Poor response to ArQule deal illustrates market's refusal for optimism

Analysis

The stock market’s treatment of US cancer drug developer ArQule this week illustrates just how tough life has become for small, high risk life science companies, with investors seemingly completely unwilling, or maybe unable, to justify owning shares in these types of investments.

On Monday, the company announced two licensing deals with Daiichi Sankyo netting $75m upfront, providing both backing of the group’s platform technology and funding for mid-stage trials of its lead compound, a promising cMET inhibitor called ARQ 197, which can now progress at full speed in all indications. Equally as important, ArQule is now funded until 2011 and the need to raise cash next year has been removed. However, the stock has slipped 4% since the deals were announced, resulting in a market value of $96m, less than half the company’s projected year-end cash balance of $150m; a fact that must prompt executives working in this sector to ask what on earth it is they have to do to keep shareholders pleased in these troubled times.

The failure of ArQule’s stock to climb since the deal was announced has variously been put down to a “sell on the news” factor, disappointment over deal terms and partner, or blamed on the general malaise in the market.

The first reason would seem to have limited truth when the longer term share price is examined. The stock did not climb appreciably prior to the announcement, despite management’s promise to deliver such a deal for some time, and in fact has fallen 59% over the year, closing yesterday at $2.39.

Sold for a song?

Disappointment over deal terms and partner could be part of the reason. In the first half of 2007 ArQule sold Japanese and certain Asian rights to ARQ 197 to Kyowa Hakko Kogyo in a deal worth up to $123m, including $30m upfront; respectable terms given that at that time the product was still a phase I compound.

By comparison Daiichi, which does not have a significant presence in oncology, has bought the remaining global rights for $60m upfront with milestones of up to $560m possible. The companies are sharing development costs and ArQule has an option to co-promote in the US. A second deal will use ArQule’s kinase inhibitor discovery platform to investigate two anti-cancer targets.

The analysis below by EvaluatePharma of deal terms for all phase II oncology deals since the beginning of 2007 suggests that while ArQule’s deal has not broken any records, it does not appear that management have sold the family jewels off cheap. It should also be remembered that ARQ 197 has so far produced limited proof of concept data.

Phase II oncology in-licensing deals since January 2007      
Deal Date Company Product Deal Partner/ Product Source Pharmacological Class Indication Summary Deal Value ($m) Upfront Payment ($m)
10/11/2008 Daiichi Sankyo ARQ 197 and platform technology deal ArQule Tyrosine kinase inhibitor Pancreatic cancer [Phase II]; MiT (micropthalmia transcription factor)-driven tumour[Phase II]; Non-small cell lung cancer (NSCLC) [Phase I/ II]; Solid tumour indications [Phase II]; Soft tissue sarcoma [Phase II];  Thyroid cancer [Phase I]; Testicular cancer [Phase I] 635 75
18/08/2008 Eisai SyB L-0501 SymBio Pharmaceuticals Alkylating agent Non-Hodgkin's lymphoma (NHL) [Phase II] 38 -
04/02/2008 Takeda AMG 706 Amgen VEGF, platelet-derived growth factor (PDGF) & c-kit inhibitor Non-small cell lung cancer (NSCLC) [Phase III]; Gastro-intestinal stromal tumours (GIST) [Phase II] 291 106
19/12/2007 Merck KGaA IMO-2055 Idera Pharmaceuticals TLR9 agonist Renal cell carcinoma (RCC) [Phase II]; Solid tumour indications [Phase I]; Non-small cell lung cancer (NSCLC) [Phase I]; Colorectal cancer [Pre-clinical] 631 60
08/10/2007 GlaxoSmithKline Elesclomol Synta Pharmaceuticals Apoptosis inducer Melanoma [Phase III]; General cancer indications [Phase II] 960 76
12/07/2007 Merck & Co Deforolimus (MK-8669) ARIAD Pharmaceuticals Rapamycin analogue (mTOR inhibitor) Soft tissue sarcoma [Phase III]; Bone cancer [Phase III]; General blood malignancies [Phase II]; Prostate cancer [Phase II]; Uterine cancer [Phase II]; Breast cancer [Phase II]; Brain cancer [Phase I]; Solid tumour indications [Phase I]; Ovarian cancer [Phase I]; Non-small cell lung cancer (NSCLC) [Phase I]; Head & neck cancers [Phase I] 927 75
19/04/2007 Novartis ASA404/AS1404 (DMXAA) Antisoma Vascular targeting agent Non-small cell lung cancer (NSCLC) [Phase III]; Prostate cancer [Phase II]; Ovarian cancer [Abandoned in R&D] 890 75

Meanwhile, some commentators believe that the failure of ArQule’s shares to react to this deal is purely down to depressed markets, and a look at the table below, examing the reaction to other deals signed in the last six weeks, suggests this is likely to have played a part.

However, it is also true that ARQ 197 still has a lot to prove, making the company a high risk bet even among its peers. Data due over the next few months should help build confidence, and go some way to determining whether Daiichi has got itself a bargain. Further proof of concept data from ARQ 197 will be available in patients with MiT (microphthalmia transcription factor) tumours and pancreatic cancer, whilst a phase 1 lead-in trial to a planned phase 2 trial in non-small cell lung cancer is proceeding.

Separately, Roche is due to decide whether to opt-in or extend its option on ARQ 501, a phase II E2F modulator, by the end of the year, which should help sentiment around the company improve.

No mood for optimism

Among the analyst reports written about ArQule it is hard to find a negative comment. Buy recommendations abound and share price targets range from $5 up to $12, all significantly above the company’s current stock price.

Analysts widely view ARQ 197 as one of the most promising cMET inhibitors under development, a class of drug that itself is emerging as an important source of targeted cancer therapies.

All of which means expectations are high for both the compound and the company. Unfortunately, the market is in no mood for optimism. ArQule, which thankfully does not have to raise money any time soon, will just have to keep on generating the good news and wait for investors to start reinvesting in risk.

Product deals since 1 September 2008
  Deal Type Product Company Deal Partner Status on Deal Date Deal Date Upfront Payment ($m) Overall Deal Value ($m) Share price move on day of deal Share price change since deal
1 In-licensed ARQ 197 Daiichi Sankyo ArQule Phase II  10-Nov-08 75 560 -12% -4%
2 In-licensed Prochymal / Chondrogen Genzyme Osiris Therapeutics Phase II  04-Nov-08 130 630 +3% +15%
3 In-licensed Asonep Merck KGaA Lpath Phase I  29-Oct-08 34 696 +31% +28%
4 In-licensed TH9507 Merck KGaA Theratechnologies Phase III  29-Oct-08 32 316 -1% -13%
5 In-licensed EOquin Allergan Spectrum Pharmaceuticals Phase III  29-Oct-08 42 42 +50% +74%
6 In-licensed AI-525 Cephalon Acusphere Pre-clinical  24-Oct-08 20 20 +0% -9%
7 In-licensed Tuberculosis Research Programme Eli Lilly Summit Research project  07-Oct-08 - - -4% -12%
8 In-licensed Cethromycin (ABT-773) Wyeth Advance LifeSciences Phase III  01-Oct-08 - 100 -14% -67%
9 In-licensed Pagoclone * Teva Pharmaceutical Industries Indevus Pharmaceuticals Phase II  26-Sep-08 - 143 +103% * +39% *
10 In-licensed MAXY-4 Astellas Pharma Maxygen Pre-clinical  19-Sep-08 10 176 +4% -6%
11 In-licensed R99 compounds Allergan Asterand Pre-clinical  08-Sep-08 6 62 +93% +23%
12 Joint venture Nanobody Research Project Merck KGaA Ablynx/Merck KGaA Research project  04-Sep-08 15 15 +8% -8%
13 In-licensed Dimebon Pfizer Medivation Phase III  03-Sep-08 225 725 +12% -33%
Average +14% -1%
* excluded from overall analysis as deal announced on same day as major news that the FDA agreed no further clinical trials would be required for testosterone drug Nebido, Indevus' lead pipeline candidate

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