ABIO

Arca Biopharma, Inc.

ARCA is a biopharmaceutical company whose principal focus is developing genetically-targeted therapies for heart failure and other cardiovascular diseases. ARCA’s lead product candidate is GencaroTM (bucindolol hydrochloride), a pharmacologically unique beta-blocker and mild vasodilator being developed for the treatment of chronic heart failure, or HF. Gencaro is an oral tablet formulation intended to be dosed twice daily.

On January 27, 2009, Nuvelo, Inc., or Nuvelo, completed a merger between a wholly-owned subsidiary of Nuvelo and ARCA biopharma, Inc., or ARCA, a privately held developmental-stage biopharmaceutical company based in Broomfield, Colorado, with ARCA continuing after the merger as the surviving corporation and a wholly-owned subsidiary of Nuvelo. Immediately following the merger, Nuvelo changed its name to ARCA biopharma, Inc. On January 28, 2009, ARCA’s common stock began trading on the Nasdaq Global Market under the new symbol “ABIO.” Unless the context otherwise requires, all references herein to “ARCA,” “the Company,” “we,” “us” and “our” refer to ARCA both before and after the completion of the merger, and all references to “Nuvelo” refer to Nuvelo and its business prior to the completion of the merger.

ARCA has identified common genetic variations in the cardiac nervous system that it believes interact with Gencaro’s pharmacology and may predict patient response. ARCA currently holds worldwide rights to Gencaro and has been granted patents in the U.S. and Europe for methods of treating heart failure patients with bucindolol based on genetic testing, which ARCA believes will provide market exclusivity for Gencaro into 2025 in those markets. ARCA has collaborated with LabCorp to develop the Gencaro Test, a companion test for the genetic markers that may predict clinical response to Gencaro.

In September 2008, the U.S. Food and Drug Administration, or FDA, formally accepted for filing ARCA’s New Drug Application, or NDA, for Gencaro as a potential treatment for HF, based on the BEST trial, which was a major, North America-based heart failure Phase 3 trial. On May 29, 2009, the FDA issued a Complete Response Letter, or CRL, to ARCA in which the FDA stated that it could not approve the Gencaro NDA in its current form and specified additional actions and information required for approval of the NDA. In the CRL, the FDA raised clinical effectiveness issues, asserting that the BEST trial did not adequately demonstrate efficacy of Gencaro in reducing all-cause mortality in HF patients. The CRL stated that in order to obtain approval of Gencaro, ARCA must conduct an additional clinical efficacy trial of Gencaro in HF patients, among other things.

To address the efficacy concerns raised in the CRL, in December 2009, ARCA submitted a clinical study protocol for review under the FDA’s Special Protocol Assessment, or SPA, process for the design of a clinical trial to assess the safety and efficacy of Gencaro in patients with HF who have the genotype that appears to respond most favorably to Gencaro. The proposed trial protocol includes two interim data analyses at pre-specified numbers of primary endpoints. If the results of either of the interim analyses meet certain criteria we believe will be defined with the FDA during the SPA process, ARCA could formally submit a complete response to the FDA’s CRL based on an interim analysis, which could serve as the clinical effectiveness basis for FDA approval of Gencaro. If ARCA obtains sufficient funding and FDA approval of the SPA, ARCA currently expects it could begin the proposed trial approximately one year after such funding and approval. ARCA anticipates that the proposed trial could reach the specified number of endpoint events for the first interim analysis as soon as approximately two years after the trial begins. ARCA believes that the proposed interim analyses will be acceptable as the basis for potential approval of Gencaro if the data supports Gencaro’s effectiveness as defined in the SPA, if any, subject to an acceptable plan to ensure that the findings at the interim analyses do not influence the trial’s subsequent course or design. ARCA has not yet reached agreement with the FDA on the study protocol. Any proposed trial protocol must be reviewed and agreed upon with the FDA and the final trial protocol may be significantly different from the Company’s SPA submission.

In the fourth quarter of 2009, the FDA designated the investigation of Gencaro for the reduction of cardiovascular mortality and cardiovascular hospitalizations in a genotype-defined HF population as a fast track development program. According to the FDA’s Fast Track Guidance document, fast track programs are designed to facilitate the development and expedite the review of new drugs that are intended to treat serious or life-threatening conditions and that demonstrate the potential to address unmet medical needs.

ARCA also holds exclusive rights to rNAPc2, a potent, long-acting recombinant protein anticoagulant with a unique mechanism of action involving inhibition of tissue factor. Previously, small studies of rNAPc2 in non-human primates demonstrated potential efficacy against two of the most deadly strains of hemorrhagic fever virus, or HFV, Ebola and Marburg. ARCA is currently seeking government funding to further develop rNAPc2 as a potential treatment for HFV. Considering the substantial cost associated with the development of rNAPc2 and ARCA’s limited financial resources, further development of rNAPc2 will be dependent upon receipt of government funding, which may not be available.

In light of the substantial additional time and costs associated with the development of Gencaro and the need to raise a significant amount of capital on acceptable terms to finance the proposed clinical trial and ARCA’s ongoing operations, in 2009 ARCA reduced its operating expenses and is evaluating strategic alternatives for funding continued operations and development programs. ARCA intends to seek interim funding that could allow the Company to operate while it continues to pursue strategic combination, partnering, financing or licensing opportunities. If ARCA is delayed in completing or is unable to complete an interim financing and/or a strategic transaction, ARCA may discontinue its development activities on Gencaro or discontinue its operations.

ARCA believes that its cash and cash equivalents balance as of December 31, 2009 will be sufficient to fund its operations, at its current cost structure, through at least June 30, 2010. ARCA is unable to assert that its current cash and cash equivalents are sufficient to fund operations beyond that date, and as a result, there is substantial doubt about ARCA’s ability to continue as a going concern. ARCA may not be able to raise sufficient capital on acceptable terms or at all to continue development of Gencaro or to continue operations and may not be able to execute any strategic transaction.

ARCA Strategy

ARCA’s mission is to become a leading biopharmaceutical company developing cardiovascular therapies, with an emphasis on genetically-targeted therapies. To achieve this goal, ARCA is pursuing the following strategies:

Advance the development of Gencaro. In December 2009, ARCA submitted a clinical study protocol for review under the FDA’s SPA process for the design of a clinical trial to assess the safety and efficacy of Gencaro in approximately 3,200 patients with chronic heart failure who have the genotype that appears to respond most favorably to Gencaro. The proposed trial protocol includes a superiority comparison to the beta-blocker metoprolol CR/XL, which is approved for heart failure and other indications. The proposed trial protocol includes two interim data analyses at pre-specified numbers of primary endpoints. If the results of either of the interim analyses meet certain criteria we believe will be defined with the FDA during the SPA process, ARCA could formally submit a complete response to the FDA’s CRL based on an interim analysis, which could serve as the clinical effectiveness basis for FDA approval of Gencaro. ARCA anticipates that the proposed trial could reach the specified number of endpoint events for the first interim analysis as soon as approximately two years after the trial begins. The SPA submission proposes that a composite of cardiovascular mortality and cardiovascular hospitalization serve as the primary endpoint of the trial. ARCA believes that the proposed interim analyses will be acceptable as the basis for potential approval of Gencaro if the data supports Gencaro’s effectiveness as defined in the SPA, if any, subject to an acceptable plan to ensure that the findings at the interim analyses do not influence the trial’s subsequent course or design. ARCA has not yet reached agreement with the FDA on the study protocol. Any proposed trial protocol must be reviewed and agreed upon with the FDA and the final trial protocol may be significantly different from ARCA’s SPA submission.

Complete a strategic transaction or raise substantial additional funding. ARCA intends to complete a strategic transaction, such as a strategic combination or partnership of Gencaro commercialization rights, or raise substantial additional funding, through government funding or public or private debt or equity markets, to support the continued clinical development of Gencaro, including the proposed additional clinical trial. ARCA intends to seek interim funding that could allow the Company to operate through near term milestones while it continues to pursue strategic combination, partnering, financing or licensing opportunities. If ARCA is delayed in completing or is unable to complete an interim financing and/or a strategic transaction, ARCA may discontinue its development activities with Gencaro or discontinue its operations.

Leverage our existing assets. ARCA is pursuing opportunities to leverage certain of its development-stage product candidates acquired through the merger. ARCA is pursuing government funding for the further development of rNAPc2, a recombinant protein and long-acting anticoagulant, and is pursuing a partnership for NU172, a direct thrombin inhibitor that has completed Phase 1 development for use as a short-acting anticoagulant during medical or surgical procedures.

Build a cardiovascular pipeline. ARCA’s management and employees, including its chief executive officer, have extensive experience in cardiovascular research, molecular genetics and clinical development of cardiovascular therapies. ARCA is seeking to leverage this expertise to identify, acquire and develop other cardiovascular products or candidates, with an emphasis on pharmacogenetic applications.

Heart Failure Market Background and Opportunity

HF is one of the world’s most significant health care challenges. Industry sources estimate that about 5.7 million Americans have HF and nearly 670,000 new patients are diagnosed annually. In addition, HF is the underlying reason for approximately 12 to 15 million annual visits to physicians, 6.5 million annual hospital days and over $37 billion in direct and indirect healthcare costs in the U.S. Some sources estimate that the number of chronic heart failure patients in countries within the European Union is significantly higher than in the U.S.

Medical therapy has made progress in treating HF, but morbidity and mortality remain high. The current standard of care for HF involves the use of various therapies that operate to inhibit the activity of the renin-angiotensin-aldosterone system (these include angiotensin converting enzyme, or ACE, inhibitors, angiotensin II receptor blockers, or ARB’s, and aldosterone receptor antagonists), diuretics, and drugs in the class known as beta-blockers.

Beta-blockers are named for their characteristic mechanism of binding to certain receptors in the nervous system of the heart, and in doing so, blocking those receptors from being activated by binding with other molecules. This drug class is part of the current standard of care in patients with HF and left ventricular dysfunction. The American Heart Association and the American College of Cardiology physician guidelines for the treatment of HF state the following:

Beta-blockers should be prescribed to all patients with stable heart failure due to reduced left ventricular ejection fraction, unless they have a contraindication to their use or have been shown to be unable to tolerate treatment with the drugs. Because of favorable effects of beta-blockers on survival and disease progression, treatment with a beta-blocker should be initiated as soon as left ventricular dysfunction is diagnosed.

The benefits of beta-blockade are well established. Beta-blockers are potentially usable by a majority of the HF population, they are effective in reducing mortality, and they are considered to be the most effective drugs overall for the treatment of HF. However, many patients who could potentially benefit from therapy are not being treated. It is estimated that approximately 40% of eligible HF patients in the U.S., and 50% in the European Union, are not being treated with beta-blockers. Further, it is believed that a substantial portion of patients being treated with beta-blockers are not receiving the target dose. Based on analysis of this market and expert opinion, ARCA believes this lack of adoption may be due in part to the fact that a significant percentage of chronic heart failure patients do not tolerate one or more of the beta-blockers currently approved for HF, or do not respond well to them.

In addition, due to the fact that patients respond unevenly to beta-blockers, it is difficult to predict what a particular patient’s response is likely to be in advance of therapy. This uncertainty creates special problems in the context of HF. The current standard of practice in administering a beta-blocker for HF involves a lengthy, often months-long process, in which the patient is gradually moved from a low initial dose up to one that has been proven to be clinically beneficial. This extended protocol is necessary because the therapeutic mechanism of this drug class inhibits processes in the failing heart that, while deleterious over the long term, initially provide support for diminished cardiac function. Thus, the dosage must be increased slowly to allow the patient to adjust to the therapy, and it may be months before it is known whether the patient will both tolerate the therapy and will benefit from it.

During this process, the patient may feel worse and exhibit no objective benefit. However, it can be difficult for the physician to determine whether this is due to the mechanism of the drug class, or whether it is a problem with the particular drug. A serious adverse event, such as hospitalization for an acute episode, or death, may be the first substantial evidence that the patient is not responding well to the particular therapy. ARCA believes that many HF patients on beta-blockers never reach their target dose, whether due to actual side effects or the perception that the patient is not benefiting. Some patients simply do not respond after enduring this long and potentially difficult process. Unfortunately, the physician has no good method to determine, in advance of therapy, whether a patient is likely to benefit, introducing an element of trial and error into the use of these agents that is frustrating to prescribers, potentially harmful to patients, and costly to payors. ARCA believes that a new HF therapy that includes a simple test to identify those patients likely to benefit, can help alleviate some of the problems encountered with the current standard of practice.

Gencaro

Gencaro (bucindolol hydrochloride) is a pharmacologically unique beta-blocker and mild vasodilator being developed for the treatment of chronic heart failure. Gencaro is considered part of the beta-blocker class because of its property of blocking both beta-1, or ß1 and beta-2, or ß2 receptors in the cardiac nervous system. The blocking of these receptors prevents binding with other molecules that serve to activate these receptors. Because of its mild vasodilator effects, ARCA believes that Gencaro is well-tolerated in patients with advanced HF. Originally developed by Bristol-Myers Squibb, or BMS, the active pharmaceutical ingredient, or API, in Gencaro, bucindolol hydrochloride, has been tested clinically in approximately 4,500 patients. Gencaro was the subject of a Phase 3 heart failure mortality trial of over 2,700 patients, mostly in the U.S., known as the “BEST” trial. The BEST trial included a DNA bank of over 1,000 patients, which was used to evaluate the effect of genetic variation on patients’ response to Gencaro.

At the time of the BEST trial, ARCA’s founding scientists, Dr. Michael Bristow and Dr. Stephen Liggett, hypothesized that the unique pharmacologic properties of Gencaro would interact with common genetic variations of the ß1, and alpha2C, or a2C, receptors, which are important receptors that regulate cardiac function. They tested this hypothesis prospectively in a substudy conducted using data from the BEST DNA bank. On the basis of this study, Drs. Bristow and Liggett determined that patients with certain variations in these receptors had substantially improved outcomes on primary and certain secondary clinical endpoints in the trial, such as mortality, heart failure progression and hospitalization, relative to the general patient population of the BEST trial. ARCA believes that these genetically determined receptor variations, which are detectable using standard genetic testing technology, can serve as diagnostic markers for predicting enhanced therapeutic response to Gencaro, and potentially avoiding adverse events, in individual patients. ARCA has patented its methods for treating heart failure patients with Gencaro based on genetic testing in the U.S. and Europe.

Pharmacology and Pharmacogenetics

Gencaro’s pharmacology appears to be different from other compounds in the beta-blocker class in two fundamental respects. First, studies conducted by ARCA researchers indicate that in human myocardial preparations, Gencaro significantly inactivates high functioning ß1 receptors through a mechanism separate from ß1-blockade, in addition to inhibiting the binding activity of the ß1 receptor like a typical beta-blocker. Second, these same ARCA studies indicate that Gencaro lowers the systemic levels of the neurotransmitter norepinephrine, or NE, which is released by cardiac and other sympathetic nerves. These two properties interact with common genetic variations in two cardiac receptors, the ß1 and a 2C receptors, to produce the unique pharmacogenetic profile of Gencaro. ARCA believes that these two properties, and their pharmacogenetic implications, are unique to Gencaro.

Gencaro has an important interaction with the ß1 receptor found on muscle cells, or cardiac myocytes, of the heart. The general role of the ß1 receptor and its downstream signaling cascades is to regulate the strength and rate of the heart’s contractions. NE serves as an activator of the ß1 receptor, causing the receptor to initiate signaling to the cardiac myocyte. Although this signaling may be beneficial to the failing heart in the short term, in chronic heart failure patients the ß1 receptor also initiates harmful, or cardiomyopathic, signaling which, over time, exacerbates the heart’s functional and structural decline. Beta-blockers counteract this destructive process by reducing ß1 receptor signaling. They do this by binding to the receptor and blocking NE molecules from binding and activating the signaling activity, and in Gencaro’s case by also inactivating the constitutively active (active in the absence of NE stimulation) state of certain ß1 receptors.