NATURE OF OPERATIONS AND BASIS OF PRESENTATION

3 Months Ended

Mar. 31, 2013

Organization and Nature Of Operations [Abstract]

NATURE OF OPERATIONS AND BASIS OF PRESENTATION

1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION

We are a clinical-stage biotechnology company organized as a Delaware corporation in 1993 engaged in the research and development of innovative cancer therapeutics. Our mission is to produce novel drugs with differentiated mechanisms of action that will extend the lives of our patients. These drugs target biological pathways implicated in a wide range of cancers. We employ technologies such as our ArQule Kinase Inhibitor Platform (“AKIPTM”) to design and develop drugs that have the potential to fulfill this mission.

Our lead product candidate is tivantinib (ARQ 197), an orally administered, small molecule inhibitor of the c-Met receptor tyrosine kinase (“c-MET”) and its biological pathway. C-MET is a promising target for cancer therapy, based on its multiple roles in cancerous cell proliferation, tumor spread, new blood vessel formation and resistance to certain drug therapies. We and our partners, Daiichi Sankyo Co., Ltd. (“Daiichi Sankyo”) and Kyowa Hakko Kirin Co., Ltd. (“Kyowa Hakko Kirin”), are implementing a clinical development program designed to realize the broad potential of tivantinib as a single agent and in combination with other anti-cancer therapies in a number of disease indications. Our strategy is to focus on the most promising indications within our clinical programs based upon continually generated and updated data. Our most advanced indication is liver cancer (“hepatocellular carcinoma” or “HCC”). We are also completing earlier-stage combination therapy trials with tivantinib and other anti-cancer agents that may provide data to support later-stage trials in additional indications.

On January 31, 2013, we announced that the first patient had been enrolled in the pivotal Phase 3 METIV trial of tivantinib for patients diagnosed with HCC who have received one or two prior systemic anti-cancer therapies. The METIV trial is a randomized, double-blind, controlled study of previously treated patients with MET-high inoperable HCC who will receive tivantinib as a single agent or placebo. The primary endpoint of this trial is overall survival (“OS”), and the secondary endpoint is progression-free survival (“PFS”). Approximately 300 patients are planned to be enrolled at approximately 120 clinical sites worldwide. This trial is being conducted under a Special Protocol Assessment (“SPA”) agreement with the U.S. Food and Drug Administration (“FDA”). The METIV trial builds upon the results of a randomized, double-blind, placebo controlled, Phase 2 trial in HCC announced in January 2012 demonstrating that treatment with tivantinib as single agent therapy produced a statistically significant improvement in the primary endpoint of time-to-progression (“TTP”) in previously treated patients. Patients with higher levels of MET who were treated with tivantinib in this Phase 2 trial experienced pronounced benefit in prolonged TTP. Additional data from this trial, presented at the Annual Meeting of the American Society of Clinical Oncology (“ASCO”) in June 2012, demonstrated significant improvements in median OS and PFS in these MET-high patients.

On January 11, 2013, we announced the top-line results of a randomized Phase 2 signal generation trial of tivantinib used in combination with irinotecan and cetuximab in patients with refractory or relapsed colorectal cancer (“CRC”). The trial did not meet its primary endpoint of PFS. The PFS results obtained in both the control arm and the experimental arm were longer than expected compared to previously published historical norms. Additional data and analyses from this trial are planned for presentation at the ASCO Annual Meeting in June 2013 and will include mature OS data as well as analyses of patient sub-groups, biomarker status and regional variability, including pre- and post-study treatments.

On October 2, 2012, we and Daiichi Sankyo announced that the independent Data Monitoring Committee (“DMC”) of the Phase 3 MARQUEE (Met inhibitor ARQ 197 plus Erlotinib vs. Erlotinib plus placebo in Non-Squamous Non-Small Cell Lung Cancer“NSCLC”) trial recommended the study be discontinued early following a planned interim analysis, when they concluded that the study would not meet its primary endpoint of improved OS. Although the interim analysis showed a statistically significant improvement in PFS in the intent-to-treat (ITT) population, this benefit did not carry over to OS. There were no safety concerns identified by the DMC during this interim analysis.

Daiichi Sankyo recently provided us with the final data set from the MARQUEE trial (with a cut-off date of December 15, 2012), including analyses of the pre-specified sub-groups prescribed in the statistical analysis plan (“SAP”) for the trial.  These latest data analyses confirm a statistically significant improvement in progression free survival (“PFS”) in the intent to treat (“ITT”) population (approximately 1000 patients) for patients receiving tivantinib, but the PFS benefit did not carry over to overall survival (“OS”).

These analyses included an exploratory analysis of the MET IHC (immunohistochemistry) sub-group comprised of 445 evaluable patients. Of these, 211 patients were confirmed to be MET-high as defined in the SAP. The MET high tivantinib group showed a substantial improvement in OS relative to control, a benefit which was not seen in the ITT population.  By comparison, 234 patients were confirmed to be MET low, and in this cohort of patients, no difference in OS was observed. PFS in MET-high and MET-low populations were similar.  Complete data from these analyses are planned for presentation at a peer-reviewed forum in the second half of 2013.

 MARQUEE is a randomized, double-blind, controlled pivotal trial conducted under an SPA to evaluate tivantinib in combination with erlotinib, an approved anti-cancer agent, in previously treated patients with locally advanced or metastatic, non-squamous NSCLC. We and Daiichi Sankyo have provided information regarding the study discontinuation to health authorities and those clinical investigators participating in studies of tivantinib. Our analysis of data from the MARQUEE trial and other studies will inform our decisions regarding potential further development in NSCLC or in certain biomarker-defined sub-groups within this disease population. In NSCLC, we are also conducting a Phase 2, randomized trial of tivantinib and erlotinib in patients with a mutated form of the KRAS gene.

On October 30, 2012, we reported that we had been informed by Kyowa Hakko Kirin that it will permanently suspend enrollment in its ongoing Phase 3 ATTENTION (Asian Trial of Tivantinib plus Erlotinib for NSCLC without EGFR Mutation) trial following the recommendation of an independent Safety Review Committee (“SRC”) in Japan after the reporting of cases of interstitial lung disease (“ILD”) in the study as a drug-related adverse event. It is our understanding that patients who were enrolled in the ATTENTION trial at the time of the safety finding can continue to receive treatment with the combination of tivantinib and erlotinib upon request from the patient and investigator and after providing new informed consent. Data from the trial are expected in late 2013 or early 2014. The ATTENTION trial is investigating the use of tivantinib and erlotinib versus erlotinib and placebo in second line non-squamous NSCLC patients with the wild-type form of the EGFR gene. This trial is being conducted by Kyowa Hakko Kirin in Japan, South Korea and Taiwan.

We have licensed commercial rights to tivantinib for human cancer indications to Daiichi Sankyo in the U.S., Europe, South America and the rest of the world, excluding Japan and certain other Asian countries, where we have licensed commercial rights to Kyowa Hakko Kirin. Our agreements with these partners provide for possible future milestone payments, royalties on product sales, and development funding, in addition to significant payments that we have already received. During 2011, we received milestone payments of $25 million from Daiichi Sankyo resulting from the dosing of the first patient in the MARQUEE trial and $10 million from Kyowa Hakko Kirin resulting from the dosing of the first patient in the ATTENTION trial. On January 31, 2013, we announced that the first patient had been enrolled in the pivotal Phase 3 METIV trial of tivantinib, entitling us to a $15 million milestone. That milestone was netted against our cumulative share of Phase 3 collaboration costs in the quarter ended March 31, 2013, and consequently we did not receive any cash proceeds from this milestone. The terms of our tivantinib licensing agreements with Daiichi Sankyo and Kyowa Hakko Kirin remain in effect following the recent developments in both of these trials.

We have regained worldwide rights for the development and commercialization of ARQ 092 and all other compounds included under our AKT collaboration with Daiichi Sankyo pursuant to their formal notice to terminate our license and co-commercialization agreement received on March 26, 2013. Termination of this agreement will be effective 90 days from our receipt of the formal notice from Daiichi Sankyo, following which we will be responsible for funding the remainder of the ongoing Phase 1 trial with ARQ 092 beyond the contractual termination period, as well as any future clinical development and commercialization of this compound. The license agreement had provided exclusive rights to Daiichi Sankyo for the development, manufacturing and marketing of ARQ 092 on a worldwide basis. Under this agreement, we received a $10 million upfront fee from Daiichi Sankyo in November 2011. Following the termination of this agreement, ARQ 092 will become our proprietary asset, and Daiichi Sankyo will have no further financial or other obligations related to this program.

ARQ 092 is part of our proprietary pipeline of product candidates directed toward molecular targets and biological processes with demonstrated roles in the development of human cancers. These product candidates also include ARQ 087, an inhibitor of fibroblast growth factor receptor, ARQ 621, an inhibitor of the Eg5 kinesin motor protein, and ARQ 736, an inhibitor of the RAF kinases, all of which are undergoing or have completed Phase 1 clinical testing.

We have prepared the accompanying condensed financial statements pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to these rules and regulations. These condensed financial statements should be read in conjunction with our audited financial statements and footnotes related thereto for the year ended December 31, 2012 included in our annual report on Form 10-K filed with the SEC on March 14, 2013.

The unaudited condensed financial statements include, in our opinion, all adjustments (consisting only of normal recurring adjustments) necessary for a fair statement of our financial position as of March 31, 2013, and the results of our operations and cash flows for the three months ended March 31, 2013 and March 31, 2012. The results of operations for such interim periods are not necessarily indicative of the results to be achieved for the full year.