ArQule's (NASDAQ:ARQL) shares have surged this week after the tiny biotech firm reported positive preclinical results in one of its early cancer research programs. Its announcement may augur well for ArQule's cancer research programs, and I wish the company every success.

But when biotech stocks move significantly on preclinical data, I tend to roll my eyes. Success in a test tube or even in a male Wistar rat is a far cry from success in humans. Most preclinical victories, statistically speaking, come to naught -- at least in terms of a marketed drug.

ArQule's situation is a good illustration of the attractions and dangers of investing in very early stage biotech companies. Their shares often shoot up on a piece of minor news and then crash back down just as quickly. It shows why investors should follow early stage data seriously, but weigh it lightly in valuing a potential investment.

What ArQule discovered
ArQule researchers found that the activation of a protein called human checkpoint kinase 2 (Chk2) caused cancer cells to stop growing, to start aging, and to go into a programmed death spiral called apoptosis. Better yet, Chk2 appears to do this all on its own. While previous research had looked at certain checkpoint proteins as a barrier to effective chemotherapy, ArQule has taken a different tack and is looking to restore or boost checkpoint activity in cells that are out of whack.

The term "checkpoint" refers to cellular mechanisms that oversee the process of cellular reproduction. If DNA damage is detected, various protein complexes either shut down replication or call repair mechanisms into action. There are various signaling molecules that play a role in this process and, thus, many potential drug targets. Chk2's particular job is to look at certain DNA structures and make sure they are being faithfully duplicated. It can trigger DNA repair mechanisms, but it can also trigger apoptosis if damage is too far gone to fix.

Thus, while checkpoint proteins are around to make sure our cells reproduce accurately, they can unwittingly aid cancer by repairing the damage that DNA-destroying chemotherapeutics wreak on cancerous cells. Or at least, that has been a widely held theory. Researchers have suggested that drugs that inhibit Chk2, for instance, might make tumors that have grown resistant to chemotherapeutics sensitive once more, which would be a major victory. ArQule is suggesting that boosting the activity of Chk2 could knock out cancer.

These two theories aren't necessarily contradictory, since checkpoint proteins can perform different functions in different circumstances, but it does illustrate how difficult it can be to cause a desired biological change through chemical intervention. Maybe boosting Chk2 will help kill cancer, but on the other hand, maybe turning it off will. Maybe each strategy would work at the right time and in the right circumstances, or maybe neither would.

Then there's the small matter of finding a molecule that safely and effectively does what you want to the desired target -- blocking it or boosting it, as the case may be. It is easy to see why preclinical data, although interesting and important, is a poor prognosticator of commercial success.

Even for well-validated targets -- that is, a biological target in which experiments have established that intervention causes desired biological outcomes -- drug development is tricky. Onyx Pharmaceuticals (NASDAQ:ONXX), for instance, put considerable investment into developing ONYX-015, a drug aimed at another checkpoint molecule called p53. This well-known target has been the subject of heavy research, and a lot is known about how it helps control the cell cycle.

But manipulating p53 with a drug was another matter. ONYX-015 was an engineered virus that was supposed to replicate only in cells with a mutated p53 gene (i.e., cancerous cells). It was a great theory, but the gene therapy technology proved too difficult, and Onyx ultimately discontinued the program in 2003.

ArQule could face similar challenges. Its lead program, which is being deployed in conjunction with Roche (NASDAQ:RHHBY), targets a family of transcription factors called E2F that others have aimed for. Corgentech (NASDAQ:CGTK) recently failed to show a benefit in a phase 3 trial of its E2F decoy drug, an aptamer intended to prevent failure of venous bypass grafts. The vein grafts had to be bathed in the drug outside the body before being implanted using a special pressure device designed to get the drug (a comparatively large molecule) inside cells where it could work.

Corgentech went to this trouble because designing a drug that influences E2F has proven to be difficult. Small molecules that can get inside a cell's nucleus where many cell regulatory mechanisms lie may not be large enough to turn on or off large regulatory proteins. Also, it's tough to get potentially more effective nucleic acid- and protein-based drugs inside cells in the first place.

ARQ-501, the company's lead compound, may do the trick. But the company is still looking for "druggable targets" in the pathway, and the current phase 1 program looks to me more like a proof-of-principle study in humans than the beginning of a program necessarily meant to take this particular molecule all the way to market.

What I like about ArQule
Let me point out that I don't mean to pick on ArQule or to suggest that its programs are destined for failure. The company has many things that make it attractive, not the least of which is its compelling research into cellular checkpoints, which could eventually lead to important new drugs.

Indeed, I looked at the company because it could eventually become a great investment. I particularly like that it's funding much of the cost of its R&D with a successful chemistry services business. ArQule had gross profits of nearly $5 million from its chemistry business last quarter, almost as much as it spent on R&D. The company lost only $1.4 million for the quarter, so with over $85 million in cash and short-term investments at the end of the first quarter, ArQule can fund several years of R&D without raising further capital.

The stock is quite cheap, even after this week's jump. With a market cap of about $275 million, there is plenty of potential upside if its clinical programs pan out. But if any of these programs show efficacy in advanced phase 2 studies, ArQule will be cheap at two or three times its current price. Personally, I'd rather wait for a little more validation and pay more later.

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Karl Thiel doesn't have any financial position in any of the companies mentioned in this article. The Motley Fool has an ironclad disclosure policy.