The past year certainly was not an easy one for Arqule’s (ARQL) investors who saw their shares plummet more than 50%. Perhaps this kind of decline does not look too big of a deal for a small biotech company when compared with “solid” investments such as AIG (AIG) or Citi (C), but the current price level is certainly not what the institutionals who bought $55 million worth of stock for 7.75$ a share last year envisioned. The good news is that now, with a new management team and an imminent partnership deal for Arqule’s lead compound, ARQ-197, the stock represents an opportunity for an aggressive upward move in 2009.

The company has been talking about licensing ARQ-197 for some time now, but based on remarks made by its new CEO, there are active discussions with potential partners that could mature into a deal in the near future. Last month, the Oppenheimer & Co healthcare team issued an insightful report titled “Collaborations as Catalysts” which mentioned ARQ-197 as a potential licensing candidate. According to Oppenheimer, although such a licensing deal could happen already this year, it is more likely to happen next year following the release of clinical data from ongoing clinical trials.

Such a licensing deal will have two commercial aspects. First, it will provide Arqule with an immediate non-dilutive source of cash, which is extremely important under the current conditions in the equity markets. Second, and equally important, it will offload the high cost of advancing the drug onto a large partner. ARQ-197 is currently in two phase II trials, which account for a large chunk of Arqule’s expenses, so transferring this liability to a partner will help the company keep cash burn lower.

On top of the obvious financial merits, a licensing deal for ARQ-197 may also have important strategic implications for Arqule,. At the moment, Arqule has only one candidate in the clinic, following the discontinuation of the ARQ-171 clinical program. Thus, the most important task the company has is broadening its clinical pipeline by promoting more drugs into clinical trials and getting more partners that will finance earlier drug discovery activities. The company is planning to achieve the latter by building a discovery platform that will rely on ARQ-197’s unique mode of action (I’ll touch on that later on). Investors can expect the company to announce several new compounds from this intriguing platform during 2009, as the company is already assessing potential candidates. In order to pursue this path, Arqule must free up financial and managerial resources that are currently being consumed by the ARQ-197 program and the best way to do that is letting a big pharma take control over the compound’s clinical development.

Arqule already licensed the rights for ARQ-197 in Asia to Japan-based Kyowa Hakko for a $30 million cash upfront licensing payment, $90 million in milestone payments and double digit royalties on future sales. One would expect a deal that includes the U.S and Europe will involve even higher numbers, given the large commercial opportunity and the more advanced stage of ARQ-197. The Oppenheimer analysts estimate that the deal will involve an upfront payment of $40-60 million and milestone payments of $200 million, on top of “low double digit royalties”.

  ARQ-197  

ARQ-197 is a kinase inhibitor, a drug that is designed to disrupt signals in cancer cells. ARQ-197 targets the c-MET receptor, which is currently one of the hottest targets in cancer research and is regarded by many as the “next big thing” in oncology.

Like many other cancer associated targets, c-MET plays an important role in embryonic development and tissue repair, mediating processes such as growth and motility of cells. These processes, which are essential for the proper development of the human body, are also important in the development of tumors, which “kidnap” them in order to grow and advance.  Paradoxically, the important role in embryonic development and tissue repair renders c-MET an excellent target for inhibition.

The improper activation of c-MET has been observed and shown to be correlated with aggressive disease and poor prognosis in a plethora of tumor types, including lung, colon, gastric and breast cancers, so hitting this target may be relevant in a very large number of patients. Moreover, c-MET is believed to be implicated in resistance to available therapies such as Tarceva and Gemzar, which further increases the potential use of c-MET inhibitors, this time in combination or following relapse with other agents.