ArQule Reports 3Q Results as Investors Now Look to Tivantinib’s HCC Indication

Oncology-focused ArQule, Inc. (NASDAQ:ARQL) reported third quarter financial results on Thursday morning, noting that cash, equivalents, and marketable investments totaled $140M on Sept. 30, and that the company will likely end the year with close to $130M. ArQule performed a bit better financially than expected in the quarter, but importantly, the company is guiding for FY12 net loss per share in the range of $.20 to $.25, in-line with analyst estimates.

The company has recently faced some headwinds. ArQule’s Japanese partner Kyowa Hakko Kirin suspended a Japanese Phase 3 non small-cell lung cancer trial of tivantinib in August due to safety concerns. And in early October, ArQule announced that its lead development program in the West (partnered with Daiichi Sankyo [OTC:DSKYF]), also evaluating tivantinib as a treatment for NSCLC, would not meet its primary endpoint, and the Phase III MARQUEE trial was halted for futility. It is important to note that the MARQUEE trial demonstrated no safety issues. The stock sold off by almost 70% as investors discounted tivantinib’s NSCLC indication. (Read more here.)

The company now pins tivantinib’s future on a planned Phase III trial for hepatocellular carcinoma (HCC, or liver cancer) and a Phase II trial for colorectal cancer (CRC). The CRC trial is expected to show clinical results by the end of the year. On Thursday’s conference call, management, however, focused almost exclusively on the HCC indication, and questions from analysts demonstrated that the CRC indication is not the top priority at the moment, given that it is only in Phase II. Because ArQule is set to release data from the CRC trial in the coming months, and there is little value being assigned to this indication, investors may be able to get a “free” look at Phase II data with limited downside risk. With a $156M market capitalization, the company trades with an enterprise value of just over $15M (technology value), with most if not all of the value assigned to the potential HCC indication. Given that tivantinib has shown activity in multiple cancer indications, the low price of the stock presents an opportunity to own a promising compound on the cheap.

ArQule and the FDA have agreed to a Special Protocol Assessment for tivantinib’s upcoming HCC trial, and management hopes to begin treating the first patient by the end of the year or in early 2013. The trial won’t be completed for at least another year, likely two, so any related value-driving events for the HCC indication, aside from trial initiation, won’t materialize in the near-term. Management did say that of four early-stage candidates, it will likely partner one or more based on early trial data as it becomes available. ArQule’s partnership with Daiichi has been lucrative and crucial to ongoing tivantinib development; if it can secure a similar partnership for another compound, the benefits could be meaningful.

With risk somewhat limited by ArQule’s healthy balance sheet, a long-term position based on tivantinib in HCC - with the possibility of unexpected upside should the CRC trial demonstrate promise - might make sense. The market for a quality second-line HCC treatment is lucrative as the drug could fulfill an unmet medical need. The FDA’s expressed confidence in the trial also lends credibility to its design, although an SPA is far from determinant. Thursday morning, the stock gained slightly, and should maintain strength as the CRC trial results come into view.