| ARQULE INC ITEM 1A RISK FACTORS RISKS RELATING TO OUR BUSINESS STRATEGY AND OPERATIONS Development of our products is at an early stage and is based on scientific platforms that are unproven approaches to therapeutic intervention |
| The discovery and development of drugs is inherently risky and involves a high rate of failure |
| Discovering and developing commercial drugs are relatively new to us |
| Our proposed drug products and drug research programs are in early stages and require significant, time-consuming and costly research and development, testing and regulatory approvals |
| We do not expect that these product candidates will be commercially available for several years, if ever |
| Our lead product candidate, ARQ 501, is based on our proprietary ACT platform, a therapeutic approach that seeks to harness the cell’s natural defense mechanism against DNA damage |
| Our second clinical-stage product candidate, ARQ 197, is based on our c-Met/Cancer Survival platform, which is designed to block cancer cell survival mechanisms and thereby trigger death in cancer cells |
| We have not, nor to our knowledge has any other company, received regulatory approval for a drug based on these approaches |
| There can be no assurance that our approaches will lead to the development of approvable or marketable drugs |
| We must show the safety and efficacy of our product candidates through expensive, time consuming preclinical and clinical trials, the results of which are uncertain and governed by exacting regulations |
| Our product candidates are in clinical or preclinical stages of development |
| Although our lead product candidate has demonstrated clinical tolerability, favorable pharmacokinetics and evidence of anti-tumor activity in Phase 1 trials, and although our second clinical-stage product has demonstrated some favorable pharmacological effects in preclinical studies, these products may not prove to be sufficiently safe or effective in more advanced human clinical trials, if at all |
| We will need to conduct extensive further testing of all of our product candidates, expend significant additional resources and possibly partner with another company (as we have done with Roche for ARQ 501) to realize commercial value from any of our product candidates |
| Before obtaining regulatory approvals for the commercial sale of our products, we must demonstrate through preclinical studies (laboratory or animal testing) and clinical trials (human testing) that our proposed products are safe and effective for use in each target indication |
| This testing is expensive and time-consuming, and failure can occur at any stage |
| Acceptable results from initial preclinical studies and clinical trials of products under development are not necessarily indicative of results that will be obtained from subsequent or more extensive preclinical studies and clinical testing in humans |
| Clinical trials may not demonstrate sufficient safety and efficacy to obtain the required regulatory approvals or result in marketable products |
| The failure to adequately demonstrate the safety and efficacy of a product under development will delay and could prevent its regulatory approval |
| A number of companies in the pharmaceutical industry, including biotechnology companies, have suffered significant setbacks in advanced clinical trials, even after promising results in earlier trials |
| Though it is our stated strategy to pursue clinical development to take advantage of available accelerated regulatory approval processes, there is no guarantee that our product candidates will show the evidence predictive of clinical benefit necessary to qualify for such regulatory treatment |
| Delays in clinical testing could result in increased costs to us and delay our ability to obtain regulatory approval and commercialize our product candidates |
| We cannot be assured of successfully completing clinical testing within the time frame we have planned, or at all |
| We may experience numerous unforeseen events during, or as a result of, the clinical 17 ______________________________________________________________________ trial process that could delay or prevent us from receiving regulatory approval or commercializing our product candidates, including the following: · our clinical trials may produce negative or inconclusive results, and we may decide, or regulators may require us, to conduct additional clinical and/or pre-clinical testing or to abandon programs; · trial results may not meet the level of statistical significance required by the FDA or other regulatory agencies; · enrollment in our clinical trials for our product candidates may be slower than we anticipate, resulting in significant delays; · we, or regulators, may suspend or terminate our clinical trials if the participating patients are being exposed to unacceptable health risks; · the effects of our product candidates on patients may not be the desired effects or may include undesirable side effects or other characteristics that may delay or preclude regulatory approval or limit their commercial use, if approved; and · the FDA or other regulatory agencies may lack experience in evaluating the safety and efficacy of drugs based on the ACT or c-Met platforms, which could lengthen the regulatory review process |
| Completion of clinical trials depends, among other things, on our ability to enroll a sufficient number of patients, which is a function of many factors, including: · the incidence among the general population of diseases which contain therapeutic endpoints chosen for evaluation; · the eligibility criteria defined in the protocol; · the size of the patient population required for analysis of the trial’s therapeutic endpoints; · our ability to recruit clinical trial investigators and sites with the appropriate competencies and experience; · our ability to obtain and maintain patient consents; and · competition for patients by clinical trial programs for other treatments |
| We primarily rely on third-parties to provide sufficient quantities of our product candidates to conduct pre-clinical and clinical studies |
| We have no control over our manufacturers’ and suppliers’ compliance with manufacturing regulations, and their failure to comply could result in an interruption in the supply of our product candidates |
| The facilities used by our contract manufacturers must undergo an inspection by the FDA for compliance with current good manufacturing practice, or cGMP, regulations before the product candidates produced there can receive marketing approval |
| In the event these facilities do not receive a satisfactory cGMP inspection result in connection with the manufacture of our product candidates, we may need to conduct additional validation studies, or find alternative manufacturing facilities, either of which would result in significant cost to us as well as a delay of up to several years in obtaining approval for any affected product candidate |
| In addition, after approval of a product candidate for commercial use our contract manufacturers, and any alternative contract manufacturer we may utilize, will be subject to ongoing periodic inspection by the FDA and corresponding state and foreign agencies for compliance with cGMP regulations, similar foreign regulations and other regulatory standards |
| We do not have control over our contract manufacturers’ compliance with these regulations and standards |
| Any failure by our third-party manufacturers or suppliers to comply with applicable regulations could result in sanctions being imposed on them (including fines, injunctions and civil penalties), failure of regulatory authorities to grant 18 ______________________________________________________________________ marketing approval of our product candidates, delays, suspension or withdrawal of approvals, license revocation, seizures or recalls of product candidates or products, operating restrictions and criminal prosecution |
| We rely on third parties to conduct most of our clinical trials, and their failure to perform their obligations in a timely or competent manner may delay development and commercialization of our product candidates |
| We are using third-party clinical research organizations to oversee most of our ongoing clinical trials and expect to use the same or similar organizations for our future clinical trials |
| We may face delays outside of our control if these parties do not perform their obligations in a timely or competent fashion or if we are forced to change service providers |
| This risk is heightened if we conduct clinical trials outside of the United States, where it may be more difficult to ensure that studies are conducted in compliance with FDA requirements |
| Any third-party that we hire to conduct clinical trials may also provide services to our competitors, which could compromise the performance of their obligations to us |
| If we experience significant delays in the progress of our clinical trials and in our plans to file NDAs, the commercial prospects for product candidates could be harmed and our ability to generate product revenue would be delayed or prevented |
| If we choose to acquire complementary businesses, products or technologies instead of developing them ourselves, we may be unable to complete these acquisitions, to integrate such acquisitions in a cost-effective and non-disruptive manner or to complete commercialization of an acquired product |
| From time to time, we may choose to acquire complementary businesses, products, or technologies instead of developing them ourselves |
| We do not know if we will be able to complete any particular acquisitions, or whether we will be able to successfully integrate the acquired business, operate it profitably or retain its key employees |
| Integrating any business, product or technology we acquire could be expensive and time-consuming, disrupt our ongoing business and distract company management |
| In addition, in order to finance any acquisition, we might need to raise additional funds through public or private equity or debt financings |
| In that event, we could be forced to obtain financing on less than favorable terms |
| In the case of equity financing, that may result in dilution to our stockholders |
| In addition, under certain circumstances, amortization of assets or charges resulting from the costs of acquisitions could harm our business and operating results |
| We may not be able to find collaborators or successfully form collaborations to further our drug development efforts |
| As we did with ARQ 501, we may seek collaborators for our drug development efforts |
| We may enter into these collaborations to obtain external financing for drug development and to obtain access to commercialization expertise |
| The availability of partners depends on the willingness of pharmaceutical companies to collaborate in drug discovery activities |
| Only a limited number of pharmaceutical companies would fit our requirements |
| The number could decline further through consolidation, or the number of collaborators with interest in our drugs could decline |
| If the number of our potential collaborators declines further, collaborators may be able to negotiate terms unfavorable to us |
| We face significant competition in seeking drug development collaborators, both from other biotechnology companies and from the internal capabilities and compound pipelines of the pharmaceutical companies themselves |
| This competition is particularly intense in the oncology field |
| Our ability to interest such companies in forming co-development and commercialization arrangements with us will be influenced by, among other things: · the compatibility of technologies; · the potential partner’s acceptance of our approach to drug discovery; 19 ______________________________________________________________________ · the quality and commercial potential of any drug candidate we may succeed in developing; and · our ability, and collaborators’ perceptions of our ability, to achieve intended results in a timely fashion, with acceptable quality and cost |
| Even if we are able to gain the interest of potential drug development partners, the negotiation, documentation and implementation of collaborative arrangements are complex and time-consuming |
| Collaborations may not be available on commercially acceptable terms and, if formed, may not be commercially successful or, if successful, may not realize sufficient return for us |
| If we are unable to form collaborations, we may not gain access to the financial resources and industry expertise necessary to develop drug products or successfully market any products we develop on our own and, therefore, be unable to generate revenue from pharmaceutical products |
| Our success depends on the efforts of our collaborators, whom we do not and cannot control |
| If we are able to enter into collaborations for the development and commercialization of our product candidates, we will depend on our partners to develop and commercialize our drug candidates |
| Similarly, we currently depend on parties to whom we have provided compounds through chemistry services collaborations to develop and commercialize those compounds |
| Our drug development and chemistry services collaborators have significant discretion in determining the efforts and resources that they will apply to the development and commercialization of compounds and drug candidates covered by their collaborations with us |
| We may not receive any further milestone, royalty or license payments under our current or any future collaborations |
| Although we have received license fees, milestone fees and other payments to date under our drug development and chemistry services collaborations, we may never receive any royalty payments or additional license and milestone fees under such agreements |
| Our receipt of any future milestone, royalty or license payments depends on many factors, including whether our collaborators want or are able to continue to pursue a potential drug candidate, unforeseen complications in the development or commercialization process, and the ultimate commercial success of the drug |
| Even if we are successful in bringing products to market, we face substantial competitive challenges in effectively marketing and distributing our products |
| Many other companies and research institutions are developing products within the field of oncology, including large pharmaceutical companies with much greater financial resources, and more experience in developing products, running clinical trials, obtaining FDA approval and bringing new drugs to market |
| We are in a rapidly evolving field of research |
| Consequently, our technology may be rendered non-competitive or obsolete by approaches and methodologies discovered by others, both before and after we have gone to market with our products |
| We also face competition from existing therapies that are currently accepted in the marketplace, and the impact of adverse events in our field that may affect regulatory approval or public perception |
| Cost containment pressures may affect the commercialization of, and the revenues generated by, our products |
| Our products may be subject to cost containment pressures |
| Even if our drugs represent improvements over competitive therapies, pharmaco-economic considerations may preclude regulatory approval or limit or preclude patient reimbursement by third-party or government payors |
| In addition, the methodology used in cost-benefit analyses of drug use may change, and we cannot predict the impact of these changes upon reimbursement levels for our products |
| 20 ______________________________________________________________________ We may not be able to recruit and retain the scientists and management we need to compete |
| Our success depends on our ability to attract, retain and motivate highly skilled scientific personnel and management, and our ability to develop and maintain important relationships with leading academic institutions, clinicians and scientists |
| We are highly dependent on our senior management and scientific staff, and the loss of the services of one or more of our other key employees could delay or have an impact on the successful completion of our clinical trials or the commercialization of our product candidates |
| We compete intensely with pharmaceutical and biotechnology companies, including our collaborators, medicinal chemistry outsourcing companies, contract research companies, and academic and research institutions to recruit scientists and management |
| The shortage of personnel with experience in drug development could lead to increased recruiting, relocation and compensation costs, which may exceed our expectations and resources |
| If we cannot hire additional qualified personnel, the workload may increase for both existing and new personnel |
| If we are unsuccessful in our recruitment efforts, we may be unable to execute our strategy |
| We may be exposed to potential liability related to the development, testing or manufacturing of compounds we develop |
| We are developing, clinically testing and manufacturing therapeutic products for use in humans |
| In connection with these activities, we could be liable if persons are injured or die while using these drugs |
| We may have to pay substantial damages and/or incur legal costs to defend claims resulting from injury or death, and we may not receive expected royalty or milestone payments if commercialization of a drug is limited or ended as a result of such claims |
| We have product liability and clinical trial insurance that contains customary exclusions and provides coverage per occurrence at levels, in the aggregate, which we believe are customary and commercially reasonable in our industry given the stage we have achieved in drug development |
| However, our product liability insurance does not cover every type of product liability claim that we may face or loss we may incur and may not adequately compensate us for the entire amount of covered claims or losses or for the harm to our business reputation |
| Also, we may be unable to maintain our current insurance policies or obtain and maintain necessary additional coverage at acceptable costs, or at all |
| RISKS RELATED TO OUR FINANCIAL CONDITION We have incurred significant losses since our inception and anticipate that we will incur significant continued losses for the next several years, and our future profitability is uncertain |
| From our inception in 1993 through December 31, 2005, we have incurred cumulative losses of approximately dlra197 million |
| These losses have resulted principally from the costs of our research activities, acquisitions, enhancements to our technology and early-stage clinical trials |
| In addition, we expect future expense to increase significantly as we conduct larger and more advanced clinical trials |
| We have derived our revenue primarily from: · license and technology transfer fees for access to our chemical synthesis and production platforms such as transfer of certain chemistry-related technology to Pfizer; · payments for product deliveries in connection with our chemistry services business; · research and development funding paid under our agreements with collaboration partners; and · to a limited extent, milestone payments |
| To date, these revenues have generated profits only in 1997 and 2000 |
| We have not realized any revenue from royalties from the sale by any of our collaboration partners of a commercial product developed using our technology |
| In addition, following our decision to exit our chemistry services business and Pfizer’s 21 ______________________________________________________________________ election to terminate our agreement effective May 22, 2006, we do not expect to receive revenue from that business following the effective date of termination |
| Although we have hired an investment bank to explore a potential sale of our chemistry services business, we may not realize any value from the disposition of these operations |
| As a result, we expect to record increased losses in the future based on cessation of these revenues and on anticipated increasing costs associated with the clinical testing of our products |
| To attain profitability, we will need to develop clinical products successfully and market and sell them effectively, either by ourselves or with collaborators |
| We have never generated revenue from the commercialization of our product candidates, and there is no guarantee that we will be able to do so in the future |
| If our current product candidates fail to show positive results in our ongoing clinical trials, or we do not receive regulatory approval, or if these product candidates do not achieve market acceptance even if approved, we may not become profitable |
| If we fail to become profitable, or if we are unable to fund our continuing losses, we may be unable to continue our clinical development programs |
| We may need substantial additional funding and may be unable to raise capital when needed, or on terms favorable to us, which could force us to delay, reduce or eliminate our drug discovery, product development and commercialization activities |
| Developing drugs, conducting clinical trials, and commercializing products is expensive |
| Our future funding requirements will depend on many factors, including: · the terms and timing of any collaborative, licensing, acquisition or other arrangements that we may establish; · the progress and cost of our clinical trials and other research and development activities; · the costs and timing of obtaining regulatory approvals; · the costs of filing, prosecuting, defending and enforcing any patent applications, claims, patents and other intellectual property rights; and · the cost and timing of securing manufacturing capabilities for our clinical product candidates and commercial products, if any |
| We believe our cash and marketable securities at December 31, 2005 will be sufficient to fund our projected operating requirements through at least 2007 |
| We have based this estimate on assumptions and estimates that may prove to be wrong |
| Even if our estimates are correct, we may choose to obtain additional financing during that time |
| It is likely we will need to raise additional capital or incur indebtedness to continue to fund our operations in the future |
| Our ability to raise additional funds will depend on financial, economic and market conditions and other factors, many of which are beyond our control |
| There can be no assurance that sufficient funds will be available to us when required, on satisfactory terms, or at all |
| If necessary funds are not available, we may have to delay, reduce the scope or eliminate some of our development programs, which could delay the time to market for any of our product candidates |
| We may seek funds through arrangements with collaborators or others that may require us to relinquish rights to certain product candidates that we might otherwise seek to develop or commercialize independently |
| There can be no assurance that we will be able to enter into any such arrangements on reasonable terms, if at all |
| 22 ______________________________________________________________________ RISKS RELATED TO INTELLECTUAL PROPERTY Our patents and other proprietary rights may fail to protect our business |
| To be successful and compete, we must obtain and protect patents on our products and technology and protect our trade secrets |
| Where appropriate, we seek patent protection for certain aspects of the technology we are developing, but patent protection may not be available for some of the compounds and drugs, and their use, synthesis, formulations and technologies |
| The patent position of biotechnology firms is highly uncertain, involves complex legal and factual questions, and has recently been the subject of much litigation |
| No consistent policy has emerged from the US Patent and Trademark Office or the courts regarding the breadth of claims allowed or the degree of protection afforded under many biotechnology patents |
| In addition, there is a substantial backlog of biotechnology patent applications at the US Patent and Trademark Office, and the approval or rejection of patent applications may take several years |
| We do not know whether our patent applications will result in issued patents |
| In addition, the receipt of a patent might not provide much practical protection |
| If we receive a patent with a narrow scope, then it will be easier for competitors to design products that do not infringe on our patent |
| We cannot be certain that we will receive any additional patents, that the claims of our patents will offer significant protection of our technology, or that our patents will not be challenged, narrowed, invalidated or circumvented |
| Competitors may interfere with our patent protection in a variety of ways |
| Competitors may claim that they invented the claimed invention prior to us |
| Competitors may also claim that we are infringing on their patents and that, therefore, we cannot practice our technology as claimed under our patents |
| Competitors may also contest our patents by showing the patent examiner that the invention was not original, was not novel or was obvious |
| In litigation, a competitor could claim that our issued patents are not valid for a number of reasons |
| As a company, we have no meaningful experience with competitors interfering with our patents or patent applications and therefore may not have the experience we would need to aggressively protect our patents should such action become necessary |
| To protect or enforce our patent rights, we may initiate patent litigation against third parties, such as infringement lawsuits or interference proceedings |
| Such litigation can be expensive, take significant time and divert management’s attention from other business concerns, which could increase our research and development expense and delay our product programs |
| Litigation that we initiate may provoke third parties to assert claims against us |
| It is also unclear whether our trade secrets will prove to be adequately protected |
| To protect our trade secrets, we require our employees, consultants and advisors to execute confidentiality agreements |
| We cannot guarantee, however, that these agreements will provide us with adequate protection against improper use or disclosure of confidential information |
| Our employees, consultants or advisors may unintentionally or willfully disclose our information to competitors |
| In addition, in some situations, these agreements may conflict with, or be subject to, the rights of third parties with whom our employees, consultants or advisors had or have previous employment or consulting relationships |
| Like patent litigation, enforcing a claim that a third party illegally obtained and is using our trade secrets is expensive and time-consuming, and the outcome is unpredictable |
| In addition, courts outside the United States are sometimes less willing than our federal and state courts to protect trade secrets |
| Furthermore, others may independently develop substantially equivalent knowledge, methods and know-how |
| If we must spend significant additional time and money protecting our patents and trade secrets, we will have fewer resources to devote to the development of our technologies, and our business and financial prospects may be harmed |
| 23 ______________________________________________________________________ Our success will depend partly on our ability to operate without infringing on or misappropriating the proprietary rights of others |
| There are many patents in our field of technology and we cannot guarantee that we do not infringe on those patents or that we will not infringe on patents granted in the future |
| If a patent holder believes a product of ours infringes on its patent, the patent holder may sue us even if we have received patent protection for our technology |
| Intellectual property litigation is costly and, even if we prevail, the cost of such litigation could adversely affect our business, financial condition and results of operations |
| In addition, litigation is time-consuming and could divert management attention and resources away from our business |
| If we do not prevail in litigation, we may have to pay substantial damages for past infringement |
| Also, if we lose, the court may prohibit us from selling or licensing the product that infringes the patent unless the patent holder licenses the patent to us |
| The patent holder is not required to grant us a license |
| In addition, some licenses may be nonexclusive and, accordingly, our competitors may have access to the same technology licensed to us |
| If we fail to obtain a required license, we could encounter delays in product development while we attempt to design around other patents or we could even be prohibited from developing, manufacturing or selling products requiring these licenses |
| Any of these occurrences will result in lost revenues and profits for us |
| Our collaborators may restrict our use of scientific information |
| The success of our strategy depends, in part, on our ability to apply a growing base of knowledge, technology and data across all of our internal projects and our collaborations |
| Some of this data has been and will continue to be generated from our work with collaborators |
| We believe that we have rights to use all such information necessary to our planned drug discovery and development efforts; however, our collaborators may disagree and may succeed in preventing us from using some or all of this information and/or technology ourselves or with others |
| Without the ability to use this information freely, we may be limited in our ability to improve the efficiency of our drug discovery and development process |
| RISKS RELATED TO REGULATION We may not obtain regulatory approval for the sale and manufacture of drug products |
| The development and commercialization of drug candidates in the United States, including those drug candidates we develop alone or in collaboration with our partners, are subject to extensive regulation by the FDA and other regulatory agencies in the United States and by comparable authorities in Europe and elsewhere |
| Pharmaceutical products require lengthy and costly testing in animals and humans and regulatory approval by the appropriate governmental agencies prior to commercialization |
| Regulatory authorities may suspend clinical trials at any time if they believe that the subjects participating in the trials are being exposed to unacceptable risks or if an agency finds deficiencies in the conduct of the trials or other problems with our product under development |
| Approval of a drug candidate as safe and effective for use in humans is never certain and these agencies may delay or deny approval of the products for commercialization |
| Changes in regulatory policy during the period of regulatory review may result in unforeseen delays or denial of approval |
| Similar regulations, delays, denials and other risks may be encountered in foreign countries |
| As a company, we have never obtained regulatory approval to manufacture and sell a drug |
| If we and/or our collaborators develop a drug candidate and cannot obtain this approval, we may not realize milestone or royalty payments based on commercialization goals for such drug candidate |
| Regulatory approval, if obtained, may be made subject to limitations on the indicated uses for which we may market a 24 ______________________________________________________________________ product |
| These limitations could adversely affect the marketability of our potential products and ultimately product revenues |
| Even if regulatory approval is obtained, regulatory authorities may require additional clinical studies, or specific risk management measures, after sales of a drug have begun |
| In addition, the identification of certain side effects after a drug is on the market may result in the subsequent withdrawal of approval, reformulation of the drug, additional preclinical and clinical trials, changes in labeling, recalls, warnings to physicians or the public, negative publicity, or the imposition of risk management measures that may limit our ability to advertise or promote the product, restrict patient access to the product, or otherwise have the effect of reducing sales of the product |
| Furthermore, for any marketed product, its manufacturer and its manufacturing facilities will be subject to continual review and periodic inspections by the FDA or other regulatory authorities |
| Failure to comply with applicable regulatory requirements may, among other things, result in fines, suspensions of regulatory approvals, product recalls, product seizures, operating restrictions and criminal prosecution |
| Any of these events could delay or prevent us from generating revenue from the commercialization of any drug candidates we develop or help to develop |
| We have only limited experience in regulatory affairs, and some of our products may be based on new technologies; these factors may affect our ability or the time we require to obtain necessary regulatory approvals |
| We have only recently initiated Phase 2 clinical testing with our lead product and Phase 1 clinical testing with our second product, and we have only limited experience in filing and prosecuting the applications necessary to gain regulatory approvals |
| Moreover, certain of the products that are likely to result from our research and development programs may be based on new technologies and new therapeutic approaches that have not been extensively tested in humans |
| The regulatory requirements governing these types of products may be more rigorous than for conventional products |
| As a result, we may experience a longer regulatory process in connection with any products that we develop based on these new technologies or new therapeutic approaches |
| RISKS RELATING TO HAZARDOUS WASTE If our use of chemical and hazardous materials violates applicable laws or causes personal injury, we may be liable for damages |
| Our drug discovery activities, including the analysis and synthesis of chemical compounds, involve the controlled use of chemicals, including flammable, combustible, toxic and radioactive materials that are potentially hazardous if misused |
| Federal, state and local laws and regulations govern our use, storage, handling and disposal of these materials |
| These laws and regulations include the Resource Conservation and Recovery Act, the Occupational Safety and Health Act and local fire and bpuilding codes, and regulations promulgated by the Department of Transportation, the Drug Enforcement Agency, the Department of Energy, the Department of Health and Human Services, and the laws of Massachusetts, where we conduct our operations |
| We may incur significant costs to comply with these laws and regulations in the future |
| Notwithstanding our extensive safety procedures for handling and disposing of such materials, the risk of accidental contamination or injury from these materials cannot be completely eliminated |
| In the event of an accident, our business could be disrupted and we could be liable for damages, and any such liability could exceed our resources, and have a negative impact on our financial condition and results of operations |