Editor

The nitty-gritty of deal making and how strategy fits (or fails to fit) with business models became topics this month when ArQule Inc.'s much-hoped-for collaboration with an unnamed partner fell through, and the company said it was cutting its work force by a third and closing two facilities.

Of course, these always have been popular topics in the industry. But with the rash of restructurings this year, analysts are looking for distinctions between them - if only to find clues for avoiding staff reductions, shutdowns and the ending of research programs. Is it always about "not enough drugs in the pipeline and too little cash"?

ArQule is worth examining in this regard, said Ivonne Marondel, analyst with Gerard Klauer Mattison & Co., who said she was "shocked" by the firm's news, which caused its stock to tumble more than 33 percent. The company said it was letting go 128 people and ceasing operations at the Redwood City, Calif., and Cambridge, UK, facilities.

The good news is that the company's cash position will allow it to dedicate more than $100 million over the next five years to drug discovery, which is just the sort of thing investors like to hear.

ArQule's partnership deal was to be focused on its ADME technology (standing for "absorption, distribution, metabolism, elimination" - factors which together make up the single largest cause of drug failure), often referred to as ADMET, since it also tests for toxicity.

ADMET was acquired in a $95 million merger last year with Camitro Corp., and ArQule uses it to design what it calls Optimal Chemical Entities - small molecules that are target-specific with drug-like properties, engineered before preclinical studies begin - using the design of molecules, plus high-throughput, automated chemistry and predictive evaluation.

"I'm not saying they're going to be dying out anytime soon," Marondel told BioWorld Financial Watch. They have a lot of money and very smart people with a lot of experience. But they have to show some more results."

In a conference call with investors, Stephen Hill, president and CEO of ArQule, pointed out that the company about a year ago did sign the biggest cash-based collaboration "probably in the whole biotech industry when you look at real dollar value - a $345 million deal with the biggest pharmaceutical company on the planet."

This was the deal with Pfizer Inc., an expansion of the agreement first made in 1999 around ArQule's "automated molecular assembly plant" technology, known as AMAP. The collaboration meant $16 million for ArQule up front with a potential value of $117 million, and Hill said ArQule has "met every single performance target." ArQule said it would keep seeking partners for ADMET.

But going for the home run, as in the Pfizer deal, ended up hurting the company, Marondel noted.

"The thing is, they always look for deals that are very big," she said. "Other chemistry companies don't do this. If you look at the other ones, they have $2 million or $3 million deals and they call that big" - which is why many don't disclose terms, she added.

Another drawback of putting all eggs in one basket, albeit a potentially lucrative basket, is that the negotiations take time, which can hurt not only the bottom line but also the chances of finally sealing the pact.

"I don't know who this [would-be partner] was, but you might have expected there were changes in the staff, so you were dealing with different people and different mindsets" over the two-year period, she added. "The likelihood that it succeeds is low."

David Hastings, chief financial officer, said the decision to pursue a big partner goes back to ArQule's resolution three years ago that it would transform itself from the service model to drug discovery.

"It becomes a matter of math, in terms of what sort of deal makes sense for the company," he told BioWorld Financial Watch. "Once we had revenue - and we're estimating $61 million to $63 million in revenue this year - the impact of a small- to medium-sized chemistry deal is not meaningful to cash flow or revenue."

The smaller deals are "nightmarish to manage," he added.

"Every collaborator wants their chemistry a certain way, and it tends to eat into your cash flow," Hastings said. "We want to grow revenue, of course, but we want to grow it in a way that contributes some amount of free cash so we can reinvest it" in the pipeline, he said, adding that this part of the strategy remains unchanged despite the recent failure of a partnership that was in the works.

"We'd prefer to forward integrate into biological expertise, maybe with a company that has a couple of drug candidates, as opposed to technology," he said.

Marondel said the company must "decide what it wants to be when it grows up," and she predicted that another part of ArQule's approach will be to "try to use the chemistry to develop a pipeline that they will then out-license. In a sense, they want to go where Vertex has gone before them, but they don't have the biological capabilities that Vertex has."

Vertex Pharmaceuticals Inc. most recently made headlines with news of its positive preliminary Phase III data from a study with the protease inhibitor GW433908 for HIV. The company and partner GlaxoSmithKline plc filed for approval about 10 days ago.

Hastings said the Vertex business model "is one that we would certainly like to be compared to. They had a chemistry expertise around rational design for potency and activity, and a well-regarded expertise in kinase biology, which ended up to be a pretty powerful combination in the mid-1990s," he said.

Marondel acknowledged that Vertex "is a leader and has been working on p38 [MAP kinase inhibitors], and the company goes after making an intellectual property estate around as many chemical classes as possible for a target."

Specifically, Vertex has begun a Phase I trial of VX-702, a second-generation p38 MAP kinase inhibitor targeting rheumatoid arthritis. The trial is in healthy volunteers, and the company wants to expand upon the clinical proof-of-concept data from the Phase II clinical trial of its lead p38 MAP kinase inhibitor, VX-745, in RA. The drugs are believed to have applications in various inflammatory and cardiovascular diseases.

ArQule's pipeline also includes p38 MAP kinase inhibitors but at an even earlier stage. Animal testing is slated to start in the first quarter of 2003.

"I cannot judge at this moment if they really have something different," Marondel said. "I brought this up with them once and they said they have a different approach and are going after different classes, but how do you know? We won't know until much later."

ArQule also has a program in ion channels, focusing on two validated targets for neuropathic pain, with recent promising results in rodents. The third program is directed at cathepsin S, a cysteine protease involved in inflammatory conditions and possibly also tumor invasion, expected to begin preliminary animal testing within 12 months.

Another important move for ArQule, Marondel said, will be to keep itself visible.

"Most of [the management comes] from big pharma and from Europe," where the emphasis is less on keeping the company's name in the public eye, even when the news is not huge.

"I don't necessarily mean, Give me a deal, one right after another,' but let people know how your progress is going internally and how your pipeline is going," she said.

Hastings said this also pertains to ArQule's view as a company.

"We're great believers in doing the experiments first or getting the deal signed first and then publicizing it, as opposed to putting out press releases that are not material or front-running news that could be viewed as hyping," he said.

What's more, "the industry has suffered somewhat from companies that are over-aggressive about positioning their prospects, only to later disappoint," Hastings said.