injunctions and civil penalties),
failure of regulatory authorities to grant 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.
Materials necessary to manufacture our product candidates
currently under development may not be available on commercially reasonable terms, or at all, which may delay our development and commercialization of
these drugs.
Some of the materials necessary for the
manufacture of our product candidates currently under development may, from time to time, be available either in limited quantities, or from a limited
number of manufacturers, or both. We and/or our collaborators need to obtain these materials for our clinical trials and, potentially, for commercial
distribution when and if we obtain marketing approval for these compounds. Suppliers may not sell us these materials at the time we need them or on
commercially reasonable terms. If we are unable to obtain the materials needed for the conduct of our clinical trials, product testing and potential
regulatory approval could be delayed, adversely impacting our ability to develop the product candidates. If it becomes necessary to change suppliers
for any of these materials or if any of our suppliers experience a shutdown or disruption in the facilities used to produce these materials, due to
technical, regulatory or other problems, it could significantly hinder or prevent manufacture of our drug candidates and any resulting
products.
RISKS RELATED TO COMPETITION
The drug research and development industry is highly
competitive, and we compete with some companies that have a broader range of capabilities and better access to resources than we
do.
The pharmaceutical and biotechnology
industries are characterized by rapid and continuous technological innovation. We compete with companies worldwide that are engaged in the research and
discovery, licensing, development and commercialization of drug candidates, including, in the area of small molecule anti-cancer therapeutics,
biotechnology companies such as Ariad Pharmaceuticals, Inc., Array BioPharma Inc., Astex Therapeutics, Cell Therapeutics, Inc., Curis, Inc.,
Cytokinetics, Inc., Deciphera Pharmaceuticals, Exelixis, Inc., Evotec AG, GlaxoSmithKline, FORMA Therapeutics, Incyte Corporation, Infinity
Pharmaceuticals, Inc., Onyx Pharmaceuticals, Inc., OSI Pharmaceuticals, Inc., Roche and Telik, Inc. and many others.
With respect to tivantinib
specifically, we are aware of a number of biotechnology and pharmaceutical companies that are or may be pursuing approaches to c-Met inhibition,
including Amgen Inc., AstraZeneca/Hutchison MediPharma, AVEO Pharmaceuticals, Inc., Bristol- Myers Squibb Company, Cephalon, Inc., Compugen Ltd.,
Exelixis, Inc., GlaxoSmithKline, Johnson & Johnson, Merck & Co., Inc., Methylgene Inc., Pfizer, Roche, Takeda and Supergen Inc. and others.
With respect to HCC, our lead indication, we are aware of a number of companies with products under development, including Eisai Co., Abbott, Eli
Lilly, Bayer, and 4SC AG.
Even if we are successful in bringing
products to market, we face substantial competitive challenges in effectively marketing and distributing our products. Companies and research
institutions, including large pharmaceutical companies with much greater financial resources and more experience in developing products, conducting
clinical trials, obtaining FDA and foreign regulatory approvals and bringing new drugs to market are developing products within the field of oncology.
Some of these entities already have competitive products on the market or product candidates in more advanced stages of development than we do. By
virtue of having or introducing competitive products on the market before us, these entities may gain a competitive advantage. In addition, there may
be product candidates of which we are not aware at an earlier stage of development that may compete with our product candidates. Some of our
competitors have entered into collaborations with leading companies within our target markets.
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
from the impact of adverse events in our field that may affect regulatory approval or public perception.
31
We anticipate that we will face
increased competition in the future as new companies enter the market and advanced technologies become available. If we are unable to successfully
compete in our chosen field, we will not become profitable.
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 have an adverse effect 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 and manufacturing
organizations, and academic and research institutions in the recruitment of 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.
RISKS RELATED TO INTELLECTUAL PROPERTY
Our patents and other proprietary rights may fail to
protect our business. If we are unable to adequately protect our intellectual property, third parties may be able to use our technology which could
adversely affect our ability to compete in the market.
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 our product candidates or their use, synthesis or
formulations. 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 U.S. 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 U.S. Patent and Trademark Office. As a consequence of these factors, 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 it will be easier for competitors to design products that do not infringe our patent. We cannot be certain that we will receive any
additional patents, that the claims of our patents will offer significant protection for 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 before 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. If a court agrees, our patents could be narrowed, invalidated or rendered unenforceable, or
we may be forced to stop using the technology covered by these patents or to license the technology from third parties. 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.
The laws of some foreign countries do
not protect intellectual property rights to the same extent as the laws of the United States. Many companies have encountered significant problems in
protecting and defending such rights in foreign jurisdictions. Many countries, including certain countries in Europe, have compulsory licensing laws
under which a patent owner may be compelled to grant licenses to third parties. In addition, many countries limit the enforceability of patents against
government agencies or government contractors. In these countries, the patent owner may have limited remedies, which could materially diminish the
value of the
32
patent. Compulsory licensing of
life-saving drugs is also becoming increasingly popular in developing countries either through direct legislation or international initiatives. Such
compulsory licenses could be extended to include some of our product candidates, which could limit our potential revenue opportunities. Moreover, the
legal systems of certain countries, particularly certain developing countries, do not favor the aggressive enforcement of patent and other intellectual
property protection, which makes it difficult to stop infringement.
Drug candidates we develop that are
approved for commercial marketing by the FDA would be subject to the provisions of the Drug Price Competition and Patent Term Restoration Act of 1984,
known as the Hatch-Waxman Act. The Hatch- Waxman Act provides companies with marketing exclusivity for varying time periods during which
generic versions of a drug may not be marketed and allows companies to apply to extend patent protection for up to five additional years. It also
provides a means for approving generic versions of a drug once the marketing exclusivity period has ended and all relevant patents have expired. The
period of exclusive marketing, however, may be shortened if a patent is successfully challenged and defeated, which could reduce the amount of revenue
we receive for such product.
Agreements we have with our employees, consultants and
collaborators may not afford adequate protection for our trade secrets, confidential information and other proprietary
information.
In addition to patent protection, we
also rely on copyright and trademark protection, trade secrets, and know-how. It is unclear whether our trade secrets and know-how will prove to be
adequately protected. To protect our trade secrets and know-how, we require our employees, consultants and advisors to execute agreements regarding the
confidentiality and ownership of such proprietary information. We cannot guarantee, however, that these agreements will provide us with adequate
protection against improper use or disclosure of confidential information and there may not be adequate remedies in the event of unauthorized use or
disclosure. 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. Our failure or inability to protect our proprietary information and techniques may inhibit or limit our ability to compete
effectively or exclude certain competitors from the market.
Our success will depend partly on our ability to operate
without infringing upon 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.
If we do not prevail in litigation or
if other parties have filed, or in the future should file, patent applications covering products and technologies that we have developed or intend to
develop, we may have to obtain licenses from third parties, which may not be available on commercially reasonable terms, or at all, and may require us
to pay substantial royalties or grant a cross-license to some of our patents to another patent holder. Additionally, we may have to change the
formulation of a product candidate so that we do not infringe third- party patents. Such reformulation may be impossible to achieve or which may
require substantial time and expense. If we are unable to cost-effectively redesign our products so they do not infringe a patent, we may be unable to
sell some of our products. Any of these occurrences will result in lost revenues and profits for us.
The drug research and development industry has a history of
patent and other intellectual property litigation, and we may be involved in costly intellectual property lawsuits.
The drug research and development
industry has a history of patent and other intellectual property litigation, and we believe these lawsuits are likely to continue. Legal proceedings
relating to intellectual property would be expensive, take significant time and divert managements attention from other business
33
concerns. We face potential patent
infringement suits by companies that control patents for drugs or potential drugs similar to our product candidates or other suits alleging
infringement of their intellectual property rights. There could be issued patents of which we are not aware that our products and their use, whether as
single agents or in combination with other products, infringe or patents that we believe we do not infringe that we are ultimately found to infringe.
The publication of discoveries in the scientific or patent literature frequently occurs substantially later than the date on which the underlying
discoveries were made and patent applications were filed. Because patent applications can take many years to issue, there may be currently pending
applications of which we are unaware that may later result in issued patents that we infringe with our drug candidates or resulting products, and their
use as single agents or in combination with other products. In addition, technology created under our research and development collaborations may
infringe the intellectual property rights of third parties, in which case we may not receive milestone or royalty revenue from those
collaborations.
If we do not prevail in an infringement
lawsuit brought against us, we might have to pay substantial damages and we could be required to stop the infringing activity or obtain a license to
use the patented technology or redesign our products so as not to infringe the patent. We may not be able to enter into licensing arrangements at a
reasonable cost or effectively redesign our products. Any inability to secure licenses or alternative technology could delay the introduction of our
products or prevent us from manufacturing or selling products.
RISKS RELATED TO EMPLOYEES, FACILITIES AND INFORMATION
TECHNOLOGY
Our operations could be interrupted by damage to our
laboratory facilities.
Our operations are dependent upon the
continued use of our specialized laboratories and equipment in Woburn, Massachusetts. Catastrophic events, including fires or explosions, could damage
our laboratories, equipment, scientific data, work in progress or inventories of chemical compounds and biological materials and may materially
interrupt our business. We employ safety precautions in our laboratory activities in order to reduce the likelihood of the occurrence of these
catastrophic events; however, we cannot eliminate the chance that such an event will occur. Rebuilding our facilities could be time consuming and
result in substantial delays in our development of products and in fulfilling our agreements with our collaborators.
Security breaches may disrupt our operations and adversely
affect our operating results.
Our network security and data recovery
measures and those of third parties with which we contract, may not be adequate to protect against computer viruses, cyber-attacks, break-ins, and
similar disruptions from unauthorized tampering with our computer systems. The misappropriation, theft, sabotage or any other type of security breach
with respect to any of our proprietary and confidential information that is electronically stored, including research or clinical data, could cause
interruptions in our operations, and could result in a material disruption of our clinical activities and business operations, in addition to possibly
requiring substantial expenditures of resources to remedy. This disruption could have a material adverse impact on our business, operating results and
financial condition. Additionally, any break-in or trespass of our facilities that results in the misappropriation, theft, sabotage or any other type
of security breach with respect to our proprietary and confidential information, including research or clinical data, or that results in damage to our
research and development equipment and assets could have a material adverse impact on our business, operating results, and financial
condition.
RISKS RELATED TO PRODUCT LIABILITY
If our use of chemical and biological materials 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,
local fire and building codes, regulations promulgated by the Department of Transportation, the Drug Enforcement Agency and the Department of Energy,
the
34
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 and current or future environmental laws and regulations may impair our research, development and production efforts. Notwithstanding our
extensive safety procedures for handling and disposing of 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. Our liability may exceed our
insurance coverage and our total assets and have a negative impact on our financial condition and results of operations.
We may be exposed to potential liability related to the
development, testing or manufacturing of compounds we develop and our insurance coverage may not be sufficient to cover
losses.
We are developing, clinically testing
and manufacturing potential 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 our current stage of drug development. 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 COMMON STOCK
Our stock price may be extremely
volatile.
The trading price of our common stock
has been highly volatile. We believe the trading price of our common stock will remain highly volatile and may fluctuate substantially due to factors
such as:
|
|
adverse results or delays in clinical trials; |
|
|
announcement of FDA approval or non-approval, or delays in the
FDA review process, of our or our collaborators product candidates or those of our competitors or actions taken by regulatory agencies with
respect to our, our collaborators or our competitors clinical trials; |
|
|
announcement of new products by us or our
competitors; |
|
|
quarterly variations in our or our competitors results of
operations, including as a result of recognition of upfront licensing or other fees, the timing and amount of expenses incurred for clinical
development, regulatory approval and commercialization of our product candidates; |
|
|
litigation, including intellectual property infringement
lawsuits, involving us; |
|
|
financing transactions; |
|
|
developments in the biotechnology and pharmaceutical
industries; |
|
|
the general performance of the equity markets and in particular
the biopharmaceutical sector of the equity markets; |
|
|
departures of key personnel or board members; |
|
|
developments concerning current or future
collaborations; |
|
|
FDA or international regulatory actions affecting our industry
generally; and |
|
|
third-party reimbursement policies. |
This volatility and general market
declines in our industry over the past several years have affected the market prices of securities issued by many companies, often for reasons
unrelated to their operating performance, and may adversely affect the price of our common stock. In the past, securities class action litigation has
often been instituted following periods of volatility in the market price of a companys securities.
35
A securities class action suit
against us could result in potential liabilities, substantial costs and the diversion of managements attention and resources, regardless of the
outcome of the action.
Some of our existing stockholders can exert control over
us, and their interests could conflict with the best interests of our other stockholders.
Due to their combined stock holdings,
our principal stockholders (stockholders holding more than 5% of our common stock), acting together, may be able to exert significant influence over
all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. In addition, this
concentration of ownership may delay or prevent a change in control of our company, even when a change may be in the best interests of our
stockholders. Furthermore, the interests of these stockholders may not always coincide with our interests as a company or the interests of other
stockholders. Accordingly, these stockholders could cause us to enter into transactions or agreements that would not be widely viewed as
beneficial.
If our officers, directors or principal
stockholders sell substantial amounts of our common stock (including shares issued upon the exercise of options and warrants) in the public market, the
market price of our common stock could fall. These sales also might make it more difficult for us to sell equity or equity- related securities in the
future at a time and price that we deem appropriate.
Anti-takeover provisions in our charter documents and under
Delaware law could make an acquisition of us, which may be beneficial to our stockholders, more difficult and may prevent or deter attempts by our
stockholders to replace or remove our current management.
Provisions in our corporate charter and
bylaws and Delaware law may discourage, delay or prevent an acquisition of our company, a change in control, or attempts by our stockholders to replace
or remove members of our current Board of Directors. Because our Board of Directors is responsible for appointing the members of our management team,
these provisions could in turn affect any attempt by our stockholders to replace current members of our management team. These provisions
include:
|
|
a Board of Directors having three classes of directors with a
three-year term of office that expires as to one class each year, commonly referred to as a staggered board; |
|
|
a prohibition on actions by our stockholders by written
consent; |
|
|
the inability of our stockholders to call special meetings of
stockholders; |
|
|
the ability of our Board of Directors to issue preferred stock
without stockholder approval, which could be used to institute a poison pill that would work to dilute the stock ownership of a potential
hostile acquirer, effectively preventing acquisitions that have not been approved by our Board of Directors; |
|
|
limitations on the removal of directors; and |
|
|
advance notice requirements for director nominations and
stockholder proposals. |
Moreover, because we are incorporated
in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which prohibits a person who owns in excess of
15% of our outstanding voting stock from merging or combining with us for a period of three years after the date of the transaction in which the person
acquired in excess of 15% of our outstanding voting stock, unless the merger or combination is approved in a prescribed manner. As a result, it is
difficult for a third party to acquire control of us without the approval of our Board of Directors and, therefore, mergers with and acquisitions of us
that our stockholders may consider in their best interests may not occur.
Because we do not intend to pay dividends, stockholders
will benefit from an investment in our common stock only if it appreciates in value.
We have never declared or paid any cash
dividends on our common stock. We currently intend to retain our future earnings, if any, to finance the expansion of our business and do not expect to
pay any cash dividends in the foreseeable future. As a result, the success of an investment in our common stock will depend entirely upon any future
appreciation. There is no guarantee that our common stock will appreciate in value or even maintain the price at which stockholders have purchased
their shares.
36
ITEM 1B. |
|
UNRESOLVED STAFF COMMENTS |
None.
In November 1999, we moved our main
operations to a new facility in Woburn, Massachusetts, which includes approximately 128,000 square feet of laboratory and office space. This facility
was designed to our specific requirements. In March 2001, we purchased this building and the land on which it sits and a developable adjacent parcel of
land for $18.2 million and $2.3 million, respectively, in an arms-length transaction with the original developer. On May 2, 2005, we completed a
transaction to sell the Woburn facility and simultaneously leased the facility from the purchaser. The lease was subsequently amended on June 30, 2005.
Under the terms of the transaction, the purchaser obtained two parcels of land and our headquarters building in exchange for a cash payment of
approximately $40.1 million. We are leasing our existing facility and the associated land for a period of ten years at an average annual rental rate of
$3.4 million. We also have options to extend the lease term for up to an additional ten years. See Note 5, Property and Equipment in the
Notes to Financial Statements appearing in Item 8 in this Annual Report on Form 10-K.
ITEM 3. |
|
LEGAL PROCEEDINGS |
None.
ITEM 4. |
|
MINE SAFTEY DISCLOSURES |
Not applicable.
37
PART II
ITEM 5. |
|
MARKET FOR THE REGISTRANTS COMMON STOCK, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
STOCK PERFORMANCE GRAPH
The following graph shows the
cumulative total stockholder return on our common stock over the period from December 31, 2007 to December 31, 2012, as compared with that of the
NASDAQ Stock Market Index (U. S. Companies) and the NASDAQ Biotechnology Index, based on an initial investment of $100 in each on December 31, 2007.
Total stockholder return is measured by dividing share price change plus dividends, if any, for each period by the share price at the beginning of the
respective period, and assumes reinvestment of dividends.
COMPARISON OF CUMULATIVE TOTAL RETURN OF ARQULE, INC.,
NASDAQ STOCK MARKET (U.S. COMPANIES) INDEX
AND NASDAQ BIOTECHNOLOGY INDEX
|
|
|
|
12/31/07
|
|
12/31/08
|
|
12/31/09
|
|
12/31/10
|
|
12/31/11
|
12/31/12
|
|
|
|
|
|
|
100.00 |
|
|
|
72.76 |
|
|
|
63.62 |
|
|
|
101.21 |
|
|
|
97.24 |
|
|
|
NASDAQ Market (U.S. Companies) Index |
|
|
|
|
100.00 |
|
|
|
61.17 |
|
|
|
87.93 |
|
|
|
104.13 |
|
|
|
104.69 |
|
|
|
NASDAQ Biotechnology Index |
|
|
|
|
100.00 |
|
|
|
87.37 |
|
|
|
101.03 |
|
|
|
116.19 |
|
|
|
129.91 |
|
|
|
ArQules common stock is traded on
the NASDAQ Global Market under the symbol ARQL.
38
The following table sets forth, for the
periods indicated, the range of the high and low sale prices for ArQules common stock:
|
|
|
|
HIGH
|
|
LOW
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
7.17 |
|
|
$ |
5.75 |
|
|
|
|
|
|
7.83 |
|
|
|
6.12 |
|
|
|
|
|
|
6.72 |
|
|
|
3.98 |
|
|
|
|
|
|
6.15 |
|
|
|
4.46 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
8.19 |
|
|
$ |
5.36 |
|
|
|
|
|
|
8.32 |
|
|
|
5.40 |
|
|
|
|
|
|
6.98 |
|
|
|
4.81 |
|
|
|
|
|
|
5.14 |
|
|
|
1.98 |
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter (through February 25, 2013) |
|
|
|
$ |
3.18 |
|
|
$ |
2.35 |
|
As of February 25, 2013, there were
approximately 80 holders of record and approximately 6,116 beneficial stockholders of our common stock
Dividend Policy
We have never paid cash dividends on
our common stock and we do not anticipate paying any cash dividends in the foreseeable future. We currently intend to retain future earnings, if any,
for use in our business.
39
ITEM 6. |
|
SELECTED FINANCIAL DATA |
The following selected financial data
have been derived from our audited historical financial statements, certain of which are included elsewhere in this Annual Report on Form 10-K. The
following selected financial data should be read in conjunction with our financial statements and related notes and Managements Discussion
and Analysis of Financial Condition and Results of Operations appearing elsewhere in this Annual Report on Form 10-K.
The following data is in thousands,
except per share data.
|
|
|
|
YEAR ENDED DECEMBER 31,
|
|
|
|
|
|
2012
|
|
2011
|
|
2010
|
|
2009
|
|
2008
|
STATEMENT OF OPERATIONS AND COMPREHENSIVE LOSS DATA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development revenue(a)(b)(c)(d) |
|
|
|
$ |
36,414 |
|
|
$ |
47,310 |
|
|
$ |
29,221 |
|
|
$ |
25,198 |
|
|
$ |
14,141 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development(e) |
|
|
|
|
33,966 |
|
|
|
45,011 |
|
|
|
47,034 |
|
|
|
49,495 |
|
|
|
49,629 |
|
General and administrative |
|
|
|
|
13,852 |
|
|
|
13,373 |
|
|
|
13,477 |
|
|
|
13,317 |
|
|
|
16,918 |
|
|
|
|
|
|
47,818 |
|
|
|
58,384 |
|
|
|
60,511 |
|
|
|
62,812 |
|
|
|
66,547 |
|
|
|
|
|
|
(11,404 |
) |
|
|
(11,074 |
) |
|
|
(31,290 |
) |
|
|
(37,614 |
) |
|
|
(52,406 |
) |
|
|
|
|
|
445 |
|
|
|
317 |
|
|
|
619 |
|
|
|
1,089 |
|
|
|
3,342 |
|
|
|
|
|
|
(26 |
) |
|
|
(25 |
) |
|
|
(274 |
) |
|
|
(655 |
) |
|
|
(472 |
) |
Other income (expense)(f) |
|
|
|
|
113 |
|
|
|
20 |
|
|
|
266 |
|
|
|
1,594 |
|
|
|
(1,328 |
) |
|
|
|
|
|
(10,872 |
) |
|
|
(10,762 |
) |
|
|
(30,679 |
) |
|
$ |
(35,586 |
) |
|
$ |
(50,864 |
) |
Benefit from (provision for) income taxes |
|
|
|
|
|
|
|
|
|
|
|
|
550 |
|
|
|
(550 |
) |
|
|
|
|
|
|
|
|
|
(10,872 |
) |
|
|
(10,762 |
) |
|
|
(30,129 |
) |
|
|
(36,136 |
) |
|
|
(50,864 |
) |
Unrealized gain (loss) on marketable securities |
|
|
|
|
108 |
|
|
|
1 |
|
|
|
(62 |
) |
|
|
55 |
|
|
|
4 |
|
|
|
|
|
$ |
(10,764 |
) |
|
$ |
(10,761 |
) |
|
$ |
(30,191 |
) |
|
$ |
(36,081 |
) |
|
$ |
(50,860 |
) |
Basic and diluted net loss per share |
|
|
|
$ |
(0.18 |
) |
|
$ |
(0.20 |
) |
|
$ |
(0.68 |
) |
|
$ |
(0.82 |
) |
|
$ |
(1.16 |
) |
Weighted average common shares outstandingbasic and diluted |
|
|
|
|
59,821 |
|
|
|
52,778 |
|
|
|
44,529 |
|
|
|
44,169 |
|
|
|
43,870 |
|
Cash, cash equivalents and marketable securities(g)(h) |
|
|
|
$ |
79,271 |
|
|
$ |
68,168 |
|
|
$ |
80,695 |
|
|
$ |
154,677 |
|
|
$ |
141,890 |
|
Marketable securities-long term |
|
|
|
|
51,328 |
|
|
|
40,475 |
|
|
|
2,154 |
|
|
|
8,814 |
|
|
|
64,219 |
|
|
|
|
|
$ |
130,599 |
|
|
$ |
108,643 |
|
|
$ |
82,849 |
|
|
$ |
163,491 |
|
|
$ |
206,109 |
|
|
|
|
|
|
52,968 |
|
|
|
23,299 |
|
|
|
34,901 |
|
|
|
73,569 |
|
|
|
59,680 |
|
|
|
|
|
|
1,700 |
|
|
|
1,700 |
|
|
|
1,700 |
|
|
|
46,100 |
|
|
|
47,750 |
|
|
|
|
|
|
134,193 |
|
|
|
117,051 |
|
|
|
88,866 |
|
|
|
171,880 |
|
|
|
214,212 |
|
Total stockholders equity (deficit)(g)(h) |
|
|
|
|
81,029 |
|
|
|
29,729 |
|
|
|
(14,562 |
) |
|
|
11,535 |
|
|
|
43,467 |
|
(a) |
|
In April 2004, we entered into an alliance with Roche to
discover and develop drug candidates targeting the E2F biological pathway. They immediately provided $15 million and continued research and development
funding through the first quarter of 2008. In 2008, we recognized revenue from this alliance of $8.2 million, including $1.6 million of deferred
revenue upon the termination of the agreement in 2008. |
(b) |
|
In November 2008, we entered into a research collaboration,
exclusive license and co-commercialization agreement with Daiichi Sankyo for the discovery of therapeutic compounds that selectively inhibit certain
kinases. The agreement includes upfront licensing fees of $15 million, which were received in 2008, payments for research support, and licensing fees
for compounds discovered as a result of this research. ArQule will also receive milestone payments related to clinical development, regulatory review
and sales and royalty payments on net sales of compounds from the collaboration. |
40
(c) |
|
In December 2008, we entered into an exclusive license agreement
with Daiichi Sankyo to develop and commercialize tivantinib in the U.S., Europe, South America and the rest of the world, excluding Japan and parts of
Asia. The agreement includes upfront licensing fees of $60 million, which were received in 2008. In addition the agreement provides for potential
development and sales milestones of $560 million, and royalty payments upon commercialization. Future development and sales milestones and royalty
payments will be offset by our share of the Phase 3 costs incurred by Daiichi Sankyo. |
(d) |
|
In November 2011, we entered into a license agreement with
Daiichi Sankyo for ARQ 092, an inhibitor of the AKT protein kinase discovered under our AKIPTM oncology drug discovery collaboration. As a result of our license agreement for this compound, we received a $10 million payment
from Daiichi Sankyo in November 2011. |
(e) |
|
The $11.0 million decrease in research and development expense
in 2012 was primarily due to an $8.7 million decrease in outsourced clinical and product development costs related to our phase 1 and 2 programs for
tivantinib and pipeline programs. Other cost decreases include $1.0 million labor related costs from reduced headcount, $0.4 million for lab expenses,
and $0.3 million for professional fees. |
(f) |
|
In 2008, we received a put option from UBS AG to repurchase
auction rate securities we owned at par value from June 30, 2010 through July 2, 2012 (the Put Option). We accounted for the Put Option as
a freestanding financial instrument and elected to record the value under the fair value option for financial assets and financial liabilities. The
fair value of the Put Option of $6.7 million was reported as other income (expense). Simultaneously, we transferred these auction rate securities from
available-for-sale to trading securities, reflecting our intent to exercise the Put Option during the period June 30, 2010 to July 2, 2012. This
resulted in a loss of $8.0 million in 2008 which was recorded in other income (expense). |
|
|
Other income (expense) in 2009 includes an unrealized gain on
our auction rate securities of $3.2 million, partially offset by a loss of $1.6 million on our auction rate security Put Option. |
|
|
Other income (expense) in 2010 includes a $4.4 million gain from
the increase in fair value of our auction rate securities and a $5.1 million loss from the decrease in fair value of our Put Option upon exercise.
Other income (expense) in 2010 also includes $1.0 million of cash grants for qualifying therapeutic discovery projects awarded under the Patient
Protection and Affordable Care Act of 2010. |
|
|
Other income (expense) in 2011 includes a gain from the increase
in fair value of our auction rate securities. |
|
|
Other income (expense) in 2012 includes a gain from the increase
in fair value of our auction rate securities. |
(g) |
|
In January 2011, we completed a stock offering in which we sold
8,050,000 shares of common stock at a price of $6.15 per share for net proceeds of $46.8 million after commissions and offering expenses. |
(h) |
|
In April 2012, we completed a stock offering in which we sold
8,222,500 shares of common stock at a price of $7.30 per share for net proceeds of $56.3 million after commissions and offering expenses. |
41
ITEM 7. |
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS |
The following discussion should be
read in conjunction with our financial statements and related notes contained in this report.
We are a clinical-stage biotechnology
company engaged in the research and development of innovative cancer therapeutics. Our mission is to produce novel drugs with differentiated mechanisms
of action that will extend the lives of our patients. These drugs target biological pathways implicated in a wide range of cancers. We employ
technologies such as our ArQule Kinase Inhibitor Platform (AKIPTM) to design
and develop drugs that have the potential to fulfill this mission.
Our product candidates and programs
span a continuum of research and development ranging from drug discovery to advanced clinical testing. They are based on our understanding of
biological processes that lead to the proliferation and metastasis of cancer cells, combined with our ability to generate product candidates possessing
certain pre-selected, drug-like properties. We believe that these qualities, when present from the earliest stages of product development, increase the
likelihood of producing safe, effective and marketable drugs. Our discovery and development efforts are also guided when possible by an understanding
of the role of biomarkers, which are indicators of a particular biological condition or process and may predict the clinical benefit of our compounds
in defined patient populations.
Our lead product candidate is
tivantinib (ARQ 197), an orally administered, small molecule inhibitor of the c-Met receptor tyrosine kinase (MET) and its biological
pathway. MET is a promising target for cancer therapy, based on its multiple roles in cancerous cell proliferation, tumor spread, new blood vessel
formation and resistance to certain drug therapies. We and our partners, Daiichi Sankyo Co., Ltd. (Daiichi Sankyo) and Kyowa Hakko Kirin
Co., Ltd. (Kyowa Hakko Kirin), are implementing a clinical development program designed to realize the broad potential of tivantinib as a
single agent and in combination with other anti-cancer therapies in a number of disease indications. Our strategy is to focus on the most promising
indications within our clinical programs based upon continually generated and updated data. Our most advanced indication is hepatocellular carcinoma
(HCC). We are also completing earlier-stage combination therapy trials with tivantinib and other anti-cancer agents that may provide data
to support later-stage trials in additional indications.
On October 2, 2012, we and Daiichi
Sankyo announced that the independent Data Monitoring Committee (DMC) of the Phase 3 MARQUEE (M et inhibitor ARQ 197 plus
Erlotinib vs. Erlotinib plus placebo in NSCLC) trial in non-squamous cell NSCLC recommended the study be discontinued early following a
planned interim analysis, when they concluded that the study would not meet its primary endpoint of improved OS. Although the interim analysis showed a
statistically significant improvement in PFS in the intent-to-treat (ITT) population, this benefit did not carry over to OS. There were no safety
concerns identified by the DMC during this interim analysis. MARQUEE is a randomized, double-blind, controlled pivotal trial conducted under an SPA to
evaluate tivantinib in combination with erlotinib, an approved anti-cancer agent, in previously treated patients with locally advanced or metastatic,
non-squamous NSCLC. We and Daiichi Sankyo have provided information regarding the study discontinuation to health authorities and those clinical
investigators participating in studies of tivantinib. Data from this study will be presented at an upcoming peer review forum. Our analysis of these
data will inform our decisions regarding potential further development in NSCLC or in certain biomarker-defined sub-groups within this disease
population. In NSCLC, we are also conducting a Phase 2, randomized trial of tivantinib and erlotinib in patients with a mutated form of the KRAS
gene.
On October 30, 2012, we reported that
we had been informed by Kyowa Hakko Kirin that it will permanently suspend enrollment in its ongoing Phase 3 ATTENTION (Asian Trial of
Tivantinib plus Erlotinib for NSCLC without EGFR Mutation) trial following the recommendation of an independent Safety
Review Committee (SRC) in Japan after the reporting of cases of interstitial lung disease (ILD) in the study as a drug-related
adverse event. It is our understanding that patients who were enrolled in the ATTENTION trial at the time of the safety finding can continue to receive
treatment with the combination of tivantinib and erlotinib upon request from the patient and investigator and after providing new informed consent.
Data from the trial are expected in late 2013 or early 2014. The ATTENTION trial is investigating the use of tivantinib and erlotinib versus erlotinib
and placebo in second line non-squamous NSCLC patients with the wild-type
42
form of the EGFR gene. This trial
is being conducted by Kyowa Hakko Kirin in Japan, South Korea and Taiwan.
On January 11, 2013, we announced the
top-line results of a randomized Phase 2 signal generation trial of tivantinib used in combination with irinotecan and cetuximab in patients with
refractory or relapsed colorectal cancer (CRC). The trial did not meet its primary endpoint of PFS, The PFS results obtained in both the
control arm and the experimental arm were longer than expected compared to previously published historical norms. Additional data and analyses from
this trial are planned for presentation at a future medical meeting and will include mature OS data as well as analyses of patient sub-groups,
biomarker status and regional variability, including pre- and post-study treatments. Additional data and analyses from this trial are planned for
presentation at a future medical meeting.
We have licensed commercial rights to
tivantinib for human cancer indications to Daiichi Sankyo in the U.S., Europe, South America and the rest of the world, excluding Japan and certain
other Asian countries, where we have licensed commercial rights to Kyowa Hakko Kirin. Our agreements with these partners provide for possible future
milestone payments, royalties on product sales, and development funding, in addition to significant payments that we have already received. During
2011, we received $25 million from Daiichi Sankyo resulting from the dosing of the first patient in the MARQUEE trial, and we received $10 million from
Kyowa Hakko Kirin resulting from dosing of the first patient in the ATTENTION trial. The terms of our tivantinib licensing agreements with Daiichi
Sankyo and Kyowa Hakko Kirin remain in effect following the recent developments in both of these trials.
Our other clinical-stage products are
directed toward molecular targets and biological processes with demonstrated roles in the development of human cancers. The most advanced candidates in
this pipeline are ARQ 087, an inhibitor of fibroblast growth factor receptor ARQ 621, an inhibitor of the Eg5 kinesin motor protein, and ARQ 736, an
inhibitor of the RAF kinases, all of which are undergoing or have completed Phase 1 clinical testing.
Our drug discovery efforts are focused
primarily on the AKIPTM, which we are using to generate compounds designed to inhibit
kinases without competing with adenosine triphosphate (ATP) for binding to the target kinase, as well as other types of kinase inhibitors.
ATP is a chemical found in all living cells and is the energy source involved in a variety of physiological processes. We have assessed the potential
of AKIPTM to target multiple kinases in oncology and other therapeutic areas, and we are
generating and validating compounds that inhibit these kinase targets. During 2011, Daiichi Sankyo licensed ARQ 092, an inhibitor of the AKT protein
kinase discovered under our AKIPTM oncology drug discovery collaboration that terminated in
November 2012. ARQ 092 is the first clinical-stage compound to emerge from this collaboration. As a result of our license agreement for this compound,
we received a $10 million payment from Daiichi Sankyo in November 2011.
We have incurred a cumulative deficit
of approximately $420 million from inception through December 31, 2012. We expect research and development costs to increase during the course of 2013,
due to clinical testing of our lead product candidates. We recorded a net loss for 2010, 2011 and 2012 and expect a net loss for 2013.
Our revenue consists primarily of
development funding from our alliances with Daiichi Sankyo and Kyowa Hakko Kirin. Revenue and expenses fluctuate from quarter to quarter based upon a
number of factors, notably the timing and extent of our cancer-related research and development activities together with the length and outcome of our
clinical trials.
On December 18, 2008, we entered into a
license, co-development and co-commercialization agreement with Daiichi Sankyo to conduct research, clinical trials and commercialization of tivantinib
in human cancer indications. The agreement provides for a $60 million cash upfront licensing payment from Daiichi Sankyo to us, which we received in
December 2008, and an additional $560 million in potential development and sales milestone payments offset by our share of the Phase 3 costs. Upon
commercialization, we will receive tiered, double-digit royalties from Daiichi Sankyo on net sales of tivantinib commensurate with the magnitude of the
transaction. We retain the option to participate in the commercialization of tivantinib in the U.S. We and Daiichi Sankyo will share equally the costs
of Phase 2 and Phase 3 clinical studies, with our share of Phase 3 costs payable solely from milestone and royalty payments by Daiichi
Sankyo.
43
The dosing of the first patient in the
Phase 3 MARQUEE clinical trial of tivantinib in NSCLC, announced in January 2011, triggered the payment of a $25 million development milestone from
Daiichi Sankyo that was received in February 2011. Revenue for this agreement is recognized using the contingency-adjusted performance model. Through
September 30, 2012, revenue was recognized based upon an estimated development period through December 2013. As a result of the October 2012 decision
to discontinue the MARQUEE trial, the development period as of October 1, 2012 was extended to June 2015. Therefore, commencing with the fourth quarter
of 2012, revenue is recognized over this new development period. Under the previous estimated development period revenue for this agreement was
expected to be approximately $4.7 million in the fourth quarter of 2012. Under the revised development period revenue for this agreement was $2.1
million in the fourth quarter of 2012 resulting in a reduction of $2.6 million.
Under the terms of our tivantinib
collaboration agreement with Daiichi Sankyo we share development costs equally with our share of Phase 3 costs funded solely from milestones and
royalties. In each quarter the tivantinib collaboration costs we incur are compared with those of Daiichi Sankyo. If our costs for the quarter exceed
Daiichi Sankyos, we recognize revenue on the amounts due to us under the contingency adjusted performance model. Revenue is calculated on a
pro-rata basis using the time elapsed from inception of the agreement over the estimated duration of the development period under the agreement. If our
costs for the quarter are less than those of Daiichi Sankyos, we report the amount due to Daiichi Sankyo as contra-revenue in that quarter. To
the extent that our share of Phase 3 collaboration costs exceeds the amount of milestones and royalties received, that excess is netted against future
milestones and royalties if and when earned and is not reported as contra-revenue.
Our cumulative share of the Daiichi
Sankyo Phase 3 costs inception to date through December 31, 2012, totaled $63.8 million and we received milestones of $25.0 million during that period.
Our cumulative share of Phase 3 collaboration costs has exceeded the amount of milestones received through December 31, 2012 by $38.8 million which
will be netted against future milestones and royalties, if any, when earned and has not been reported as contra-revenue. On January 31, 2013, we
announced that the first patient had been enrolled in the pivotal Phase 3 METIV trial of tivantinib, entitling us to a $15 million milestone. We will
not receive any net cash proceeds from this milestone as it will be netted against our cumulative share of Phase 3 collaboration costs in excess of
milestones received of $38.8 million at December 31, 2012.
In 2012, our Phase 2 tivantinib
collaboration costs incurred were less than those of Daiichi Sankyos by $1.4 million which was recognized as contra-revenue and netted against
our tivantinib Daiichi Sankyo research and development revenue. Our non-refundable share of advance drug purchases is recognized as contra-revenue as
the related drugs are administered to patients. For the year ended December 31, 2012, $2.5 million of these drug purchases was also recognized as
contra-revenue. There were no advance drug purchases in the year ended December 31, 2012.
In 2011, our Phase 2 tivantinib
collaboration costs incurred were less than those of Daiichi Sankyos by $16.6 million which was recognized as contra-revenue and netted against
our tivantinib Daiichi Sankyo research and development revenue. Our non-refundable share of advance drug purchases in 2011 was $5.4 million. These
costs are recognized as contra-revenue as the related drugs are administered to patients. For the year ended December 31, 2011 $2.9 million of these
drug purchases was also recognized as contra-revenue.
In 2010, our Phase 2 tivantinib
collaboration costs incurred were less than those of Daiichi Sankyos by $3.3 million which was recognized as contra-revenue and netted against
our tivantinib Daiichi Sankyo research and development revenue. There were no advance drug purchases in the year ended December 31,
2010.
Prepaid expenses and other current
assets at December 31, 2011 included $2.5 million of prepaid Phase 3 drug purchases. This amount was recognized as contra-revenue in the year ended
December 31, 2012 as the drugs were administered to patients in the Phase 3 trial.
In November 2012, we completed our
research collaboration with Daiichi Sankyo under an agreement entered into in 2008 that was focused on applications of our proprietary AKIPTM technology and know-how. The agreement provides for a $15 million upfront payment, which we
received in November 2008, research support payments for the first two years of the collaboration (which was extended for an additional two years in
2010), licensing fees for compounds discovered as a result of this research, milestone payments related to
44
clinical development, regulatory
review and sales, and royalty payments on net sales of compounds from the collaboration. We retain the option to co-commercialize licensed products
developed under this agreement in the U.S. In May 2009, we entered into an agreement with Daiichi Sankyo related to potential future milestones and
royalties for our AKIPTM collaboration, under which we could receive up to a total of $265
million in upfront, potential development and sales milestone payments for each product selected for clinical development. Upon commercialization of a
licensed product, we would also receive tiered, double-digit royalties on its net sales. Revenue for this agreement was recognized using the
contingency-adjusted performance model with an estimated performance period through November 2012.
In November 2011, we and Daiichi Sankyo
announced the execution of a license agreement for the development of ARQ 092, the first compound to emerge from the companies AKIPTM collaboration. The license agreement provides exclusive rights to Daiichi Sankyo for the
development, manufacturing and marketing of ARQ 092 on a worldwide basis. Under this agreement, we received a $10 million payment from Daiichi Sankyo
in November 2011.
On April 27, 2007, we entered into an
exclusive license agreement with Kyowa Hakko Kirin to develop and commercialize tivantinib in Japan and parts of Asia. A $3 million portion of an
upfront licensing fee was received by the Company under this agreement in the first quarter of 2007, and an additional $27 million in upfront licensing
fees was received on May 7, 2007. The agreement includes $123 million in upfront and potential development milestone payments from Kyowa Hakko Kirin to
ArQule, including the $30 million cash upfront licensing payments. In February 2008, we received a $3 million milestone payment from Kyowa Hakko Kirin,
and in September 2010, we received a $5 million milestone payment. Upon commercialization, ArQule will receive tiered royalties in the mid-teen to
low-twenty percent range from Kyowa Hakko Kirin on net sales of tivantinib. Kyowa Hakko Kirin will be responsible for all clinical development costs
and commercialization of the compound in certain Asian countries, consisting of Japan, China (including Hong Kong), South Korea and Taiwan. In addition
to the upfront and possible regulatory milestone payments totaling $123 million, the Company will be eligible for future milestone payments based on
the achievement of certain levels of net sales.
The Company will recognize the
payments, if any, as revenue in accordance with its revenue recognition policies. As of December 31, 2012, the Company has not recognized any revenue
from these sales milestone payments, and there can be no assurance that it will do so in the future. Revenue for this agreement is recognized using the
contingency-adjusted performance model with an estimated development period through April 2016.
LIQUIDITY AND CAPITAL RESOURCES
|
|
|
|
December 31,
|
|
% increase (decrease)
|
|
|
|
|
|
2012
|
|
2011
|
|
2010
|
|
2011 to 2012
|
2010 to 2011
|
|
|
|
|
|
(in millions) |
|
|
|
|
|
Cash, cash equivalents and marketable securities short-term |
|
|
|
$ |
79.3 |
|
|
$ |
68.2 |
|
|
$ |
80.7 |
|
|
|
16 |
% |
|
|
Marketable securities long-term |
|
|
|
|
51.3 |
|
|
|
40.5 |
|
|
|
2.2 |
|
|
|
27 |
% |
|
|
|
|
|
|
|
1.7 |
|
|
|
1.7 |
|
|
|
1.7 |
|
|
|
|
|
|
|
|
|
|
|
|
53.0 |
|
|
|
23.3 |
|
|
|
34.9 |
|
|
|
128 |
% |
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
2012
|
|
2011
|
|
2010
|
|
|
|
|
|
|
|
|
(in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(34.2 |
) |
|
$ |
(23.7 |
) |
|
$ |
(34.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
(20.5 |
) |
|
|
(36.9 |
) |
|
|
62.3 |
|
|
|
|
|
|
|
|
|
|
|
|
57.9 |
|
|
|
51.2 |
|
|
|
(43.6 |
) |
|
|
|
|
|
|
Cash flow from operating
activities. Our uses of cash for operating activities have primarily consisted of salaries and wages for our employees, facility and
facility-related costs for our offices and laboratories, fees paid in connection with preclinical and clinical studies, laboratory supplies and
materials, and professional fees. The sources of our cash flow from operating activities have consisted primarily of payments received from our
collaborators for services performed or upfront payments for future services. For the year ended
45
December 31, 2012, our net use of
cash of $34.2 million was primarily driven by the difference between cash receipts from our collaborators and payments for operating
expenses.
Cash flow from investing
activities. Our net cash used by investing activities of $20.5 million in 2012 was primarily comprised of net purchases of marketable securities.
The composition and mix of cash, cash equivalents and marketable securities may change frequently as a result of the Companys constant evaluation
of conditions in financial markets, the maturity of specific investments, and our near term liquidity needs.
Our cash equivalents and marketable
securities typically include U.S. Treasury bill funds, money market funds, commercial paper, and U.S. federal and state agency backed certificates,
including auction rate securities that have investment grade ratings. Our cash equivalents and our portfolio of marketable securities are subject to
market risk due to changes in interest rates. Fixed rate interest securities may have their market value adversely impacted due to a rise in interest
rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, our future investment
income may fall short of expectation due to changes in interest rates or we may suffer losses in principal if we are forced to sell securities that
decline in market value due to changes in interest rates. ArQules marketable securities portfolio includes $2.1 million (at cost) at December 31,
2012 and 2011, invested in auction rate securities.
Beginning in the first quarter of 2008
and throughout 2012, certain auction rate securities failed at auction due to sell orders exceeding buy orders. On November 3, 2008, the Company
received a put option from UBS AG to repurchase auction rate securities owned by the Company at par value at any time during the period from June 30,
2010 through July 2, 2012 (the Put Option). The Company accounted for the Put Option as a freestanding financial instrument and elected to
record the value under the fair value option for financial assets and financial liabilities.
On June 30, 2010, the company exercised
the Put Option and in July 2010, UBS AG redeemed at par value all $22.9 million of the Companys auction rate securities held by UBS AG that were
outstanding at June 30, 2010. Throughout 2010 UBS AG redeemed at par value a total of $56.9 million of the Companys auction rate securities held
by UBS AG, including those redeemed from the exercise of the Put Option. The Company used a portion of the $56.9 million of 2010 redemptions to retire
the $44.4 million notes payable to UBS AG that had been outstanding at December 31, 2009. The credit line at UBS AG was cancelled in July
2010.
Cash flow from financing
activities. Our net cash provided by financing activities of $57.9 million in the year ended December 31, 2012 consisted of $56.3 million from the
net proceeds of our April 2012 stock offering and additional cash inflow of $1.6 million from the exercise of stock options and employee stock plan
purchases.
Our net cash provided by financing
activities of $51.2 million in the year ended December 31, 2011 consisted of $46.8 million from the net proceeds of our January 2011 stock offering and
additional cash inflow of $4.5 million from the exercise of stock options and employee stock plan purchases.
Our net cash used by financing
activities of $43.6 million in the year ended December 31, 2010 was from the $44.4 million payment on our notes payable, partially offset by additional
cash inflow of $0.8 million from stock option exercises and employee stock plan purchases.
Our cash requirements may vary
materially from those now planned depending upon the results of our drug discovery and development strategies, our ability to enter into additional
corporate collaborations and the terms of such collaborations, results of research and development, unanticipated required capital expenditures,
competitive and technological advances, acquisitions and other factors. We cannot guarantee that we will be able to develop any of our drug candidates
into a commercial product. 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 due to global capital and credit market
conditions or for other reasons, we may be unable to raise capital when needed, or on terms favorable to us. If necessary funds are not available, we
may have to delay, reduce the scope of, or eliminate some of our development programs, potentially delaying the time to market for any of our product
candidates.
In April 2012, we received net proceeds
of $56.3 million from our 8,222,500 share stock offering. In light of this cash inflow, cash, cash equivalents and marketable securities on hand at
December 31, 2012 and
46
our collaboration agreements, we
expect that our available cash and cash equivalents will be sufficient to finance our working capital and capital requirements well into
2015.
Our contractual obligations were
comprised of the following as of December 31, 2012 (in thousands):
|
|
|
|
Payment due by period
|
|
Contractual Obligations
|
|
|
|
Total
|
|
Less than 1 year
|
|
13 years
|
|
35 years
|
|
More than 5 years
|
|
|
|
|
$ |
1,700 |
|
|
$ |
1,700 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Operating lease obligations |
|
|
|
|
7,327 |
|
|
|
3,073 |
|
|
|
4,254 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,893 |
|
|
|
5,893 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
14,920 |
|
|
$ |
10,666 |
|
|
$ |
4,254 |
|
|
$ |
|
|
|
$ |
|
|
Purchase obligations are comprised
primarily of outsourced preclinical and clinical trial expenses and payments to license certain intellectual property to support the Companys
research efforts. Interest on notes payable is variable and is excluded from the table above. Notes payable currently bears interest at LIBOR plus 125
basis points. Under our tivantinib collaboration with Daiichi Sankyo, our share of Phase 3 costs are payable solely from future milestones and
royalties. As of December 31, 2012 our portion of these costs was $38.8 million and is excluded from the table above. These costs are netted against
any future milestones and royalties due to us. Daiichi Sankyo has the right to offset future milestone and royalty payments by this
amount.
CRITICAL ACCOUNTING POLICIES AND
ESTIMATES
A critical accounting
policy is one which is both important to the portrayal of the Companys financial condition and results and requires managements most
difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.
Management believes the following are critical accounting policies. For additional information, please see the discussion of our significant accounting
policies in Note 2 to the Financial Statements included in Item 8 of this Form 10-K.
Research and Development Revenue
Research and development revenue is
generated primarily through collaborative research and development agreements. The terms of the agreements may include nonrefundable upfront payments,
funding for research and development, milestone payments and royalties on any product sales derived from collaborations.
The Company adopted the FASB issued ASU
No. 2010-17, Revenue RecognitionMilestone Method on a prospective basis on January 1, 2011. The decision to use the milestone method of
revenue recognition is a policy election. The milestone method may impact any new collaboration agreements or material modifications to existing
agreements, in the event we elect the policy of utilizing the milestone method to recognize substantive milestones.
Research and development payments
associated with our collaboration agreements in effect prior to January 1, 2011 are recognized as research and development revenue using the
contingency adjusted performance model. Under this model, when payments are earned, revenue is immediately recognized on a pro-rata basis in the period
we achieve the milestone based on the time elapsed from inception of the agreement to the time the milestone is earned over the estimated duration of
the development period under the agreement. Thereafter, the remaining portion of the milestone payment is recognized on a straight-line basis over the
remaining estimated development period under the agreement. This estimated development period may ultimately be shorter or longer depending upon the
outcome of the development work, resulting in accelerated or deferred recognition of the development revenue. Royalty payments will be recognized as
revenue when earned. The costs associated with satisfying research and development contracts are included in research and development expense as
incurred.
For our tivantinib collaboration with
Daiichi Sankyo, we compare the collaboration costs we incur with those of Daiichi Sankyo each quarter. If our costs for the quarter exceed Daiichi
Sankyos we recognize
47
revenue on the amounts due to us
under the contingency adjusted performance model. Revenue is calculated on a pro-rata basis using the time elapsed from inception of the agreement over
the estimated duration of the development period under the agreement. If our costs for the quarter are less than those of Daiichi Sankyos, we
report the amount due to Daiichi Sankyo as contra-revenue in that quarter. Amounts recognized as contra-revenue are netted against our tivantinib
Daiichi Sankyo research and development revenue. To the extent that our share of Phase 3 collaboration costs exceeds the amount of milestones and
royalties received, that excess is netted against future milestones and royalties if and when earned and is not reported as
contra-revenue.
On November 10, 2011, we and Daiichi
Sankyo announced the execution of a license agreement for the development of a new AKT inhibitor, ARQ 092. The license agreement provides exclusive
rights to Daiichi Sankyo for the development, manufacturing and marketing of ARQ 092 on a worldwide basis. Revenue for this agreement is recognized
using Financial Accounting Standards Board (FASB) Accounting Standards Update No. 2009-13, Multiple-Deliverable Revenue Arrangements
(ASU 2009-13). Under ASU 2009-13 all undelivered items under an agreement are divided into separate units of accounting based on whether
the deliverable provides stand-alone value to the licensee. The Company determines the best estimate selling price (BESP) for each unit of accounting
based upon managements judgment and including factors such as discounted cash flows, estimated direct expenses and other costs and probability of
successful outcome of clinical trials.
Stock-Based Compensation
Our stock-based compensation cost is
measured at the grant date, based on the calculated fair value of the award, and is recognized as an expense over the employees requisite service
period (generally the vesting period of the equity grant). We estimate the fair value of stock options using the Black-Scholes valuation model. Key
input assumptions used to estimate the fair value of stock options include the exercise price of the award, expected option term, expected volatility
of our stock over the options expected term, risk-free interest rate over the options expected term, and the expected annual dividend
yield. We believe that the valuation technique and approach utilized to develop the underlying assumptions are appropriate in calculating the fair
values of our stock option grants.
Cash Equivalents and Marketable
Securities
We consider all highly liquid
investments purchased within three months of original maturity date to be cash equivalents. We invest our available cash primarily in U.S. Treasury
bill funds, money market funds, commercial paper, and U.S. federal and state agency backed certificates, including auction rate securities that have
investment grade ratings. Auction rate securities are structured with short-term interest reset dates of generally less than 90 days, but with
contractual maturities that can be well in excess of ten years. At the end of each reset period, which occurs every seven to twenty-eight days,
investors can sell or continue to hold the securities at par value. Our auction rate securities are classified as trading securities. We generally
classify our marketable securities as available-for-sale at the time of purchase and re-evaluate such designation as of each balance sheet date. The
Company classifies its investments as either current or long-term based upon the investments contractual maturities and the Companys
ability and intent to convert such instruments to cash within one year. We report available-for-sale investments at fair value as of each balance sheet
date and include any unrealized gains and, to the extent deemed temporary, unrealized losses in stockholders equity. Realized gains and losses
are determined using the specific identification method and are included in other income in the statement of operations and comprehensive loss. Certain
of our marketable securities are classified as trading securities and any changes in the fair value of those securities are recorded as other income in
the statement of operations and comprehensive loss.
We conduct quarterly reviews to
determine the fair value of our investment portfolio and to identify and evaluate each investment that has an unrealized loss, in accordance with the
meaning of other-than-temporary impairment and its application to certain investments. An unrealized loss exists when the current fair value of an
individual security is less than its amortized cost basis. In the event that the cost basis of a security exceeds its fair value, we evaluate, among
other factors, the duration of the period that, and extent to which, the fair value is less than cost basis, the financial health of and business
outlook for the issuer, including industry and sector performance, and operational and financing cash flow factors, overall market conditions and
trends, our intent to sell the investment and if it is more likely than not that we would be required to sell
48
the investment before its
anticipated recovery. Unrealized losses on available-for-sale securities that are determined to be temporary, and not related to credit loss, are
recorded in accumulated other comprehensive income loss.
For available-for-sale debt securities
with unrealized losses, we perform an analysis to assess whether we intend to sell or whether we would more likely than not be required to sell the
security before the expected recovery of the amortized cost basis. Where we intend to sell a security, or may be required to do so, the securitys
decline in fair value is deemed to be other-than-temporary and the full amount of the unrealized loss is reflected in the statement of operations and
comprehensive loss as an impairment loss.
Regardless of our intent to sell a
security, we perform additional analysis on all securities with unrealized losses to evaluate losses associated with the creditworthiness of the
security. Credit losses are identified where we do not expect to receive cash flows sufficient to recover the amortized cost basis of a
security.
RESULTS OF OPERATIONS
The following are the results of
operations for the years ended December 31, 2012, 2011 and 2010:
Revenue
|
|
|
|
|
|
% increase (decrease)
|
|
|
|
|
|
2012
|
|
2011
|
|
2010
|
|
2011 to 2012
|
2010 to 2011
|
|
|
|
|
|
(in millions) |
|
|
|
|
|
Research and development revenue |
|
|
|
$ |
36.4 |
|
|
$ |
47.3 |
|
|
$ |
29.2 |
|
|
|
(23 |
)% |
|
|
2012 as compared to 2011:
Research and development revenue in 2012 was comprised of revenue from the Daiichi Sankyo development and research collaboration agreements entered
into in 2008, the November 2011 license agreement with Daiichi Sankyo for the development of ARQ 092, and the 2007 Kyowa Hakko Kirin exclusive license
agreement.
Under the terms of our tivantinib
collaboration agreement with Daiichi Sankyo we share development costs equally with our share of Phase 3 costs funded solely from milestones and
royalties. In each quarter the tivantinib collaboration costs that we incur are compared with those of Daiichi Sankyo. If our costs for the quarter
exceed Daiichi Sankyos, we recognize revenue on the amounts due to us under the contingency adjusted performance model. Revenue is calculated on
a pro-rata basis using the time elapsed from inception of the agreement over the estimated duration of the development period under the agreement. If
our costs for the quarter are less than those of Daiichi Sankyos, we report the amount due to Daiichi Sankyo as contra-revenue in that quarter.
To the extent that our share of Phase 3 collaboration costs exceeds the amount of milestones and royalties received, that excess is netted against
future milestones and royalties if and when earned and is not reported as contra-revenue.
Our cumulative share of the Daiichi
Sankyo Phase 3 costs inception to date through December 31, 2012, totaled $63.8 million and we received milestones of $25.0 million during that period.
Our cumulative share of Phase 3 collaboration costs has exceeded the amount of milestones received through December 31, 2012 by $38.8 million which
will be netted against future milestones and royalties, if any, when earned and has not been reported as contra-revenue. On January 31, 2013, we
announced that the first patient had been enrolled in the pivotal Phase 3 METIV trial of tivantinib, entitling us to a $15 million milestone. We will
not receive any net cash proceeds from this milestone as it will be netted against our cumulative share of Phase 3 collaboration costs in excess of
milestones received of $38.8 million at December 31, 2012.
In 2012, our tivantinib collaboration
costs incurred were less than those of Daiichi Sankyos by $1.4 million which was recognized as contra-revenue and netted against our tivantinib
Daiichi Sankyo research and development revenue. Our non-refundable share of advance drug purchases is recognized as contra-revenue as the related
drugs are administered to patients. For the year ended December 31, 2012 $2.5 million of these drug purchases was also recognized as contra-revenue.
There were no advance drug purchases in the year ended December 31, 2012.
The $10.9 million revenue decrease in
2012 was principally due to a $10.0 million decrease in revenue recognized from Daiichi Sankyo ARQ 092 milestone we received in 2011, a $4.4 million
decrease in revenue recognized from the license agreement with Kyowa Hakko Kirin, a $10.2 million decrease in revenue
49
recognized on the milestone we
received from the Daiichi Sankyo tivantinib program in 2011, a $2.2 million revenue decrease from our Daiichi Sankyo AKIPTM agreement, and a $2.6 million decrease in revenue resulting from the extension of the development period of our
Daiichi Sankyo tivantinib agreement. These revenue decreases were partially offset by a $2.8 million increase from our Daiichi Sankyo ARQ 092 agreement
and lower contra-revenue of $15.7 million associated with our Daiichi Sankyo tivantinib program.
2011 as compared to 2010:
Research and development revenue in 2011 was comprised of revenue from the Daiichi Sankyo development and research collaboration agreements entered
into in 2008, the November 2011 license agreement with Daiichi Sankyo for the development of ARQ 092, and the 2007 Kyowa Hakko Kirin exclusive license
agreement.
In 2011, our tivantinib collaboration
costs incurred were less than those of Daiichi Sankyos by $16.6 million which was recognized as contra-revenue and netted against our tivantinib
Daiichi Sankyo research and development revenue. Our non-refundable share of advance drug purchases in 2011 was $5.4 million. These costs are
recognized as contra-revenue as the related drugs are administered to patients. For the year ended December 31, 2011 $2.9 million of these drug
purchases was also recognized as contra-revenue.
Our cumulative share of the Daiichi
Sankyo Phase 3 costs inception to date through December 31, 2011, totaled $35.6 million and we received milestones of $25.0 million during that period.
Our cumulative share of Phase 3 collaboration costs has exceeded the amount of milestones received through December 31, 2011 by $10.6 million which
will be netted against future milestones and royalties when earned and has not been reported as contra-revenue.
Prepaid expenses and other current
assets at December 31, 2011 included $2.5 million of prepaid Phase 3 drug purchases which was recognized as contra-revenue in 2012 as the drugs were
administered to patients in the Phase 3 trial.
In 2010, our tivantinib collaboration
costs incurred were less than those of Daiichi Sankyos by $3.3 million which was recognized as contra-revenue and netted against our tivantinib
Daiichi Sankyo research and development revenue. There were no advance drug purchases in the year ended December 31, 2010.
The increase in revenues in 2011 was
due to an increase in revenues of $4.0 million from our license agreement with Kyowa Hakko Kirin, $5.1 million from our Daiichi Sankyo AKIPTM program and $10.0 million from our November 2011 license agreement with Daiichi Sankyo for
the development of ARQ 092. Offsetting these increases was a net decrease of $1.0 million in revenue from our Daiichi Sankyo tivantinib program.
Although revenue for that program increased by $15.2 million in 2011, the amount of contra-revenue increased by $16.2 million as our share of
development costs associated with the MARQUEE trial increased.
Research and development
|
|
|
|
|
|
% increase (decrease)
|
|
|
|
|
|
2012
|
|
2011
|
|
2010
|
|
2011 to 2012
|
2010 to 2011
|
|
|
|
|
|
(in millions) |
|
|
|
|
|
|
|
$ |
34.0 |
|
|
$ |
45.0 |
|
|
$ |
47.0 |
|
|
|
(25 |
)% |
|
|
2012 as compared to 2011: The
$11.0 million decrease in research and development expense in 2012 was primarily due to an $8.7 million decrease in outsourced clinical and product
development costs related to our phase 1 and 2 programs for tivantinib and pipeline programs. Other cost decreases include $1.0 million labor related
costs from reduced headcount, $0.4 million for lab expenses, and $0.3 million for professional fees. At December 31, 2012, we had 72 employees
dedicated to our research and development program, down from 75 employees at December 31, 2011.
2011 as compared to 2010: The
$2.0 million decrease in research and development expense in 2011 was primarily due to a $1.8 million decrease in outsourced clinical and product
development costs related to our phase 1 and 2 programs for tivantinib. At December 31, 2011, we had 75 employees dedicated to our research and
development program, down from 86 employees at December 31, 2010.
Overview
Our research and development expense
consists primarily of salaries and related expenses for personnel, costs of contract manufacturing services, costs of facilities and equipment, fees
paid to professional service providers in conjunction with our clinical trials, fees paid to research organizations in conjunction
with
50
pre-clinical animal studies, costs
of materials used in research and development, consulting, license, and sponsored research fees paid to third parties and depreciation of associated
laboratory equipment. We expect our research and development expense to increase as we continue to develop our portfolio of oncology
programs.
We have not accumulated and tracked our
internal historical research and development costs or our personnel and personnel-related costs on a program-by-program basis. Our employee and
infrastructure resources are allocated across several projects, and many of our costs are directed to broadly applicable research endeavors. As a
result, we cannot state the costs incurred for each of our oncology programs on a program-by-program basis.
The expenses incurred by us to third
parties for pre-clinical and clinical trials in the current year and since inception of our lead clinical stage program were as follows (in
millions):
Oncology program
|
|
|
|
Current status
|
|
Year Ended December 31, 2012
|
|
Program-to-date
|
|
|
|
|
|
|
$ |
4.2 |
|
|
$ |
79.2 |
|
Our future research and development
expenses in support of our current and future oncology programs will be subject to numerous uncertainties in timing and cost to completion. We test
potential products in numerous pre-clinical studies for safety, toxicology, and efficacy. We may conduct multiple clinical trials for each product. As
we obtain results from trials, we may elect to discontinue or delay clinical trials for certain products in order to focus our resources on more
promising products. Completion of clinical trials may take several years or more, and the length of time generally varies substantially according to
the type, complexity, novelty, and intended use of a product. It is not unusual for the pre-clinical and clinical development of each of these types of
products to take nine years or more, and for total development costs to exceed $500 million for each product.
We estimate that clinical trials of the
type generally needed to secure new drug approval are typically completed over the following timelines:
Clinical Phase
|
|
|
|
Estimated Completion Period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The duration and the cost of clinical
trials may vary significantly over the life of a project as a result of differences arising during clinical development, including, among others, the
following:
|
|
the number of clinical sites included in the trials; |
|
|
the length of time required to enroll suitable
patients; |
|
|
the number of patients that ultimately participate in the
trials; |
|
|
the duration of patient follow-up to ensure the absence of
long-term product-related adverse events; and |
|
|
the efficacy and safety profile of the product. |
An element of our business strategy is
to pursue the research and development of a broad pipeline of products. This is intended to allow us to diversify the risks associated with our
research and development expenditures. As a result, we believe our future capital requirements and future financial success do not substantially depend
on any one product. To the extent we are unable to build and maintain a broad pipeline of products, our dependence on the success of one or a few
products increases.
Our strategy includes entering into
alliance arrangements with third parties to participate in the development and commercialization of our products, such as our collaboration agreements
with Daiichi Sankyo and Kyowa Hakko Kirin. In the event that third parties have control over the clinical trial process for a product, the estimated
completion date would be under control of that third party rather than under our control. We cannot forecast with any degree of certainty whether our
products will be subject to future collaborative arrangements or how such arrangements would affect our development plans or capital
requirements.
51
As a result of the uncertainties
discussed above, we make significant estimates in determining the duration and completion costs of our oncology programs or when and to what extent we
will receive cash inflows from the commercialization and sale of a product. Our inability to complete our oncology programs in a timely manner or our
failure to enter into appropriate collaborative agreements could significantly increase our capital requirements and could adversely impact our
liquidity. These uncertainties could force us to seek additional, external sources of financing from time-to-time in order to continue with our product
development strategy. Our inability to raise additional capital, or to do so on terms reasonably acceptable to us, would jeopardize the future success
of our business.
General and administrative
|
|
|
|
|
|
% increase (decrease)
|
|
|
|
|
|
2012
|
|
2011
|
|
2010
|
|
2011 to 2012
|
2010 to 2011
|
|
|
|
|
|
(in millions) |
|
|
|
General and administrative |
|
|
|
$ |
13.9 |
|
|
$ |
13.4 |
|
|
$ |
13.5 |
|
|
|
4 |
% |
|
|
2012 compared to 2011: General
and administrative expense in 2012 increased primarily due to higher stock-based compensation expense. General and administrative headcount was 25 at
December 31, 2012 and 26 at December 31, 2011.
2011 compared to 2010: General
and administrative expense in 2011 decreased slightly from 2010. General and administrative headcount was 26 at December 31, 2011 and 29 at December
31, 2010.
Interest income, interest expense and other
income
|
|
|
|
|
|
% increase (decrease)
|
|
|
|
|
|
2012
|
|
2011
|
|
2010
|
|
2011 to 2012
|
2010 to 2011
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
|
|
$ |
445 |
|
|
$ |
317 |
|
|
$ |
619 |
|
|
|
40 |
% |
|
|
|
|
|
|
|
(26 |
) |
|
|
(25 |
) |
|
|
(274 |
) |
|
|
4 |
% |
|
|
|
|
|
|
|
113 |
|
|
|
20 |
|
|
|
266 |
|
|
|
465 |
% |
|
|
Interest income is comprised of
interest income derived from our portfolio of cash, cash equivalents and investments. Interest income increased in 2012 due primarily to the increase
in our investment portfolio from our April 2012 stock offering. Interest income decreased in 2011 primarily due to lower interest rates earned on our
portfolio. Interest expense was incurred on our notes payable and decreased in 2011 due to a $44.4 million payment in 2010 of our notes
payable.
Other income in 2012 includes a $113
thousand gain from the increase in fair value of our auction rate securities. Other income in 2011 includes a $20 thousand gain from the increase in
fair value of our auction rate securities. Other income in 2010 includes a $4.4 million gain from the increase in fair value of our auction rate
securities and a $5.1 million loss from the decrease in fair value of our Put Option upon exercise. Other income in 2010 also includes $1.0 million of
cash grants for qualifying therapeutic discovery projects that were awarded under the Patient Protection and Affordable Care Act of
2010.
Provision for income taxes
There was no current or deferred tax
expense for the years ended December 31, 2012 and 2011. The Company recorded a $0.6 million federal income tax benefit in 2010 attributable to an
election it made in the second quarter of 2010 under legislation that allowed net operating losses to offset 100% of alternative minimum tax
(AMT). Prior to this legislation, only 90% of AMT could be offset by net operating losses and accordingly in 2009 the Company recorded a
$0.6 million federal income tax expense for AMT. The Company received a refund in 2010 of the $0.6 million AMT paid in 2009.
The American Taxpayer Relief Act of
2012 (ATR Act) was enacted on January 2, 2013 which, among other things, provides a retroactive two-year extension of the U.S. research and
development tax credits that had previously expired on December 31, 2011. We have not recorded the benefit of these credits for the 2012 year. We will
record the benefit from these credits in the first quarter of calendar year 2013 as a result of the enactment of the ATR Act. We expect to record a
benefit related to 2012 Research Credit of approximately $1,231, and a full valuation allowance, resulting in a net benefit of $0.
52
RECENT ACCOUNTING PRONOUNCEMENTS
From time to time, new accounting
pronouncements are issued by the Financial Accounting Standards Board (FASB) or other standard setting bodies that are adopted by the
Company as of the specified effective date. Unless otherwise discussed, we believe that the impact of recently issued standards that are not yet
effective will not have a material impact on our financial position or results of operations upon adoption.
In May 2011, the FASB issued ASU No.
2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and
IFRSs. This newly issued accounting standard clarifies the application of certain existing fair value measurement guidance and expands the
disclosures for fair value measurements that are estimated using significant unobservable (Level 3) inputs. This ASU is effective on a prospective
basis for annual and interim reporting periods beginning on or after December 15, 2011. We adopted this standard on January 1, 2012 and it did not have
a material impact on our financial position or results of operations
In June 2011, the FASB issued ASU No.
2011-05, Comprehensive Income (Topic 220). This newly issued accounting standard (1) eliminates the option to present the components
of other comprehensive income as part of the statement of changes in stockholders equity; (2) requires the consecutive presentation of the
statement of net income and other comprehensive income; and (3) requires an entity to present reclassification adjustments on the face of the financial
statements from other comprehensive income to net income. The amendments in this ASU do not change the items that must be reported in other
comprehensive income or when an item of other comprehensive income must be reclassified to net income nor do the amendments affect how earnings per
share is calculated or presented. This ASU is required to be applied retrospectively and is effective for fiscal years and interim periods within those
years beginning after December 15, 2011. As this accounting standard only requires enhanced disclosure, the adoption of this standard on January 1,
2012 did not impact our financial position or results of operations.
In February 2013, the Financial
Accounting Standards Board (FASB) issued an amendment to the accounting guidance on reporting amounts reclassified out of accumulated other
comprehensive income. The guidance requires an entity to report the effect of significant reclassifications out of accumulated other comprehensive
income on the respective line items in net income if the amount being reclassed is required under United States Generally Accepted Accounting
Principles (GAAP) to be reclassified in its entirety to net income. For other amounts that are not required under United States GAAP to be
reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under United States GAAP that
provide additional detail about those amounts. The guidance is effective prospectively for reporting periods beginning after December 15, 2012. The
Company does not expect the adoption of this guidance will have a material impact on its financial statements.
ITEM 7A. |
|
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK |
We own financial instruments that are
sensitive to market risk as part of our investment portfolio. We have implemented policies regarding the amount and credit ratings of investments. Our
investment portfolio is used to preserve our capital until it is used to fund operations, including our research and development activities. Our
investments are evaluated quarterly to determine the fair value of the portfolio.
Our cash and marketable securities
typically include U.S. Treasury bill funds, money market funds, commercial paper and U.S. federal and state agency backed certificates, including
auction rate securities that have strong credit ratings.
Our cash equivalents and our portfolio
of marketable securities are subject to market risk due to changes in interest rates. Fixed rate interest securities may have their market value
adversely impacted due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in
part to these factors, our future investment income may fall short of expectation due to changes in interest rates or we may suffer losses in principal
if we are forced to sell securities that decline in market value due to changes in interest rates.
Auction rate securities are structured
with short-term interest reset dates of generally less than 90 days, but with contractual maturities that can be well in excess of ten years. At the
end of each reset period, which occurs every seven to twenty-eight days, investors can sell or continue to hold the securities at par value.
If
53
auction rate securities fail an
auction, due to sell orders exceeding buy orders, the funds associated with a failed auction would not be accessible until a successful auction
occurred, a buyer was found outside the auction process, the underlying securities matured or a settlement with the underwriter is reached. Beginning
in the first quarter of 2008 and throughout 2012, certain auction rate securities failed at auction due to sell orders exceeding buy orders. At
December 31, 2012 we held $1.8 million of auction rate securities at fair value.
54
ITEM 8. |
|
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
INDEX TO FINANCIAL STATEMENTS
|
|
|
|
Page
|
Report of Independent Registered Public Accounting Firm |
|
|
|
|
56 |
|
Balance Sheets at December 31, 2012 and 2011 |
|
|
|
|
57 |
|
Statements of Operations and Comprehensive Loss for the years ended December 31, 2012, 2011 and 2010 |
|
|
|
|
58 |
|
Statements of Stockholders Equity (Deficit) for the years ended December 31, 2012, 2011 and 2010 |
|
|
|
|
59 |
|
Statements of Cash Flows for the years ended December 31, 2012, 2011 and 2010 |
|
|
|
|
60 |
|
Notes to Financial Statements |
|
|
|
|
61 |
|
55
Report of Independent Registered Public Accounting
Firm
To the Board of Directors and Stockholders of ArQule,
Inc.,
In our opinion, the accompanying
balance sheets and the related statements of operations and comprehensive loss, of stockholders equity (deficit), and of cash flows present
fairly, in all material respects, the financial position of ArQule, Inc. at December 31, 2012 and 2011, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 2012 in conformity with accounting principles generally accepted in the United
States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2012, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The Companys management is responsible for these financial statements, for maintaining effective
internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in
Managements Report on Internal Control Over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on these
financial statements and on the Companys internal control over financial reporting based on our integrated audits. We conducted our audits in
accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the
audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control
over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an
understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design
and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered
necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A companys internal control over
financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles. A companys internal control over
financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures
of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the companys assets that could have a material
effect on the financial statements.
Because of its inherent limitations,
internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
March 14, 2013
56
ARQULE, INC.
|
|
|
|
December 31,
|
|
|
|
|
|
2012
|
|
2011
|
|
|
|
|
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE
DATA) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
|
|
$ |
14,327 |
|
|
$ |
11,095 |
|
Marketable securities-short term |
|
|
|
|
64,944 |
|
|
|
57,073 |
|
Prepaid expenses and other current assets |
|
|
|
|
344 |
|
|
|
4,020 |
|
|
|
|
|
|
79,615 |
|
|
|
72,188 |
|
Marketable securities-long term |
|
|
|
|
51,328 |
|
|
|
40,475 |
|
Property and equipment, net |
|
|
|
|
1,992 |
|
|
|
2,939 |
|
|
|
|
|
|
1,258 |
|
|
|
1,449 |
|
|
|
|
|
$ |
134,193 |
|
|
$ |
117,051 |
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses |
|
|
|
$ |
10,163 |
|
|
$ |
11,932 |
|
|
|
|
|
|
1,700 |
|
|
|
1,700 |
|
Current portion of deferred revenue |
|
|
|
|
14,232 |
|
|
|
34,705 |
|
Current portion of deferred gain on sale leaseback |
|
|
|
|
552 |
|
|
|
552 |
|
Total current liabilities |
|
|
|
|
26,647 |
|
|
|
48,889 |
|
Deferred revenue, net of current portion |
|
|
|
|
25,733 |
|
|
|
37,097 |
|
Deferred gain on sale leaseback, net of current portion |
|
|
|
|
784 |
|
|
|
1,336 |
|
|
|
|
|
|
53,164 |
|
|
|
87,322 |
|
Commitments and contingencies (Note 12)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock, $0.01 par value; 1,000,000 shares authorized; no shares issued or outstanding |
|
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par value; 100,000,000 shares authorized; 62,399,827 and 53,825,567 shares issued and outstanding at December 31,
2012 and 2011, respectively |
|
|
|
|
624 |
|
|
|
538 |
|
Additional paid-in capital |
|
|
|
|
500,655 |
|
|
|
438,677 |
|
Accumulated other comprehensive income (loss) |
|
|
|
|
102 |
|
|
|
(6 |
) |
|
|
|
|
|
(420,352 |
) |
|
|
(409,480 |
) |
Total stockholders equity |
|
|
|
|
81,029 |
|
|
|
29,729 |
|
Total liabilities and stockholders equity |
|
|
|
$ |
134,193 |
|
|
$ |
117,051 |
|
The accompanying notes are an integral part of these
financial statements.
57
ARQULE, INC.
STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
|
|
|
|
YEAR ENDED DECEMBER 31,
|
|
|
|
|
|
2012
|
|
2011
|
|
2010
|
|
|
|
|
(IN THOUSANDS, EXCEPT PER SHARE DATA) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development revenue |
|
|
|
$ |
36,414 |
|
|
$ |
47,310 |
|
|
$ |
29,221 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33,966 |
|
|
|
45,011 |
|
|
|
47,034 |
|
General and administrative |
|
|
|
|
13,852 |
|
|
|
13,373 |
|
|
|
13,477 |
|
|
|
|
|
|
47,818 |
|
|
|
58,384 |
|
|
|
60,511 |
|
|
|
|
|
|
(11,404 |
) |
|
|
(11,074 |
) |
|
|
(31,290 |
) |
|
|
|
|
|
445 |
|
|
|
317 |
|
|
|
619 |
|
|
|
|
|
|
(26 |
) |
|
|
(25 |
) |
|
|
(274 |
) |
|
|
|
|
|
113 |
|
|
|
20 |
|
|
|
266 |
|
|
|
|
|
|
(10,872 |
) |
|
|
(10,762 |
) |
|
|
(30,679 |
) |
Benefit from income taxes |
|
|
|
|
|
|
|
|
|
|
|
|
550 |
|
|
|
|
|
|
(10,872 |
) |
|
|
(10,762 |
) |
|
|
(30,129 |
) |
Unrealized gain (loss) on marketable securities |
|
|
|
|
108 |
|
|
|
1 |
|
|
|
(62 |
) |
|
|
|
|
$ |
(10,764 |
) |
|
$ |
(10,761 |
) |
|
$ |
(30,191 |
) |
Basic and diluted net loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(0.18 |
) |
|
$ |
(0.20 |
) |
|
$ |
(0.68 |
) |
Weighted average basic and diluted common shares outstanding |
|
|
|
|
59,821 |
|
|
|
52,778 |
|
|
|
44,529 |
|
The accompanying notes are an integral part of these
financial statements.
58
ARQULE, INC.
STATEMENTS OF STOCKHOLDERS EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE DATA)
|
|
|
|
COMMON STOCK
|
|
|
|
|
|
SHARES
|
|
PAR VALUE
|
|
ADDITIONAL PAID-IN CAPITAL
|
|
ACCUMULATED OTHER COMPREHENSIVE
INCOME/(LOSS)
|
|
ACCUMULATED DEFICIT
|
|
STOCK- HOLDERS EQUITY (DEFICIT)
|
Balance at December 31, 2009 |
|
|
|
|
44,772,945 |
|
|
$ |
448 |
|
|
$ |
379,621 |
|
|
$ |
55 |
|
|
$ |
(368,589 |
) |
|
$ |
11,535 |
|
Stock option exercises and issuance of stock |
|
|
|
|
43,621 |
|
|
|
1 |
|
|
|
283 |
|
|
|
|
|
|
|
|
|
|
|
284 |
|
Employee stock purchase plan |
|
|
|
|
156,769 |
|
|
|
1 |
|
|
|
550 |
|
|
|
|
|
|
|
|
|
|
|
551 |
|
Stock based compensation expense |
|
|
|
|
|
|
|
|
|
|
|
|
3,259 |
|
|
|
|
|
|
|
|
|
|
|
3,259 |
|
Change in unrealized gain (loss) on marketable securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(62 |
) |
|
|
|
|
|
|
(62 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(30,129 |
) |
|
|
(30,129 |
) |
Balance at December 31, 2010 |
|
|
|
|
44,973,335 |
|
|
|
450 |
|
|
|
383,713 |
|
|
|
(7 |
) |
|
|
(398,718 |
) |
|
|
(14,562 |
) |
Issuance of common stock from stock offering, net |
|
|
|
|
8,050,000 |
|
|
|
80 |
|
|
|
46,676 |
|
|
|
|
|
|
|
|
|
|
|
46,756 |
|
Stock option exercises and issuance of stock |
|
|
|
|
692,916 |
|
|
|
7 |
|
|
|
3,935 |
|
|
|
|
|
|
|
|
|
|
|
3,942 |
|
Employee stock purchase plan |
|
|
|
|
109,316 |
|
|
|
1 |
|
|
|
523 |
|
|
|
|
|
|
|
|
|
|
|
524 |
|
Stock based compensation expense |
|
|
|
|
|
|
|
|
|
|
|
|
3,830 |
|
|
|
|
|
|
|
|
|
|
|
3,830 |
|
Change in unrealized gain (loss) on marketable securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,762 |
) |
|
|
(10,762 |
) |
Balance at December 31, 2011 |
|
|
|
|
53,825,567 |
|
|
|
538 |
|
|
|
438,677 |
|
|
|
(6 |
) |
|
|
(409,480 |
) |
|
|
29,729 |
|
Issuance of common stock from stock offering, net |
|
|
|
|
8,222,500 |
|
|
|
82 |
|
|
|
56,174 |
|
|
|
|
|
|
|
|
|
|
|
56,256 |
|
Stock option exercises and issuance of stock |
|
|
|
|
254,893 |
|
|
|
3 |
|
|
|
1,347 |
|
|
|
|
|
|
|
|
|
|
|
1,350 |
|
Employee stock purchase plan |
|
|
|
|
96,867 |
|
|
|
1 |
|
|
|
322 |
|
|
|
|
|
|
|
|
|
|
|
323 |
|
Stock based compensation expense |
|
|
|
|
|
|
|
|
|
|
|
|
4,135 |
|
|
|
|
|
|
|
|
|
|
|
4,135 |
|
Change in unrealized gain (loss) on marketable securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
108 |
|
|
|
|
|
|
|
108 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,872 |
) |
|
|
(10,872 |
) |
Balance at December 31, 2012 |
|
|
|
|
62,399,827 |
|
|
$ |
624 |
|
|
$ |
500,655 |
|
|
$ |
102 |
|
|
$ |
(420,352 |
) |
|
$ |
81,029 |
|
The accompanying notes are an integral part of these
financial statements.
59
ARQULE, INC.
|
|
|
|
YEAR ENDED DECEMBER 31,
|
|
|
|
|
|
2012
|
|
2011
|
|
2010
|
|
|
|
|
(IN THOUSANDS) |
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(10,872 |
) |
|
$ |
(10,762 |
) |
|
$ |
(30,129 |
) |
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
|
|
1,064 |
|
|
|
1,172 |
|
|
|
1,425 |
|
Amortization of premium/discount on marketable securities |
|
|
|
|
1,873 |
|
|
|
1,117 |
|
|
|
1,130 |
|
Amortization of deferred gain on sale leaseback |
|
|
|
|
(552 |
) |
|
|
(552 |
) |
|
|
(552 |
) |
Non-cash stock compensation |
|
|
|
|
4,135 |
|
|
|
3,830 |
|
|
|
3,259 |
|
Loss on auction rate securities put option |
|
|
|
|
|
|
|
|
|
|
|
|
5,074 |
|
Gain on auction rate securities |
|
|
|
|
(113 |
) |
|
|
(20 |
) |
|
|
(4,362 |
) |
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid expenses and other current assets |
|
|
|
|
3,676 |
|
|
|
(2,901 |
) |
|
|
1,357 |
|
|
|
|
|
|
191 |
|
|
|
(68 |
) |
|
|
(53 |
) |
Accounts payable and accrued expenses |
|
|
|
|
(1,769 |
) |
|
|
(4,904 |
) |
|
|
4,476 |
|
|
|
|
|
|
(31,837 |
) |
|
|
(10,650 |
) |
|
|
(16,441 |
) |
Net cash used in operating activities |
|
|
|
|
(34,204 |
) |
|
|
(23,738 |
) |
|
|
(34,816 |
) |
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of marketable securities |
|
|
|
|
(121,498 |
) |
|
|
(185,969 |
) |
|
|
(91,484 |
) |
Proceeds from sale or maturity of marketable securities |
|
|
|
|
101,122 |
|
|
|
149,717 |
|
|
|
154,128 |
|
Purchases of property and equipment |
|
|
|
|
(117 |
) |
|
|
(594 |
) |
|
|
(357 |
) |
Net cash provided by (used in) investing activities |
|
|
|
|
(20,493 |
) |
|
|
(36,846 |
) |
|
|
62,287 |
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(44,400 |
) |
Proceeds from stock offering, net |
|
|
|
|
56,256 |
|
|
|
46,756 |
|
|
|
|
|
Proceeds from stock option exercises and employee stock plan purchases |
|
|
|
|
1,673 |
|
|
|
4,466 |
|
|
|
835 |
|
Net cash provided by (used in) financing activities |
|
|
|
|
57,929 |
|
|
|
51,222 |
|
|
|
(43,565 |
) |
Net increase (decrease) in cash and cash equivalents |
|
|
|
|
3,232 |
|
|
|
(9,362 |
) |
|
|
(16,094 |
) |
Cash and cash equivalents, beginning of period |
|
|
|
|
11,095 |
|
|
|
20,457 |
|
|
|
36,551 |
|
Cash and cash equivalents, end of period |
|
|
|
$ |
14,327 |
|
|
$ |
11,095 |
|
|
$ |
20,457 |
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION (IN
THOUSANDS):
The Company paid interest on debt of
$26, $25 and $274 in 2012, 2011 and 2010, respectively.
The Company paid no taxes in 2012 or
2011 and received a tax refund of $550 in 2010 of taxes paid in 2009.
The accompanying notes are an integral part of these
financial statements.
60
ARQULE, INC.
NOTES TO
FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1. ORGANIZATION AND NATURE OF OPERATIONS
We are a clinical-stage biotechnology
company organized as a Delaware corporation in 1993 engaged in the research and development of innovative cancer therapeutics. Our mission is to
produce novel drugs with differentiated mechanisms of action that will extend the lives of our patients. These drugs target biological pathways
implicated in a wide range of cancers. We employ technologies such as our ArQule Kinase Inhibitor Platform (AKIPTM) to design and develop drugs that have the potential to fulfill this mission.
Our lead product candidate is
tivantinib (ARQ 197), an orally administered, small molecule inhibitor of the c-Met receptor tyrosine kinase (c-MET) and its biological
pathway. C-MET is a promising target for cancer therapy, based on its multiple roles in cancerous cell proliferation, tumor spread, new blood vessel
formation and resistance to certain drug therapies. We and our partners, Daiichi Sankyo Co., Ltd. (Daiichi Sankyo) and Kyowa Hakko Kirin
Co., Ltd. (Kyowa Hakko Kirin), are implementing a clinical development program designed to realize the broad potential of tivantinib as a
single agent and in combination with other anti-cancer therapies in a number of disease indications. Our strategy is to focus on the most promising
indications within our clinical programs based upon continually generated and updated data. Our most advanced indication is liver cancer
(hepatocellular carcinoma or HCC). We are also completing earlier-stage combination therapy trials with tivantinib and other
anti-cancer agents that may provide data to support later-stage trials in additional indications.
On January 31, 2013, we announced that
the first patient had been enrolled in the pivotal Phase 3 METIV trial of tivantinib for patients diagnosed with HCC who have received one or two prior
systemic anti-cancer therapies. The METIV trial is a randomized, double-blind, controlled study of previously treated patients with MET-high inoperable
HCC who will receive tivantinib as a single agent or placebo. The primary endpoint of this trial is overall survival (OS), and the
secondary endpoint is progression-free survival (PFS). Approximately 300 patients are planned to be enrolled at approximately 120 clinical
sites worldwide. This trial is being conducted under a Special Protocol Assessment (SPA) agreement with the U.S. Food and Drug
Administration (FDA). The METIV trial builds upon the results of a randomized, double-blind, placebo controlled, Phase 2 trial in HCC
announced in January 2012 demonstrating that treatment with tivantinib as single agent therapy produced a statistically significant improvement in the
primary endpoint of time-to-progression (TTP) in previously treated patients. Patients with higher levels of MET who were treated with
tivantinib in this Phase 2 trial experienced pronounced benefit in prolonged TTP. Additional data from this trial, presented at the Annual Meeting of
the American Society of Clinical Oncology (ASCO) in June 2012, demonstrated significant improvements in median overall survival
(OS) and progression-free survival (PFS) in these MET-high patients.
On January 11, 2013, we announced the
top-line results of a randomized Phase 2 signal generation trial of tivantinib used in combination with irinotecan and cetuximab in patients with
refractory or relapsed colorectal cancer (CRC). Although the trial did not meet its primary endpoint of PFS, the analysis of the patients
enrolled (n=122) showed that median PFS was 8.3 months in the experimental arm (patients treated with irinotecan and cetuximab plus tivantinib),
compared with 7.3 months in the control arm (patients treated with irinotecan and cetuximab plus placebo) (hazard ratio = 0.85, 95% CI: 0.55, 1.33).
Objective Response Rate (ORR), a secondary endpoint, was 45 percent in the experimental arm versus 33 percent in the control arm but the
difference was not statistically significant. The PFS results obtained in both the control arm and the experimental arm were longer than expected
compared to previously published historical norms. Additional data and analyses from this trial are planned for presentation at a future medical
meeting and will include mature OS data as well as analyses of patient sub-groups, biomarker status and regional variability, including pre- and
post-study treatments. Adverse events were reported at similar rates in the experimental and control arms, except for increased neutropenia observed in
the experimental arm, with no discontinuations of treatment for this reason. No treatment-emergent adverse events leading to death were assessed as
related to study treatment. Tivantinib was generally well tolerated in combination with the doses of cetuximab and irinotecan studied in this
trial.
61
ARQULE, INC.
NOTES TO
FINANCIAL STATEMENTS (Continued)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1. ORGANIZATION AND NATURE OF OPERATIONS
(Continued)
On October 2, 2012, we and Daiichi
Sankyo announced that the independent Data Monitoring Committee (DMC) of the Phase 3 MARQUEE (Met inhibitor ARQ 197 plus
Erlotinib vs. Erlotinib plus placebo in NSCLC) trial recommended the study be discontinued early following a planned interim analysis,
when they concluded that the study would not meet its primary endpoint of improved OS. Although the interim analysis showed a statistically significant
improvement in PFS in the intent-to-treat (ITT) population, this benefit did not carry over to OS. There were no safety concerns identified by the DMC
to Daiichi Sankyo or ArQule during this interim analysis. MARQUEE is a randomized, double-blind, controlled pivotal trial conducted under an SPA to
evaluate tivantinib in combination with erlotinib, an approved anti-cancer agent, in previously treated patients with locally advanced or metastatic,
non-squamous NSCLC. We and Daiichi Sankyo have provided information regarding the study discontinuation to health authorities and those clinical
investigators participating in studies of tivantinib. Data from this study will be presented at an upcoming peer review forum. Our analysis of these
data will inform our decisions regarding potential further development in NSCLC or in certain biomarker-defined sub-groups within this disease
population. In NSCLC, we are also conducting a Phase 2, randomized trial of tivantinib and erlotinib in patients with a mutated form of the KRAS
gene.
On October 30, 2012, we reported that
we had been informed by Kyowa Hakko Kirin that it will permanently suspend enrollment in its ongoing Phase 3 ATTENTION (Asian Trial of Tivantinib plus
Erlotinib for NSCLC without EGFR Mutation) trial following the recommendation of an independent Safety Review Committee (SRC) in Japan
after the reporting of cases of interstitial lung disease (ILD) in the study as a drug-related adverse event. It is our understanding that
patients who were enrolled in the ATTENTION trial at the time of the safety finding can continue to receive treatment with the combination of
tivantinib and erlotinib upon request from the patient and investigator and after providing new informed consent. Data from the trial is expected in
late 2013 or early 2014. The ATTENTION trial is investigating the use of tivantinib and erlotinib versus erlotinib and placebo in second line
non-squamous non-small cell lung cancer (NSCLC). This trial is being conducted by Kyowa Hakko Kirin in Japan, South Korea and Taiwan.
We have licensed commercial rights to
tivantinib for human cancer indications to Daiichi Sankyo in the U.S., Europe, South America and the rest of the world, excluding Japan and certain
other Asian countries, where we have licensed commercial rights to Kyowa Hakko Kirin. Our agreements with these partners provide for possible future
milestone payments, royalties on product sales, and development funding, in addition to significant payments that we have already received. The most
recent milestone payments under these agreements were made during 2011, when , we received $25 million from Daiichi Sankyo resulting from the dosing of
the first patient in the MARQUEE trial and $10 million from Kyowa Hakko Kirin resulting from dosing of the first patient in the ATTENTION trial. The
terms of our tivantinib licensing agreements with Daiichi Sankyo and Kyowa Hakko Kirin remain in effect following the recent developments in both of
these trials.
On November 10, 2011, we and Daiichi
Sankyo announced the execution of a license agreement for the development of a new AKT inhibitor, ARQ 092, the first compound to emerge from the
companies AKIPTM collaboration. The license agreement provides exclusive rights to
Daiichi Sankyo for the development, manufacturing and marketing of ARQ 092 on a worldwide basis. Under this agreement, we received a $10 million
upfront fee from Daiichi Sankyo in November 2011.
Our proprietary pipeline is directed
toward molecular targets and biological processes with demonstrated roles in the development of human cancers. The most advanced candidates in this
pipeline are ARQ 087, an inhibitor of fibroblast growth factor receptor, ARQ 621, an inhibitor of the Eg5 kinesin motor protein, and ARQ 736, an
inhibitor of the RAF kinases, all of which are in Phase 1 clinical testing.
62
ARQULE, INC.
NOTES TO
FINANCIAL STATEMENTS (Continued)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
2. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Significant accounting policies
followed in the preparation of these financial statements are as follows:
Use of Estimates
The preparation of financial statements
in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from these estimates.
Cash Equivalents and Marketable
Securities
We consider all highly liquid
investments purchased within three months of original maturity date to be cash equivalents. We invest our available cash primarily in U.S. Treasury
bill funds, money market funds, commercial paper, and U.S. federal and state agency backed certificates, including auction rate securities that have
investment grade ratings. Auction rate securities are structured with short-term interest reset dates of generally less than 90 days, but with
contractual maturities that can be well in excess of ten years. At the end of each reset period, which occurs every seven to twenty-eight days,
investors can sell or continue to hold the securities at par value. Our auction rate securities are classified as trading securities. We generally
classify our marketable securities as available-for-sale at the time of purchase and re-evaluate such designation as of each balance sheet date. The
Company classifies its investments as either current or long-term based upon the investments contractual maturities and the Companys
ability and intent to convert such instruments to cash within one year. We report available-for-sale investments at fair value as of each balance sheet
date and include any unrealized gains and, to the extent deemed temporary, unrealized losses in stockholders equity. Realized gains and losses
are determined using the specific identification method and are included in other income (expense) in the statement of operations and comprehensive
loss. Certain of our marketable securities are classified as trading securities and any changes in the fair value of those securities are recorded as
other income (expense) in the statement of operations and comprehensive loss.
We conduct quarterly reviews to
determine the fair value of our investment portfolio and to identify and evaluate each investment that has an unrealized loss, in accordance with the
meaning of other-than-temporary impairment and its application to certain investments. An unrealized loss exists when the current fair value of an
individual security is less than its amortized cost basis. In the event that the cost basis of a security exceeds its fair value, we evaluate, among
other factors, the duration of the period that, and extent to which, the fair value is less than cost basis, the financial health of and business
outlook for the issuer, including industry and sector performance, and operational and financing cash flow factors, overall market conditions and
trends, our intent to sell the investment and if it is more likely than not that we would be required to sell the investment before its anticipated
recovery. Unrealized losses on available-for-sale securities that are determined to be temporary, and not related to credit loss, are recorded in
accumulated other comprehensive income (loss).
For available-for-sale debt securities
with unrealized losses, we perform an analysis to assess whether we intend to sell or whether we would more likely than not be required to sell the
security before the expected recovery of the amortized cost basis. Where we intend to sell a security, or may be required to do so, the securitys
decline in fair value is deemed to be other-than-temporary and the full amount of the unrealized loss is reflected in the statement of operations and
comprehensive loss as an impairment loss.
Regardless of our intent to sell a
security, we perform additional analysis on all securities with unrealized losses to evaluate losses associated with the creditworthiness of the
security. We did not recognize any other-than-temporary impairments during the years ended December 31, 2012, 2011 or 2010. Credit losses are
identified where we do not expect to receive cash flows sufficient to recover the amortized cost basis of a security.
63
ARQULE, INC.
NOTES TO
FINANCIAL STATEMENTS (Continued)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Fair Value of Financial Instruments
At December 31, 2012 and 2011 our
financial instruments consist of cash, cash equivalents, investments in corporate debt securities, auction rate securities, accounts payable, accrued
expenses and notes payable. The carrying amount of these financial instruments approximates their fair values. At December 31, 2012 and 2011 our
financial instruments also included marketable securities which are reported at fair value.
Non-refundable Advance Payments for Research and
Development
Non-refundable advance payments for
goods or services that will be used or rendered for future research and development activities are initially deferred and capitalized. Related expenses
(or contra-revenues) are then recognized as expense (or contra-revenue) as the goods are delivered and consumed or the related services are
performed.
Property and Equipment
Property and equipment are recorded at
cost and depreciated using the straight-line method over their estimated useful lives. Assets under capital leases and leasehold improvements are
amortized over the shorter of their estimated useful lives or the term of the respective leases by use of the straight-line method. Maintenance and
repair costs are expensed as incurred. Depreciation and amortization expense for the years ended December 31, 2012, 2011 and 2010 was $1,064, $1,172,
and $1,425, respectively.
Revenue RecognitionResearch and Development
Revenue
Research and development revenue is
generated primarily through collaborative research and development agreements. The terms of the agreements may include nonrefundable upfront payments,
funding for research and development, milestone payments and royalties on any product sales derived from collaborations.
The Company adopted the FASB issued ASU
No. 2010-17, Revenue RecognitionMilestone Method on a prospective basis on January 1, 2011. The decision to use the milestone method of
revenue recognition is a policy election. The milestone method may impact any new collaboration agreements or material modifications to existing
agreements, in the event we elect the policy of utilizing the milestone method to recognize substantive milestones.
Research and development payments
associated with our collaboration agreements in effect prior to January 1, 2011 are recognized as research and development revenue using the
contingency adjusted performance model. Under this model, when payments are earned, revenue is immediately recognized on a pro-rata basis in the period
we achieve the milestone based on the time elapsed from inception of the agreement to the time the milestone is earned over the estimated duration of
the development period under the agreement. Thereafter, the remaining portion of the milestone payment is recognized on a straight-line basis over the
remaining estimated development period under the agreement. This estimated development period may ultimately be shorter or longer depending upon the
outcome of the development work, resulting in accelerated or deferred recognition of the development revenue. Royalty payments will be recognized as
revenue when earned. The costs associated with satisfying research and development contracts are included in research and development expense as
incurred.
On November 10, 2011, we and Daiichi
Sankyo announced the execution of a license agreement for the development of a new AKT inhibitor, ARQ 092. The license agreement provides exclusive
rights to Daiichi Sankyo for the development, manufacturing and marketing of ARQ 092 on a worldwide basis. Revenue for this agreement is recognized
using Financial Accounting Standards Board Accounting Standards Update No. 2009-13, Multiple-Deliverable Revenue Arrangements (ASU
2009-13). Under ASU 2009-13 all
64
ARQULE, INC.
NOTES TO
FINANCIAL STATEMENTS (Continued)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
undelivered items under an
agreement are divided into separate units of accounting based on whether the deliverable provides stand-alone value to the licensee. The Company
determines the best estimate selling price (BESP) for each unit of accounting based upon managements judgment and including factors such as
discounted cash flows, estimated direct expenses and other costs and probability of successful outcome of clinical trials.
Research and Development Costs
Costs of research and development,
which are expensed as incurred, are comprised of the following types of costs incurred in performing research and development activities and those
incurred in connection with research and development revenue: salaries and benefits, allocated overhead and occupancy costs, clinical trial and related
clinical manufacturing costs, contract services, and other outside costs.
Impairment or Disposal of Long-Lived
Assets
We assess our long-lived assets for
impairment whenever events or changes in circumstances (a triggering event) indicate that the carrying value of a group of long-lived
assets may not be recoverable. If such circumstances are determined to exist, an estimate of undiscounted future cash flows produced by the long-lived
asset, including its eventual residual value, is compared to the carrying value to determine whether impairment exists. In the event that such cash
flows are not expected to be sufficient to recover the carrying amount of the assets, the assets are written-down to their estimated fair values. We
did not recognize an impairment charges related to our long-lived assets during 2012, 2011 and 2010.
Segment Data
The chief operating decision maker uses
consolidated financial information in determining how to allocate resources and assess performance. For this reason, we have determined that we are
principally engaged in one operating segment. See Note 13 with respect to significant customers. Substantially all of our revenue since inception has
been generated in the United States and all of our long-lived assets are located in the United States.
Other Income
Other income in 2012 includes a $113
gain from the increase in fair value of our auction rate securities. Other income in 2011 includes a $20 gain from the increase in fair value of our
auction rate securities. Other income in 2010 includes a $4,362 gain from the increase in fair value of our auction rate securities and a $5,074 loss
from the decrease in fair value of our Put Option upon exercise. Other income in 2010 also includes $978 of cash grants for qualifying therapeutic
discovery projects that were awarded under the Patient Protection and Affordable Care Act of 2010.
Income Taxes
Income taxes have been accounted for
using the asset and liability method. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial carrying amounts of existing assets and liabilities and their respective tax bases and
operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of
a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance against deferred tax assets is
recorded if, based upon the weight of all available evidence, it is more likely than not that some or all of the deferred tax assets will not be
realized. For uncertain tax positions that meet a more likely than not threshold, the Company recognizes the benefit of uncertain tax
positions in the financial statements.
65
ARQULE, INC.
NOTES TO
FINANCIAL STATEMENTS (Continued)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Earnings (Loss) Per Share
The computations of basic and diluted
earnings (loss) per common share are based upon the weighted average number of common shares outstanding and potentially dilutive securities.
Potentially dilutive securities include stock options. Options to purchase 7,157,458, 6,547,443 and 6,355,827 shares of common stock were not included
in the 2012, 2011 and 2010 computations of diluted net loss per share, respectively, because inclusion of such shares would have an anti-dilutive
effect.
Stock-Based Compensation
Our stock-based compensation cost is
measured at the grant date, based on the calculated fair value of the award, and is recognized as an expense over the employees requisite service
period (generally the vesting period of the equity grant).
We estimate the fair value of stock
options using the Black-Scholes valuation model. Key input assumptions used to estimate the fair value of stock options include the exercise price of
the award, expected option term, expected volatility of our stock over the options expected term, risk-free interest rate over the options
expected term, and the expected annual dividend yield. We believe that the valuation technique and approach utilized to develop the underlying
assumptions are appropriate in calculating the fair values of our stock options granted.
The following table presents
stock-based compensation expense for the years ended December 31, 2012, 2011 and 2010 included in our Statements of Operations and Comprehensive
Loss:
|
|
|
|
2012
|
|
2011
|
|
2010
|
|
|
|
|
$ |
1,533 |
|
|
$ |
1,586 |
|
|
$ |
1,283 |
|
General and administrative |
|
|
|
|
2,602 |
|
|
|
2,244 |
|
|
|
1,976 |
|
Total stock-based compensation expense |
|
|
|
$ |
4,135 |
|
|
$ |
3,830 |
|
|
$ |
3,259 |
|
In the years ended
December 31, 2012, 2011 and 2010, no stock-based compensation expense was capitalized and there were no recognized tax benefits associated with the
stock-based compensation charge.
The fair value of stock options and
employee stock purchase plan shares granted in the years ended December 31, 2012, 2011 and 2010 respectively were estimated on the grant date using the
Black-Scholes option-pricing model with the following assumptions:
|
|
|
|
2012
|
|
2011
|
|
2010
|
|
|
|
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
0.0 |
% |
Weighted average expected volatility factor(2) |
|
|
|
|
67 |
% |
|
|
64 |
% |
|
|
64 |
% |
|
|
|
|
|
0.6-0.8 |
% |
|
|
1.02.2 |
% |
|
|
1.42.3 |
% |
Expected term, excluding options issued pursuant to the Employee Stock Purchase Plan(4) |
|
|
|
|
|
|
|
|
Expected termEmployee Stock Purchase Plan(5) |
|
|
|
|
|
|
|
|
(1) |
|
We have historically not paid dividends on our common stock and
we do not anticipate paying any dividends in the foreseeable future. |
(2) |
|
Measured using an average of historical daily price changes of
our stock over a period equal to our expected term. |
66
ARQULE, INC.
NOTES TO
FINANCIAL STATEMENTS (Continued)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
(3) |
|
The risk-free interest rate for periods equal to the expected
term of share option based on the U.S. Treasury yield in effect at the time of grant. |
(4) |
|
The expected term is the number of years that we estimate, based
on historical experience, that options will be outstanding before exercise or cancellation. The range in expected term is the result of certain groups
of employees exhibiting different exercising behavior. |
(5) |
|
The expected term of options issued in connection with our
Employee Stock Purchase Plan is 6 months based on the terms of the plan. |
Recent Accounting Pronouncements
From time to time, new accounting
pronouncements are issued by the Financial Accounting Standards Board (FASB) or other standard setting bodies that are adopted by the
Company as of the specified effective date. Unless otherwise discussed, we believe that the impact of recently issued standards that are not yet
effective will not have a material impact on our financial position or results of operations upon adoption.
In May 2011, the FASB issued ASU No.
2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and
IFRSs. This newly issued accounting standard clarifies the application of certain existing fair value measurement guidance and expands the
disclosures for fair value measurements that are estimated using significant unobservable (Level 3) inputs. This ASU is effective on a prospective
basis for annual and interim reporting periods beginning on or after December 15, 2011. We adopted this standard on January 1, 2012 and it did not have
a material impact on our financial position or results of operations.
In June 2011, the FASB issued ASU No.
2011-05, Comprehensive Income (Topic 220). This newly issued accounting standard (1) eliminates the option to present the components
of other comprehensive income as part of the statement of changes in stockholders equity; (2) requires the consecutive presentation of the
statement of net income and other comprehensive income; and (3) requires an entity to present reclassification adjustments on the face of the financial
statements from other comprehensive income to net income. The amendments in this ASU do not change the items that must be reported in other
comprehensive income or when an item of other comprehensive income must be reclassified to net income nor do the amendments affect how earnings per
share is calculated or presented. This ASU is required to be applied retrospectively and is effective for fiscal years and interim periods within those
years beginning after December 15, 2011. As this accounting standard only requires enhanced disclosure, the adoption of this standard on January 1,
2012 did not impact our financial position or results of operations.
In February 2013, the Financial
Accounting Standards Board (FASB) issued an amendment to the accounting guidance on reporting amounts reclassified out of accumulated other
comprehensive income. The guidance requires an entity to report the effect of significant reclassifications out of accumulated other comprehensive
income on the respective line items in net income if the amount being reclassed is required under United States Generally Accepted Accounting
Principles (GAAP) to be reclassified in its entirety to net income. For other amounts that are not required under United States GAAP to be
reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under United States GAAP that
provide additional detail about those amounts. The guidance is effective prospectively for reporting periods beginning after December 15, 2012. The
Company does not expect the adoption of this guidance will have a material impact on its financial statements.
3. COLLABORATIONS AND ALLIANCES
Daiichi Sankyo Kinase Inhibitor Discovery
Agreement
In November 2012, we completed our
research collaboration with Daiichi Sankyo under a research collaboration, exclusive license and co-commercialization agreement entered into originally
on November 7,
67
ARQULE, INC.
NOTES TO
FINANCIAL STATEMENTS (Continued)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
3. COLLABORATIONS AND ALLIANCES
(Continued)
2008, that was focused on
applications of our proprietary AKIPTM technology and know-how for the discovery of
therapeutic compounds that selectively inhibit certain kinases in the field of oncology. The agreement provides for a $15 million upfront payment,
which we received in November 2008, research support payments for the first two years of the collaboration (which was extended for an additional two
years in 2010), licensing fees for compounds discovered as a result of this research, milestone payments related to clinical development, regulatory
review and sales, and royalty payments on net sales of compounds from the collaboration. We retain the option to co-commercialize licensed products
developed under this agreement in the U.S. In May 2009, we entered into an agreement with Daiichi Sankyo related to potential future milestones and
royalties for our AKIPTM collaboration, under which we could receive up to a total of $265
million in upfront, potential development and sales milestone payments for each product selected for clinical development. Upon commercialization of a
licensed product, we would also receive tiered, double-digit royalties on its net sales. Daiichi Sankyos obligation to provide further research
funding to ArQule under this agreement terminated in November 2012. Daiichi retains rights under the agreement to designate compounds discovered under
this collaboration for toxicology testing and also has the option to take one or more of such compounds into clinical testing by opting into a license
and development agreement pursuant to the economic terms of the May 2009 agreement described above.
The duration and termination of the
agreement are tied to future events. Unless earlier terminated due to breach, insolvency or upon 90 days notice by Daiichi Sankyo, the agreement
terminates on the later of (i) the expiration of the research collaboration period, or (ii) various periods specified in the agreement for development
and commercialization of products. If Daiichi Sankyo has commercialized a licensed product or products, the agreement will continue in force until such
time as all royalty terms for all licensed products have ended. The royalty term, on a country-by-country basis for a product, ends as of the later of
(i) the expiration of the last valid claim under a patent covering the manufacture, use, or sale of a licensed product or (ii) a certain number of
years from the date of the commercial sale of the licensed product in such country.
Revenue for this agreement was
recognized using the contingency-adjusted performance model with a performance period through November 2012. For the years ended December 31, 2012,
2011and 2010, $15.5 million, $17.7 million and $12.6 million, respectively, were recognized as revenue. Since the agreement ended on November 30, 2012,
there is no deferred revenue at December 31, 2012.
Daiichi Sankyo ARQ 092 Agreement
On November 10, 2011, we and Daiichi
Sankyo announced the execution of a license agreement for the development of a new AKT inhibitor, ARQ 092, the first compound to emerge from the
companies AKIPTM collaboration. The license agreement provides exclusive rights to
Daiichi Sankyo for the development, manufacturing and marketing of ARQ 092 on a worldwide basis. Under this agreement, we received a $10 million
upfront fee from Daiichi Sankyo in November 2011.
Revenue for this agreement is
recognized using Financial Accounting Standards Board Accounting Standards Update No. 2009-13, Multiple-Deliverable Revenue Arrangements
(ASU 2009-13). Under ASU 2009-13 all undelivered items under the agreement are divided into separate units of accounting based on whether
the deliverable provides stand-alone value to the licensee. These units of accounting consist of (i) the license to develop and commercialize ARQ 092,
(ii) committed future clinical trial services, (iii) committed future clinical trial costs and (ii) steering committee services. The Company determined
the best estimate selling price (BESP) for each unit of accounting based upon managements judgment and including factors such as discounted cash
flows, estimated direct expenses and other costs and probability of successful outcome of clinical trials.
As the license granted under the
agreement was delivered, the license had standalone value, and there were no further obligations related to the license, revenue of $10 million related
to this accounting unit was recognized in 2011 based on the best estimate of selling price of the license. Revenue related to future
clinical
68
ARQULE, INC.
NOTES TO
FINANCIAL STATEMENTS (Continued)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
3. COLLABORATIONS AND ALLIANCES
(Continued)
trial services, clinical trial
costs and steering committee services will be recognized ratably over the clinical trial as services are provided and costs are incurred, up to the
amount of cash received for these deliverables based on the best estimate of selling price of each deliverable. The estimated development period for
this agreement is through June 2013. For the years ended December 31, 2012 and 2011, $2.8 million and $10.0 million, respectively were recognized as
revenue. At December 31, 2012 $0.2 million remained in deferred revenue.
Daiichi Sankyo Tivantinib Agreement
On December 18, 2008, we entered into a
license, co-development and co-commercialization agreement with Daiichi Sankyo to conduct research, clinical trials and the commercialization of
tivantinib in human cancer indications in the U.S., Europe, South America and the rest of the world, excluding Japan, China (including Hong Kong),
South Korea and Taiwan, where Kyowa Hakko Kirin has exclusive rights for development and commercialization.
The agreement provides for a $60
million cash upfront licensing payment from Daiichi Sankyo to us, which we received in December 2008, and an additional $560 million in potential
development and sales milestone payments offset by our share of the Phase 3 costs. Upon commercialization, we will receive tiered, double-digit
royalties from Daiichi Sankyo on net sales of tivantinib commensurate with the magnitude of the transaction. We retain the option to participate in the
commercialization of tivantinib in the U.S. We and Daiichi Sankyo will share equally the costs of Phase 2 and Phase 3 clinical studies, with our share
of Phase 3 costs payable solely from milestone and royalty payments by Daiichi Sankyo.
Under the terms of our tivantinib
collaboration agreement with Daiichi Sankyo we share development costs equally with our share of Phase 3 costs funded solely from milestones and
royalties. In each quarter the tivantinib collaboration costs we incur are compared with those of Daiichi Sankyo. If our costs for the quarter exceed
Daiichi Sankyos, we recognize revenue on the amounts due to us under the contingency adjusted performance model. Revenue is calculated on a
pro-rata basis using the time elapsed from inception of the agreement over the estimated duration of the development period under the agreement. If our
costs for the quarter are less than those of Daiichi Sankyos, we report the amount due to Daiichi Sankyo as contra-revenue in that quarter. To
the extent that our share of Phase 3 collaboration costs exceeds the amount of milestones and royalties received, that excess is netted against future
milestones and royalties if and when earned and is not reported as contra-revenue.
Our cumulative share of the Daiichi
Sankyo Phase 3 costs inception to date through December 31, 2012, totaled $63.8 million and we received milestones of $25.0 million during that period.
Our cumulative share of Phase 3 collaboration costs has exceeded the amount of milestones received through December 31, 2012 by $38.8 million which
will be netted against future milestones and royalties, if any, when earned and has not been reported as contra-revenue. On January 31, 2013, we
announced that the first patient had been enrolled in the pivotal Phase 3 METIV trial of tivantinib, entitling us to a $15 million milestone. We will
not receive any net cash proceeds from this milestone as it will be netted against our cumulative share of Phase 3 collaboration costs in excess of
milestones received of $38.8 million at December 31, 2012. Our cumulative share of Phase 3 collaboration costs in excess of milestones received was
$10.6 million at December 31, 2011.
In 2012, our non-phase 3 tivantinib
collaboration costs incurred were less than those of Daiichi Sankyos by $1.4 million which was recognized as contra-revenue and netted against
our tivantinib Daiichi Sankyo research and development revenue. Our non-refundable share of advance drug purchases is recognized as contra-revenue as
the related drugs are administered to patients. For the year ended December 31, 2012, $2.5 million of these drug purchases was also recognized as
contra-revenue. There were no advance drug purchases in the year ended December 31, 2012.
69
ARQULE, INC.
NOTES TO
FINANCIAL STATEMENTS (Continued)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
3. COLLABORATIONS AND ALLIANCES
(Continued)
In 2011, our tivantinib collaboration
costs incurred were less than those of Daiichi Sankyos by $16.6 million which was recognized as contra-revenue and netted against our tivantinib
Daiichi Sankyo research and development revenue. Our non-refundable share of advance drug purchases in 2011 was $5.4 million. These costs are
recognized as contra-revenue as the related drugs are administered to patients. For the year ended December 31, 2011, $2.9 million of these drug
purchases was also recognized as contra-revenue.
In 2010, our tivantinib collaboration
costs incurred were less than those of Daiichi Sankyos by $3.3 million which was recognized as contra-revenue and netted against our tivantinib
Daiichi Sankyo research and development revenue. There were no advance drug purchases in the year ended December 31, 2010.
Prepaid expenses and other current
assets at December 31, 2011 included $2.5 million of prepaid Phase 3 drug purchases. This amount was recognized as contra-revenue in the year ended
December 31, 2012 as the drugs were administered to patients in the Phase 3 trial.
The duration and termination of the
agreement are tied to future events. Unless earlier terminated due to breach, insolvency or upon 90 days notice if prior to phase 3 clinical trials or
180 days notice if on or after the beginning of phase 3 clinical trials by Daiichi Sankyo, the agreement shall continue until the later of (i) such
time as Daiichi Sankyo is no longer developing at least one licensed product or (ii) if Daiichi Sankyo has commercialized a licensed product or
products, such time as all royalty terms for all licensed products have ended. The royalty term, on a country-by-country basis for a product, ends as
of the later of (i) the expiration of the last valid claim under a patent covering the manufacture, use, or sale of a licensed product or (ii) a
certain number of years from the date of the commercial sale of the licensed product in such country.
Revenue for this agreement is
recognized using the contingency-adjusted performance model. Through September 30, 2012, revenue was recognized based upon an estimated development
period through December 2013. As a result of the October 2012 decision to discontinue the MARQUEE trial, the development period as of October 1, 2012
was extended to June 2015. Therefore, commencing with the fourth quarter of 2012, revenue is recognized over this new development period. Under the
previous estimated development period revenue for this agreement was expected to be approximately $4.7 million in the fourth quarter of 2012. Under the
revised development period revenue for this agreement was $2.1 million in the fourth quarter of 2012 resulting in a reduction of $2.6
million.
For the years ended December 31, 2012,
2011 and 2010, $12.4 million, net of $3.9 million of contra-revenue, $9.5 million, net of $19.5 million of contra-revenue and $10.5 million net of $3.3
million of contra-revenue, respectively, were recognized as revenue. At December 31, 2012 and 2011, $20.8 and $37.0 million respectively, remained in
deferred revenue.
Kyowa Hakko Kirin Licensing Agreement
On April 27, 2007, we entered into an
exclusive license agreement with Kyowa Hakko Kirin to develop and commercialize tivantinib in Japan and parts of Asia. A $3 million portion of an
upfront licensing fee was received by the Company under this agreement in the first quarter of 2007, and an additional $27 million in upfront licensing
fees was received on May 7, 2007. The agreement includes $123 million in upfront and potential development milestone payments from Kyowa Hakko Kirin to
ArQule, including the $30 million cash upfront licensing payments. In February 2008, we received a $3 million milestone payment from Kyowa Hakko Kirin.
Upon commercialization, ArQule will receive tiered royalties in the mid-teen to low-twenty percent range from Kyowa Hakko Kirin on net sales of
tivantinib. Kyowa Hakko Kirin will be responsible for all clinical development costs and commercialization of the compound in certain Asian countries,
consisting of Japan, China (including Hong Kong), South Korea and Taiwan. In July 2010, we announced the initiation of a Phase 2 trial with tivantinib
by Kyowa Hakko Kirin in gastric cancer, for which we received a $5 million milestone payment in September 2010. In August 2011, Kyowa Hakko Kirin
announced the initiation of the Phase 3 ATTENTION trial in Asia of tivantinib and erlotinib in non-squamous NSCLC patients with wild
type
70
ARQULE, INC.
NOTES TO
FINANCIAL STATEMENTS (Continued)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
3. COLLABORATIONS AND ALLIANCES
(Continued)
EGFR. Dosing of the first patient
in this trial triggered a $10 million milestone payment, which we received in August 2011. The milestone payment was recorded as deferred revenue and
is being recognized as revenue using the contingency-adjusted performance model with an estimated development period through April
2016.
In addition to the upfront and possible
regulatory milestone payments totaling $123 million, the Company will be eligible for future milestone payments based on the achievement of certain
levels of net sales. The Company will recognize the payments, if any, as revenue in accordance with the contingency-adjusted performance model. As of
December 31, 2012, the Company had not recognized any revenue from these sales milestone payments, and there can be no assurance that it will do so in
the future.
The duration and termination of the
agreement are tied to future events. Unless earlier terminated due to breach, insolvency or upon 90 days notice by Kyowa Hakko Kirin, the agreement
terminates on the date that the last royalty term expires in all countries in the territory. The royalty term ends as of the later of (i) the
expiration of the last pending patent application or expiration of the patent in the country covering the manufacture, use, or sale of a licensed
product or (ii) a certain number of years from the date of the commercial launch in such country of such license product.
Revenue for this agreement is
recognized using the contingency-adjusted performance model with an estimated development period through April 2016. For the years ended December 31,
2012, 2011, and 2010, $5.7 million, $10.1 million, and $6.1 million, respectively were recognized as revenue. At December 31, 2012 and 2011, $19.0
million and $24.7 million respectively, remained in deferred revenue.
4. MARKETABLE SECURITIES AND FAIR VALUE
MEASUREMENTS
We generally classify our marketable
securities as available-for-sale at the time of purchase and re-evaluate such designation as of each balance sheet date. Since we generally intend to
convert them into cash as necessary to meet our liquidity requirements our marketable securities are classified as cash equivalents if the original
maturity, from the date of purchase, is ninety days or less and as short-term investments if the original maturity, from the date of purchase, is in
excess of ninety days but less than one year. Our marketable securities are classified as long-term investments if the maturity date is in excess of
one year of the balance sheet date.
We report available-for-sale
investments at fair value as of each balance sheet date and include any unrealized gains and, to the extent deemed temporary, unrealized losses in
stockholders equity. Realized gains and losses are determined using the specific identification method and are included in other income (expense)
in the statement of operations and comprehensive loss. Our auction rate securities are classified as trading securities and any changes in the fair
value of those securities are recorded as other income (expense) in the statement of operations and comprehensive loss.
We conduct quarterly reviews to
determine the fair value of our investment portfolio and to identify and evaluate each investment that has an unrealized loss, in accordance with the
meaning of other-than-temporary impairment and its application to certain investments. An unrealized loss exists when the current fair value of an
individual security is less than its amortized cost basis. In the event that the cost basis of a security exceeds its fair value, we evaluate, among
other factors, the duration of the period that, and extent to which, the fair value is less than cost basis, the financial health of and business
outlook for the issuer, including industry and sector performance, and operational and financing cash flow factors, overall market conditions and
trends, our intent to sell the investment and if it is more likely than not that we would be required to sell the investment before its anticipated
recovery. Unrealized losses on available-for-sale securities that are determined to be temporary, and not related to credit loss, are recorded in
accumulated other comprehensive income (loss).
71
ARQULE, INC.
NOTES TO
FINANCIAL STATEMENTS (Continued)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
4. MARKETABLE SECURITIES AND FAIR VALUE MEASUREMENTS
(Continued)
For available-for-sale debt securities
with unrealized losses, we perform an analysis to assess whether we intend to sell or whether we would more likely than not be required to sell the
security before the expected recovery of the amortized cost basis. Where we intend to sell a security, or may be required to do so, the securitys
decline in fair value is deemed to be other-than-temporary and the full amount of the unrealized loss is reflected in the statement of operations and
comprehensive loss as an impairment loss.
Regardless of our intent to sell a
security, we perform additional analysis on all securities with unrealized losses to evaluate losses associated with the creditworthiness of the
security. Credit losses are identified where we do not expect to receive cash flows sufficient to recover the amortized cost basis of a
security.
We invest our available cash primarily
in U.S. Treasury bill funds, money market funds, commercial paper, and U.S. federal and state agency backed certificates, including auction rate
securities that have investment grade ratings. Auction rate securities are structured with short-term interest reset dates of generally less than 90
days, but with contractual maturities that can be well in excess of ten years. At the end of each reset period, which occurs every seven to
twenty-eight days, investors can sell or continue to hold the securities at par value. If auction rate securities fail an auction, due to sell orders
exceeding buy orders, the funds associated with a failed auction would not be accessible until a successful auction occurred, a buyer was found outside
the auction process, the underlying securities matured or a settlement with the underwriter is reached.
ArQules marketable securities
portfolio includes $2.1 million (at cost) at December 31, 2012 and 2011, invested in auction rate securities.
ArQules marketable securities
portfolio included $59.5 million (at cost) at December 31, 2009, invested in auction rate securities. Beginning in the first quarter of 2008 and
throughout 2012, certain auction rate securities failed at auction due to sell orders exceeding buy orders. On November 3, 2008, the Company received a
put option from UBS AG to repurchase auction rate securities owned by the Company at par value at any time during the period from June 30, 2010 through
July 2, 2012 (the Put Option). The Company accounted for the Put Option as a freestanding financial instrument and elected to record the
value under the fair value option for financial assets and financial liabilities.
On June 30, 2010, the company exercised
the Put Option and in July 2010, UBS AG redeemed at par value all $22.9 million of the Companys auction rate securities held by UBS AG that were
outstanding at June 30, 2010. Throughout 2010 UBS AG redeemed at par value a total of $56.9 million of the Companys auction rate securities held
by UBS AG, including those redeemed from the exercise of the Put Option. The Company used a portion of the $56.9 million of 2010 redemptions to retire
the $44.4 million notes payable to UBS AG that had been outstanding at December 31, 2009. The credit line at UBS AG was cancelled in July
2010.
The following is a summary of the fair
value of available-for-sale marketable securities we held at December 31, 2012 and December 31, 2011:
December 31, 2012
|
|
|
|
Amortized Cost
|
|
Gross Unrealized Gains
|
|
Gross Unrealized Losses
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt securities-short term |
|
|
|
$ |
64,921 |
|
|
$ |
45 |
|
|
$ |
(22 |
) |
|
$ |
64,944 |
|
Corporate debt securities-long term |
|
|
|
|
49,460 |
|
|
|
93 |
|
|
|
(14 |
) |
|
|
49,539 |
|
Total available-for-sale marketable securities |
|
|
|
$ |
114,381 |
|
|
$ |
138 |
|
|
$ |
(36 |
) |
|
$ |
114,483 |
|
72
ARQULE, INC.
NOTES TO
FINANCIAL STATEMENTS (Continued)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
4. MARKETABLE SECURITIES AND FAIR VALUE MEASUREMENTS
(Continued)
December 31, 2011
|
|
|
|
Amortized Cost
|
|
Gross Unrealized Gains
|
|
Gross Unrealized Losses
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Federal Treasury and U.S. government agencies securities-short term |
|
|
|
$ |
17,259 |
|
|
$ |
1 |
|
|
$ |
(1 |
) |
|
$ |
17,259 |
|
Corporate debt securities-short term |
|
|
|
|
39,828 |
|
|
|
22 |
|
|
|
(36 |
) |
|
|
39,814 |
|
|
|
|
|
|
57,087 |
|
|
|
23 |
|
|
|
(37 |
) |
|
|
57,073 |
|
U.S. Federal Treasury and U.S. government agencies securities-long term |
|
|
|
|
33,556 |
|
|
|
13 |
|
|
|
(6 |
) |
|
|
33,563 |
|
Corporate debt securities-long term |
|
|
|
|
5,235 |
|
|
|
2 |
|
|
|
(1 |
) |
|
|
5,236 |
|
|
|
|
|
|
38,791 |
|
|
|
15 |
|
|
|
(7 |
) |
|
|
38,799 |
|
Total available-for-sale marketable securities |
|
|
|
$ |
95,878 |
|
|
$ |
38 |
|
|
$ |
(44 |
) |
|
$ |
95,872 |
|
The Companys available-for-sale
marketable securities in a loss position at December 31, 2012 and December 31, 2011, were in a continuous unrealized loss position for less than 12
months.
The following is a summary of the fair
value of trading securities we held at December 31, 2012 and December 31, 2011:
December 31, 2012
|
|
|
|
Amortized Cost
|
|
Gross Unrealized Gains
|
|
Gross Unrealized Losses
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,100 |
|
|
$ |
|
|
|
$ |
(311 |
) |
|
$ |
1,789 |
|
|
|
|
|
$ |
2,100 |
|
|
$ |
|
|
|
$ |
(311 |
) |
|
$ |
1,789 |
|
December 31, 2011
|
|
|
|
Amortized Cost
|
|
Gross Unrealized Gains
|
|
Gross Unrealized Losses
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,100 |
|
|
$ |
|
|
|
$ |
(424 |
) |
|
$ |
1,676 |
|
|
|
|
|
$ |
2,100 |
|
|
$ |
|
|
|
$ |
(424 |
) |
|
$ |
1,676 |
|
The underlying collateral of our
auction rate securities consists of student loans, supported by the federal government as part of the Federal Family Education Loan Program (FFELP). At
December 31, 2012, the Companys auction rate security is included in marketable securities-long term and totals $1,789. At December 31, 2011, the
Companys auction rate security is included in marketable securities-long term and totals $1,676. The net increase in value of our auction rate
securities totaling $113 in the year ended December 31, 2012 was recorded as a gain in other income in the statement of operations and comprehensive
loss. The net increase in value of our auction rate securities totaling $20 in the year ended December 31, 2011 was recorded as a gain in other income
in the and statement of operations and comprehensive loss.
The following tables present
information about our assets that are measured at fair value on a recurring basis for the periods presented and indicates the fair value hierarchy of
the valuation techniques we utilized to determine such fair value. In general, fair values determined by Level 1 inputs utilize quoted prices
(unadjusted) in active markets for identical assets or liabilities. Fair values determined by Level 2 inputs utilize data points that are observable
such as quoted prices, interest rates and yield curves. We value our level 2 investments using quoted prices for identical assets in the markets where
they are traded, although
73
ARQULE, INC.
NOTES TO
FINANCIAL STATEMENTS (Continued)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
4. MARKETABLE SECURITIES AND FAIR VALUE MEASUREMENTS
(Continued)
such trades may not occur daily.
These quoted prices are based on observable inputs, primarily interest rates. Fair values determined by Level 3 inputs are unobservable data points for
the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. There were no transfers in or
out of Level 1 or Level 2 measurements for the periods presented:
|
|
|
|
December 31, 2012
|
|
Quoted Prices in Active Markets (Level 1)
|
|
Significant Other Observable Inputs
(Level 2)
|
|
Significant Unobservable Inputs (Level 3)
|
|
|
|
|
$ |
11,754 |
|
|
$ |
11,754 |
|
|
$ |
|
|
|
$ |
|
|
Corporate debt securities-short term |
|
|
|
|
64,944 |
|
|
|
|
|
|
|
64,944 |
|
|
|
|
|
Corporate debt securities-long term |
|
|
|
|
49,539 |
|
|
|
|
|
|
|
49,539 |
|
|
|
|
|
Auction rate securities-long term |
|
|
|
|
1,789 |
|
|
|
|
|
|
|
|
|
|
|
1,789 |
|
|
|
|
|
$ |
128,026 |
|
|
$ |
11,754 |
|
|
$ |
114,483 |
|
|
$ |
1,789 |
|
|
|
|
|
December 31, 2011
|
|
Quoted Prices in Active Markets (Level 1)
|
|
Significant Other Observable Inputs
(Level 2)
|
|
Significant Unobservable Inputs (Level 3)
|
|
|
|
|
$ |
10,042 |
|
|
$ |
10,042 |
|
|
$ |
|
|
|
$ |
|
|
U.S. Federal Treasury and U.S. government agencies securities-short term |
|
|
|
|
17,259 |
|
|
|
|
|
|
|
17,259 |
|
|
|
|
|
Corporate debt securities-short term |
|
|
|
|
39,814 |
|
|
|
|
|
|
|
39,814 |
|
|
|
|
|
U.S. Federal Treasury and U.S. government agencies securities-long term |
|
|
|
|
33,563 |
|
|
|
|
|
|
|
33,563 |
|
|
|
|
|
Corporate debt securities-long term |
|
|
|
|
5,236 |
|
|
|
|
|
|
|
5,236 |
|
|
|
|
|
Auction rate securities-long term |
|
|
|
|
1,676 |
|
|
|
|
|
|
|
|
|
|
|
1,676 |
|
|
|
|
|
$ |
107,590 |
|
|
$ |
10,042 |
|
|
$ |
95,872 |
|
|
$ |
1,676 |
|
Due to the lack of market quotes
relating to our auction rate securities, the fair value measurements for our auction rate securities have been estimated using an income approach model
(discounted cash flow analysis), which is exclusively based on Level 3 inputs. The model considers factors that reflect assumptions market participants
would use in pricing including, among others, the collateralization underlying the investments, the creditworthiness of the counterparty, the expected
future cash flows, liquidity premiums, the probability of successful auctions in the future, and interest rates. The assumptions used are subject to
volatility and may change as the underlying sources of these assumptions and markets conditions change.
The following table rolls forward the
fair value of our auction rate securities and put option, whose fair values are determined by Level 3 inputs for 2012:
|
|
|
|
Amount
|
Balance at Deceber 31, 2011 |
|
|
|
$ |
1,676 |
|
Gain on auction rate securities |
|
|
|
|
113 |
|
|
|
|
|
|
|
|
Balance at December 31, 2012 |
|
|
|
$ |
1,789 |
|
74
ARQULE, INC.
NOTES TO
FINANCIAL STATEMENTS (Continued)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
4. MARKETABLE SECURITIES AND FAIR VALUE MEASUREMENTS
(Continued)
The following table rolls forward the
fair value of our auction rate securities and put option, whose fair values are determined by Level 3 inputs for 2011:
|
|
|
|
Amount
|
Balance at December 31, 2010 |
|
|
|
$ |
2,154 |
|
Gain on auction rate securities |
|
|
|
|
20 |
|
|
|
|
|
|
(498 |
) |
Balance at December 31, 2011 |
|
|
|
$ |
1,676 |
|
The following table provides
quantitative information on the unobservable inputs of our fair value measurements for our Level 3 assets for the year ended December 31,
2012:
|
|
|
|
Estimated Fair Value at December 31,
2012
|
|
Valuation Technique
|
|
Unobservable Inputs
|
|
Range
|
|
|
|
|
$ |
1,789 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.62 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
3.50%4.50 |
% |
|
|
|
|
|
|
|
|
|
|
Probability of earning maximum rate until maturity |
|
|
0.06%0.09 |
% |
|
|
|
|
|
|
|
|
|
|
Probability of principal returned prior to maturity |
|
|
86.34%88.38 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
11.57%13.57 |
% |
A significant increase or decrease in
the individual assumptions included above could result in a significantly lower or higher fair value measurement.
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the
following at December 31, 2012 and 2011:
|
|
|
|
USEFUL LIFE ESTIMATED (YEARS)
|
|
2012
|
|
2011
|
|
|
|
|
|
5 |
|
|
$ |
12,824 |
|
|
$ |
12,733 |
|
|
|
|
|
|
310 |
|
|
|
4,620 |
|
|
|
4,594 |
|
|
|
|
|
|
7 |
|
|
|
1,175 |
|
|
|
1,175 |
|
|
|
|
|
|
3 |
|
|
|
3,639 |
|
|
|
3,639 |
|
|
|
|
|
|
|
|
|
|
22,258 |
|
|
|
22,141 |
|
Less: Accumulated depreciation and amortization |
|
|
|
|
|
|
|
|
20,266 |
|
|
|
19,202 |
|
Net property and equipment |
|
|
|
|
|
|
|
$ |
1,992 |
|
|
$ |
2,939 |
|
Depreciation and amortization expense |
|
|
|
|
|
|
|
$ |
1,064 |
|
|
$ |
1,172 |
|
75
ARQULE, INC.
NOTES TO
FINANCIAL STATEMENTS (Continued)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
5. PROPERTY AND EQUIPMENT (Continued)
On May 2, 2005, we completed a
transaction to sell our Woburn headquarters facility and two parcels of land in exchange for a cash payment, net of commissions and closing costs, of
$39,331. Simultaneous with that sale, we entered into an agreement to lease back the entire facility and the associated land. The lease was
subsequently amended on June 30, 2005. The amended lease has a term of ten years with an average annual rental rate of $3,409. We also have options to
extend the lease term for up to an additional ten years. We are applying sale leaseback accounting to the transaction and are treating the lease as an
operating lease. As a result of this transaction, we realized a gain on the sale of $5,477, which was deferred and is being amortized over the initial
ten year lease term as a reduction in rent expense. The remaining amount of the deferred gain is $1,336 at December 31, 2012.
6. OTHER ASSETS
Other assets include the following at
December 31, 2012 and 2011:
|
|
|
|
2012
|
|
2011
|
|
|
|
|
$ |
669 |
|
|
$ |
669 |
|
Prepaid rent, net of current portion |
|
|
|
|
589 |
|
|
|
780 |
|
|
|
|
|
$ |
1,258 |
|
|
$ |
1,449 |
|
7. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses
include the following at December 31, 2012 and 2011:
|
|
|
|
2012
|
|
2011
|
|
|
|
|
$ |
560 |
|
|
$ |
226 |
|
|
|
|
|
|
2,872 |
|
|
|
2,768 |
|
Accrued outsourced pre-clinical and clinical fees |
|
|
|
|
5,501 |
|
|
|
8,034 |
|
Accrued professional fees |
|
|
|
|
641 |
|
|
|
379 |
|
|
|
|
|
|
589 |
|
|
|
525 |
|
|
|
|
|
$ |
10,163 |
|
|
$ |
11,932 |
|
8. NOTES PAYABLE
In October 2008, we entered into a
margin loan agreement with a financial institution collateralized by $2.9 million of our auction rate securities and borrowed $1.7 million which is the
maximum amount allowed under this facility. The amount outstanding under this facility was $1.7 million at December 31, 2012 and 2011, collateralized
by $2.1 million of auction rate securities at cost.
Interest expense was $26, $25 and $274
for the years ended December 31, 2012, 2011 and 2010, respectively.
9. STOCKHOLDERS EQUITY
We are authorized to issue up to one
million shares of preferred stock. As of December 31, 2012 and 2011, there were no outstanding shares of preferred stock. Our Board of Directors will
determine the terms of the preferred stock if and when the shares are issued.
76
ARQULE, INC.
NOTES TO
FINANCIAL STATEMENTS (Continued)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
9. STOCKHOLDERS EQUITY
(Continued)
Common Stock
Our amended Certificate of
Incorporation authorizes the issuance of up to 100 million shares of $0.01 par value common stock.
In January 2011, we completed a stock
offering in which we sold 8,050,000 shares of common stock at a price of $6.15 per share for net proceeds of $46.8 million after commissions and
offering expenses.
In April 2012, we completed a stock
offering in which we sold 8,222,500 shares of common stock at a price of $7.30 per share for net proceeds of $56.3 million after commissions and
offering expenses.
At December 31, 2012, we have 585,033
common shares reserved for future issuance under the Employee Stock Purchase Plan (Purchase Plan) and for the exercise of common stock
options pursuant to the 1994 Amended and Restated Equity Incentive Plan (Equity Incentive Plan) and the 1996 Amended and Restated Director
Stock Option Plan (Director Plan).
10. EQUITY INCENTIVE PLANS
During 2011, our stockholders approved
an amendment to the Equity Incentive Plan to increase the number of shares available to 15,500,000. All shares are awarded at the discretion of our
Board of Directors in a variety of stock based forms including stock options, restricted stock and performance based stock units. Pursuant to the
Equity Incentive Plan, incentive stock options may not be granted at less than the fair market value of our common stock at the date of the grant, and
the option term may not exceed ten years. Stock options issued pursuant to the Equity Incentive Plan generally vest over four years. For holders of 10%
or more of our voting stock, options may not be granted at less than 110% of the fair market value of the common stock at the date of the grant, and
the option term may not exceed five years. Stock appreciation rights granted in tandem with an option shall have an exercise price not less than the
exercise price of the related option. As of December 31, 2012, no stock appreciation rights have been issued. At December 31, 2012, there were
3,521,735 shares available for future grant under the Equity Incentive Plan.
During 2011, our stockholders approved
an amendment to the Director Plan to increase the number of shares available to 950,500. Under the terms of the Director Plan, options to purchase
shares of common stock are automatically granted (A) to the Chairman of the Board of Directors (1) upon his or her initial election or appointment in
the amount of 25,000 and vesting over three years and (2) upon his or her re-election or continuation on our board immediately after each annual
meeting of stockholders in the amount of 25,000 and vesting immediately, and (B) to each other Director (1) upon his or her initial election to our
board in the amount of 30,000 and vesting over three years and (2) upon his or her re-election or continuation on our board in the amount of 15,000 and
vesting immediately. All options granted pursuant to the Director Plan have a term of ten years with exercise prices equal to fair market value on the
date of grant. Through December 31, 2012, options to purchase 947,500 shares of common stock have been granted under this plan of which 615,000 shares
are currently exercisable. As of December 31, 2012, 212,000 shares are available for future grant.
77
ARQULE, INC.
NOTES TO
FINANCIAL STATEMENTS (Continued)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
10. EQUITY INCENTIVE PLANS
(Continued)
Option activity under the Plans for the
years ended December 31, 2010, 2011 and 2012 was as follows:
Stock Options
|
|
|
|
Number of Shares
|
|
Weighted Average Exercise Price
|
Outstanding as of December 31, 2009 |
|
|
|
|
5,215,189 |
|
|
$ |
6.04 |
|
|
|
|
|
|
1,548,650 |
|
|
|
3.74 |
|
|
|
|
|
|
(83,023 |
) |
|
|
3.42 |
|
|
|
|
|
|
(324,989 |
) |
|
|
10.37 |
|
Outstanding as of December 31, 2010 |
|
|
|
|
6,355,827 |
|
|
$ |
5.29 |
|
|
|
|
|
|
1,675,950 |
|
|
|
6.69 |
|
|
|
|
|
|
(728,811 |
) |
|
|
5.41 |
|
|
|
|
|
|
(755,523 |
) |
|
|
7.88 |
|
Outstanding as of December 31, 2011 |
|
|
|
|
6,547,443 |
|
|
$ |
5.34 |
|
|
|
|
|
|
1,453,468 |
|
|
|
7.72 |
|
|
|
|
|
|
(278,545 |
) |
|
|
4.85 |
|
|
|
|
|
|
(564,908 |
) |
|
|
7.20 |
|
Outstanding as of December 31, 2012 |
|
|
|
|
7,157,458 |
|
|
$ |
5.70 |
|
Exercisable as of December 31, 2012 |
|
|
|
|
4,428,151 |
|
|
$ |
5.17 |
|
Weighted average grant-date fair value of options granted during the year ended December 31, 2012 |
|
|
|
|
|
|
|
$ |
4.67 |
|
The following table summarizes
information about options outstanding at December 31, 2012:
|
|
|
|
Options Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
Options Exercisable
|
|
Range of Exercise Prices
|
|
|
|
Number Outstanding at December 31, 2012
|
|
Weighted Average Remaining Contractual Life
|
|
Weighted Average Exercise Price
|
|
Exercisable as of December 31, 2012
|
|
Weighted Average Exercise Price
|
|
|
|
|
|
18,000 |
|
|
|
5.9 |
|
|
$ |
2.48 |
|
|
|
17,000 |
|
|
$ |
2.46 |
|
|
|
|
|
|
2,859,287 |
|
|
|
5.4 |
|
|
|
3.92 |
|
|
|
2,319,636 |
|
|
|
4.01 |
|
|
|
|
|
|
4,203,171 |
|
|
|
6.6 |
|
|
|
6.86 |
|
|
|
2,014,515 |
|
|
|
6.39 |
|
|
|
|
|
|
77,000 |
|
|
|
4.4 |
|
|
|
9.09 |
|
|
|
77,000 |
|
|
|
9.09 |
|
|
|
|
|
|
7,157,458 |
|
|
|
6.1 |
|
|
$ |
5.70 |
|
|
|
4,428,151 |
|
|
$ |
5.17 |
|
The aggregate intrinsic value of
options outstanding at December 31, 2012 was $6, all related to exercisable options. The weighted average grant date fair value of options granted in
year ended December 31, 2012, 2011 and 2010 was $4.67, $3.99, and $2.24, per share, respectively. The intrinsic value of options exercised in the year
ended December 31, 2012, 2011, and 2010 was $604, $963, and $213, respectively.
Shares vested, expected to vest and
exercisable at December 31, 2012 are as follows:
|
|
|
|
Shares
|
|
Weighted-Average Exercise Price
|
|
Weighted-Average Remaining Contractual Term
(in years)
|
|
Aggregate Intrinsic Value
|
Vested and unvested expected to vest at December 31, 2012 |
|
|
|
|
6,991,763 |
|
|
$ |
5.70 |
|
|
|
6.1 |
|
|
$ |
6 |
|
Exercisable at December 31, 2012 |
|
|
|
|
4,428,151 |
|
|
$ |
5.17 |
|
|
|
4.8 |
|
|
$ |
6 |
|
78
ARQULE, INC.
NOTES TO
FINANCIAL STATEMENTS (Continued)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
10. EQUITY INCENTIVE PLANS
(Continued)
The total compensation cost not yet
recognized as of December 31, 2012 related to non-vested option awards was $7,218 which will be recognized over a weighted-average period of 2.3 years.
During the year ended December 31, 2012, there were 400,850 shares forfeited with a weighted average grant date fair value of $3.91 per share. The
weighted average remaining contractual life for options exercisable at December 31, 2012 was 4.8 years.
In 2009, we granted 412,200 shares of
restricted stock to employees, vesting annually over a four year period. In 2008 we granted 103,316 shares of restricted stock to employees, vesting
annually over a four year period and 125,000 shares vesting annually over a two year period. The shares of restricted stock were issued at no cost to
the recipients. The weighted average fair value of the restricted stock at the time of grant in 2009 and 2008 was $3.54 and $4.31 respectively, per
share, and is being expensed ratably over the vesting period. Through December 31, 2012, 69,495 shares have been forfeited, and 491,226 shares have
vested. We recognized share-based compensation expense related to restricted stock of $257, $358 and $389 for the year ended December 31, 2012, 2011
and 2010, respectively.
Restricted stock activity under the
Plan for the year ended December 31, 2012 was as follows:
Restricted Stock
|
|
|
|
Number of Shares
|
|
Weighted Average Grant Date Fair Value
|
Unvested as of December 31, 2011 |
|
|
|
|
195,979 |
|
|
$ |
3.65 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(107,634 |
) |
|
|
3.74 |
|
|
|
|
|
|
(8,550 |
) |
|
|
3.54 |
|
Unvested as of December 31, 2012 |
|
|
|
|
79,795 |
|
|
$ |
3.54 |
|
The fair value of restricted stock
vested in 2012, 2011 and 2010 was $223, $800 and $449, respectively.
In July 2010, the Company amended its
chief executive officers (the CEOs) employment agreement to grant the CEO 100,000 stock options, of which 25% vested upon grant
and 25% vest annually over the next three years, and a maximum of 390,000 performance-based stock units that vest upon the achievement of certain
performance and market based targets. In February 2012, the Company amended its chief medical officers (the CMOs) employment
agreement to grant the CMO 50,000 performance-based stock units that vest upon the achievement of certain performance based targets. Through December
31, 2012 no expense has been recorded for these performance-based stock units.
In March 2013, the Company amended
its chief operating officers (the COOs) employment agreement to grant the COO 125,000 performance-based stock units that vest
upon the achievement of certain performance based targets. In March 2013, the Company amended its CMOs employment agreement to grant the CMO
120,000 performance-based stock units that vest upon the achievement of certain performance based targets.
In 1996, the stockholders adopted the
Purchase Plan. This plan enables eligible employees to exercise rights to purchase our common stock at 85% of the fair market value of the stock on the
date the right was granted or the date the right is exercised, whichever is lower. Rights to purchase shares under the Purchase Plan are granted by the
Board of Directors. The rights are exercisable during a period determined by the Board of Directors; however, in no event will the period be longer
than twenty-seven months. The Purchase Plan is available to substantially all employees, subject to certain limitations. In 2011, our stockholders
approved an amendment to the Purchase Plan to increase the aggregate number of shares of the Companys common stock that may be issued to
2,400,000. As of December 31, 2012, 1,814,967 shares have been purchased and 585,033 shares are available for future sale under the Purchase Plan. We
recognized
79
ARQULE, INC.
NOTES TO
FINANCIAL STATEMENTS (Continued)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
10. EQUITY INCENTIVE PLANS
(Continued)
share-based compensation expense
related to the Purchase Plan of $159, $165 and $248 for the year ended December 31, 2012, 2011 and 2010, respectively.
11. INCOME TAXES
There was no current or deferred tax
expense for the years ended December 31, 2012 and 2011. The Company recorded a $550 federal income tax benefit in 2010 attributable to an election it
made in the second quarter of 2010 under legislation that allowed net operating losses to offset 100% of alternative minimum tax (AMT).
Prior to this legislation, only 90% of AMT could be offset by net operating losses and accordingly in 2009 the Company recorded a $550 federal income
tax expense for AMT. The Company received a refund in 2010 of the $550 AMT paid in 2009.
The American Taxpayer Relief Act of
2012 (ATR Act) was enacted on January 2, 2013 which, among other things, provides a retroactive two-year extension of the U.S. research and
development tax credits that had previously expired on December 31, 2011. We have not recorded the benefit of these credits for the 2012 year. We will
record the benefit from these credits in the first quarter of calendar year 2013 as a result of the enactment of the ATR Act. We expect to record a
benefit related to 2012 Research Credit of approximately $1,231, and a full valuation allowance, resulting in a net benefit of $0.
The following is reconciliation between
the U.S. federal statutory rate and the effective tax rate for the years ended December 31, 2012, 2011 and 2010:
|
|
|
|
2012
|
|
2011
|
|
2010
|
Income tax (benefit) expense at statutory rate |
|
|
|
$ |
(3,696 |
) |
|
$ |
(3,659 |
) |
|
$ |
(10,430 |
) |
State tax (benefit) expense, net of Federal tax (benefit) expense |
|
|
|
|
(449 |
) |
|
|
357 |
|
|
|
(559 |
) |
|
|
|
|
|
648 |
|
|
|
617 |
|
|
|
116 |
|
Effect of change in valuation allowance and State NOL expiration |
|
|
|
|
3,190 |
|
|
|
3,737 |
|
|
|
11,586 |
|
|
|
|
|
|
320 |
|
|
|
(2,006 |
) |
|
|
(1,466 |
) |
|
|
|
|
|
(13 |
) |
|
|
954 |
|
|
|
203 |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
(550 |
) |
The income tax effect of temporary
differences comprising the deferred tax assets and deferred tax liabilities on the accompanying balance sheets is a result of the following at December
31, 2012 and 2011:
|
|
|
|
2012
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards |
|
|
|
$ |
91,118 |
|
|
$ |
86,848 |
|
|
|
|
|
|
22,172 |
|
|
|
22,492 |
|
Equity based compensation |
|
|
|
|
6,774 |
|
|
|
5,881 |
|
Book depreciation in excess of tax |
|
|
|
|
2,263 |
|
|
|
2,321 |
|
|
|
|
|
|
(132 |
) |
|
|
(101 |
) |
|
|
|
|
|
15,672 |
|
|
|
21,439 |
|
|
|
|
|
|
194 |
|
|
|
194 |
|
|
|
|
|
|
140 |
|
|
|
180 |
|
|
|
|
|
|
138,201 |
|
|
|
139,254 |
|
|
|
|
|
|
(138,201 |
) |
|
|
(139,254 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
80
ARQULE, INC.
NOTES TO
FINANCIAL STATEMENTS (Continued)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
11. INCOME TAXES (Continued)
Total valuation allowance decreased by
$1,053 for the year ended December 31, 2012. We have evaluated positive and negative evidence bearing upon the realizability of our deferred tax
assets, which are comprised principally of federal net operating loss (NOL), net capital loss, and research and development credit
carryforwards. We have determined that it is more likely than not that we will not recognize the benefits of our federal and state deferred tax assets
and, as a result, we have established a full valuation allowance against our net deferred tax assets as of December 31, 2012.
As of December 31, 2012, we had federal
NOL, state NOL, and research and development credit carryforwards of approximately $265,004, $113,262 and $24,885 respectively, expiring from 2013 to
2032, which can be used to offset future income tax liabilities. Federal capital loss carryforwards of approximately $571, expiring in 2015, can be
used to offset future federal capital gain income. Approximately $15,003 of our federal NOL and $907 of our state NOL were generated from excess tax
deductions from share-based awards, the tax benefit of which will be credited to additional paid-in-capital when the deductions reduce current taxes
payable.
At December 31, 2011, and 2012 we had
no unrecognized tax benefits. We do not expect that the total amount of unrecognized tax benefits will significantly increase in the next twelve
months. Our policy is to recognize interest and penalties related to uncertain tax positions in income tax expense. As of December 31, 2011 and 2012,
we had no accrued interest or penalties related to uncertain tax positions. Our U.S. federal tax returns for the tax years 2010 through 2012 and our
state tax returns for the tax years 2009 through 2012 remain open to examination. Prior tax years remain open to the extent of net operating loss and
tax credit carryforwards.
Utilization of NOL and research and
development credit carryforwards may be subject to a substantial annual limitation in the event of an ownership change that has occurred previously or
could occur in the future pursuant to Section 382 and 383 of the Internal Revenue Code of 1986, as amended, as well as similar state provisions. An
ownership change may limit the amount of NOL and research and development credit carryforwards that can be utilized annually to offset future taxable
income, and may, in turn, result in the expiration of a portion of those carryforwards before utilization. In general, an ownership change, as defined
by Section 382, results from transactions that increase the ownership of certain stockholders or public groups in the stock of a corporation by more
than 50 percentage points over a three year period. We undertook a detailed study of our NOL and research and development credit carryforwards through
January 31,2013, to determine whether such amounts are likely to be limited by Section 382. As a result of this analysis, we currently do not believe
any Sections 382 or 383 limitations will significantly impact our ability to offset income with available NOL and research and development credit
carryforwards. However, future ownership changes under Section 382 may limit our ability to fully utilize these tax benefits.
12. COMMITMENTS AND CONTINGENCIES
We lease facilities under
non-cancelable operating leases. At December 31, 2012, the minimum lease commitments for all leased facilities, net of sublease income, are as
follows:
YEAR ENDING DECEMBER 31,
|
|
|
|
OPERATING LEASES
|
|
|
|
|
$ |
3,073 |
|
|
|
|
|
|
3,185 |
|
|
|
|
|
|
1,069 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total minimum lease payments |
|
|
|
$ |
7,327 |
|
81
ARQULE, INC.
NOTES TO
FINANCIAL STATEMENTS (Continued)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
12. COMMITMENTS AND CONTINGENCIES
(Continued)
Rent expense under non-cancelable
operating leases was approximately $2,866 for the years ended December 31, 2012, 2011, and 2010.
13. CONCENTRATION OF CREDIT RISK
Revenue from one customer represented
approximately 84% of total revenue during 2012, 79% in 2011 and 79% in 2010. Revenue from another customer represented approximately 16% of total
revenue during 2012, 21% in 2011, and 21% in 2010.
14. SELECTED QUARTERLY FINANCIAL DATA
(UNAUDITED)
|
|
|
|
FIRST QUARTER
|
|
SECOND QUARTER
|
|
THIRD QUARTER
|
|
FOURTH QUARTER
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
8,498 |
|
|
$ |
11,829 |
|
|
$ |
10,944 |
|
|
$ |
5,143 |
|
|
|
|
|
|
(4,260 |
) |
|
|
(885 |
) |
|
|
(431 |
) |
|
|
(5,296 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(0.08 |
) |
|
$ |
(0.01 |
) |
|
$ |
(0.01 |
) |
|
$ |
(0.09 |
) |
|
|
|
|
FIRST QUARTER
|
|
SECOND QUARTER
|
|
THIRD QUARTER
|
|
FOURTH QUARTER
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
13,405 |
|
|
$ |
5,447 |
|
|
$ |
11,954 |
|
|
$ |
16,504 |
|
|
|
|
|
|
(1,466 |
) |
|
|
(10,804 |
) |
|
|
(2,260 |
) |
|
|
3,768 |
|
Basic and diluted earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) per share |
|
|
|
$ |
(0.03 |
) |
|
$ |
(0.20 |
) |
|
$ |
(0.04 |
) |
|
$ |
0.07 |
|
82
ITEM 9. |
|
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE |
None.
ITEM 9A. |
|
CONTROLS AND PROCEDURES |
Conclusion Regarding the Effectiveness of Disclosure Controls
and Procedures
Our management, with the participation
of our Chief Executive Officer and President and Chief Operating Officer (Principal Financial Officer), evaluated the effectiveness of our disclosure
controls and procedures as of December 31, 2012. The term disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934, as amended (Exchange Act), means controls and other procedures of a company that are designed to
ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the SECs rules and forms. Disclosure controls and procedures include, without
limitation, controls and procedures designed to provide reasonable assurance that information required to be disclosed by a company in the reports that
it files or submits under the Exchange Act is accumulated and communicated to the companys management, including its principal executive and
principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Our management recognizes that any controls and
procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and our management
necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our
disclosure controls and procedures as of December 31, 2012, our Chief Executive Officer and President and Chief Operating Officer (Principal Financial
Officer) concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.
Managements Report on Internal Control Over Financial
Reporting
Our management is responsible for
establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Under the
supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an
evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal ControlIntegrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in
Internal ControlIntegrated Framework, our management concluded that our internal control over financial reporting was effective as of
December 31, 2012.
The effectiveness of our internal
control over financial reporting as of December 31, 2012 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting
firm, as stated in their report which is included herein.
Changes in Internal Control Over Financial
Reporting
There has been no change in our
internal control over financial reporting during the quarter ended December 31, 2012 that has materially affected or is reasonably likely to materially
affect our internal control over financial reporting.
ITEM 9B. |
|
OTHER INFORMATION |
None.
83
PART III
Except as otherwise indicated, the
following information required by the Instructions to Form 10-K is incorporated herein by reference from various sections of the ArQule, Inc. Proxy
Statement for the annual meeting of stockholders to be held on May 20, 2013, as summarized below:
ITEM 10. |
|
DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE
GOVERNANCE |
Election of Directors;
Section 16(a) Beneficial Ownership Reporting Compliance; Corporate Governance; and Board Committees and
Meetings.
Information regarding the executive
officers of the Company is incorporated by reference from Executive Officers of the Registrant at the end of Item 1 of this
report.
ITEM 11. |
|
EXECUTIVE COMPENSATION |
Compensation Discussion and
Analysis; Executive Compensation; Director Compensation; Compensation, Nominating and Governance Committee
Interlocks and Insider Participation; and Compensation Committee Report.
ITEM 12. |
|
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
Share Ownership of Certain
Beneficial Owners and Securities Authorized for Issuance Under Equity Compensation Plans.
ITEM 13. |
|
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE |
Certain Relationships and Related
Transactions and Director Independence.
ITEM 14. |
|
PRINCIPAL ACCOUNTING FEES AND SERVICES |
Fees paid to the Companys
independent registered public accounting firm are disclosed under the caption Ratification of the Selection of an Independent Registered Public
Accountants.
PART IV
ITEM 15. |
|
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES |
(a) 1. FINANCIAL
STATEMENTS
The financial statements are listed
under Item 8 of this report.
2. FINANCIAL STATEMENT
SCHEDULES
The financial statement schedules are
omitted from this report because they are not applicable or required information are shown in the financial statements of the footnotes
thereto.
84
3. EXHIBITS
EXHIBIT NO.
|
|
|
|
DESCRIPTION
|
|
|
|
|
Restated Certificate of Incorporation of the Company, Filed as Exhibit 3.1 to the Companys Annual Report on Form 10-K filed on
March 2, 2011 (File No. 000-21429) and incorporated herein by reference. |
|
|
|
|
Amended and Restated By-laws of the Company. Filed as Exhibit 3.1 to the Companys Current Report on Form 8-K filed on November
19, 2007 (File No. 000-21429) and incorporated herein by reference. |
|
|
|
|
Specimen Common Stock Certificate. Filed as Exhibit 4.2 to the Companys Registration Statement on Form S-1 filed on August 19,
1996 (File No. 333-11105) and incorporated herein by reference. |
|
|
|
|
Amended and Restated 1994 Equity Incentive Plan. Filed as Appendix A to the Companys Definitive Proxy Statement filed on April
29, 2011 (File No. 000-21429) and incorporated herein by reference. |
|
|
|
|
Amended and Restated 1996 Employee Stock Purchase Plan. Filed as Appendix B to the Companys Definitive Proxy Statement filed on
April 29, 2011 (File No. 000-21429) and incorporated herein by reference. |
|
|
|
|
Amended and Restated 1996 Director Stock Option Plan. Filed as Appendix C to the Companys Definitive Proxy Statement filed on
April 29, 2011 (File No. 000-21429) and incorporated herein by reference. |
|
|
|
|
2005 Director Stock Compensation Plan. Filed as Exhibit 4 to the Companys Registration Statement on Form S-8 filed on December
6, 2005 (File No. 333-130159) and incorporated herein by reference. |
|
|
|
|
Amended and Restated Lease by and between ARE-MA Region No. 20, LLC and the Company, dated June 30, 2005. Filed as Exhibit 10.21 to
the Companys Quarterly Report on Form 10-Q for the quarter ended June 30, 2005 filed on August 5, 2005 (File No. 000-21429) and incorporated
herein by reference. |
|
|
|
|
Employment Agreement between the Company and Peter S. Lawrence, dated April 13, 2006. Filed as Exhibit 10.1 to the Companys
Current Report on Form 8-K dated April 18, 2006 (File No. 000-21429) and incorporated herein by reference. |
|
|
|
|
Exclusive License Agreement, by and between the Company and Kyowa Hakko Kogyo Co., Ltd. Filed as Exhibit 10.1 to the Companys
Quarterly Report on Form 10-Q for the quarter ended June 30, 2007 filed on August 7, 2007 (File No. 000-21429) and incorporated herein by
reference. |
|
|
|
|
Amendment to Employment Agreement, dated as of October 4, 2007, by and between the Company and Peter S. Lawrence. Filed as Exhibit
10.1 to the Companys Current Report on Form 8-K filed on October 10, 2007 (File No. 000-21429) and incorporated herein by
reference. |
|
|
|
|
Form of Incentive Stock Option Agreement. Filed as Exhibit 10.16 to the Companys Annual Report on Form 10-K filed on March 17,
2008 (File No. 000-21429) and incorporated herein by reference. |
|
|
|
|
Form of Non-Statutory Stock Option Agreement. Filed as Exhibit 10.17 to the Companys Annual Report on Form 10-K filed on March
17, 2008 (File No. 000-21429) and incorporated herein by reference. |
|
|
|
|
Second Amendment to Employment Agreement, dated April 14, 2008, by and between ArQule, Inc. and Peter S. Lawrence. Filed as Exhibit
10.4 to the Companys Current Report on Form 8-K, filed on April 18, 2008 (File No. 000-21429) and incorporated herein by
reference. |
85
EXHIBIT NO.
|
|
|
|
DESCRIPTION
|
|
|
|
|
Employment Agreement, dated as of April 15, 2008, by and between ArQule, Inc. and Paolo Pucci. Filed as Exhibit 10.4 to the
Companys Current Report on Form 8-K, filed on April 18, 2008 (File No. 000-21429) and incorporated herein by reference. |
|
|
|
|
Collaborative Research, Development and License Agreement, dated November 7, 2008, by and between ArQule, Inc. and Daiichi Sankyo
Co., Ltd. Filed as Exhibit 10.22 to the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2008 filed on March 6, 2009
(File No. 000-21429) and incorporated herein by reference. |
|
|
|
|
License, Co-Development and Co-Commercialization Agreement, dated December 18, 2008, by and between ArQule, Inc. and Daiichi Sankyo
Co., Ltd. Filed as Exhibit 10.23 to the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2008 filed on March 6, 2009
(File No. 000-21429) and incorporated herein by reference. |
|
|
|
|
Agreement on Milestone Payments and Royalties, effective as of May 25, 2009 by and between ArQule, Inc. and Daiichi Sankyo Co., Ltd.
Filed as Exhibit 10.1 to the Companys Current Report on Form 10-Q for the quarter ended June 30, 2009, filed on August 7, 2009 (File No.
000-21429) and incorporated herein by reference. |
|
|
|
|
Amendment to Employment Agreement, dated as of July 15, 2010, by and between the Company and Paolo Pucci. Filed as Exhibit 10.1 to
the Companys Quarterly Report on Form 10-Q for the quarter ended June 30, 2010 filed on August 4, 2010, (File No. 000-21429) and incorporated
herein by reference. |
|
|
|
|
Form of Stock Unit Agreement. Filed as Exhibit 10.2 to the Companys Quarterly Report on Form 10-Q for the quarter ended June
30, 2010, filed on August 4, 2010, (File No. 000-21429) and incorporated herein by reference. |
|
|
|
|
Form of Restricted Stock Agreement. Filed as Exhibit 10.3 to the Companys Quarterly Report on Form 10-Q for the quarter ended
June 30, 2010, filed on August 4, 2010, (File No. 000-21429) and incorporated herein by reference. |
|
|
|
|
Amendment No. 1 to Collaborative Research, Development and License Agreement, dated October 8, 2010, by and between ArQule, Inc. and
Daiichi Sankyo Co., Ltd. Filed as Exhibit 10.1 to the Companys Amendment No.1 to Quarterly Report on Form 10-Q for the quarter ended September
30, 2010 filed on January 14 , 2011, (File No. 000-21429) and incorporated herein by reference. |
|
|
|
|
Employment Agreement, dated as of November 21, 2008 by and between ArQule, Inc. and Thomas C. K. Chan, filed as Exhibit 10.21 to the
Companys Annual Report on Form 10-K for the year ended December 31, 2011 filed on March 1, 2012 (File No. 000-21429) and incorporated herein by
reference. |
|
|
|
|
Employment Agreement, dated as of June 17, 2008, by and between ArQule, Inc. and Brian Schwartz, filed as Exhibit 10.1 to the
Companys Current Report on Form 8-K filed on February 24, 2012 (File No. 000-21429) and incorporated herein by reference. |
|
|
|
|
Amendment to Employment Agreement dated as of February 23, 2012 by and between ArQule, Inc. and Brian Schwartz, filed as Exhibit 10.2
to Amendment No.1 to the Companys Current Report on Form 8-K filed on February 27, 2012 (File No. 000-21429) and incorporated herein by
reference. |
|
|
|
|
License and Co-Commercialization Agreement, dated November 8, 2011, by and between ArQule, Inc. and Daiichi Sankyo Co., Ltd., filed
as Exhibit 10.24 to the Companys Annual Report on Form 10-K for the year ended December 31, 2011 filed on March 1, 2012 (File No. 000-21429) and
incorporated herein by reference. |
|
|
|
|
Amendment to Employment Agreement filed dated as of November 2, 2012 by and between ArQule, Inc. and Thomas C. K. Chan, filed
herewith. |
86
EXHIBIT NO.
|
|
|
|
DESCRIPTION
|
|
|
|
|
Second Amendment to Employment Agreement, dated as of March 8, 2013, by and between ArQule, Inc. and Paolo Pucci, filed as Exhibit
10.1 to the Companys Current Report on Form 8-K filed on March 11, 2013 (File No. 000-21429) and incorporated herein by
reference. |
|
|
|
|
Third Amendment to Employment Agreement, dated as of March 8, 2013, by and between ArQule, Inc. and Peter S. Lawrence, filed as
Exhibit 10.2 to the Companys Current Report on Form 8-K filed on March 11, 2013 (File No. 000-21429) and incorporated herein by
reference. |
|
|
|
|
Second Amendment to Employment Agreement, dated March 8, 2013, by and between ArQule, Inc. and Brian Schwartz, filed as Exhibit 10.3
to the Companys Current Report on Form 8-K filed on March 11, 2013 (File No. 000-21429) and incorporated herein by
reference. |
|
|
|
|
Consent of PricewaterhouseCoopers LLP, an Independent Registered Public Accounting Firm, filed herewith. |
|
|
|
|
Rule 13a-14(a) Certificate of Chief Executive Officer, filed herewith. |
|
|
|
|
Rule 13a-14(a) Certificate of Principal Financial Officer, filed herewith. |
|
|
|
|
Rule 13a-14(b) Certificate of Chief Executive Officer and Principal Financial Officer, filed herewith. |
|
|
|
|
The following materials from ArQule, Inc.s Annual Report on Form 10-K for the year ended December 31, 2012, formatted in XBRL
(Extensible Business Reporting Language): (i) Balance Sheets, (ii) Statements of Operations and Comprehensive Loss, (iii) Statements of
Stockholders Equity (Deficit) and Comprehensive Loss, (iv) Statements of Cash Flows, and (v) Notes to Financial
Statements. |
* |
|
Indicates a management contract or compensatory
plan. |
+ |
|
Certain confidential material contained in the document has been
omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 406 of the Securities Act of 1933, as amended or Rule 24b-2
of the Securities and Exchange Act of 1934, as amended. |
87
SIGNATURES
Pursuant to the requirements of Section
13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
|
|
|
|
ARQULE, INC. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paolo Pucci Chief Executive Officer
|
|
|
|
|
Date:
March 14, 2013 |
Pursuant to the requirements of the
Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
SIGNATURE
|
|
|
|
TITLE
|
|
DATE
|
/s/ PAOLO PUCCI Paolo Pucci |
|
|
|
Chief Executive Officer and Director (Principal Executive Officer) |
|
|
|
/s/ PETER S. LAWRENCE Peter S.
Lawrence |
|
|
|
President and Chief Operating Officer (Principal Financial Officer) |
|
|
|
/s/ ROBERT J. WEISKOPF Robert J.
Weiskopf |
|
|
|
Vice President of Finance, Corporate Controller and Treasurer (Principal Accounting Officer) |
|
|
|
/s/ PATRICK J. ZENNER Patrick J.
Zenner |
|
|
|
DirectorChairman of the Board |
|
|
|
/s/ TIMOTHY C. BARABE Timothy C.
Barabe |
|
|
|
|
|
|
|
/s/ SUSAN L. KELLEY Susan L. Kelley |
|
|
|
|
|
|
|
/s/ RONALD M. LINDSAY Ronald M.
Lindsay |
|
|
|
|
|
|
|
/s/ MICHAEL D. LOBERG Michael D.
Loberg |
|
|
|
|
|
|
|
/s/ WILLIAM G. MESSENGER William G.
Messenger |
|
|
|
|
|
|
88