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No matter how diversified or well-managed a biotech company is, eventually there is no escape from binary events. These events usually come in the form of data readout from clinical trials that can make or break the stock. Two weeks ago, Arqule (ARQL) announced topline results from a much-anticipated phase II trial of its lead agent, ARQ 197, in lung cancer. The trial is evaluating ARQ 197 in combination with the approved drug, Tarceva, in patients with non-small cell lung cancer [NSCLC], and who have been previously treated with chemotherapy.

Although the data set is not a clear slam dunk, it generated an impressive efficacy signal that warrants advancing ARQ 197 into phase III. This, coupled with the progress the company has made on other fronts in the past year, makes Arqule one of most attractive biotech stocks in the market.

Designed for success

Arqule’s study is an excellent example of a properly designed clinical program, especially when it comes to targeted therapies. From the get-go, the trial had the right ingredients, including a robust trial design, the right indication and a combination regimen supported by solid scientific rationale.

Doing a combination trial with Tarceva in NSCLC looks like the ideal place to start with ARQ 197 for several reasons. ARQ 197 inhibits c-MET, a protein associated with multiple cancer-related functions such as invasion and metastasis. The expression and involvement of c-MET in lung cancer is well-established, based on numerous reports evaluating tumors from patients. The past years saw a flood of data with respect to c-MET and lung cancer, including a study which found that more than 70% of lung cancer tissues had some level of c-MET expression. Some studies also point to c-MET as a potential marker of aggressive disease and poor prognosis.

ARQ 197 and Tarceva have distinct yet intertwined mechanisms of action, so combining the two drugs is expected to result in at least additive, if not synergistic effect. c-MET activation is believed to account for 20-25% of cases of Tarceva resistance, so by adding ARQ 197, investigators hope to delay Tarceva resistance at least in some of the patients. Interestingly, recent experimental data shows that cells can become resistant to c-MET inhibitors by activating the EGFR pathway, which is inhibited by Tarceva.

From a commercial standpoint, it is always easier to add a new drug to an existing treatment line rather than replacing it. Tarceva is a commonly used drug in NSCLC with annual sales of $1.2B, so by adding ARQ 197, Arqule can build on Tarceva’s market penetration and create a new standard of care rather quickly. In addition, by the time ARQ 197 reaches the market, Tarceva will probably be generic, which will make the combination cheaper for patients and reimbursers. Lastly, both drugs are oral, so adding ARQ 197 does not lead to compliance or logistic issues.

The design of the trial is also noteworthy, as it is a fairly large (~170 patients) randomized study in which patients receive a combination of Tarceva with either ARQ 197 or placebo. Large randomized phase II trials are becoming ever more popular in oncology due to their ability to identify ineffective drugs and avoid unnecessary phase III studies. Their main disadvantage is cost, however that is a price the industry has learned to accept, especially in the case of combining targeted agents that often have a subtle effect in terms of tumor shrinkage.

Naturally, evaluating a drug in a randomized phase II increases the risk of failure, as results are compared head to head with a control arm. Non-randomized trials are more likely to generate a “positive” signal in comparison with historical data, but results are less reliable. Therefore, the robust design of the ARQ 197 trial renders it more challenging but also more reliable for deciding whether to advance this combination into a registration study. In other words, if the trial is positive, it serves as a strong basis for a phase III study with a higher probability of success.

Results

Results from the phase II trial included 167 patients who received ARQ 197+Tarceva or Tarceva+placebo. On the safety front, the combination regimen was well tolerated with no meaningful safety issues. The primary endpoint was progression free survival [PFS], which is the time until disease progression (usually tumor growth or appearance of new lesions). Although patients in the ARQ 197+Tarceva arm had a PFS of 16.1 weeks, compared with 9.7 weeks for the patients on the Tarceva+placebo arm, the difference was not statistically significant. Nevertheless, two additional analyses were extremely encouraging.

It turned out that there were imbalances between treatment arms in terms of mutations in two genes (EGFR and KRAS) that are known to be linked to response to Tarceva. The imbalances were in favor of the control arm, which means that the control arm had more patients with a high likelihood of responding to Tarceva. When this difference was factored in, the difference between the combination and control arms became statistically significant. Another analysis was done in a subset of patients classified as non-squamous (histological classification).

In this subset of patients, which accounted for ~70% of patients in the trial, the difference between the two arms was more pronounced (18.9 vs. 9.7 weeks) and reached statistical significance.

Positive signals

Although the trial did not meet its pre-defined primary endpoint, the efficacy signal is definitely there. Retrospective and subset analyses should always be treated with skepticism, but in this case, both analyses seem reasonable and reliable. Obviously, these signals will have to be validated prospectively in a large phase III trial.

Distinguishing between squamous and non-squamous NSCLC is a common analysis that had originally been part of the trial design. It is conducted on a regular basis in clinical trials, as the difference between the two subpopulations in terms of response to certain drugs is well recognized. The best example for that is Alimta, which is extremely effective in non-squamous NSCLC but ineffective and potentially deleterious in squamous NSCLC. Importantly, as non-squamous NSCLC accounts for 65-70% of NSCLC cases, it still represents a huge opportunity. Alimta, which is approved only for non-squamous NSCLC generated sales of $1.7B in 2009.

The imbalances between the two arms in EGFR and KRAS mutations are not surprising, as these factors were not included in the randomization process. EGFR and KRAS mutations are considered validated predictors of Tarceva response and are not always available at the time of treatment initiation. Patients with EGFR mutations tend to derive meaningful benefit from Tarceva whereas KRAS mutant tumors are considered relatively resistant to the drug. Therefore, factoring in these imbalances seems reasonable in trials that involve Tarceva.

Comparison with other trials

Comparing Arqule’s study to previous studies (see table below) in a similar patient population may provide additional insights. It is important to understand that no definitive conclusions can be drawn from comparing results from different trials, and usually there is an inverse correlation between a drug’s performance and trial size. Nevertheless, one can get a sense of where ARQ 197 stands in terms of PFS from such analysis. Even in comparison with established chemotherapy agents such as Taxotere and Alimta, the combination of ARQ 197 and Tarceva looks promising. The mild safety profile of the regimen is definitely a major advantage over chemo regimens, but cost might be an issue.



In its registration trial, Tarceva’s improvement in PFS was minimal yet statistically significant (2.2 vs. 1.8 months), but the real benefit was in overall survival (a 2 month difference). In the phase II trial, ARQ 197’s increase in PFS was more profound, especially in the non-squamous subgroup, despite the imbalances between the two arms. Alimta’s benefit in non-squamous patients also seems limited to overall survival, with no real difference in PFS. On the one hand, this makes Arqule’s data even more promising. On the other, it might imply that PFS is not necessarily indicative of survival, but phase II trials cannot evaluate overall survival in a reliable manner, especially in lung cancer where there are so many treatment lines.

Although the overall survival data is still unavailable, it is highly unlikely to see a clear statistically significant signal there as the trial was not powered to demonstrate that. In addition, the trial employed a cross-over design, where patients on the control arm can receive the combination of ARQ 197 and Tarceva after progressing on Tarceva alone, which may offset any potential effect of ARQ 197. Therefore, there is actually a third arm of patients who receive ARQ 197 and Tarceva following progressing on Tarceva. What investors can hope for is a trend of improved survival in patients on the ARQ 197 arm and those on the control arm who did not cross over after progression. According to the company, the majority of patients in the control arm did not crossover to the combination arm, so numbers might be sufficient to show a survival trend.

The control arm in the ARQ 197 trial had a median PFS of 9.7 weeks (2.2 months), which is similar to what Tarceva achieved in its registration trial. Although one could expect the control arm to do slightly better than historic controls, this further validates the trial design and implies the control arm in Arqule’s study is more or less reflective of a typical phase III population.

Next steps

Armed with such a promising data set, Arqule’s next obvious step is a global phase III trial in lung cancer. Although the formal decision has not been made, Arqule and its partner, Daiichi Sankyo, are likely to launch a phase III trial towards year end. Given the doubling of PFS in non-squamous patients, the trial will probably be limited to this subpopulation. Although the phase II was conducted primarily in the U.S. and EU, the phase III program will probably include Japan, the second largest oncology market and an important Tarceva market. The commercialization rights for ARQ 197 in Japan belong to Kyowa-Hakko, which licensed the drug in April 2007. Kyowa Hakko recently initiated a phase I study of ARQ 197 and Tarceva which will probably serve as a basis for larger studies in Japan.

The companies have no time to waste as the field of c-MET inhibitors is becoming very crowded, with over 10 programs at various stages of development. Although Arqule is leading the pack in lung cancer, Exelixis (EXEL) is already in phase III in medullary thyroid cancer with one of its c-MET inhibitors, XL184 (licensed to BMS). XL184 is also in a phase II study in lung cancer where it is being given with Tarceva. Although the trial design is not as robust as Arqule’s trial, there is anecdotal evidence that it can reverse Tarceva resistance. Exelxis’ second c-MET inhibitor, XL880 (licensed to GSK) is also in a large clinical development program with good activity in a subtype of renal cancer. Most of the other c-MET inhibitors are still at an earlier stage of development with no clear proof of concept.

Designing a proper phase III trial in lung cancer has become a daunting task due to the increasing number of approved and experimental agents and the realization that tumors can be classified into multiple subtypes based on histology and tumor biology. This is another place where a robust phase II trial comes in handy.

The phase II study generated a database of biomarkers and correlations related to c-MET inhibition, which is accessible only to Arqule and Daiichi. This database, probably the most reliable and extensive of its kind (since it is derived of a randomized placebo controlled trial), will enable the companies to optimally design the phase III trial. Therefore, the value of the study is not only in the increased likelihood of success of the pivotal trial, but also in its ability to guide the teams towards the most suitable trial design.

Even when assuming all goes well with the regulators and trial design, data from the pivotal study will take at least two years to emerge (depending on size, design, patient population etc.). In the meantime, ARQ 197 will face multiple additional binary events, each representing a value creation opportunity as well as a potential point of failure.

The collaboration with Daiichi Sankyo enabled Arqule to launch multiple phase II studies, including 3 randomized phase II studies in liver, pancreatic and colon cancer. These studies are similar to the lung cancer trial in that they are large randomized controlled trials where ARQ 197 is given in combination with standard of care. Data from the studies is expected to be available next year, even though each of these studies also includes a run in phase I portion that could generate data already in 2010. The value of such data is limited, as it will be very hard to distinguish between ARQ 197’s contribution and that of the combined drugs.

Last February, Arqule submitted a protocol for a trial in gastric cancer but withdrew it the following day. Based on clinicaltrials.gov website, the trial’s goal was comparing ARQ 197 alone to chemotherapy in second line gastric cancer patients. The trial size as appears on the site was 300 patients, which is surprising due to the lack of experience with ARQ 197 in this indication. In addition, although c-MET activity has been found in many gastric cancer samples, so far results from Exelixis’ XL880 as a single agent were disappointing in this indication.

ARQ 197 is also being evaluated as a single agent in several trials, including phase II trials in two niche indications in MiT tumors and germ cell cancer. Although these opportunities represent fast routes to market, the commercial opportunity is low and so are expectations, at least in the MiT trial. Another study that could have interesting data is a forgotten phase I in Japan, which was initiated by Kyowa Hakko more than two years ago. There is currently no visibility on if and when data from this study, which should be completed by now, will be published. Neither Arqule nor its partner have disclosed anything about this trial in a long time.

A growing pipeline

ARQ 197 is clearly Arqule’s most advanced asset, but the company has other shots on goal. Arqule has a wholly owned agent in phase I, with results due in the second half of the year and may put two additional wholly owned drugs in the clinic this year. Therefore, by year end, Arqule may have 4 drugs in the clinic. The market rightfully ascribes minimal value to Arqule’s early stage programs as they have not reached proof of concept in humans. In addition, the three agents hit targets that are already pursued by other companies (Eg5, BRAF and FGFR), even though Arqule believes its molecules possess certain disclosed and undisclosed advantages, especially the BRAF inhibitor.

Arqule’s most interesting, and potentially most valuable asset is its kinase inhibitor discovery platform. The platform, AKIP (Arqule Kinase Inhibitor Platform), appears to be unique in its ability to generate a specific type of kinase inhibitors usually referred to as “non-ATP competitive” or “allosteric” kinase inhibitors. With this platform, Arqule might be able to differentiate itself in a highly competitive field that has experienced a surge in activity in recent years.

Allosteric inhibitors are believed to be extremely specific, which may result in fewer side effects. As the industry is moving towards combining targeted therapies, this attribute may prove very useful. In addition, as kinase inhibitors migrate from oncology to conditions where safety profile is more important (inflammation and pain), having selective kinase inhibitors could be a huge differentiator. The amount of value that can be extracted from AKIP is immense, however, it represents more of a longer term opportunity.

Summary

Since my previous write up on Arqule 16 months ago, the company has been consistently diversifying and de-risking its business. Its lead agent, ARQ 197, a phase III ready drug with blockbuster potential and favorable chances of success, is part of a broad clinical program including 3 randomized trials, each representing a substantial value creation opportunity. The company also complemented its lead program with multiple early stage programs and could have 3 additional programs in clinical testing this year. Finally, the company’s most undervalued asset is a unique discovery platform which could expand the pipeline and provide the company with non-dilutive funds through licensing deals.

Biotech Portfolio updates

Since its inception 18 months ago, the biotech portdolio, managed by Ran Nussbaum and myself is up 81.8%. The table below compares its performance to other general and life sciences-oriented indices and ETFs. After over a year at the top of the list, the portfolio slipped to the second spot, behind the Amex Biotechnology Index.

The Biotech Portfolio as of April 11th 2010





Author's Disclosure: long ARQL, Long EXEL

Source: Arqule Joins the Phase III Club