Editor

The 22 percent-plus hit taken last week by ArQule Inc. last week signaled investor jitters on word that Stephen Hill, president and CEO, is stepping down as of March. Analysts sought to calm Wall Street, but observers hardly required long memories to recall the June 2006 case of Anadys Pharmaceuticals Inc.

CEO Kleanthis Xanthopoulos said goodbye to Anadys just two weeks before the firm suspended Phase Ib dosing of its lead Toll-like receptor-7 agonist ANA975 because of preclinical toxicology trouble. Anadys' news resulted in a 48 percent drop in share price. Xanthopoulos, who stayed on as a board member of the company, called the timing of his departure as chief "unfortunate" but said it was "completely unrelated" to the bad news with ANA975.

Hill, leaving ArQule after nine years for a new position, will pass leadership to Peter Lawrence, recently appointed chief operating officer. A search committee has been appointed by the board and will consider Lawrence as well as external candidates for the CEO position.

During a conference call that included Hill and Lawrence, analysts Joel Sendek with Lazard Capital Markets and Howard Liang with Leerink Swann seemed to take the transition news well, but other participants sounded much less happy. One called Hill's decision to leave an "11^th hour move" that "leave[s] the company under somewhat of a cloud." Another cited Hill's fiduciary responsibility, and said now is "a major transitional point for the company."

ArQule has been talking with potential U.S. partners for its oral c-Met inhibitor ARQ 197. Kyowa Hakko Kogyo Co. Ltd. has bought rights in Japan and other Asian areas in a deal that could bring ArQule up to $123 million in up-front and milestone payments, along with double-digit royalties on product sales. Phase II trials began this fall with ARQ 197, the lead compound, in patients with microphthalmia transcription factor tumors and pancreatic cancer.

In late November, though, the firm disclosed trouble in a Phase I, dose-escalation trial with ARQ 171 - specifically, QTc prolongation. ARQ 171 is a follow-up to ARQ 501, E2F activators for cancer. F. Hoffmann La-Roche Ltd. is supporting ArQule's ongoing development activities, and holds an option to license worldwide E2F rights - which could mean $276 million in milestones, plus royalties, for ArQule under the terms of the relationship begun in 2004.

The bad news with ARQ 171 could delay Roche's decision on whether to take its option, as ArQule shops for a North American partner for ARQ 197. Analysis of the QTc data is due this quarter, as well as survival data from an ARQ 501 Phase II trial. Phase II/III trials likely will begin in the first half of this year, which is when analysts expect Roche to make its intentions known regarding the E2F program.

As for ARQ 501, preliminary six-month survival data from the Phase II pancreatic cancer combination trial yielded an increased survival benefit of five weeks to six weeks with the drug when given with Gemzar (gemcitabine, Eli Lilly & Co.), but more than half the patients ended up with a dose-limiting toxicity of severe hemolytic anemia at the recommended 400 mg/m2 dose.

Plenty is happening at ArQule, but CEO Hill defended his decision to part ways with the firm.

"I anticipate being here for the next couple of months or so. Who knows what will happen in that time," he said. "Whatever we did in the next two three four five months, whether it was sign a deal, generate data, there would be something else in the future that would be important to the company. It's almost impossible to finesse the timing of such transitions to meet everybody's needs." Hill said he was providing "as much advance notice as I can. There are opportunities that don't wait."

Lawrence, who has been in charge of c-Met partnering talks, said ArQule hasn't wanted to specify a time frame on when the agreement might come. "If the right deal emerges, we will avail ourselves of that deal," he said. "I don't feel this type of a management change will have a material effect on our ability to consummate a deal."

Hill, for his part, acknowledged that "the company has a fiduciary responsibility, and as long as I am an employee of the company, I share in that fiduciary responsibility, and I will fulfill it to the best of my ability." He insisted his leaving is "not harming the reality of ArQule's prospects," even if some investors felt less than certain.

Liang, in a research report on the move, urged ArQule buyers to bet on the horse, rather than the jockey. "While it may appear to some that [Hill's] departure could mean that a deal on ARQ-197 is not imminent, we don't think this is necessarily true," Liang wrote, noting that the loss of CEO could mean "greater urgency, and the probability may have increased that a partnership could be established for ARQ-197" during the next several months. He also raised the possibility of a takeover during the period.

Hill, Liang pointed out, plans to take "a highly attractive position at what we believe is likely significantly larger company. There can be many motivations for a management change, and we believe that in this case it is highly unlikely that it is as a result of a negative finding in the clinical programs." That opinion, Liang wrote is "based on [Hill's] public statement, our conversations with him and our strong belief in his integrity.

C-Met, in any case, is a busy space, albeit early stage. Others making news recently include MethylGene Inc., which filed an investigational new drug application with the FDA for MGCD265, which targets c-MET, vascular endothelial growth factor receptor (VEGFR)1, VEGFR2, VEGFR3, Tie-2 and Ron receptor tyrosine kinases. SGX Pharmaceuticals Inc. did the same for SGX523, an oral, small-molecule expected to start Phase I tests in solid tumor patients early this year.

Also due for an IND filing soon is AV-299 from Aveo Pharmaceuticals Inc., a drug that became the subject in April of a potential $477.5 million pact with Schering-Plough Corp. The antibody is to bind and inhibit the hepatocyte growth factor/scatter factor through the HGF/c-Met pathway.