Editor

About a year and a half ago, investors began to take serious note of ArQule Inc. when the company leveraged its Activated Checkpoint Therapy - gained in the $25 million buyout of Cyclis Pharmaceuticals Inc. - into an unquestionably handsome deal with Roche Holding Ltd.

Under the terms, Roche paid $15 million up front, plus research and development support described as "significant" but not disclosed. The arrangement is focused on cancer drugs targeting the E2F pathway that regulates cell death, and ArQule found itself in line for as much as $276 million in milestones plus royalties from Roche, which also has an option to acquire the whole ACT program. (See BioWorld Financial Watch, April 19, 2004.)

The technology is based on the 1988 discovery of the DNA damage checkpoint, a critical zone in the cell-division signaling pathway. Finding the checkpoint drew a Nobel Prize for yeast biologist Leland Hartwell in 2001. Among the papers on ACT published recently was one in July in Cancer Research, which highlighted data showing the direct activation of human checkpoint kinase 2 caused the death of cancer cells and inhibited their growth and proliferation. Two other papers were published in Nature.

The technology is paying off for ArQule. Last month, the company disclosed plans to offload the chemistry services aspect of the business, which contributed about $46 million and $49 million to the bottom lines of 2005 and 2004, respectively, and to take more focused aim at cancer therapeutics.

William Boni, vice president of corporate communications for ArQule, noted that chemistry services had become largely a commodity enterprise and emphasized that the company is "retaining some of the key chemistry capabilities that allow us to optimize cancer products at the earliest stage."

The move means ArQule will not accept any more chemistry service jobs from outside sources and plans to work with big buyer Pfizer Inc. to make the change as smooth as possible. And it puts ACT at center stage. Basically, the approach uses small molecules to restore impaired cell-cycle checkpoints, thus killing cancer cells while sparing (unlike chemotherapy) normal cells, the DNA of which is relatively intact.

The lead ACT candidate - included in the Roche deal - is ARQ 501, which is undergoing dose-escalating trials as a monotherapy against advanced solid tumors.

ArQule's most advanced preclinical compounds include ARQ 550, a second-generation E2F modulator, ARQ 650, a cancer survival protein modulator, and ARQ 350, a raf kinase inhibitor. Together they make a nice, if early stage, package.

ARQ 501, though, is the drug candidate getting the most attention. Interim Phase I data offered at the American Society of Clinical Oncology meeting proved encouraging, and analysts are watching for a Phase II study to start at the end of this year or the beginning of next.

As of March 24, the Phase I trial had signed up 32 patients who had failed chemo treatments ranging from one to 15 courses each. Twenty-six were evaluable. Of those, 20 got ARQ 501 as a one-hour infusion and six got the drug with varying regiments. Reported as serious adverse events were hemolytic anemia and hyperbilirubinemia, but they were transient and manageable.

The big news was about response. Scientists evaluated patients by way of the commonly used Response Evaluation Criteria in Solid Tumors - a method known by its acronym RECIST, which incorporates X-ray, CT scans and MRI - at the eighth week, and every eight weeks after. ARQ 501 proved active in 10 of 16 (or 62.5 percent) evaluable patients, with one achieving a partial response, two patients achieving minor responses, and seven patients achieving stable disease.

That single partial response involved a uterine sarcoma patient who has been in the study for a year and eight months. Minor responses showed up in a patient with metastatic parotid cancer, who got a 21 percent reduction at 14 weeks, and a patient with metastatic adrenal carcinoma, who showed an 18 percent reduction at 19 weeks. ArQule still is enrolling patients in the upper-dose ranges (390 to 550 mg/m2), which could get even better activity, and trying infusion times that vary between one and three hours.

ARQ 501 also is being tested in combination with gemcitabine or paclitaxel, and a Phase II trial evaluating the gemcitabine pairing against pancreatic cancer is probably next.

"Previously there was a theory, at least, that checkpoint activation could be used in combination with chemotherapy to repair the damage," Boni said, but lately data suggest the method might work well alone. "We believe ArQule has been ahead of the curve," he added, and the company's faith has been validated, so far, by research.

The whole picture is enough to have Rodman & Renshaw excited, with an "outperform/speculative risk" rating and a 12-month target price recently raised from $8 to $10. To arrive at the target price, Rodman & Renshaw analyst Reni Benjamin compared the enterprise value (EV) of ArQule, which was trading around $7.80 late last week, with those of other companies that have drugs in Phase II trials.

At the top end of the scale was Ariad Pharmaceu- ticals Inc., with an EV of $345 million, and at the low end was Seattle Genetics Inc., with an EV of $173 million, for an average EV on the eight-company list of $209 million, or about 1.3 times that of ArQule. (After Ariad, the companies in order were Oxigene Inc., CuraGen Corp., Cytokinetics Inc., Coley Pharmaceutical Group, BioCryst Pharmaceuticals Inc., and Kosan Biosciences Inc.)

As of June 30, ArQule had plenty of resources - about $130.2 million in cash, cash equivalents and marketable securities.

The company's Phase I program, typically, "involves all comers, multiple different types of cancer," Boni told BioWorld Financial Watch. "We're certainly looking at the drug both as a stand-alone therapeutic agent and as a way to amplify the effects of chemotherapy," although which might work better remains to be seen.

"We'll just have to look at more data," he said.

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