We are trading just over cash value. Amazing.

ArQule, Inc.
Reports 3Q; Important ARQ 197 Data Expected in
1H10
Reiterate BUY rating
Openheimer

SUMMARY
On 11/5, ARQL reported 3Q results. ARQL's primary focus remains development of
ARQ 197 in combination with Tarceva in second-line NSCLC. A ph.II trial of the
combination is fully enrolled, and data is expected in 1H10. Based on the ph.I data
for the combo, we expect at least a strong positive signal in the ph.II. Additionally,
ARQL is testing ARQ 197 in multiple combinations. We believe c-Met inhibition is
likely to have at least additive effects when combined with other targeted agents,
suggesting broad potential for the drug. We believe ARQL shares are undervalued
based on ARQ 197's potential across multiple tumor types, and we expect upside
catalysts from clinical data in 1H10.
KEY POINTS
n ARQL reported EPS of ($0.18) vs our ($0.26), primarily on cost savings.
Revenues were $6.4M vs our $5.6M. Total expenses were $14.5M vs. our
$17.3M est. ARQL ended 3Q with ~$130M in cash, net of debt collateralized by
the company's ARS holdings.
n Ph.II data for ARQ 197+Tarceva in NSCLC is a key event for ARQL in 1H10.
Ph.Ib data showed clear activity for the combo in NSCLC (PFS of 26.3 wks vs.
9.7 wks for Tarceva). We believe the ph.II trial will likely show at least a strong
PFS signal, supporting advancement into ph.III.
n We believe there is still some small chance of accelerated approval of
ARQ 197 in MiT tumors. Ph.II data for ARQ 197 in this setting is due in 1H10.
Given the unmet medical need, additional trial requirements could be relatively
manageable. However, this will depend on the quality of the ph.II data.
n We believe the long-term value of the ARQ 197 program is in NSCLC.
ARQL has focused on NSCLC as the lead indication for ARQ 197; we believe
this is appropriate, given the potential risks to solely focusing on an approval in
MiT.
n Key ph.I ARQ 621 data is expected in late 2009/early 2010. The company
has stated that dose escalation in this trial is continuing as planned. Given the
toxicity issues with earlier generation Eg5 inhibitors, we believe the safety profile
will need to be very clean to merit moving ARQ 621 into ph.II.