ArQule Wins At EHA, More Upside Ahead In Second Half Of 2019

Jul. 02, 2019 9:23 AM ETArQule, Inc. (ARQL)2 Comments6 Likes

Summary

  • Shares have risen by 50% since my last update piece.
  • Strong showing at EHA for ARQ531 substantially strengthens thesis and I look forward to additional updates as we gain more clarity on durability and tolerability.
  • Strong demand for secondary offering followed by positive price action was a green flag. The company disclosed an additional responder in the high dose cohort for ARQ531.
  • Other value drivers in the pipeline continue to be overlooked. The stock remains a Buy with additional upside in the second half of the year.
  • Looking for a portfolio of ideas like this one? Members of ROTY get exclusive access to our model portfolio. Get started today »

Shares of ArQule (NASDAQ:ARQL) have risen by over 50% since my last update piece stated it remained a Buy with substantial upside ahead over the long term. Readers may be tempted to take full profits on the name considering the high appreciation that's taken place recently. However, when thesis strengthens substantially as it has here, a case can be made that patience leads to maximizing profits.

My present goal is to revisit the name given that I still believe significant upside potential exists in the near to medium term.

Figure 1: ARQL daily advanced chart (Source: Finviz)

When looking at charts, clarity often comes from taking a look at distinct time frames in order to determine important technical levels to get a feel for what's going on. In the above chart (daily advanced), we can see June's gap up after very promising news for noncovalent BTK inhibitor ARQ531 was reported at EHA (European Hematology Association) annual meeting. In ROTY's Live Chat (and on Twitter), I pointed out that the stock's strength into and after the secondary offering at $9.75 was a green flag, a buy signal showing substantial demand for shares and near term upside still in the cards.

Overview

In recent update article, I touched on the following keys to the bullish thesis:

  • Drug candidate miransertib was recipient of the Rare Pediatric Disease Designation for the treatment of Proteus syndrome (could receive the coveted Breakthrough Therapy Designation as well). I noted that the small company could receive a priority review voucher if approved. We already knew that two overgrowth disease patients had seen substantial improvement in quality of life after receiving the drug, and updated guidance revealed that 5 of 6 patients experienced a reduction of at least 50% of phospho-AKT levels (as well as disease modification in cerebriform connective tissue nevus lesions). Additionally, at AACR, the drug candidate showed intriguing activity in patients with hormone-sensitive tumors with AKT1 or PI3K dysregulation (presented in an oral presentation) in which there was one complete responder and three patients with partial responses (total n=8). In March, the company announced that instead of just pursuing the small Proteus Syndrome indication in its registrational study, they are going after PROS family of overgrowth spectrum disorders as well ($200 million to $500 million market opportunity).
  • Other assets provided us significant optionality, including ARQ 087 being evaluated in a pivotal study in FGFR2 fusion positive second-line intrahepatic cholangiocarcinoma. In January, partner Basilea Pharmaceutica (OTC:BPMUF) announced data from the interim analysis of the registrational phase 2 study evaluating derazantinib in patients with FGFR2 gene fusion-expressing intrahepatic cholangiocarcinoma. Safety and tolerability observed in prior studies was confirmed, and interim analysis was conducted in subset of 29 patients who had at least one post-baseline imaging assessment. Objective response rate was 21% with disease control rate of 83%. ArQule COO reminded us that the company could receive up to $326 million in regulatory and commercial milestone payments from the partnered program. In late April partner Sinovant Sciences announced that its Clinical Trial Application for derazantinib had been accepted by the Center for Drug Evaluation at the China National Medical Products Administration, enabling the initiation of a registrational clinical trial in patients with second-line intrahepatic cholangiocarcinoma in the second half of 2019.
  • BTK inhibitor ARQ 531 appeared to be an especially lucrative asset with intriguing preclinical data and a large market opportunity via targeting the patient population of 2nd line B-cell malignancies. Early results from a phase 1 dose escalation study for ARQ 531 in patients with relapsed or refractory hematologic malignancies were presented at ASH last year. The trial has a 3+3 dose escalation design and data reported included the first six cohorts (dose levels of 5, 10, 15, 20, 30 and 45 mg once a day) in patients with relapsed or refractory chronic lymphocytic leukemia, small lymphocytic leukemia, Waldenstrom's macroglobulinemia and B-cell Non-Hodgkin lymphomas. No dose-limiting toxicities were observed, PK data was supportive of QD dosing, and anti-tumor activity was observed in 9 of 20 patients. Of note, 80% of ibrutinib refractory, heavily pretreated CLL patients in highest dose cohorts experienced tumor shrinkage. 4 of 5 lymphoma patients experienced shrinkage of 27% to 68%, including one partial response in a Follicular Lymphoma patient who remains on therapy after 70 weeks (began at 5mg, dose escalated to 15 and then 45 mg). On December's Investor Call, management noted that responses had the potential to deepen over time (patients were being dose-increased where appropriate which could aid efficacy as well). Therefore, they suggested that another data update, including the second scan in summer 2019, could provide more clarification on future steps for this program. On the Q4 conference call, CEO Paulo Pucci provided an update that the first C481S CLL patient in cohort 7 being treated at the 65mg QD dose of ARQ531 experienced a deep response (88% tumor reduction after first scan, quite impressive). He noted that this is the second partial response observed so far in the trial and is important as 3rd line CLL patients with C481S mutation represent a fast path to market. It was also noted that one patient in cohort 7 experienced grade 3 rash (dose limiting toxicity). On the Q1 2019 conference call one useful nugget was that both patients who were treated with ARQ531 and experienced partial responses continued on the trial as confirmed responders (with subsequent scans, meaning there are signs of durability). Management's language in regards to June EHA data seems encouraging as well ("as we continue to move higher, we see a dose dependent effect on clinical activity, and therefore, we're highly confident that we will show significant incremental clinical activity from cohort 7 in the target patient population of CLL C481S-mutated patients"). For frame of reference, I noted that a large opportunity is being targeted here (these patients with C841S BTK mutations which account for 20% to 50% of CLL patients treated with ibrutinib).
  • Green flags identified included the hiring of Dr. Marc Schegerin and Dr. Shirish Hirani (the latter served as VP of drug development at ARIAD Pharmaceuticals which was acquired for $5.2 billion, former hailed from Sage Therapeutics and Biogen). I also pointed out that Biotechnology Value Fund (BVF) continued to hold a large position.

Figure 2: Pipeline (Source: corporate presentation)

Brief Update

On June 14th the company announced preliminary results from the dose escalation study for ARQ531, its dual inhibitor of both wild type and C481S-mutant Bruton's tyrosine kinase or BTK. Robust, dose-dependent, anti-tumor activity was observed. ORR of 66% was observed in heavily pretreated R/R CLL patients, all with the BTK-C481S mutation, from cohort 7. A partial response was observed in the first patient with Richter's Transformation, who had progressed on ibrutinib and R-CHOP, suggesting that ARQ 531's distinct MOA is amenable to target this unmet medical need (quick path to market). A Follicular Lymphoma patient remains a confirmed PR and has been on therapy approximately two years, providing initial insights into long- term safety as well as durability of response.

Figure 3: Pipeline (Source: EHA poster)

I also thought that an Evaluate article on the company's turnaround was well-written, reminding us that AbbVie paid $21 billion for 50% rights to Pharmacyclics ibrutinib. ArQule increasingly looks like a valuable bolt-on acquisition due to ARQ531's potential in patients who relapse on Imbruvica or Calquence with the C481S mutation. Additionally, I hadn't considered the possibility of all patients eventually being started on a non-covalent drug.

When the investment thesis strengthens substantially like it has here, I remain patient as it plays out.

The company also announced that it presented preliminary results from its phase 1/2 study of pan-AKT inhibitor, miransertib (ARQ 092), in patients with PIK3CA-related Overgrowth Spectrum (PROS) and Proteus syndrome (PS) in an oral presentation at the European Society of Human Genetics Conference. Recommended initial dose for registrational study was defined as 15 mg/m2 QD with subsequent maximum dose increase to 25 mg/m2. Safety profile appeared solid with mostly Grade 1 or 2 adverse events (in patients as young as 2 years old). Improvement in diseases related symptoms and performance status (measured by Karnofsky/Lansky scale) was reported in the majority of patients, with most demonstrating improvement or no disease progression extending beyond 1 year on treatment.

Later in June the company pulled off a great financing with secondary offered at a very slight discount (suggests strong demand). The financing consisted of 9.25 million shares sold at $9.75 per share for gross proceeds of $90.2 million (plus underwriter allotment of 1,387,500 shares). I pointed out in ROTY Live Chat and on Twitter that the lack of selling pressure spoke volumes in regards to near term upside (a significant green flag).

In the associated regulatory filing, the company confirmed that patient 30 from cohort 7 (one of 4 CLL patients with C481S-mutation who responded), received a second scan and was confirmed as a responder after five cycles of treatment. 5 patients have been enrolled in the 8th cohort (75 mg QD), with the first one (DLBCL) achieving a partial response and remaining on therapy. Clinical activity data is awaited on the remaining patients (4 of 5 were dose reduced to 65 mg QD or Cohort 7 dose due to grade 2 adverse events). One of five patients discontinued treatment and was not evaluable.

Near term, the company will establish a recommended phase 2 dose and begin enrolling expansion cohorts with registrational intent in patients with C481S mutation and potentially those with Richter's Transformation if further data supports it. The company will also be going after other indications where irreversible BTK inhibitors are not highly effective.

As a reminder, for the first quarter of 2019 the company reported cash and equivalents of $92 million as compared to net loss of $10.2 million. Research and development expense rose to $7.4 million, while G&A rose to $4.3 million. Management was guiding for year end cash balance of around $60 million. However, now that they've conducted a successful secondary offering the operational runway has been extended significantly.

Final Thoughts

To conclude, the thesis continues to strengthen for this targeted oncology idea as clinical results presented at EHA confirm the efficacy and safety of ARQ531 along with its potential in treating patients with C481S mutation and potentially those with Richter's Transformation. The burden of proof is on the company at this point in regards to duration and successfully running expansion cohorts to replicate data in a larger number of patients. Other value drivers such as its rare disease program and AKT inhibitors (data coming 2H 2019 for miransertib phase 1b cohorts and ARQ751 phase 1b cohorts) provide us additional reasons to positive on this name.

For readers who are interested in the story and have done their due diligence, I suggest initiating a pilot position and accumulating dips.

Time Frame For Upside is 6 months, as we get updated data at ASH in December for ARQ531 and updates on other assets in the pipeline.

Risks include setbacks in the clinic (all eyes will be on durability and tolerability profile for ARQ531), disappointing data, negative regulatory feedback regarding pathway to approval and competition (other noncovalent BTK inhibitors in the clinic such as Sunesis Pharmaceutical's vecabrutinib and Eli Lilly's LOXO-305). Dilution in the near term does not appear likely given current burn rate and recent financing.

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This article was written by

Jonathan Faison profile picture
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Community of Biotech Investors Focused on Value & Clinical Momentum

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Disclosure: I am/we are long ARQL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Disclaimer: Commentary presented is NOT individualized investment advice. Opinions offered here are NOT personalized recommendations. Readers are expected to do their own due diligence or consult an investment professional if needed prior to making trades. Strategies discussed should not be mistaken for recommendations, and past performance may not be indicative of future results. Although I do my best to present factual research, I do not in any way guarantee the accuracy of the information I post. I reserve the right to make investment decisions on behalf of myself and affiliates regarding any security without notification except where it is required by law. Keep in mind that any opinion or position disclosed on this platform is subject to change at any moment as the thesis evolves. Investing in common stock can result in partial or total loss of capital. In other words, readers are expected to form their own trading plan, do their own research and take responsibility for their own actions. If they are not able or willing to do so, better to buy index funds or find a thoroughly vetted fee-only financial advisor to handle your account.

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