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Yesterday morning, Arqule (NASDAQ:ARQL) announced it had signed two licensing deals with Japan based Daiichi Sankyo. The first deal involved the licensing of Arqule’s lead compound, ARQ197, a kinase inhibitor for the treatment of cancer, with a very broad potential utility. The second deal was a drug discovery collaboration in which Daiichi Sankyo gets access to Arqule’s recently established discovery platform with the purpose of developing kinase inhibitors against two targets. 

The two deals are great news for Arqule because they serve as a validation for both ARQ197 and Arqule’s technology. The licensing of ARQ-197 was a much anticipated event, as I previously wrote here, as it seemed like the best way to unleash the potential of a compound with a utility in so many different indications. Prior to the deal, Arqule was a small company who carried the burden of developing a promising drug in a highly competitive field with limited financial resources. Now, with the resources of a large partner, Arqule can finally advance ARQ197 fast aggressively, without diluting its shareholders.

The licensing deal for  the drug discovery platform was a more surprising event, but equally important for the long run, and can be regarded as the first step in transforming Arqule into a platform company that can use its knowledge, expertise and intellectual property for bringing more cash and expanding its pipeline. These kinds of deals enable small companies like Arqule to get more compounds in the clinic and decrease the overall risk in the stock by increasing the number of shots on goal.

Nevertheless, the more near term impact of the two deals is in the upfront payment of $75 million Arqule received from Daiichi Sankyo. This amount is even more impressive when considering that Arqule had a market cap of just over $110M and a net cash position of approximately $90 million, prior to the deal. According to what the company said on its conference call yesterday, they now have enough cash for the coming three years, which completely removes any fears of dilution in the near future.

Amazingly, in response to these announcements investors sent Arqule shares 12% lower, a reaction that, in my opinion, represents a severe lack of judgment. Even if there might be legitimate criticism of Arqule’s decisions in terms of the nature of the deals and the partner, the absolute values of yesterday’s deals cannot be ignored. Financially, Arqule is now a better investment that represents no risk of dilution, and higher chances for success, which is why we decided to increase our position in the company. Similar to the case of Immunogen we discussed here, this is a classic case of an extremely positive fundamental event that does not translate into a positive effect on the stock price, or in other words, a buying opportunity.

Disclosure: Long ARQL

Source: Arqule’s Theater of the Absurd