MARKETABLE SECURITIES AND FAIR VALUE MEASUREMENTS

12 Months Ended

Dec. 31, 2012

Marketable Securities and Fair Value Measurements [Abstract]

MARKETABLE SECURITIES AND FAIR VALUE MEASUREMENTS

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).

      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 security’s 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.

ArQule’s marketable securities portfolio includes $2.1 million (at cost) at December 31, 2012 and 2011, invested in auction rate securities.

ArQule’s 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 Company’s 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 Company’s 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
Security type
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

December 31, 2011	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Security type
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 Company’s 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
Security type
Auction rate securities	$	2,100	$	—	$	(311	)	$	1,789
Total trading securities	$	2,100	$	—	$	(311	)	$	1,789

December 31, 2011	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Security type
Auction rate securities	$	2,100	$	—	$	(424	)	$	1,676
Total trading securities	$	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 Company’s auction rate security is included in marketable securities-long term and totals $1,789. At December 31, 2011, the Company’s 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

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)
Cash equivalents	$	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
Total	$	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)
Cash equivalents	$	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
Total	$	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
Settlements		—
Balance at December 31, 2012	$	1,789

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
Settlements		(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
Auction rate securities	$	1,789	Discounted cash flow
				Maximum rate		1.62	%
				Liquidity risk premium		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	%
				Probability of default		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.