ArQule, Inc.

19 Presidential Way
Woburn, Massachusetts 01801-5140
U.S.A.
Telephone: (781) 994-0300
Fax: (781) 376-6019
Web site: http://www.arqule.com

Public Company
Incorporated: 1993
Employees: 257
Sales: $65.5 million (2003)
Stock Exchanges: NASDAQ
Ticker Symbol: ARQL
NAIC: 541710 Research and Development in the Physical Sciences and Engineering Sciences

ArQule, Inc., is a biotechnology company involved in the research and development of small molecule therapeutics. The company also provides fee-based chemistry services to pharmaceutical and biotechnology companies to produce novel chemic compounds with drug-like characteristics. ArQule's revenue is derived primarily from compound development chemistry performed for its customers and research and development funding.

Origins

ArQule was incorporated in 1993 as one of the first companies to focus on the chemistry aspect of drug discovery. From the beginning, the company pursued a business strategy of raising cash by collaborating with major pharmaceutical companies. In March 1995, ArQule announced a $30 million deal with Pharmacia, the Swedish pharmaceutical company that would use ArQule's technology for making organic compounds to develop new products. This deal was followed by a $35 million agreement with Abbott Laboratories in June for ArQule's technology tools to help find new drugs. The arrangement called for Abbott to pay a significant up-front fee, support ArQule research, and make payments as the work reached certain milestones. Nevertheless, Abbott obtained no ownership stake in ArQule. This was a key business strategy: Unlike other cash-starved biotech companies, ArQule managed to avoid selling itself to big firms with large cash reserves. Instead, the fledgling company sought to negotiate deals in which it did work for larger firms but gave up no ownership control. Following this strategy, in November 1995 ArQule signed its third deal in one year with Solvay Duphar B.V., worth an estimated $50 million.

One major reason for ArQule's success in negotiating favorable deals with leading pharmaceutical companies was its ability to do high-volume testing—1,000 to 5,000 tests—on many compounds using automated assembly line testing methods. What a medicinal chemist might accomplish in two weeks working on a single compound, the company could perform on 1,000 compounds in a single day. Indeed, chemistry had become the chief bottleneck in the drug discovery process. Both pharmaceutical and biotechnology companies had become increasingly anxious to ensure a supply of new chemical compounds suitable for drug screening and to gain access to better technology for optimizing the discovery of new drugs. ArQule's technology offered a revolutionary change in the approach of medicinal chemistry. The company provided a novel modular building block technology that integrated structure-guided drug design, high-speed parallel chemical synthesis, and information technology to accelerate the identification and potential development of new drugs.

Argule's advantageous agreements with other firms also stemmed from larger forces at play. In their formative years, biotech firms were flush with cash for developing breakthrough drugs to challenge the big pharmaceutical companies. In the early 1990s, however, Wall Street investors and venture capitalists began to limit their willingness to gamble on the nation's 1,300 biotech firms after several highly publicized drug failures. Investors also grew impatient with the high cost and extensive time to develop new therapeutics. As these lines of capital began to dry up, the biotech industry turned to major drug firms for new infusions of cash. In addition, biotech companies soon realized that the pharmaceutical sector offered other benefits, including manufacturing capacity, distribution networks, and experience in running human testing trials to meet Food and Drug Administration approval.

In turn, the pharmaceutical companies needed the innovation and creativity of the burgeoning biotech field, which offered new technology to help produce breakthrough drugs in a cost-effective manner. Despite spending billions of dollars a year in research and development, pharmaceutical companies had little to show for their cash layout except for improvements of existing products. In need of innovation, large drug firms began replacing venture capitalists as major sponsors of the biotech industry. While the nature of the deals varied, in the early years cash-strapped biotech firms were often required to turn over product rights, clinical trial testing, marketing and distribution, and sometimes even manufacturing rights in exchange for long-term financial stability. As the biotech industry matured, however, pharmaceutical companies became more willing to share its rewards, offering such incentives as higher royalties and options for manufacturing. Given these trends, ArQule saw its future in becoming the research and development arm of large pharmaceutical firms. Having raised $6.5 million in two capital venture rounds in its first two years, ArQule moved quickly beginning in 1995 to sign multi-year pharmaceutical and biotech partnership deals.

Forming Partnerships for Cash: Mid- to Late 1990s

On October 16, 1996, ArQule made an initial public offering (IPO), raising $34 million at twelve dollars per share. The company expected to use the proceeds for research and development. Also during 1996, ArQule expanded its collaborations with both pharmaceutical companies and other biotech firms. By the end of the year, the company had established a fourth partnership with a multi-national pharmaceutical company, Roche Bioscience, a division of Syntx Inc., worth about $60 million. ArQule also entered the agrochemical area with a five-year deal with Monsanto covering the discovery and development of new agricultural chemicals. ArQule estimated the deal at $12 million plus royalties of the sale of products resulting from the collaboration. In addition, the company signed collaboration agreements with nine biotech firms to leverage their biology with its chemistry capabilities. For 1996, these various collaborations increased revenues to $7.25 million, up from $3.33 million in 1995. In commenting on the company's 1996 fiscal results, president and chief executive officer Eric B. Gordan said that ArQule's plans were to adhere to its novel business model by signing additional pharmaceutical and biotech agreements and increasing the company's presence in the agrochemicals and bioseparations industries.

On April 4, 1997, ArQule announced another IPO of two million shares of common stock, raising $24 million. That July, the company announced a drug discovery collaboration with the Wyeth-Ayerst Pharmaceuticals division of American Home Products. The signing of the sixth pharmaceuticals partnership represented another validation of the company's technology and business strategy. Under the agreement, Wyeth would make a $2 million equity investment and would pay ArQule a minimum of $26 million over five years. In return, Wyeth would get a five-year subscription to ArQule's Mapping Array program, covering about 200,000 new compounds per year. In November, the company also signed a three-year deal with Sankyo worth about $35 million. By the end of 1997, ArQule had established deals with seven leading multi-national pharmaceutical firms, as well as eighteen biotechnology companies, covering diverse therapeutic areas. In addition, the company began collaborating with the University of California San Francisco (UCSF) to develop a new class of HIV protease inhibitors and received a patent covering methods for using compounds called aminimides in the design of polymers with specific functions. According to ArQule, the technology pointed to the potential of combinatory chemistry in uses beyond drug discovery, including agrochemical research and development and materials research.

By the beginning of 1998, ArQule had honed its business strategy to two simple formulas. The agreements with large drug firms involved primarily a pay-as-you-go arrangement, with the company receiving fees for providing access to its novel technology. With the biotech companies, ArQule took a different approach, often trading chemistry know-how for equity in the firms. Under either arrangement, ArQule could apply its technologies in high-throughput automated screening and detection of compounds to a wide variety of pharmaceutical and other life-science applications. In layman's terms, this meant that ArQule's ability to design and produce novel compounds could be used as a starting point for screening programs and perhaps later lead to compounds that were suitable to put into human trials with the aim of discovering new pharmaceuticals. The result was that both the company's technology ventures and its bottom line benefited. For 1997, the company reported total revenues of $17.4 million, up from $7.25 million in 1996. Net income for the year broke in positive territory for the first time, totaling $291,000 compared to a net loss of nearly $3 million in 1996. In addition, as a result of rising revenues and two public offerings of common stock, ArQule built a $51 million war chest that could be used for capital investments for acquisitions.

Company Perspectives:

ArQule is a biotechnology company engaged in research and development of cancer therapeutics. Our mission is to research, develop, and commercialize broadly effective cancer drugs with reduced toxicities compared to conventional cancer chemotherapeutics. ArQule develops cancer therapies based on our innovative and proprietary Activated Checkpoint Therapy (ACT) platform by applying a unique molecular biology approach that leverages automated chemistries and intelligent drug design.

In 1998, ArQule continued to develop its preeminence as a chemistry services business for drug discovery firms. The company expanded its collaborations with pharmaceutical and biotech companies and academic institutions, including Ontogeny, Sepracor Inc., Immunex, Acadia, Genome Therapeutics, CuraGen, Beth Israel Deaconess Medical Center, and R.W. Johnson Pharmaceutical Research Institute, a Johnson & Johnson affiliate. ArQule also delivered a lead agricultural compound to Monsanto, accomplishing the first major development milestone in the collaboration. In addition, ArQule established its first commercial partnership with Amersham Pharmacia Biotech to develop and market customized bioseparations products for life science and research applications. In addition, the company added new technology relating to a program that would allow exclusive access to specially designed chemistries, received six new patents, and doubled its production capabilities.

In July 1998, ArQule broke ground for a 130,000-square-foot headquarters and research and development facility in Woburn, Massachusetts. With 180 employees and collaborations with more than thirty companies and academic institutions worldwide, the new state-of-the-art facility represented the next phase of ArQule's planned expansion. At the same time, ArQule announced a senior management succession plan to guide the company through its next stage of development. The ArQule board of directors, including then current CEO and president Eric B. Gordan, began searching for a new chief executive officer with extensive experience in large scale drug discovery operations. During the transition period, Gordon agreed to hold the position until a new CEO was found, including serving on the board of directors. The change in leadership came on April 1, 1999 with the appointment of Stephen Hill as ArQule's new president and chief executive officer. Hill, a medical doctor, arrived at ArQule after ten years of pharmaceutical experience. Prior to joining ArQule, Hill served as director of Global Drug Development at F. Hoffman-LaRoche in Basel, Switzerland.

In July 1999, ArQule announced a major four-and-a-half–year agreement with Pfizer Inc. worth up to $117 million. The deal was one of the largest in the field of combinatorial chemistry, which enabled pharmaceutical and biotechnology companies to accelerate the search for promising drugs. The agreement provided that ArQule devote its entire Medford facility, including designated technologies, scientists, and its AMAP chemistry operating system, to generating libraries of compounds for Pfizer. ArQule would receive $16 million up front and $20 to $27 million annually over the life of the agreement. ArQule was required to begin providing compounds to Pfizer in the year 2000. In addition, all compounds developed by ArQule would be owned by Pfizer, which would assume control of the Medford facility at the conclusion of the arrangement. The deal came at a fortuitous time as the company had been suffering from steep losses and declining stock prices stemming from a dwindling number of new pharmaceutical collaborations. ArQule signed another agreement in October 1999 with Bayer AG worth $30 million. Under the deal, ArQule would design and develop exclusive chemical compounds for Bayer over a three-year period. In November 2000, the company signed a collaborative drug discovery agreement with SmithKline Beecham for $500,000 to $1 million a year during the term of the contract.

Transformation to Biopharmaceutical Company

Under CEO Stephen Hill's new leadership, the company sought to transform itself from a chemistry services business to a biopharmaceutical drug-discovery firm. In pursuit of this goal, in November 2000 ArQule sold 2.92 million shares of common stock for $65.7 million to help fund its move into the drug-discovery sector. The company, which primarily designed and synthesized molecules for pharmaceutical and biotechnology firms, intended to use proceeds from the stock offering to fund acquisitions in the industry. As a result, in February 2001 ArQule concluded a $95 million merger with Camitro Corporation, a privately held predictive modeling company based in Menlo Park, California. The merger established Camitro as a wholly owned subsidiary of ArQule. Camitro's technology consisted of an integrated platform of predictive models and strategies for the design, selection, and optimization of potential new pharmaceutical drugs. ArQule planned to incorporate these models into its own Parallel Track Drug Discovery program. The company expected the acquisition to be the first significant step in its transition from being a services company to becoming a leading chemistry-based drug discovery firm. Plans for the acquisition failed to materialize, however, as ArQule was unable to commercialize the Camitro's technology, resulting in the layoff of 128 employees. In addition, the company closed its facilities in Redwood City, California, and Cambridge, United Kingdom, to conserve cash and restructure operations.

Despite this setback, on September 8, 2003 ArQule's efforts to reinvent itself as a biopharmaceutical drug and development company hit a milestone with the purchase of Cyclis Pharmaceuticals, Inc., a privately held, development stage cancer-therapeutics company based in Norwood, Massachusetts. The deal was made for $25 million in stock and cash. As part of the deal, ArQule acquired Cyclis's lead clinical candidate for cancer, CO-501, plus its Activated Checkpoint Therapy used to develop the new drug. Shortly after buying Cyclis, ArQule announced the launching of Phase I human clinical trials for CO-501, a product it hoped would reduce and kill tumors via injection by switching on cell "checkpoints" that would tell cancer cells of their inherent DNA damage, causing them to self-destruct. ArQule named Chiang Li as chief science officer and vice-president and head of its Biomedical Institute. Li, a former vice-president of research at Cyclis, helped to develop the science behind CO-501. ArQule's future plans included developing products that would combine biology and chemistry to create synthetic versions of CO-501 to treat other cancers. The company also began focusing on inflammation drugs and developing a pill to treat rheumatoid arthritis, which was slated to begin preclinical animal studies by the end of 2003.

Key Dates:

1993:: The company is incorporated.
1995:: ArQule signs deals with major pharmaceutical firms.
1996:: The company makes an initial public offering of common stock, raising $34 million.
1998:: ArQule breaks ground on new headquarters and a research and development facility in Woburn, Massachusetts.
2001:: The company acquires Camitro Corporation.
2003:: ArQule acquires Cyclis Pharmaceuticals Inc.
2003:: ArQule announces Phase I human clinical trials for CO-501, an anti-cancer agent.

Compared with many other small drug-discovery companies, ArQule was well positioned. The company's entry into the drug discovery industry enabled it to negotiate a significant expansion of its 1999 strategic alliance with Pfizer that was worth between $120 million and $345 million depending on whether ArQule attained all milestones in support of Pfizer's efforts to develop new drugs. Moreover, seven months after its acquisition of Cyclis, ArQule leveraged the Activated Checkpoint Therapy technology to conclude an oncology deal with Switzerland's Hoffman-La Roche to discover and develop drug candidates that target a new pathway to selectively kill cancer cells. The alliance included a compound that was in Phase I clinical development. Assuming the successful development and commercialization of the compound under the program, ArQule would receive up to $276 million in predetermined payments, plus royalties based on net sales. By this time, the company also had $83 million in the bank, and second quarter net income for 2003 hit $1 million versus a $4.9 million net loss in 2002. In 2004, Hill believed ArQule was entering its most exciting time in the company's history. The company had much going for it—a clinical-stage compound, growing early-stage portfolio of new drug candidates, promising research and development technology, and cash in the bank.

Principal Subsidiaries

ArQule U.K. Ltd.

Principal Competitors

Albany Molecular Research; Array Biopharma; Pharmacopeia Drug Discovery.

ArQule, Inc.

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ArQule, Inc.

19 Presidential Way
Woburn, Massachusetts 01801-5140
U.S.A.
Telephone: (781) 994-0300
Fax: (781) 376-6019
Web site: http://www.arqule.com

Origins

Forming Partnerships for Cash: Mid- to Late 1990s

Company Perspectives:

Transformation to Biopharmaceutical Company

Key Dates:

1993:: The company is incorporated.
1995:: ArQule signs deals with major pharmaceutical firms.
1996:: The company makes an initial public offering of common stock, raising $34 million.
1998:: ArQule breaks ground on new headquarters and a research and development facility in Woburn, Massachusetts.
2001:: The company acquires Camitro Corporation.
2003:: ArQule acquires Cyclis Pharmaceuticals Inc.
2003:: ArQule announces Phase I human clinical trials for CO-501, an anti-cancer agent.