Despite losses, drug firm sees bright future

WOBURN -- With several cancer drugs in the pipeline, executives of ArQule Inc. are optimistic about the future.

Until those drugs are approved for use, however, the Woburn-based biotechnology company expects losses to continue.

"The losses we have are investments in our future," chief executive Stephen A. Hill said in an interview last week at the company's 128,000-square-foot headquarters off Commerce Way.

For the first quarter ended March 31, ArQule reported revenue of $1.6 million and a net loss of $14.5 million, reflecting the discontinuation of its chemistry-services operations last year.

Nevertheless, ArQule is financially viable, Hill said, with $83.7 million in cash and marketable securities and a promising licensing agreement, signed last month, with a Tokyo-based pharmaceutical firm, Kyowa Hakko Kogyo Co.

The agreement calls for Kyowa Hakko Kogyo to pay $30 million up front, with the potential for another $123 million (not including royalties on future sales) as it further develops and sells, in parts of Asia, a drug called ArQule 197. The product is in phase-one clinical trials in Texas, California, and Ohio and is designed for cancer patients who have not benefited from other drugs.

"This is the biggest deal ever between a biotech company and a Japanese company for a drug in phase-one trials," Hill said, adding that data on the drug's potential will be presented June 2 to a conference of the American Society of Clinical Oncology in Chicago.

Other ArQule drugs undergoing clinical trials are:

ARQ 501, which is nearing completion of phase-two trials at 50 medical centers in the United States, including Massachusetts General Hospital and Dana-Farber Cancer Institute, both in Boston; Great Britain; Germany; Poland; Russia; and Ukraine. It's intended to treat head-and-neck cancers, smooth muscle cancers, and pancreatic cancer.

ARQ 171, which has the same biological properties as ARQ 501 and is in phase-one trials at Mass. General and Dana-Farber. F. Hoffmann-La Roche Ltd. of Switzerland is a partner in the development of 501 and 171, an agreement that has a potential of $276 million, Hill said.

About 10 drug candidates are being investigated, including one that may show great promise for inhibiting protein growth in melanomas, he said.

ArQule "is in the forefront of these very interesting drugs' development," said Howard Liang, a senior biotechnology analyst in the Boston office of Leerink Swann & Co., an investment bank.

"There is so much [work] to do in oncology in the future," said Hill, whose total compensation last year was $680,000.

ArQule Inc. was founded in 1993 as a supplier of chemistry services for large pharmaceutical companies.

In the beginning, Hill said, ArQule concentrated on developing compounds in a Medford facility, based on a theory of the company's lead founder, Joseph C. Hogan Jr., who had been an industrial chemist for Millipore Corp. and Polaroid Corp.

"Hogan came up with a better way of doing chemistry, or taking a combination of building blocks and making many compounds with one chemical reaction. This was known as solution-phase chemistry," Hill said. (Hogan, who is no longer associated with ArQule, could not be reached for comment.)

Two California venture-capital firms, Sevin-Rosen Partners and Atlas Ventures, bankrolled the company's start, investing less than $10 million between them, Hill said.

The company went public in 1996, and its shares are traded on Nasdaq. The annual shareholders meeting will begin at 9 tomorrow morning at the Museum of Science in Boston.

Hill, 49, was trained as an orthopedic surgeon in England. He later headed the global drug development operation of F. Hoffman-La Roche and was named ArQule's chief executive in 1999.

When he arrived, Hill said, the company had $36 million in expenses, $18 million in revenue, and little cash in the bank.

But two deals brokered at the end of 1999 saved the day, he said. They were a four-year, $100 million pact with Pfizer Inc. and a $30 million agreement with Bayer AG.

"We were filling their compound repositories so that they could screen these compounds for drug developments," he said. "These agreements transformed the company."

In 2001, Pfizer asked to increase the contract to $350 million over a seven-year period, he said. But the agreement was terminated in May 2006 because of Pfizer's cost constraints and the increasing competition offshore for chemistry services, Hill said. ArQule received a final payment of $285 million.

Three years earlier, ArQule had acquired, for less than $30 million, Cyclis Pharmaceuticals of Norwood.

"We had looked all over for a company with biology expertise and Cyclis turned out to be the best one available," Hill said. "It was built around the notion that cancer cells, rather than dividing, could be programmed to kill themselves, and that is the basis of our research today."

ArQule has spun off Cyclis, and in January entered an eight-month, $5 million research agreement with newly formed Boston Biomedical Inc.

As ArQule has redirected its operations, it has had to lay off 278 workers since 2001. Currently, there are 100 employees, Hill said, and "the core of our business is now oncology-focused research and development."