Near Term Catalyst Has ArQule Poised for a Move Up

Near Term Catalyst Has ArQule Poised for a Move Up 
LOS ANGELES, CA -- (Marketwire) -- 12/18/12 --  ArQule, Inc. engages
in the research and development of cancer therapeutics directed
toward molecular targets and biological processes. 
The firm's lead product candidate Tivantinib (ARQ 197) is an
inhibitor of the c-Met receptor tyrosine kinase, which is in Phase 3
clinical trial for the treatment of liver cancer and colorectal
cancer (CRC). The company also develops ARQ 621, an inhibitor of the
Eg5 kinesin motor protein that has completed Phase I trial; ARQ 736,
an inhibitor of the RAF kinases, which is in Phase I clinical trial;
ARQ 761, an activator of the E2F-1 damage response/checkpoint
pathway; and ARQ 087, an inhibitor of fibroblast growth factor
receptor that is in pre-clinical stage. It has partnership agreement
with Daiichi Sankyo Co., Ltd. and Kyowa Hakko Kirin Co., Ltd. 
The lead product candidate is Tivantinib (ARQ 197), an orally
administered, small molecule inhibitor of the c-Met receptor tyrosine
kinase. C-Met is a promising target for cancer therapy based on its
multiple roles in cancerous cell proliferation, tumor spread, new
blood vessel formation and resistance to certain drug therapies.
ArQule and its partners, Daiichi Sankyo Co., Ltd. and Kyowa Hakko
Kirin Co., Ltd, are implementing a clinical development program
designed to realize the broad potential of Tivantinib as a
well-tolerated single agent and in combination with other anti-cancer
therapies in a number of disease indications. The company's strategy
is to focus on the most promising indications within the clinical
programs based upon data that is continually generated. Its leading
indications include liver cancer, non-small cell lung cancer, and
colorectal cancer. The company is also completing earlier-stage
combination therapy trials with Tivantinib and other anti-cancer
agents that may provide data to support later-stage trials in
additional indications.  
On October 16, 2012, the company announced a Special Protocol
Assessment agreement with the U.S. Food and Drug Administration for
the design of a pivotal Phase III trial of Tivantinib in patients
with HCC. The Phase III trial will be a randomized, double-blinded
study of Tivantinib as single agent therapy in previously treated
patients with MET diagnostic-high inoperable HCC. The primary
endpoint is overall survival in the intent-to-treat population, and
the secondary endpoint is progression free survival in the same
population. Approximately 300 patients are planned to be enrolled at
approximately 120 centers worldwide.  
ArQule has advanced into Phase III clinical with ARQ 197. C-Met is a
promising target for cancer therapy, as evidence suggests that it
plays multiple roles in cancerous cell proliferation, tumor spread,
new blood vessel formation and drug resistance. The company believes
that the inappropriate expression of c-Met in many cancers and its
involvement in multiple signal transduction pathways affecting tumor
growth and metastasis render it a compelling target for cancer
Oncology research and development activities are increasingly focused
on kinases, which play pivotal roles in modulating diverse cellular
activities and have been implicated as important mediators of certain
forms of cancer and other diseases. The success of kinase inhibitors
such as Gleevec and Nexavar has focused attention on the kinase
field, resulting in the increased development of next-generation
inhibitors that target cancers and other diseases such as
inflammation. The current market for protein kinase inhibitors is
estimated to exceed $7 billion, and by 2020, small-molecule kinase
inhibitors are projected to generate collectively annual revenues
greater than $25 billion.  
ArQule has extensively studied the mechanism by which ARQ 197
selectively inhibits its target c-Met receptor kinase. These studies
have revealed the molecular and structural basis by which ARQ 197
targets c-Met. ARQ 197 inhibits c-Met autophosphorylation and is
selective for the inactive or unphosphorylated form of c-Met.
Elucidation of this novel mode of inhibition of c-Met has opened up
the opportunity for the design and development of similar selective
inhibitors for other kinases.  
Drug discovery at ArQule utilizes a proven innovative and efficient
drug discovery engine which employs a proprietary structure-based
drug design technology known as the ArQule Kinase Inhibitor Platform
(AKIP(TM)). This platform targets inactive forms of kinases that have
pivotal roles in cancer and other diseases. AKIP integrates in silico
drug design, parallel robotic chemistry, and novel assay development
expertise to create non-ATP competitive inhibitors that interact with
these kinases in novel binding modes. Inhibitors identified through
AKIP are optimized into drug candidates having the appropriate
efficacy and selectivity for their target with minimal side effects. 
The company believes it has within this platform the capability to
rationally design novel kinase inhibitors that encompass new chemical
spaces and allow for an expanding intellectual property estate. It
anticipates that these novel kinase inhibitors, when targeted against
selected therapeutically relevant kinases, will have utility in a
broad range of human diseases in addition to cancer.  
The company is seeking to expand the applications of this proprietary
drug discovery platform through collaborative research programs as
well as through our own internal discovery and development activities
in multiple therapeutic areas.  
ArQule has a collaboration with Daiichi Sankyo Co., Ltd. to apply its
AKIP technology in the discovery of therapeutic compounds that
selectively inhibit certain kinases in the field of oncology.  
It is also independently applying AKIP to the discovery of inhibitors
of fibroblast growth factor receptor (FGFR). Progress to date has
resulted in a series of small molecule inhibitors of FGFR that are
not ATP-competitive and show potent anti-tumor activity in
FGFR-driven human and animal cancer models. 
Daiichi Sankyo (DS) is ArQule's co-development worldwide partner for
ARQ 197, (except Asia) and paid ArQule $60M upfront, with another
$560M due for potential milestones and tiered double-digit royalties.
The most recent milestone was a $25M payment for the initiation of
the MARQUEE Phase III trial. DS retains all ex-Asia commercial
rights, with ArQule retaining the US co-commercialization rights.
There has been some speculation that DS is considering acquiring
ArQule, but I have yet to hear from a real source on this front
regarding this. 
Right off the bat, it seems to me that ArQule is very undervalued
speculation wise, with its current market cap of $178.30M. 

  Balance Sheet                                                             
  Total Cash (mrq):                       120M (estimated)                  
  Total Cash Per Share (mrq):             1.33                              
  Total Debt (mrq):                       1.70M                             
  Total Debt/Equity (mrq):                1.99                              
  Current Ratio (mrq):                    2.11                              
  Book Value Per Share (mrq):             1.37                              
  Cash Flow Statement                                                       
  Operating Cash Flow (ttm):              -41.54M (Yearly)                  
  Levered Free Cash Flow (ttm):           -16.95M                           

Right off the bat, it seems to us that ArQule is undervalued with its
current market cap of $178.30M. 
Potential catalyst trade:  
Phase II top-line data covering CRC is due out by the end of this
year/early next year for ARQ 197. The data release will estimate the
difference in progression-free survival (PFS) between the study and
control arms in subjects with CRC with wild-type KRAS who have
received front-line therapy. Positive data here would likely gap the
stock up considerably, so traders should keep an eye out for this. 
Wi an Eg5 Inhibitor, a BRAF Inhibitor, an FGFR Inhibitor, and an AKT
Inhibitor -- a deep pipeline along with the near term catalyst event
of top line Phase II data, makes the company's $178.30M market cap
undervalued for a mid-stage Oncology biotech in my opinion, and also
makes for a good catalyst trade opportunity. 

  Net Institutional Purchases - Prior Qtr to Latest Qtr                     
  Net Shares Purchased                    5,640,490                         
  % Change in Institutional Shares Held   10.48%                            

Institutions have increased their stake by over 10% in the company
lately, which is always a good sign. 
Also of note, Edison Investment Research values ArQule at $5.40 a
share, which equates to a market cap of about $376M, more than double
the company's current market cap. 
This chart was taken from Robert Pedone's Street article published a
couple of weeks ago. I spoke to Robert yesterday to get his updated
take on the charts, and we both agree that if the stock breaks past
$3 on decent volume, we could see an upwards gap fill to $4 rather
quickly. With the data release expected any day now, I feel ArQule is
a good long side trade for the short term, and with good data,
possibly a longer term buy and hold. 
The Biopharma segment of the market is rather hot these days with
companies like Sarepta and Acadia recently seeing large price gaps up
on positive data releases. 
Our short term price target opinion is $4 a share, and a 1 year
target over $10 if the company's platform proves successful in 2013. 
Disclosure: Author Scott Matusow @scottmatusow is LONG ARQL 
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