhibitor into phase I. The first Pfizer compound that entered the clinic appears to be safe, however, there is still no data on its activity. If one of its programs is discontinued, Pfizer might want to fill the gap with an advanced validated compound, however, Pfizer might also prefer to rely on its internal capabilities and take additional compounds forward.

Amgen has an antibody against HGF, the protein that naturally activates c-MET but it also seems very determined to have a c-MET kinase inhibitor in the clinic. Judging by the flush of scientific publications its scientists submitted in the past several months (Here, here and here), Amgen should have plenty of compounds to choose from and will probably in-license a compound only as a last resort.

Several months ago at ASCO, Merck published preliminary results from a phase I that evaluated its c-MET kinase inhibitor. Although the drug was well tolerated, it did not look particularly active even at fairly high doses, so the possibility of replacing it with ARQ-197 sounds possible.

If I had to add one name to the list compiled by the Oppenheimer team, it would be no other than Bayer (BAYERF.PK), the former employer of Arqule’s CEO, Paolo Pucci and Chief Medical Officer, Brian Schwartz. The two officers were intimately involved in the development of Nexavar, a kinase inhibitor approved for kidney and liver cancers, that was licensed by Bayer from an early stage, small American biotech company, Onyx Pharmaceuticals (ONXX). This time, Pucci and Schwartz may try to replicate Nexavar’s success story from the small company perspective. 


Licensing ARQ-197 seems to be the most important catalyst for Arqule. As previously mentioned, such a deal should come with a substantial upfront payment, but more importantly, it should drastically reduce the development costs and decrease the cash burn rate. Timing in this kind of deals is crucial so the company must strive to cut a deal as soon as possible, not only for the sake of pleasing the market, but also to optimally develop ARQ-197, which is at an ideal stage for licensing. It already showed an initial proof of concept and a great safety profile, making it an attractive licensing target. In addition, ARQ-197 is a drug with a virtually unlimited number of potential paths for development, as single agent in well defined populations as well as in combination with other agents for a wide array of cancers.  Because of its broad potential utility, it could take years and numerous phase II trials until ARQ-197 finds its optimal uses, something a small company like Arqule simply cannot afford.


ARQ-197 is currently being evaluated in two phase II clinical trials, a single arm study in Mit (Microphthalmia Transcription Factor) tumors and a comparative study in pancreatic cancer, where ARQ-197 is evaluated head to head against Gemzar. A third study where ARQ-197 is given in combination with Tarceva to NSCLC (Non-small cell lung cancer) patients is scheduled to start in the coming months. Hopefully, Arqule’s management will not hinder the negotiation process in order to squeeze more data from these trials, as the bar for success in phase II studies is much higher than in phase I trials. Particularly worrying is the trial in pancreatic cancer, a disease with one of the worst success rates in oncology. The odds of ARQ-197 to demonstrate clinical activity as a single agent in pancreatic cancer, let alone superiority over the only drug that does work in this setting are slim.


In summary, one can hope that Arqule will do the right thing and license ARQ-197 for the sake of transforming itself into a platform company with several drugs in the clinic, at least one big pharma partner for ARQ-197 and some early stage development contracts. If it manages to do so, the valuation it receives should be substantially higher.

   Author is long ARQL & EXEL 

2 thoughts on “Arqule’s Imminent Licensing Deal

  1. Very interesting article, Ohad.

    Despite the recent announcement and the “imminent” deal the stock is still behaving very badly.
    Perhaps there is something we are missing, or is it a once in a lifetime opportunity?



  2. Thanks Dave.

    I think that now with an even broader activity profile, and assuming there is nothing new on the safety front ARQ197 is getting even more attarctive.
    In other words, Arqule is now in a better position than last week , but is worth ~15% less, so the rationale in buying now is even stronger.
    I don’t know if you can call it a once in a lifetime opportunity because it’s a small biotech and uncertainty is still a primary factor, especially bearing in mind that Arqule has only one asset and how will the new platform pan out remains to be seen. Nevertheless, we’re lookign at a $117 mil company, who is about to sign a deal that includes 40-60$ mil in cash and tens of millions in development costs that will be taken by the partner. I think that’s an opportunity but I wouldn’t bet the farm on a single stock, let alone a small biotech with a limited clinical pipeline.



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