<PAGE>   1
                                                                   EXHIBIT 10.36

   CONFIDENTIAL MATERIALS OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
              EXCHANGE COMMISSION. ASTERISKS DENOTE SUCH OMISSIONS.

                       COLLABORATION AND LICENSE AGREEMENT

This Collaboration and License Agreement dated as of November 28, 2000 (the
"Effective Date") is between SmithKline Beecham Corporation ("SB"), a
Pennsylvania corporation, and ArQule, Inc. ("ArQule"), a Delaware corporation.

                                 R E C I T A L S

         WHEREAS, ArQule has expertise relating to the discovery and
optimization of compounds for use in the Field; and

         WHEREAS, SB has expertise with respect to certain biological targets
within the Field; and

         WHEREAS, SB desires to collaborate with ArQule to screen certain
compounds within ArQule's compound libraries and certain compounds produced by
SB against SB's biological targets in the Field to identify, optimize and
develop compounds that exhibit activity against such targets.

         NOW, THEREFORE, in consideration of the mutual covenants set forth in
this Agreement, SB and ArQule hereby agree as follows:


1.       CERTAIN DEFINITIONS. The following meanings shall be ascribed to
capitalized terms used herein without definition:

         1.1. "Active Compound" means an ArQule Compound that exhibits
significant functional activity against a Target, as determined by SB in a
manner consistent with the manner SB uses to evaluate other similarly situated
compounds being developed by SB within the Field.

         1.2. "Affiliate" means any legal entity (such as a corporation,
partnership, or limited liability company) that control, is controlled by or is
under common control with a party to this Agreement. For the purposes of this
definition, the term "control" means (i) beneficial ownership of at least fifty
percent (50%) of the voting securities of a corporation or other business
organization with voting securities (or such lesser percentage which is the
maximum allowed by a foreign corporation in a particular jurisdiction), (ii) a
fifty percent (50%) or greater interest in the net assets or profits of a
partnership or other business organization without voting securities, or (iii)
the ability to direct the affairs of any such entity.

                                        1
<PAGE>   2
         1.3. "Analog Compound" means a chemical compound that [*****]. "ArQule
Analog Compound" shall mean an Analog Compound developed from an ArQule Compound
(as the parent compound) in the course of an optimization program by ArQule or
SB as contemplated by this Agreement [*****]. For the avoidance of doubt, a
compound is not an ArQule Analog Compound if that compound is acquired,
discovered, or developed by or on behalf of SB independent of this Agreement.
"SB Analog Compound " means an Analog Compound developed from an SB Compound (as
the parent compound) in the course of an optimization program by ArQule or SB as
contemplated by this Agreement [*****]. For the avoidance of doubt, a compound
is not an SB Analog Compound if that compound is acquired, discovered, or
developed by or on behalf of SB independent of this Agreement.

         1.4. "ArQule Compound" means a chemical compound owned or controlled by
ArQule provided by ArQule to SB pursuant to this Agreement as part of a
screening library, including without limitation the compounds provided in the
Compass Array Library and Mapping Array Libraries.

         1.5. "Available Compound" means an Active Compound which ArQule has
determined in good faith is not (i) licensed or otherwise committed to a third
party in the Field or (ii) committed to an internal ArQule program in the Field.
For purposes of (i) above, "committed" shall mean a third party with contractual
or other legal rights to claim such compound for development and
commercialization has notified ArQule in writing that such third party has
claimed such compound for development and commercialization. For purposes of
(ii) above, "committed" shall mean that the compound has been designated by
ArQule as committed to an internal development program at ArQule (initiated and
conducted without use of any information generated in the course of this
Agreement) in accordance with its ordinary procedures, as evidenced by the
status of such compound in its corporate database, and is under bona fide
evaluation or is the subject of an active and funded internal development
program at ArQule.

         1.6. "Compass Array(TM) Library" means a collection of ArQule Compounds
that is a diverse representative subset of the Mapping Array Libraries used for
initial screening of the Mapping Array Libraries. The description of, and the
specifications for, the Compass Array(TM) Library are set forth in Schedule A
attached hereto.

         1.7. "Confidential Information" means any non-public technical or
business information furnished by one party (the "Disclosing Party") to the
other party (the "Receiving Party") in connection with this Agreement or
generated pursuant to this Agreement. Such Confidential Information may include,
without limitation, the identity or use of a chemical compound, the identity or
use of a biological target, computer models, trade secrets, know-how,
inventions, technical data or specifications, testing methods, business or
financial information, collaboration and development activities, JSC reports,
royalty reports, product and marketing plans, clinical development plans,
customer and supplier information, compound locations within Compass Array
Libraries and the Markush structures of ArQule Compounds.

----------------------

CONFIDENTIAL MATERIALS OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION. ASTERISKS DENOTE SUCH OMISSIONS.


                                       2
<PAGE>   3
         1.8. "Field" means all applications in the life sciences.

         1.9. "Full-Time Equivalent" or "FTE" shall mean the effort equivalent
to one (1) qualified full-time employee of ArQule working on a specific project
or task for a period of one year.

         1.10. "Inactive ArQule Compound" means an ArQule Compound (i) which is
selected by SB from the same Mapping Array Library as one or more Active
Compounds with activity for the same Target, and (ii) which is not active
against the same Target as such Active Compounds, as determined by SB in a
manner consistent with the manner SB uses to evaluate other similarly situated
compounds being developed by SB within the Field.

         1.11. "IND" means an investigational new drug application filed with
the United States Food and Drug Administration (or its foreign equivalent) prior
to beginning clinical trials in humans or any comparable application filed with
the regulatory authorities of a country other than the United States, prior to
beginning clinical trials in humans in that country; provided however, that for
purposes of this definition, an IND shall not include an investigational new
drug application regarding the testing of several closely related compounds, or
formulations or other adaptations of the same compound, to aid in the selection
of a lead compound for further human clinical development.

         1.12. "IND Candidate Compound" means any Royalty-Bearing Product that
is designated by SB as an IND Candidate pursuant to Section 4.4.

         1.13. "Lead Optimization Array" means a set of ArQule Analog Compounds
or SB Analog Compounds synthesized by ArQule pursuant to Section 4.2. of this
Agreement.

         1.14. "Licensed Compound" means any Available Compound or Inactive
ArQule Compound that has been designated as a Licensed Compound as provided in
Subsection 4.1.4 below.

         1.15. "Licensed Compound Set" means a set of one or more Licensed
Compounds from the same Mapping Array Library that have biological activity for
the same Target, as well as any ArQule Analog Compounds of such Licensed
Compounds that are synthesized by a party in the course of optimizing those
Licensed Compounds.

         1.16. "Mapping Array(TM) Library" means a set of ArQule Compounds
consisting of diverse, structurally related small organic chemical compounds
arranged in a spatially addressable format, such as a microtiter screening
plate, which ArQule makes available to its collaborators for screening on a
non-exclusive basis. The description of, and the specifications for, the Mapping
Array(TM) Libraries are set forth in Exhibit A attached hereto.

         1.17. "Net Sales" means the gross amount billed or invoiced on sales by
SB, its Affiliates and sublicensees of Royalty-Bearing Products, less the
following: [*****]. In any transfers of Royalty-Bearing Products among SB,
an Affiliate and/or a sublicensee, Net Sales

----------------------

CONFIDENTIAL MATERIALS OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION. ASTERISKS DENOTE SUCH OMISSIONS.


                                       3
<PAGE>   4
shall be calculated based on the final sale of the Royalty-Bearing Product to an
independent third party. In the event that SB, an Affiliate or a sublicensee
receives non-monetary consideration for any Royalty-Bearing Products, Net Sales
shall be calculated based on the average price charged by that party for such
Royalty-Bearing Products during the preceding Royalty Period or, in the absence
of such sales, the fair market value of the non-monetary consideration as
determined by the parties in good faith.

         1.18. "Patent Rights" means any United States and foreign patent
application and any divisional, continuation, or continuation-in-part of such
patent application (to the extent the claims are directed to subject matter
specifically described therein), as well as any patent issued thereon and any
reissue or reexamination of such patent, and any foreign counterparts to such
patents and patent applications. "ArQule Patent Rights" means Patent Rights that
are either (i) assigned solely to ArQule, (ii) assigned jointly to ArQule and a
party other than SB, or (iii) licensed to or otherwise controlled by ArQule, in
each case to the extent that ArQule has the ability to license or sublicense the
rights required under this Agreement without payment to a third party. "SB
Patent Rights" means Patent Rights that are either (i) assigned solely to SB
(including Patent Rights in Analog Compounds pursuant to Section 6.1.), (ii)
assigned jointly to SB and a party other than ArQule, or (iii) licensed to or
otherwise controlled by SB, in each case to the extent that SB has the ability
to license or sublicense the rights required under this Agreement without
payment to a third party. "Joint Patent Rights" means Patent Rights assigned to
both ArQule and SB as joint owners. Joint Patent Rights will include (i) Patent
Rights claiming Joint Technology and (ii) Patent Rights claiming both ArQule
Technology and SB Technology in a single filing, but will not include Patent
Rights in Analog Compounds assigned by ArQule to SB pursuant to Section 6.1.

         1.19. "Program Status Compound" means any Royalty-Bearing Product that
is designated by SB as eligible to enter the Program Phase pursuant to Section
4.3.

         1.20. "Proprietary Materials" means any tangible materials, whether
biological, chemical, physical, or otherwise, that one party (the "Provider")
furnishes to the other party (the "Recipient") under this Agreement and
designates as proprietary or confidential including, without limitation all
ArQule Compounds and SB Compounds.

         1.21. "Royalty Period" means the partial calendar quarter commencing on
the date on which the first Royalty-Bearing Product is sold and every complete
or partial calendar quarter thereafter during which SB has the obligation to pay
a royalty pursuant to Section 7.6.

         1.22. "Royalty-Bearing Product" means a product containing as one of
its constituents, [*****].

         1.23. "SB Compound" means any chemical molecule owned or controlled by
SB that is provided by SB or its Affiliates to ArQule for lead optimization
under this Agreement.

----------------------

CONFIDENTIAL MATERIALS OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION. ASTERISKS DENOTE SUCH OMISSIONS.

                                       4
<PAGE>   5
         1.24. "Screening Phase" means the period commencing on the Effective
Date and continuing for [*****] years thereafter during the term of this
Agreement, as extended by the parties through the Steering Committee or pursuant
to Section 4.2.6.

         1.25. "Target" means any biological target selected by SB in its
discretion including, without limitation (a) any genetic material, gene,
nucleotide, protein, or peptide, (b) any collections of genetic material, genes,
proteins or peptides, and (c) any cellular activity in the Field that, in any
case, SB selects for screening against ArQule Compounds. "Anti-Fungal Target"
means any Target within the Field that has utility in the treatment, prophylaxis
or diagnosis of fungal diseases. "Anti-Infective Target" means any Target within
the Field that has utility in the treatment, prophylaxis or diagnosis of disease
caused by infection with bacterial organisms. The term "Target" shall include
all Anti-Infective Targets and Anti-Fungal Targets.

         1.26. "Technology" means any proprietary development, information,
know-how, idea, design, concept, technique, process, invention, compound,
discovery, improvement whether or not patentable or copyrightable. "ArQule
Technology" means Technology that is either (i) assigned solely to ArQule, (ii)
assigned jointly to ArQule and a party other than SB, or (iii) licensed to or
otherwise controlled by ArQule, in each case to the extent that ArQule has the
ability to license or sublicense the rights required under this Agreement
without payment to a third party. "SB Technology" means Technology that is
either (i) assigned solely to SB, (ii) assigned jointly to SB and a party other
than ArQule, or (iii) licensed to or otherwise controlled by SB, in each case to
the extent that SB has the ability to license or sublicense the rights required
under this Agreement without payment to a third party. "Joint Technology" means
Technology that is developed or discovered jointly by one or more employees or
consultants of SB and one or more employees or consultants of ArQule in
connection with this Agreement.

         1.27. "Valid Claim" means either (i) a claim of an issued patent that
has not been held unenforceable or invalid by an agency or a court of competent
jurisdiction in any unappealable or unappealed decision or (ii) a claim of a
pending patent application that has not been abandoned or finally rejected
without the possibility of appeal or refiling.

2.       NATURE AND OBJECTIVE OF COLLABORATION. The primary objective of the
collaboration is to discover and develop compounds provided by both ArQule and
SB that demonstrate potential as human therapeutic products for the treatment,
prophylaxis or diagnosis of infectious diseases caused by bacterial organisms.
In order to achieve this objective, the parties shall (i) perform compound
screening activities using ArQule Compounds to identify Active Compounds, (ii)
perform lead qualification activities on Active Compounds that are determined to
be Available Compounds to prioritize such compounds for lead optimization, (iii)
perform lead optimization activities on Licensed Compounds to develop one or
more Program Status Compounds that may result in Royalty-Bearing Products, and
(iv) perform lead optimization activities on SB Compounds to develop one or more
Program Status Compounds that may result in Royalty-Bearing Products, in each
case as further described below.

3.       MANAGEMENT OF COLLABORATION.

----------------------

CONFIDENTIAL MATERIALS OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION. ASTERISKS DENOTE SUCH OMISSIONS.



                                       5
<PAGE>   6
         3.1. ESTABLISHMENT OF JOINT STEERING COMMITTEE. The parties hereby
establish a Joint Steering Committee (the "JSC") comprised of six (6) members,
with three (3) representatives appointed by each party, one of whom from each
party shall fulfill the role of alliance manager for the collaboration. The
members initially designated by SB are John Elliott, Gary Woodnutt, and Mitchell
Gross. The members initially designated by ArQule are Norton Peet, David
Hartsough, and Sheila DeWitt. The JSC shall be chaired by one of the SB
representatives. A party may change any of its representatives to the JSC at any
time upon written notice to the other party.

         3.2. DUTIES OF JOINT STEERING COMMITTEE. The JSC shall plan, monitor,
manage, and administer the collaboration under this Agreement. In general, the
JSC will act on behalf of the parties and, subject to Section 3.3, will be
responsible for approving specific research and development objectives and
milestones, determining when and if milestones are met, and recommending
resource allocation requirements. In particular, the activities of the JSC will
include reviewing progress made in the various phases of the collaboration and
recommending necessary changes to the collaboration. The JSC will be responsible
for research data, i.e. any laboratory notes, technical data or specifications,
test results, or other information or materials that arise as a result of the
collaboration. The JSC may also establish one or more Research Committees to
assist in project management.

         3.3. DECISIONS RESERVED TO SB. Notwithstanding anything to the contrary
in this Agreement, the parties agree that SB shall have the final decision on
the following matters:

         (i)      approval of all material research allocation (e.g., FTE
                  funding);

         (ii)     definition of criteria for selection and identification of
                  qualified lead compounds suitable for optimization;

         (iii)    the minimum eligibility requirements for a compound to be
                  considered an Active Compound, Inactive Compound, Program
                  Status Compound (subject to Section 4.3.), and IND Candidate
                  Compound (subject to Section 4.4.).


         3.4. MEETINGS OF JOINT STEERING COMMITTEE. Unless otherwise determined
by the JSC, the JSC shall meet at least once each calendar quarter alternately
at the location of each party, or at other times, locations, or manner (e.g.,
telephone conferences) determined by the JSC. Dates for the next meeting will be
decided within fifteen (15) days after the previous meeting. A representative of
the JSC jointly appointed by its members shall provide each member with five (5)
business days notice of the time and location of each quarterly meeting, unless
such notice is waived by all members. If a designated representative of a party
cannot attend a meeting of the JSC, such party may designate a different
representative for that meeting without notice to the other party, and the
substitute member will have full power to vote on behalf of the permanent
member. Except as otherwise provided in this Agreement, all actions and
decisions reserved for the JSC will require the unanimous consent of all of its
members. If the JSC fails to reach agreement upon any matter that is not subject
to a final decision by SB as set forth in Section 3.3, the dispute will be
resolved in accordance with the procedures set forth in Article 13 below. Within
ten (10) business days following each quarterly meeting of the JSC,


                                       6
<PAGE>   7
a representative of the JSC jointly appointed by its members shall prepare and
deliver, to both parties, a written report describing the program status and the
issues, decisions, conclusions, and other actions taken by the JSC. SB will
appoint an SB person as chairperson for the JSC.

         3.5. COOPERATION. Each party agrees to provide the JSC with information
and documentation as reasonably required for the JSC and each party to fulfill
its duties under this Agreement. In addition, each party agrees to make
available its employees and consultants as reasonably requested by the JSC. The
parties anticipate and intend that members of the JSC will communicate
informally with each other and with employees and consultants of the parties on
matters relating to the collaboration.

4.       CONDUCT OF COLLABORATION.

         4.1. SCREENING PHASE. All activities described in this Section 4.1
shall end when the Screening Phase ends. SB may extend the Screening Phase upon
six (6) months written notice to ArQule, provided that the parties reach
agreement on terms and conditions for such extension during the six-month notice
period. The Screening Phase may also extend automatically as provided in
Subsection 4.2.6.

                  4.1.1. COMPASS ARRAY LIBRARY. Within ten (10) business days of
the Effective Date, ArQule will supply SB with one (1) copy of the Compass Array
Library in accordance with the specifications set forth in Schedule A attached
hereto. During the Screening Phase, SB will screen the ArQule Compounds within
the Compass Array Library against Anti-Infective Targets using efforts
consistent with its normal scientific and business practices. In addition, SB
may also screen the Compass Array Library against Anti-Fungal Targets and other
Targets as set forth in Subsection 4.1.6 below. SB shall periodically submit to
ArQule a list containing the array plate number and well number of all Active
Compounds by facsimile transmission followed by a confirmatory letter. ArQule
will promptly determine whether the listed Active Compounds are Available
Compounds and notify SB of such determination. If any Active Compound is not an
Available Compound, ArQule shall not disclose the structure and SB shall have no
rights under this Agreement with respect to that Active Compound; provided
however, that ArQule shall promptly notify SB if such Active Compound later
becomes an Available Compound. If an Active Compound is an Available Compound,
ArQule shall reserve such Active Compound as an Available Compound to SB under
this Agreement and, promptly thereafter, ArQule shall disclose to SB the
structure of such Available Compound correlated to its well location. Upon
request of SB, ArQule shall disclose which Mapping Array Library corresponds to
any Active Compound whether or not such ArQule Compound is an Available
Compound, including the Markush structure of the Mapping Array Library, as
described in Schedule A.

                  4.1.2. MAPPING ARRAY LIBRARY. After SB screens the Compass
Array Library and thereafter at any point during additional screening activities
(as described below) on Available Compounds from the Compass Array Library, and
as determined by SB in consultation with the JSC, SB may screen one or more
Mapping Array Libraries corresponding to any Active Compound(s) identified from
the Compass Array Library to obtain initial structure-activity relationship
("SAR") data with respect to those Active Compounds and to

                                       7
<PAGE>   8
identify additional Active Compounds for development. If SB elects to access
these Mapping Array Libraries, SB shall provide ArQule with written notice
identifying the Mapping Array Libraries selected for such purposes. ArQule shall
provide SB with the relevant Mapping Array Libraries within ten (10) business
days of receipt of such notice. Initially, ArQule will not identify the
structures of the individual ArQule Compounds within any delivered Mapping Array
Library. ArQule will, however, provide SB with Markush structures of each
Mapping Array Library furnished to SB upon shipment. SB shall periodically
submit to ArQule a list containing the array plate number and well number of all
Active Compounds with the Mapping Array Library by facsimile transmission
followed by a confirmatory letter. ArQule will promptly determine whether the
listed Active Compounds are Available Compounds and notify SB of such
determination. If any Active Compound is not an Available Compound, ArQule shall
not disclose the structure and SB shall have no rights under this Agreement with
respect to that Active Compound; provided however, that ArQule shall promptly
notify SB if such Active Compound later becomes an Available Compound. If an
Active Compound is an Available Compound, ArQule shall reserve such Active
Compound as an Available Compound to SB under this Agreement and, promptly
thereafter, ArQule shall disclose to SB (i) the structure of such Available
Compound correlated to its well location, and (ii) upon request of SB, the
structures but not the locations of inactive ArQule Compounds in the same
Mapping Array Library. [*****]

                  4.1.3. RESYNTHESIS AND ADDITIONAL SCREENING.

                            (a) RESYNTHESIS. ArQule shall resynthesize and
deliver to SB an additional quantity of any Available Compound requested by SB
to enable SB to conduct screening activities. The Available Compounds may come
from the Compass Array Library or a Mapping Array Library. SB shall provide
ArQule with written notice of the Available Compounds that SB desires to have
resynthesized by ArQule, in accordance with the specifications set forth in
Schedule A. In each case the amount of, and delivery schedule for, resynthesized
Available Compounds will be determined by SB, subject to approval by the JSC.

                            (b) ADDITIONAL SCREENING. SB will promptly conduct
additional screening of the resynthesized Available Compounds and submit such
results as necessary to the JSC.

                  4.1.4. DESIGNATION OF LICENSED COMPOUNDS. At any time after SB
has screened the Compass Array Library and the Mapping Array Libraries
corresponding to Available Compounds identified in the Compass Array Library
(i.e., confirmation in secondary screens is unnecessary), SB may select any
reserved Available Compound or reserved Inactive ArQule Compound as a Licensed
Compound under this Agreement. In such event, SB shall provide ArQule with
written notice of its selection and ArQule will change the status of such ArQule
Compounds from "reserved" to "licensed". Upon the designation of an ArQule
Compound as a Licensed Compound, the licenses set forth in Subsection 5.2 shall
automatically become effective. All Licensed Compounds from a Mapping Array
Library that share activity for the same Target, [*****] shall form a Licensed
Compound Set for the purposes of this Agreement.

----------------------

CONFIDENTIAL MATERIALS OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION. ASTERISKS DENOTE SUCH OMISSIONS.


                                       8
<PAGE>   9
                  4.1.5. OPTIMIZATION RIGHTS. SB shall have the right to conduct
lead optimization of any Licensed Compound Set, provided that SB shall submit
one Licensed Compound Set to ArQule for optimization as provided below. In the
event that SB conducts optimization of a Licensed Compound Set, then at the
request of SB, ArQule will provide SB with synthetic protocols to enable SB to
make those Licensed Compounds. In addition, SB may request that ArQule provide
additional resynthesized quantities of those Licensed Compounds and, subject to
the availability of chemists and reagents, ArQule will provide SB with such
resynthesized quantities at the rates set forth in Section 7.2 (but, for
clarity, only during the Screening Phase).

                  4.1.6. SCREENING RIGHTS FOR TARGETS OTHER THAN ANTI-INFECTIVE
TARGETS.

                            (a) ANTI-FUNGAL TARGETS. SB may screen the Compass
Array Library against Anti-Fungal Targets and then conduct the activities
described in this Section 4 with respect to Available Compounds identified in
such screens; provided that before the parties commence such activities, the
parties shall negotiate in good faith the commercially reasonable financial
terms pertaining to such compounds as described in Sections 7.5. and 7.6. below,
which terms shall be set forth in a separate agreement. In addition, if SB
desires to conduct an optimization project with ArQule on any resulting Licensed
Compounds, the parties shall negotiate in good faith the applicable commercially
reasonable FTE rate unless the project is a substitute project as described in
Subsection 4.2.6.

                            (b) OTHER TARGETS. In the event that (i) SB fails to
identify any Active Compounds from the Compass Array Library in its screens
against Anti-Infective Targets and, if applicable, Anti-Fungal Targets and
decides not to initiate any additional screening activities of ArQule Compounds
against Anti-Infective Targets or Anti-Fungal Targets, or (ii) SB identifies
fewer than [*****] Available Compounds from the Compass Array Library in its
screens against Anti-Infective Targets and, if applicable, Anti-Fungal Targets,
then SB may screen the unused quantities of any ArQule Compounds from the
Compass Array Library retained by SB against other Targets for the duration of
the Screening Phase; provided that, SB shall give ArQule written notice prior to
undertaking such additional screening activities, which notice shall identify
such other Targets; and, provided further that before the parties commence such
activities, the parties shall negotiate in good faith the commercially
reasonable financial terms pertaining to such compounds as described in Section
7.5. and 7.6. below, which terms shall be set forth in a separate agreement. In
addition, if SB desires to conduct an optimization project with ArQule on any
resulting Licensed Compounds, the parties shall negotiate in good faith the
applicable commercially reasonable FTE rate unless the project is a substitute
project as described in Subsection 4.2.6.

                  4.1.7. REVERSE ENGINEERING. SB shall not attempt to reverse
engineer, or attempt to determine the structure of, any ArQule Compound until
the structure of such compound has been disclosed to SB by ArQule pursuant to
this Section 4.

----------------------

CONFIDENTIAL MATERIALS OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION. ASTERISKS DENOTE SUCH OMISSIONS.


                                       9
<PAGE>   10
         4.2. LEAD OPTIMIZATION PHASE.

                  4.2.1. COMMITTED LEAD OPTIMIZATION PROJECTS. ArQule agrees to
perform, and SB agrees to perform and fund, two lead optimization projects in
accordance with the terms and conditions of this Agreement. One of the committed
projects will come from a Licensed Compound Set with activity for an
Anti-Infective Target, which project will be selected as described in Subsection
4.2.2 (b) should SB desire to optimize an Available Compound. For the avoidance
of doubt, in the event SB does not elect to optimize an Available Compound, SB
shall have no obligation to fund or perform an optimization project for any
Licensed Compound Set for an Anti-Infective Target and, as a result, SB shall
only have an obligation to fund and perform the optimization project described
in the next sentence. The other committed project will come from a series of SB
Compounds that SB has determined to have activity for an Anti-Infective Target,
which project will be selected by SB and submitted to ArQule as described in
Subsection 4.2.2 (a). SB will define the general guidelines and goals of the
project and the JSC will develop a defined workplan for each project in
accordance with such guidelines and goals, including project deliverables, and
then the JSC will coordinate and monitor the projects. The project deliverables
are subject to approval by both parties through the JSC, but SB has the final
decision for all other aspects of the lead optimization projects. Each lead
optimization project under this Section will commence not later than the end of
the Screening Phase and shall continue for the initial periods set forth in
Section 4.2.4 and such extension as set forth in Section 4.2.5, but not more
than [*****] years, unless earlier terminated as described in Subsection
4.2.6.

                  4.2.2 SELECTION OF PROJECTS.

                            (a) SB COMPOUNDS. On or before the Effective Date,
SB shall disclose to ArQule the structures of the SB Compounds that SB will
submit to ArQule for lead optimization, together with all data, synthetic
protocols, and other information in the possession of SB which may assist ArQule
in the project. ArQule shall commence work on this project within thirty (30)
days after the JSC develops and approves a workplan.

                            (b) ARQULE COMPOUNDS. At any time during the
Screening Phase, SB will provide a list of Licensed Compound Sets with
Anti-Infective activity to the JSC for consideration as lead optimization
projects. The JSC will select one of these Licensed Compound Sets for
optimization by ArQule under this Agreement. ArQule shall commence work on this
project promptly after the JSC develops and approves a workplan.

                  4.2.3. RESPONSIBILITIES OF PARTIES. Subject to modification by
the JSC and in accordance with the applicable workplan, ArQule will generally
perform [*****] activities associated with lead optimization projects including,
without limitation, [*****] as described in Schedule A, and SB will generally
perform [*****] activities associated with lead optimization projects, including
without limitation, [*****]. SB shall also perform such other activities as it
deems necessary or appropriate in connection with the lead optimization project.
Either party may perform [*****] as directed from time to time by the JSC. The
specific responsibilities of

----------------------

CONFIDENTIAL MATERIALS OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION. ASTERISKS DENOTE SUCH OMISSIONS.

                                       10
<PAGE>   11
each party shall be described in the applicable workplan. Each party will
promptly report all research results related to such lead optimization
activities to the JSC.

                  4.2.4. INITIAL RESOURCE COMMITMENTS. SB commits to fund the
two (2) projects described in Section 4.2.1 in the following manner. On the
Effective Date, ArQule will initially allocate at least [*****] for
[*****] to a project derived from the series of SB Compounds for an
Anti-Infective Target as described in Subsection 4.2.2(a). In addition, upon
selection by the JSC of a Licensed Compound Set for a lead optimization project,
ArQule will initially allocate at least [*****] for [*****] to the project
derived from the Licensed Compound Set for an Anti-Infective Target as described
in Subsection 4.2.2(b). SB agrees to fund the FTEs for these two projects at the
rates set forth in Section 7.4 for at least a [*****] period for each project,
subject to early termination as set forth in Subsection 4.2.6 below.

                  4.2.5. ONGOING RESOURCE COMMITMENTS. When a project begins,
the JSC will, subject to Section 3.3, agree to an estimated number of FTEs per
project to complete the approved workplan and timeline to add those FTEs. ArQule
agrees to provide a maximum of [*****] FTEs per project in the following manner.
The JSC will determine the actual number of FTEs for each project at any given
time, subject to SB approval. Actual changes to the FTE commitment beyond the
project minimum detailed in Subsection 4.2.4 will require sixty (60) days
written notice by SB to ArQule. If an FTE increase is required, ArQule will make
a reasonable effort to increase the FTEs at the rate of at least [*****] per
quarter. If an FTE decrease is required, SB will make a reasonable effort to
reduce FTEs at the rate of no more than [*****] per quarter. SB will fund the
FTEs applied to each project at the rates set forth in Section 7.4. SB may
extend a project beyond the [*****] minimum at its discretion, for additional
[*****]month periods not to exceed a total of [*****] additional years. SB will
give ArQule at least ninety (90) days written notice before the [*****]
anniversary date of project commencement if SB desires to extend, and will
estimate the additional time period in [*****]month increments. Thereafter, SB
will give ArQule at least ninety (90) days written notice before the end of the
extension period for any subsequent extensions. In the event SB elects not to
extend a project, SB shall have no further funding obligations with respect to
such project.

                  4.2.6. PROJECT TERMINATION. At any time after a period of
[*****] from the initiation of a lead optimization project, SB may terminate the
project for any reason upon ninety (90) days prior written notice to ArQule;
provided that such notice period shall be reduced to sixty (60) days if SB
reasonably determines that ArQule is not proceeding diligently to meet the
deliverables defined in the corresponding workplan. In the event of termination,
SB will have no further obligation to fund the FTEs involved in that project
except for accrued expenses and subject to the following. If SB terminates the
project based on a Licensed Compound Set during the first year of the project
and such termination is not due to a lack of diligence by ArQule to meet the
deliverables defined in the workplan, then (i) ArQule will have no obligation to
refund any payments for FTEs actually received from SB and SB shall have an
obligation to make any remaining quarterly payments for the FTEs committed by
ArQule during the first year of the project, but ArQule shall apply the unused
balance to other services and products under this

----------------------

CONFIDENTIAL MATERIALS OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION. ASTERISKS DENOTE SUCH OMISSIONS.

                                       11
<PAGE>   12
Agreement (e.g., resynthesis fees, Mapping Array Library access fees, or another
project) and (ii) the parties will endeavor to identify another mutually
acceptable Licensed Compound Set to submit to ArQule as a lead optimization
project. If the parties identify a mutually acceptable substitute project within
ninety (90) days after SB terminates the original project, then SB shall have
the benefit of the FTE rates in this Agreement for the balance of such
[*****]year period (plus the delay of up to ninety days while the parties
decided on the substitute project). If the parties identify a substitute project
after this ninety-day period expires, the FTE rate in the Agreement will not
apply but SB may still apply any unused credits of FTE payments to the new
project. If SB terminates the project based on a Licensed Compound Set during
the first year of the project and such termination is due to a lack of diligence
by ArQule to meet the deliverables defined in the workplan, then SB shall have
no further obligation to fund that project.

         4.3. PROGRAM PHASE. SB may declare Program Status for Royalty-Bearing
Products using the criteria set forth in Schedule B or other criteria
subsequently agreed upon by the parties. SB may select a Program Status Compound
at any time. SB will make its selections of Program Status Compounds in its sole
discretion under the criteria in Schedule B or other criteria subsequently
agreed upon by the parties, however SB will not treat Licensed Compounds or
ArQule Analog Compounds differently from other compounds that SB considers for
Program Status. SB shall promptly furnish ArQule with written notice upon the
selection of a Royalty-Bearing Product as a Program Status Compound. Effective
upon receipt of this notice by ArQule, the Program Status Compound and all other
ArQule Compounds and Analog Compounds in the same Licensed Compound Set will no
longer be subject to reversion as described in Section 9.3. At the request of
SB, ArQule will transfer synthetic protocols for Program Status Compounds if
transfer did not previously occur.

         4.4. IND CANDIDATE. SB may designate a Royalty-Bearing Product as an
IND Candidate Compound using the criteria set forth in Schedule C or other
criteria subsequently agreed upon by the parties. SB may select an IND Candidate
Compound at any time. SB will make its selections of IND Candidate Compounds in
its sole discretion under the criteria in Schedule C or other criteria
subsequently agreed upon by the parties, however SB will not treat Licensed
Compounds or ArQule Analog Compounds differently from other compounds that SB
considers as IND Candidates. SB shall promptly furnish ArQule with written
notice upon the selection of a Royalty-Bearing Product as an IND Candidate
Compound.

5.       LICENSE GRANTS.

         5.1. SCREENING LICENSES.

                  5.1.1. PRIMARY TARGETS. Subject to the terms and conditions of
this Agreement, ArQule hereby grants to SB a nonexclusive, worldwide,
royalty-free license (without the right to sublicense) under the ArQule Patent
Rights and other rights in the ArQule Technology to screen ArQule Compounds
delivered under the collaboration against Anti-Infective Targets and Anti-Fungal
Targets in the Field, but only during the Screening Phase.

----------------------

CONFIDENTIAL MATERIALS OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION. ASTERISKS DENOTE SUCH OMISSIONS.


                                       12
<PAGE>   13
                  5.1.2. OTHER TARGETS. Subject to the terms and conditions of
this Agreement, and specifically subject to the limitations set forth in
Subsection 4.1.6(b) above, ArQule hereby grants to SB a nonexclusive, worldwide,
royalty-free license (without the right to sublicense) under the ArQule Patent
Rights and other rights in ArQule Technology to screen ArQule Compounds
delivered under the collaboration against Targets in the Field other than
Anti-Infective Targets and Anti-Fungal Targets, but only during the Screening
Phase.

         5.2 DEVELOPMENT AND COMMERCIALIZATION LICENSE. Subject to the terms and
conditions of this Agreement, ArQule hereby grants to SB and its Affiliates the
following licenses:

         (i)      an exclusive, worldwide license (with the right to sublicense)
                  under the ArQule Patent Rights and other rights in ArQule
                  Technology to conduct development of Licensed Compounds in the
                  Field, including the right to develop Analog Compounds based
                  on Licensed Compounds.;

         (ii)     an exclusive, worldwide license (with the right to sublicense)
                  under the ArQule Patent Rights and other rights in ArQule
                  Technology to make, have made, use, have used, sell, and
                  import Licensed Compounds and certain identified Analog
                  Compounds, as described below, in the Field; and

         (iii)    a non-exclusive, worldwide license (with the right to
                  sublicense) under the ArQule Patent Rights and other rights in
                  ArQule Technology to use chemical synthesis methods within the
                  ArQule Patent Rights and ArQule Technology to make and have
                  made Royalty-Bearing Products.

SB and ArQule acknowledge and agree that the exclusive license granted under
clause (i) of this Section prohibits ArQule from granting any third party any
right or license to develop Analog Compounds based on Licensed Compounds in the
Field, but does not extend to the composition or use of Analog Compounds except
as follows. At any time during the term of this Agreement, SB may disclose to
ArQule the structure of one or more Analog Compounds that SB desires to include
within the license grant set forth in clause (ii) above. In such event, ArQule
will promptly determine in good faith whether the identified Analog Compound(s)
are not (a) licensed or otherwise committed to a third party in the Field or (b)
committed to an internal ArQule program in the Field,. For purposes of (a)
above, "committed" shall mean a third party with contractual or other legal
rights to claim such compound for development and commercialization has notified
ArQule in writing that such third party has claimed such compound for
development and commercialization. For purposes of (b) above, "committed" shall
mean that the compound has been designated by ArQule as committed to an internal
development program at ArQule in accordance with its ordinary procedures, as
evidenced by the status of such compound in its corporate database, and is under
bona fide evaluation or is the subject of an active and funded internal
development program at ArQule (without any use of information under this
Agreement). If the identified Analog Compound(s) are not licensed or
"committed", as defined above, in the Field, then ArQule shall include such
Analog Compound(s) within the license grant set forth in clause (ii) above;
otherwise, such Analog Compound(s) shall not be included in such license grant.
SB further acknowledges and agrees that the license grant in clause (iii) of
this Section is subject to the terms, conditions, and limitations of any
agreement under which ArQule has acquired rights in a chemical synthesis

                                       13
<PAGE>   14
method from a third party and, in such event, ArQule may require SB to enter
into a separate sublicense agreement before such license grant shall take
effect. Notwithstanding the definitions of ArQule Patent Rights and ArQule
Technology, ArQule represents and warrants that SB will not incur any payment
obligation to a third party as a result of the practice of the license grant in
clause (iii) of this Section for third party licenses that ArQule has executed
as of the Effective Date and ArQule covenants that ArQule shall notify SB prior
to implementation of any ArQule Technology that would subject SB to a payment
obligation to a third party as a result of the practice of the license grant in
clause (iii) of this Section for third party licenses that ArQule executes after
the Effective Date. In the event that SB decides to sublicense its rights under
this Section to a third party, SB shall furnish ArQule with written notice of
the sublicense grant and shall ensure that all sublicense agreements conform to
this Agreement.

6.       INTELLECTUAL PROPERTY RIGHTS.

         6.1. RIGHTS IN COMPOUNDS. SB shall have the sole right to prepare,
file, prosecute, and maintain Patent Rights that claim the composition or use of
ArQule Analog Compounds or SB Analog Compounds developed by either party under
this Agreement. ArQule shall assign to SB all right, title, and interest in any
Patent Rights filed by SB that claim the composition or use of such ArQule
Analog Compounds or SB Analog Compounds. Therefore, such Patent Rights are
considered SB Patent Rights under this Agreement rather than Joint Patent
Rights.

         6.2. OWNERSHIP OF INTELLECTUAL PROPERTY. Other than as expressly
provided herein, neither party shall have any rights in Patent Rights and
Technology that is invented, developed or discovered by the other party prior to
the Effective Date or outside the research performed under this Agreement.
Ownership of Patent Rights and Technology arising from the research performed
under this Agreement shall be allocated in accordance with US patent law.

         6.3. MANAGEMENT OF PATENT RIGHTS. SB shall have sole responsibility
for, and control over, the management of SB Patent Rights and ArQule shall have
sole responsibility for, and control over, the management of ArQule Patent
Rights; provided, however, that ArQule shall consult with SB with respect to any
ArQule Patent Rights that claim an ArQule Compound that is part of a Licensed
Compound Set. Each party will bear its own expenses in connection with such
Patent Rights. In the case of Joint Technology, the JSC will decide whether to
seek Joint Patent Rights claiming that Technology. If the JSC decides to seek
any Joint Patent Rights under this Section 6.3, the parties shall jointly
prepare, file, prosecute, and maintain such Patent Rights, and all related
expenses shall be borne equally by the parties. In the event that one party
declines to pay or desires to cease further payment of patent-related expenses
for such Joint Patent Rights in any country and the other party desires to
maintain the Joint Patent Rights, the withdrawing party may assign to the
continuing party all rights in such Joint Patent Rights in such country and
thereafter have no further obligation to pay such expenses.

         6.4. COOPERATION. Each party agrees to cooperate fully with the other
in the preparation, filing, and prosecution of any Joint Patent Rights. ArQule
agrees to cooperate fully with SB in the preparation, filing, and prosecution of
any Patent Rights that ArQule has assigned to SB pursuant to Section 6.1. Such
cooperation includes, but is not limited to:

         (i)      executing all papers and instruments, or requiring its
                  employees or agents, to

                                       14
<PAGE>   15
                  execute such papers and instruments, so as to effectuate the
                  ownership of Patent Rights as established under this Agreement
                  and to enable the other party to apply for and to prosecute
                  patent applications in any country;

         (ii)     promptly informing the other party of any matters coming to
                  such party's attention that may affect the preparation,
                  filing, or prosecution of any such patent applications; and

         (iii)    undertaking no actions that are potentially deleterious to the
                  preparation, filing, or prosecution of such patent
                  applications.

         6.5.     INFRINGEMENT.

                  6.5.L. OFFENSIVE ACTIONS. With respect to infringement of any
SB Patent Right or ArQule Patent Right claiming the composition or use of a
Licensed Compound, Analog Compound, or Royalty-Bearing Product, SB shall have
the primary right, but not the obligation, to enforce such Patent Right under
its sole control and at its sole expense. In such event, SB shall be exclusively
entitled to all proceeds or recoveries resulting therefrom, but from such
proceeds or recoveries SB shall pay ArQule a royalty in accordance with Section
7.6. on sales lost to the infringer. In the event that SB declines to enforce
such Patent Right with respect to a Royalty-Bearing Product where the sales of
the alleged infringer are at least [*****] percent [*****] of the
worldwide market for said product, then ArQule shall have the secondary right to
enforce such Patent Right under its sole control and at its sole expense. In
such event, ArQule shall be exclusively entitled to all proceeds or recoveries
resulting therefrom.

         6.5.2. DEFENSIVE ACTIONS. SB will indemnify, defend, and hold harmless
ArQule, its Affiliates, and their respective officers, directors, employees, and
agents from any and all loss, damage, cost, and expense (including reasonable
attorneys fees) and amounts paid in settlement arising from any actual or
alleged infringement claim brought by a third party, in law or in equity, based
on activities undertaken by SB or by ArQule at the direction of SB pursuant to
this Agreement (except for claims based solely on the practice of an ArQule
Patent Right or the use of ArQule Technology) or based on the manufacture or
sale of a Royalty-Bearing Product. In the event that ArQule intends to claim
indemnification under this Subsection, ArQule shall promptly notify SB of the
infringement action and SB shall assume the defense of the action under its sole
control, including the right to effect a settlement. A failure by ArQule to
deliver notice to SB within a reasonable time shall relieve SB of its indemnity
obligation under this Subsection to the extent such failure prejudices the
ability of SB to defend such action. ArQule shall cooperate fully with SB and
its legal representatives in the investigation and defense of the action. In the
event of a settlement, SB shall obtain the consent of ArQule before agreeing to
any settlement that imposes restrictions which are inconsistent with the rights
and obligations of the parties under this Agreement.

         6.6. ARQULE REPRESENTATION AND WARRANTY. ArQule represents and warrants
to SB that, to the best of ArQule's knowledge and belief, the practice of the
combinatorial library

----------------------

CONFIDENTIAL MATERIALS OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION. ASTERISKS DENOTE SUCH OMISSIONS.


                                       15
<PAGE>   16
design, synthesis, and analysis technology within the ArQule Technology
(commonly referred to and collectively defined herein as the "AMAP Chemistry
Operating System") as of the Effective Date does not infringe any Valid Claim of
any Patent Right of a third party in a manner that would have a material adverse
effect on SB as a result of this Agreement. In addition, ArQule covenants that,
during the term of this Agreement, ArQule will use its best efforts to ensure
that the practice of the AMAP Chemistry Operating System will not infringe any
Valid Claim of any Patent Right of a third party in a manner that would have a
material adverse effect on SB as a result of this Agreement. In the event that
the preceding representation and warranty is untrue, or if ArQule breaches the
preceding covenant, then upon written notice by SB to ArQule of such event:

         (i)      ArQule shall use its reasonable best efforts to modify the
                  ArQule Technology such that the practice of the ArQule
                  Technology no longer infringes the relevant Patent Right or to
                  secure a license to such Patent Right at no cost to SB.

         (ii)     ArQule will indemnify, defend, and hold harmless SB, its
                  Affiliates, and their respective officers, directors,
                  employees, and agents from any and all loss, damage, cost, and
                  expense (including reasonable attorneys fees) and amounts paid
                  in settlement arising from any claim brought by a third party,
                  in law or in equity, based on such material breach. In the
                  event that SB intends to claim indemnification under this
                  Section, SB shall promptly notify ArQule of the infringement
                  action and ArQule shall assume the defense of the action under
                  its sole control, including the right to effect a settlement.
                  A failure by SB to deliver notice to ArQule within a
                  reasonable time shall relieve ArQule of its indemnity
                  obligation under this Section to the extent such failure
                  prejudices the ability of ArQule to defend such action. SB
                  shall cooperate fully with ArQule and its legal
                  representatives in the investigation and defense of the
                  action. In the event of a settlement, ArQule shall obtain the
                  consent of SB before agreeing to any settlement that imposes
                  restrictions which are inconsistent with the rights and
                  obligations of the parties under this Agreement.

SB agrees that the maximum liability of ArQule under this Section, including
without limitation legal expenses, damages, and settlement payments resulting
from the indemnity granted in clause (ii) above, shall be limited to ten million
dollars ($10,000,000).

7.       PAYMENTS.

         7.1. COMPASS ARRAY ACCESS FEE. In partial consideration of SB obtaining
access to the Compass Array Library as set forth in Subsection 4.1.1 of this
Agreement, SB shall pay to ArQule an access fee in the amount of [*****],
payable within forty-five (45) days of the Effective Date, upon invoice from
ArQule. If SB, at its sole discretion, obtains a second copy of the Compass
Array Library, SB shall pay to ArQule a fee in the amount of [*****] payable
within forty-five (45) days after SB receives the second copy, upon invoice from
ArQule.

----------------------

CONFIDENTIAL MATERIALS OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION. ASTERISKS DENOTE SUCH OMISSIONS.


                                       16
<PAGE>   17
         7.2. COMPOUND RESYNTHESIS FEES. In partial consideration of the
production and delivery by ArQule of resynthesized Available Compounds pursuant
to Subsection 4.1.3(a) and 4.1.5. or any applicable workplan, SB agrees to pay
ArQule [*****] per [*****] mg and [*****] for up to [*****] mg of
resynthesized Available Compound, payable within forty-five (45) days of
delivery; provided, that, the aggregate funding for the resynthesis of all
Available Compounds for each fiscal quarter shall not, unless SB expressly
authorizes an increase, exceed [*****] per fiscal quarter or [*****] per fiscal
year.

         7.3. MAPPING ARRAY DELIVERY FEE. In partial of consideration of the
delivery by ArQule to SB of Mapping Array Libraries in accordance with
Subsection 4.1.2 hereof, SB shall pay ArQule [*****] per Mapping Array Library,
payable within forty-five (45) days of delivery, upon invoice from ArQule.

         7.4. OPTIMIZATION PROGRAM FUNDING. In partial consideration of the
performance by ArQule of the lead optimization projects described in Section 4.2
hereof, SB shall pay ArQule for the FTEs assigned to such projects at the
"Applicable FTE Rate" (as defined below) payable in advance in equal quarterly
installments, with the first such payment to be made within forty-five (45) days
of notification to the JSC of project initiation, and with each installment
thereafter payable within five (5) business days of the first day of each fiscal
quarter thereafter, upon invoice from ArQule. The "Applicable FTE Rate" will be
determined as follows:

         (i)      For the lead optimization project on an SB Compound (as
                  described in Subsection 4.2.2(a)), the Applicable FTE Rate
                  from project initiation through [*****] shall be [*****] per
                  FTE for the first [*****] FTEs and [*****] for the next
                  [*****] FTEs, and the Applicable FTE rate from [*****] onwards
                  shall be [*****] per FTE for up to [*****] FTEs. SB and ArQule
                  will negotiate a separate Applicable FTE Rate if the number of
                  FTEs employed by ArQule for a project exceeds [*****] at any
                  time.

         (ii)     For the lead optimization project on a Licensed Compound Set
                  (as described in Subsection 4.2.2(b)), the Applicable FTE Rate
                  from project initiation through [*****] shall be [*****] per
                  FTE for the first [*****] FTEs and [*****] for the next
                  [*****] FTEs, and the Applicable FTE rate thereafter shall be
                  [*****] per FTE for up to [*****] FTEs. SB and ArQule will
                  negotiate a separate Applicable FTE Rate if the number of FTEs
                  employed by ArQule for a project exceeds [*****] at any time

         The parties hereby acknowledge and agree that the FTE rate for any
additional optimization programs will be negotiated in good faith by the parties
and set forth in a separate agreement to be executed by the parties.

         7.5.     MILESTONE PAYMENTS.

                  7.5.1. [*****] MILESTONE PAYMENTS.

----------------------

CONFIDENTIAL MATERIALS OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION. ASTERISKS DENOTE SUCH OMISSIONS.


                                       17
<PAGE>   18
                            (a) PAYMENTS. In partial consideration of the
performance by ArQule of the activities described in Section 4.2., SB shall pay
ArQule the following amount within forty-five (45) days after a compound
resulting from such a project (whether synthesized by ArQule or SB) in which
ArQule participated achieves [*****]. The amount to be paid upon achievement of
each [*****] will be calculated in accordance with the formula set forth below:

                           [*****]

The above milestone payments shall be non-refundable and shall not be credited
against royalties payable to ArQule under this Agreement.

                            (b) EXCEPTION. No payment for achievement of the
[*****] Milestone will be made under this Subsection with respect to a
particular optimization project if SB terminates that project due to lack of
diligent efforts by ArQule pursuant to Subsection 4.2.6. hereof, regardless of
whether such compound meets the criteria for an [*****]. In addition, the
parties agree that the [*****] Milestone shall only be paid on the initial
Royalty-Bearing Product to achieve such milestone within the same activity
profile previously defined by SB and agreed by the JSC.


                  7.5.2.   OTHER DEVELOPMENT MILESTONE PAYMENTS.

                            (a) PAYMENTS. In partial consideration of the
delivery of the Compass Array Library and Mapping Array Libraries and the
performance by ArQule of the optimization activities described in Section 4.2.
of this Agreement, SB shall pay ArQule the following development milestone
payments within forty-five (45) days after each occurrence of each event for
each Royalty-Bearing Product, upon invoice from ArQule:

"Type I RBP" means a Royalty-Bearing Product [*****]

"Type II RBP" means  a Royalty-Bearing Product[*****]

"Type III RBP" means a Royalty-Bearing Product[*****]

"Type IV RBP" means a Royalty-Bearing Product[*****]

"Major Market Country" means any of the United States, United Kingdom, France,
Germany, Italy, Spain or Japan.

----------------------

CONFIDENTIAL MATERIALS OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION. ASTERISKS DENOTE SUCH OMISSIONS.


                                       18
<PAGE>   19
                        Milestone Payments (in thousands)
<TABLE>
<CAPTION>

  Milestone                                Type of Royalty-Bearing Product
                         Type I RBP          Type II RBP       Type III RBP      Type IV RBP
                       Oral        IV     Oral      IV       Oral      IV       Oral      IV
<S>                   <C>      <C>       <C>      <C>       <C>      <C>       <C>      <C>
[*****]               [*****]  [*****]   [*****]  [*****]   [*****]  [*****]   [*****]  [*****]
[*****]               [*****]  [*****]   [*****]  [*****]   [*****]  [*****]   [*****]  [*****]
[*****]               [*****]  [*****]   [*****]  [*****]   [*****]  [*****]   [*****]  [*****]
[*****]               [*****]  [*****]   [*****]  [*****]   [*****]  [*****]   [*****]  [*****]
TOTAL                  $1,200     $650    $2,000   $1,300    $3,500   $2,100    $7,000   $4,200
</TABLE>

*For the purposes of this Section, the phrase "successful completion of Phase II
clinical trial (or equivalent)" means [*****]

                            (b) EXCEPTIONS. The above milestone payments shall
be non-refundable and shall not be credited against royalties payable to ArQule
under this Agreement. However, the parties agree that development milestones
shall only be paid on the initial Royalty-Bearing Product to achieve such
milestone within the same activity profile previously defined by SB and agreed
by the JSC; provided, that, if a second Royalty-Bearing Product within the same
activity profile reaches a given milestone which would have resulted in a
greater milestone payment, SB shall pay such difference.

                  7.5.3. OTHER MILESTONES. The parties shall negotiate in good
faith the commercially reasonable financial terms pertaining to payments for
achievement of development milestones relating to Royalty-Bearing Products based
on compounds resulting from the screening described in Section 4.1.6 or for uses
of a Royalty-Bearing Product within the Field for purposes other than as a human
therapeutic or prophylactic for [*****], which terms shall be set forth in a
separate agreement.

         7.6.     PRODUCT ROYALTIES.

                  7.6.1. EARNED ROYALTIES WITHIN THE FIELD. In partial
consideration of the performance by ArQule of the activities set forth in
Article 4, SB shall pay to ArQule the following royalties on the incremental Net
Sales of Royalty-Bearing Products within the Field in accordance with the
procedures set forth in Article 8 hereof.

"Type I RBP" means a Royalty-Bearing Product [*****]

----------------------

CONFIDENTIAL MATERIALS OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION. ASTERISKS DENOTE SUCH OMISSIONS.


                                       19
<PAGE>   20
"Type II RBP" means a Royalty-Bearing Product [*****]

"Type III RBP" means a Royalty-Bearing Product[*****]

"Type IV RBP" means a Royalty-Bearing Product[*****]

"Major Market Country" means any of the United States, United Kingdom, France,
Germany, Italy, Spain or Japan.

                                    Royalties
<TABLE>
<CAPTION>

Incremental                                                      Type of Royalty-Bearing Product
 Net Sales
    in
 Calendar
   Year
                    Type I RBP                 Type II RBP                 Type III RBP                Type IV RBP
                Oral           IV           Oral           IV           Oral           IV           Oral          IV
<S>            <C>          <C>           <C>           <C>           <C>           <C>           <C>           <C>
Less than      [*****]      [*****]       [*****]       [*****]       [*****]       [*****]       [*****]       [*****]
$300m
$300m or       [*****]      [*****]       [*****]       [*****]       [*****]       [*****]       [*****]       [*****]
more
</TABLE>


                  7.6.2 ROYALTY TERM. The foregoing royalty obligations shall
commence with the first commercial sale of a Royalty-Bearing Product in any
country and shall continue on a country-by-country basis for a period of ten
(10) years after the first commercial sale (i.e. the date of first sale of a
Royalty-Bearing Product in the ordinary course of business in any country by SB
or an Affiliate or sublicensee of SB) of the Royalty-Bearing Product in such
country. Upon expiration of the ten-year royalty payment obligations in a
country, SB shall thereafter have, in perpetuity, a fully paid up license under
Section 5.2 of this Agreement.

                  7.6.3. OTHER ROYALTIES. The parties shall negotiate in good
faith the financial terms pertaining to royalty payments for sales of
Royalty-Bearing Products based on compounds resulting from the screening
described in Subsection 4.1.6 or for uses of a Royalty-Bearing Product within
the Field for purposes other than as a human therapeutic or prophylactic for
[*****], which terms shall be set forth in a separate agreement.

                  7.6.4 THIRD PARTY ROYALTIES. SB shall be responsible for
procuring such licenses as it deems, in its sole discretion, appropriate for the
manufacture, use, marketing, sale or distribution of Royalty-Bearing Products by
SB and its Affiliates and sublicensees, and for the payment of any amounts due
third parties under such licenses; provided SB may offset, against the royalties
owed to ArQule with respect to a Royalty-Bearing Product in a country, [*****]
of royalties that SB pays to a third party in order to license in the relevant
country a Valid Claim

----------------------

CONFIDENTIAL MATERIALS OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION. ASTERISKS DENOTE SUCH OMISSIONS.

                                       20
<PAGE>   21
covering the composition of a Licensed Compound contained in that
Royalty-Bearing Product or the use of a synthetic protocol provided by ArQule to
SB under this Agreement to manufacture that Royalty-Bearing Product, up to (i)
in the case of an issued patent, a maximum of [*****] or (ii) in the case of a
patent application, a maximum of [*****], of the royalty owed to ArQule in any
quarter with respect to the applicable Royalty-Bearing Product in the applicable
country. Any such amounts which are not credited in a quarter may be carried
forward until expended.

8.       REPORTS, RECORDS, AND PAYMENT PROCEDURES.

         8.1. ROYALTY REPORTS AND PAYMENTS. Within sixty (60) days after the
conclusion of each Royalty Period, SB shall deliver to ArQule a report
containing the following information:

         (i)      the gross sales of Royalty-Bearing Products during the
                  applicable Royalty Period in each country of sale in
                  sufficient detail to permit confirmation of the accuracy of
                  the royalty payment;

         (ii)     adjustments and calculation of Net Sales for the applicable
                  Royalty Period in each country of sale; and

         (iii)    total Net Sales in U.S. dollars, together with the exchange
                  rates used for conversion.

If no payment is due to ArQule for any reporting period, the report shall so
state. All such reports shall be considered Confidential Information under this
Agreement. Concurrent with this report, SB shall remit to ArQule any payment due
for the applicable Royalty Period.

         8.2. METHOD AND CURRENCY OF PAYMENT. All amounts payable by SB to
ArQule under this Agreement shall be by check or wire transfer for immediately
available funds. All payments due to ArQule under this Agreement shall be
payable in United States dollars. Conversion of foreign currency to U.S. dollars
shall be made using the actual average exchange rates for such currency as used
by SB in producing its quarterly and annual accounts, as confirmed by SB's
auditors. Subject to Section 8.5, such payments shall be without deduction of
exchange, collection, or other charges. If by law, regulation, or fiscal policy
of a particular country, conversion into United States dollars or transfer of
funds of a convertible currency to the United States is restricted or forbidden,
SB shall give ArQule prompt written notice of such restriction, which notice
shall satisfy the payment deadlines in this Agreement. SB shall pay any amounts
due to ArQule through whatever lawful methods ArQule reasonably designates;
provided, however, that if ArQule fails to designate such payment method within
thirty (30) days after being notified of the restriction, SB may deposit such
payment in local currency to the credit of ArQule in a recognized banking
institution selected by SB and identified by written notice to ArQule, and such
deposit shall fulfill all obligations of SB to ArQule with respect to such
payment.

         8.3. LATE PAYMENTS. Any payment by SB that is not paid on or before the
date such payment is due under this Agreement shall bear interest, to the extent
permitted by law, at two

----------------------

CONFIDENTIAL MATERIALS OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION. ASTERISKS DENOTE SUCH OMISSIONS.

                                       21
<PAGE>   22
percentage points above the "Prime Rate" of interest as reported in the Wall
Street Journal on the date payment is due, with interest calculated based on the
number of days that payment is delinquent.

         8.4. RECORDS. SB shall maintain, and shall require its Affiliates and
other authorized sellers of Royalty-Bearing Products to maintain, complete and
accurate records of Royalty-Bearing Products made, used, or sold under this
Agreement, and any amounts payable to ArQule in relation to such Royalty-Bearing
Products, which records shall contain sufficient information to permit ArQule to
confirm the accuracy of any reports delivered to ArQule in accordance with
Section 8.1. SB shall retain such records relating to a given Royalty Period for
at least five (5) years after the conclusion thereof. ArQule shall have the
right, at its own expense, to cause an independent certified public accountant
reasonably acceptable to SB to inspect such records during normal business hours
for the sole purpose of verifying any reports and payments delivered under this
Agreement. The accountant shall conduct the audit at a date and time reasonably
acceptable to SB but not later than fifteen (15) business days after ArQule
notifies SB of the audit. Such accountant shall not disclose to ArQule any
information other than information relating to accuracy of reports and payments
delivered under this Agreement and shall provide SB with a copy of any report
given to ArQule. The parties shall reconcile any underpayment or overpayment
within sixty (60) days after the accountant delivers the results of the audit.
In the event that any audit performed under this Section reveals an underpayment
in excess of five percent (5%) in any Royalty Period, SB shall bear the full
cost of such audit. ArQule shall not exercise its audit right under this Section
more than once in any twelve-month period.

         8.5. WITHHOLDING AND SIMILAR TAXES. Any tax required to be withheld by
SB or any Affiliate or sublicensee of SB under the laws of any foreign country
for the account of ArQule under this Section 8 shall be promptly paid by SB or
said Affiliate or sublicensee for and on behalf of ArQule to the appropriate
governmental authority, and SB or said Affiliate or sublicensee shall furnish
ArQule with proof of payment of such tax together with official or other
appropriate evidence issued by the appropriate governmental authority sufficient
to enable ArQule to support a claim for income tax credit in respect of any sum
so withheld.

9.       DILIGENCE.

         9.1. DILIGENCE. SB shall use reasonable efforts to develop,
manufacture, market, and sell a Royalty-Bearing Product based on each Licensed
Compound Set in accordance with its scientific, medical, business and legal
judgment.

         9.2. STATUS REPORTS. SB will furnish ArQule with a brief [*****]
statement, within thirty (30) days after [*****] of each calendar year, that
describes the status of each Licensed Compound Set which remains under
development by SB as a Royalty-Bearing Product. After SB completes development
of a Royalty-Bearing Product, SB will promptly notify ArQule of the first
commercial sale of that Royalty-Bearing Product in each country. In addition, SB
agrees to

----------------------

CONFIDENTIAL MATERIALS OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION. ASTERISKS DENOTE SUCH OMISSIONS.

                                       22
<PAGE>   23
inform ArQule at least [*****] regarding the status of any SB Analog Compounds
that SB develops based on SB Analog Compounds developed by the parties under
this Agreement.

         9.3. RETURN OF ARQULE COMPOUNDS. For a period of [*****] after an
ArQule Compound is designated as a Licensed Compound under this Agreement, or
such longer period as ArQule is conducting a lead optimization project with
respect to such Licensed Compound, SB shall be deemed to comply with the
diligence requirements of Section 9.1. Thereafter, in the event that SB ceases
to use reasonable efforts to develop at least one Licensed Compound or Analog
Compound within a Licensed Compound Set as a Royalty-Bearing Product in
accordance with Section 9.1, including without limitation the cessation of
efforts to optimize such Licensed Compound Set prior to reaching Program Status
(other than for lack of diligence by ArQule), then (i) rights in any ArQule
Compounds within such Licensed Compound Set shall revert to ArQule, (ii) all
licenses granted to SB under this Agreement with respect to such ArQule
Compounds shall terminate, and (iii) SB shall assign to ArQule the ownership of
such ArQule Compounds and all SB Patent Rights and Joint Patent Rights in the
composition of such ArQule Compounds. Notwithstanding the foregoing, once SB
designates a Licensed Compound within a Licensed Compound Set as a Program
Status Compound, then the entire Licensed Compound Set will no longer be subject
to this Section 9.3.

10.      CONFIDENTIAL INFORMATION.

         10.1. DESIGNATION OF CONFIDENTIAL INFORMATION. Confidential Information
that is disclosed in writing or by electronic transmission which can be
converted into writing shall be marked with a legend indicating its confidential
status. Confidential Information that is disclosed orally or visually shall be
documented in a written notice prepared by the Disclosing party and delivered to
the Receiving party within thirty (30) days of the date of disclosure; such
notice shall summarize the Confidential Information disclosed to the Receiving
Party and reference the time and place of disclosure.

         10.2.    OBLIGATIONS.  The Receiving Party agrees that it shall:

         (i)      maintain all Confidential Information in strict confidence,
                  except that the Receiving Party may disclose or permit the
                  disclosure of any Confidential Information to its, and its
                  Affiliates, directors, officers, employees, consultants, and
                  advisors who are obligated to maintain the confidential nature
                  of such Confidential Information and who need to know such
                  Confidential Information for the purposes set forth in this
                  Agreement;

         (ii)     use all Confidential Information solely for the purposes set
                  forth in, or as permitted by, this Agreement; and

         (iii)    allow its directors, officers, employees, consultants, and
                  advisors to reproduce the Confidential Information only to the
                  extent necessary to effect the purposes set forth in this
                  Agreement, with all such reproductions being considered
                  Confidential Information.

----------------------

CONFIDENTIAL MATERIALS OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION. ASTERISKS DENOTE SUCH OMISSIONS.


                                       23
<PAGE>   24
         10.3. EXCEPTIONS. The obligations of the Receiving Party under Section
10.2. above shall not apply to the extent that the Receiving Party can
demonstrate that certain Confidential Information:

         (i)      was in the public domain prior to the time of its disclosure
                  under this Agreement;

         (ii)     entered the public domain after the time of its disclosure
                  under this Agreement through means other than an unauthorized
                  disclosure resulting from an act or omission by the Receiving
                  Party;

         (iii)    was independently developed or discovered by the Receiving
                  Party without use of the Confidential Information;

         (iv)     is or was disclosed to the Receiving Party at any time,
                  whether prior to or after the time of its disclosure under
                  this Agreement, by a third party having no fiduciary
                  relationship with the Disclosing Party and having no
                  obligation of confidentiality to the Disclosing Party with
                  respect to such Confidential Information; or

         (v)      is required to be disclosed to comply with applicable laws or
                  regulations (such as disclosure to the FDA or the United
                  States Patent and Trademark Office or to their foreign
                  equivalents), or to comply with a court or administrative
                  order, provided that the Disclosing Party receives prior
                  written notice of such disclosure and that the Receiving Party
                  takes all reasonable and lawful actions to obtain confidential
                  treatment for such disclosure and, if possible, to minimize
                  the extent of such disclosure.

         10.4. RETURN OF CONFIDENTIAL INFORMATION. Upon the termination of this
Agreement, at the request of the Disclosing Party, the Receiving Party shall
destroy or return to the Disclosing Party all originals, copies, and summaries
of documents, materials, and other tangible manifestations of Confidential
Information in the possession or control of the Receiving Party, except that the
Receiving Party may retain one copy of the Confidential Information in the
possession of its Legal Department solely for the purpose of monitoring its
obligations under this Agreement.

         10.5. SURVIVAL OF OBLIGATIONS. The obligations set forth in this
Section shall remain in effect for a period of [*****] years after
termination of this Agreement, except that the obligations of the Receiving
Party to destroy or return Confidential Information to the Disclosing Party
shall survive until fulfilled.


11.      PROPRIETARY MATERIALS.

         11.1. OWNERSHIP. SB acknowledges and agrees that the ArQule Compounds
and any other Proprietary Materials provided to SB and its Affiliates under this
Agreement are and shall remain the property of ArQule. ArQule acknowledges and
agrees that any SB Compounds and

----------------------

CONFIDENTIAL MATERIALS OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION. ASTERISKS DENOTE SUCH OMISSIONS.

                                       24
<PAGE>   25
any other Proprietary Materials provided to ArQule under this Agreement are and
shall remain the property of SB. The foregoing notwithstanding, the parties
agree that ownership of any intellectual property rights in ArQule Analog
Compounds and SB Analog Compounds shall be determined in accordance with Section
6.

         11.2. RESTRICTIONS ON USE AND TRANSFER. SB shall use the ArQule
Compounds only for the purposes contemplated by this Agreement, and, except as
permitted under Section 5.2 above, shall not transfer the ArQule Compounds to
any third party without the prior written consent of ArQule. Except as expressly
permitted herein, SB shall not attempt to identify the ArQule Compounds in the
Mapping Array Libraries or Compass Array Libraries. ArQule shall use the SB
Compounds and SB Analog Compounds only for the purposes contemplated by this
Agreement, and shall not transfer the SB Compounds or any SB Analog Compounds to
any third party without the prior written consent of SB. In the case of
Proprietary Materials other than Compounds, the Recipient agrees to use such
Proprietary Materials only for the purposes indicated by the Provider, and shall
not transfer the Proprietary Materials to any third party without the prior
written consent of the Provider. The Recipient further agrees to inform its
employees and consultants about the proprietary nature of the Proprietary
Materials and to take reasonable precautions, at least as stringent as those
observed by the Recipient to protect its own Proprietary Materials, to ensure
that such employees and consultants observe the obligations of the Recipient
under this Article 11.

         11.3. DISPOSITION OF UNUSED MATERIALS. At the request of the Provider,
the Recipient will return or destroy any unused Proprietary Materials furnished
by the Provider; provided, however, that subject to Section 4.1.6(b), the
disposition of unused ArQule Compounds shall be made in accordance with Section
12.4.

         11.4. COMPLIANCE WITH LAW. The Recipient agrees to comply with all
federal, state, and local laws and regulations applicable to the use, storage,
disposal, and transfer of Proprietary Materials furnished by the provider,
including without limitation the Toxic Substances Control Act (15 USC 2601 et
seq.) and implementing regulations (in particular, 40 CFR 720.36 [Steering and
Development Exemption]), the Food, Drug, and Cosmetic Act (21 USC 301 et seq.)
and implementing regulations, and all Export Administration Regulations of the
Department of Commerce. The Recipient assumes sole responsibility for any
violation of such laws or regulations by the Recipient or any of its Affiliates.

         11.5. LIMITATION OF LIABILITY. Any Proprietary Materials delivered
pursuant to this Agreement are understood to be experimental in nature and may
have hazardous properties. The Recipient should assume that the materials are
dangerous and should use appropriate precautions. THE PROVIDER MAKES NO
REPRESENTATIONS, AND EXTENDS NO WARRANTIES OF ANY KIND, EITHER EXPRESS OR
IMPLIED, WITH RESPECT TO THE PROPRIETARY MATERIALS FURNISHED TO THE RECIPIENT.
THERE ARE NO EXPRESS OR IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A
PARTICULAR PURPOSE. EXCEPT AS SET FORTH IN SECTION 7.6.4, THE PROVIDER DISCLAIMS
ANY WARRANTY, EXPRESS OR IMPLIED, THAT THE USE OF ANY PROPRIETARY MATERIALS WILL
NOT INFRINGE ANY PATENT OR OTHER INTELLECTUAL PROPERTY RIGHTS OF A THIRD PARTY,
AND THE PROVIDER SHALL HAVE NO LIABILITY RELATING THERETO.

                                       25
<PAGE>   26
12.      TERM AND TERMINATION.

         12.1. TERM. This Agreement shall commence on the Effective Date and
shall remain in effect for a period of five (5) years, subject to extension by
agreement of the parties or pursuant to Subsection 4.2.5 or unless earlier
terminated as provided in this Article 12.

         12.2. MATERIAL BREACH. In the event that either party commits a
material breach of any of its obligations under this Agreement and such party
fails (i) to remedy that breach within sixty (60) days after receiving written
notice thereof from the other party or (ii) to commence dispute resolution
pursuant to Article 13, within sixty (60) days after receiving written notice of
that breach from the other party, the other party may immediately terminate this
Agreement upon written notice to the breaching party.

         12.3. FORCE MAJEURE. Neither party will be responsible for delays
resulting from acts beyond the control of such party, provided that the
nonperforming party uses commercially reasonable efforts to avoid or remove such
causes of nonperformance and continues performance hereunder with reasonable
dispatch whenever such causes are removed.

         12.4. TERMINATION OF ACTIVITIES. In the event that all activities under
Article 4 have been completed or terminated prior to the five-year expiration of
the Agreement set forth in Section 12.1 above, including without limitation in
the event of early termination of all activities pursuant to Subsection 4.2.6.,
this Agreement shall automatically terminate.

         12.5. EFFECT OF TERMINATION. Termination of this Agreement shall not
relieve the parties of any obligation accruing prior to such termination. The
following provisions shall survive the expiration or termination of this
Agreement: Articles 6, 8, 9, 10, 11, 13, 14; Sections 5.2., 7.5., 7.6., 12.5.,
15.8., and 15.10.,. Notwithstanding the foregoing, if ArQule terminates this
Agreement pursuant to Section 12.2., then (i) SB shall have no further right to
screen or optimize ArQule Compounds pursuant to Article 4, or to develop and
commercialize Program Status Compounds and (ii) SB shall immediately return all
unused ArQule Compounds in a manner directed by ArQule.

13.      DISPUTE RESOLUTION.

         13.1. PROCEDURES MANDATORY. The parties agree that any dispute arising
out of or relating to this Agreement shall be resolved solely by means of the
procedures set forth in this Article 13, and that such procedures constitute
legally binding obligations that are an essential provision of this Agreement;
provided, however, that all procedures and deadlines specified in this Article
13 may be modified by written agreement of the parties. If either party fails to
observe the procedures of this Article 13, as modified by their written
agreement, the other party may bring an action for specific performance in any
court of competent jurisdiction.


                                       26
<PAGE>   27
         13.2.    DISPUTE RESOLUTION PROCEDURES.

                  13.2.1 NEGOTIATION. In the event of any dispute arising out of
or relating to this Agreement, the affected party shall notify the other party,
and the JSC shall attempt in good faith to resolve the matter, subject to the
approval of the senior management of both parties, within ten (10) days after
the date such notice is received by the other party (the "Notice Date"). Any
disputes not resolved by good faith discussions by the JSC shall be referred to
the Chief Executive Officer of ArQule and the Chairman of Research and
Development of SB, who shall meet at a mutually acceptable time and location
within thirty (30) days after the Notice Date and attempt to negotiate a
settlement.

                  13.2.2. MEDIATION. If the matter remains unresolved within
sixty (60) days after the Notice Date, or if the senior executives fail to meet
within thirty (30) days after the Notice Date, either party may initiate
mediation upon written notice to the other party, whereupon both parties shall
be obligated to engage in a mediation proceeding under the then current Center
for Public Resources ("CPR") Model Procedure for Mediation of Business Disputes,
except that specific provisions of this Section shall override inconsistent
provisions of the CPR Model Procedure. The mediator will be selected from the
CPR Panels of Neutrals. If the parties cannot agree upon the selection of a
mediator within ninety (90) days after the Notice Date, then upon the request of
either party, the CPR shall appoint the mediator. The parties shall attempt to
resolve the dispute through mediation until one of the following occurs: (i) the
parties reach a written settlement; (ii) the mediator notifies the parties in
writing that they have reached an impasse; (iii) the parties agree in writing
that they have reached an impasse; or (iv) the parties have not reached a
settlement within one hundred and twenty (120) days after the Notice Date.

                  13.2.3.TRIAL WITHOUT JURY. If the parties fail to resolve the
dispute through mediation, or if neither party elects to initiate mediation,
each party shall have the right to pursue any other remedies legally available
to resolve the dispute, provided, however, that the parties expressly waive any
right to a jury trial in any legal proceeding under this Article 13.

         13.3. PRESERVATION OF RIGHTS PENDING RESOLUTION.

                  13.3.1. PERFORMANCE TO CONTINUE. Each party shall continue to
perform its obligations under this Agreement pending final resolution of any
dispute arising out or relating to this Agreement; provided, however, that a
party may suspend performance of its obligations during any period in which the
other party fails or refuses to perform its obligations.

                  13.3.2. PROVISIONAL REMEDIES. Although the procedures
specified in this Section 13 are the sole and exclusive procedures for the
resolution of disputes arising out of relating to this Agreement, either party
may seek a preliminary injunction or other provisional equitable relief if, in
its reasonable judgment, such action is necessary to avoid irreparable harm to
itself or to preserve its rights under this Agreement.

                  13.3.4. STATUTE OF LIMITATIONS. The parties agree that all
applicable statutes of limitation and time-based defenses (such as estoppel and
laches) shall be tolled while the

                                       27
<PAGE>   28
procedures set forth in Subsections 13.2.1. and 13.2.2. are pending. The parties
shall take any actions necessary to effectuate this result.

14.      INDEMNIFICATION AND INSURANCE.

         14.1. INDEMNIFICATION. SB agrees to defend, indemnify and hold ArQule,
its Affiliates and their respective directors, officers, employees, and agents
(the "Indemnitees") harmless from all costs, judgments, liabilities, and damages
assessed by a court of competent jurisdiction arising from claims asserted by a
third party against ArQule, its Affiliates, or their respective directors,
officers, employees, or agents as a result of any of the following: (i) actual
or asserted violations by SB or its Affiliates, sublicensees, or third party
manufacturers of any applicable law or regulation that relates to the
manufacture, distribution, or sale of any Royalty-Bearing Product, including
without limitation, any alleged or actual claim that such product was
adulterated, misbranded, or mislabeled; (ii) claims for bodily injury, death, or
property damage attributable to the manufacture, distribution, sale, or use by
SB or its Affiliates, sublicensees, or third party manufacturers of any
Royalty-Bearing Product; or (iii) a recall ordered by a governmental agency, or
required by a confirmed failure, of any Royalty-Bearing Product, that is
manufactured, distributed, or sold by SB, its Affiliates, sublicensees, or third
party manufacturers.

         14.2. PROCEDURE. The Indemnitees agree to provide SB with prompt
written notice of any claim, suit, action, demand, or judgment for which
indemnification is sought under this Agreement. SB agrees, at its own expense,
to provide attorneys reasonably acceptable to ArQule to defend against any such
claim. The Indemnitees shall cooperate fully with SB in such defense and will
permit SB to conduct and control such defense and the disposition of such claim,
suit, or action (including all decisions relative to litigation, appeal, and
settlement); provided, however, that any Indemnitee shall have the right to
retain its own counsel, at the expense of SB, if representation of such
Indemnitee by the counsel retained by SB would be inappropriate because of
actual or potential differences in the interests of such Indemnitee and any
other party represented by such counsel. SB agrees to keep ArQule informed of
the progress in the defense and disposition of such claim and to consult with
ArQule with regard to any proposed settlement.

         14.3. INSURANCE. SB shall maintain appropriate product liability
insurance or self-insurance with respect to development, manufacture, and sales
of Royalty-Bearing Product in such amount as SB customarily maintains with
respect to sales of its other products. SB shall each maintain such insurance
for so long as it continues to manufacture or sell such products, and thereafter
for so long as SB maintains insurance for itself covering such manufacture or
sales.

15.      MISCELLANEOUS.

         15.1. PUBLICITY. Neither party shall reveal the terms of this Agreement
or use the name of the other party in connection with any promotional statements
to the public about the work performed under this Agreement or the relationship
between the parties, whether in a press release, advertisement, promotional
sales literature, or other promotional oral or written statements, without the
prior written approval of the other party, which consent shall not be


                                       28
<PAGE>   29
unreasonably withheld or delayed, except for restatements of previously-approved
statements and disclosures required by applicable law or regulation.

         15.2. RELATIONSHIP OF PARTIES. For the purposes of this Agreement, each
party is an independent contractor and not an agent or employee of the other
party. Neither party shall have authority to make any statements,
representations, or commitments of any kind, or to take any action which shall
be binding on the other party, except as may be explicitly provided for herein
or otherwise authorized in writing.

         15.3. REPRESENTATIONS AND WARRANTIES. Each party represents and
warrants to the other party (i) that it has the legal right, power, and
authority to enter into this Agreement, to extend the rights and licenses
granted to the other party in this Agreement, and to fully perform its
obligations under this Agreement, and (ii) that the performance of such
obligations will not conflict with its charter documents or any agreements,
contracts, or other arrangements to which it is a party. In the event that a
party becomes aware that any of its representations and warranties under this
Section 15.3 become untrue during the term of this Agreement, such party shall
immediately furnish the other party with written notice which describes the
facts in reasonable detail.

         15.4. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, and all of which
together shall be deemed to be one and the same instrument.

         15.5. HEADINGS. All headings in this Agreement are for convenience only
and shall not affect the meaning of any provision hereof.

         15.6. BINDING EFFECT. This Agreement shall inure to the benefit of and
be binding upon the parties and their respective lawful successors and permitted
assigns.

         15.7. ASSIGNMENT. Neither party may assign this Agreement without the
prior written consent of the other party, except that a party may assign this
Agreement to an Affiliate or to a successor in connection with the merger,
consolidation, or sale of all or substantially all of its assets or that portion
of its business pertaining to the subject matter of this Agreement.

         15.8. NOTICES. All notices, requests, demands and other communications
required or permitted to be given pursuant to this Agreement shall be in writing
and shall be deemed to have been duly given upon the date of receipt if
delivered by hand, recognized national overnight courier, confirmed facsimile
transmission, or registered or certified mail, return receipt requested, postage
prepaid, to the following addresses or facsimile numbers:


                                       29
<PAGE>   30
         If to SB:



                           SmithKline Beecham Pharmaceuticals
                           709 Swedeland Road
                           P.O. Box 1539
                           King of Prussia, PA 19406-0939
                           Attn: Alliance Management
                           Tel:     610-270-4800
                           Fax:     610-270-5964

         with a copy (which shall not constitute notice) to:

                           SmithKline Beecham Corporation
                           One Franklin Plaza
                           P.O. Box 7929
                           Philadelphia, PA  19101
                           Attn:    US General Counsel
                           Tel:     215-7514000
                           Fax:     215-751-3935

         If to ArQule:
                           ArQule, Inc.
                           19 Presidential Way
                           Woburn, MA  01801-5140
                           Attn:  President
                           Tel: (781) 994-0300
                           Fax: (781) 994-0676

         with a copy (which shall not constitute notice) to:

                           ArQule, Inc.
                           19 Presidential Way
                           Woburn, MA  01801-5140
                           Attn:  Legal Department
                           Tel: (781) 994-0300
                           Fax: (781) 994-0676

Either party may change its designated address and facsimile number by notice to
the other party in the manner provided in this Section 15.8.

         15.9. AMENDMENT AND WAIVER. This Agreement may be amended,
supplemented, or otherwise modified at any time, but only by means of a written
instrument signed by both parties. Any waiver of any rights or failure to act in
a specific instance shall relate only to such instance and shall not be
construed as an agreement to waive any rights or fail to act in any other
instance, whether or not similar.


                                       30
<PAGE>   31
         15.10. GOVERNING LAW. This Agreement and the legal relations among the
parties shall be governed by and construed in accordance with the laws of the
Commonwealth of Massachusetts irrespective of any conflict of laws principles.

         15.11 HART-SCOTT-RODINO ACT. If required by law, the parties shall, at
their own expense, prepare and make appropriate filings under Title II of the
Hart-Scott-Rodino Antitrust Improvement Act of 1976, as amended, and the rules
and regulations promulgated thereunder (16 C.F.R. 801.1 et. seq.) (the "Act") as
soon as reasonably practicable. The parties shall co-operate in the antitrust
clearance process and agree to furnish promptly to the FTC and the Antitrust
Division of the Department of Justice any additional information reasonably
requested by them in connection with such filings.

         15.12. SEVERABILITY. In the event that any provision of this Agreement
shall, for any reason, be held to be invalid or unenforceable in any respect,
such invalidity or unenforceability shall not affect any other provision hereof,
and this Agreement shall be construed as if such invalid or unenforceable
provision had not been included herein.

         15.13. ENTIRE AGREEMENT. This Agreement constitutes the entire
agreement between the parties with respect to the subject matter hereof and
supersedes any and all prior or contemporaneous oral and prior written
agreements and understandings.


                                       31
<PAGE>   32
         IN WITNESS WHEREOF, the undersigned have duly executed and delivered
this Agreement as a sealed instrument effective as of the date first above
written.



SMITHKLINE BEECHAM CORPORATION


By:      /s/ Authorized Officer
   -----------------------------------------
Name:
Title:


ARQULE, INC.


By:      /s/ Stephen A. Hill, M.D.
   -----------------------------------------
Stephen A. Hill, M.D.
President and Chief Executive Officer


                                       32
<PAGE>   33
                                   Schedule A

                                    [*****]

----------------------

CONFIDENTIAL MATERIALS OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION. ASTERISKS DENOTE SUCH OMISSIONS.


                                       33
<PAGE>   34
                                   Schedule B

                                    [*****]

----------------------

CONFIDENTIAL MATERIALS OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION. ASTERISKS DENOTE SUCH OMISSIONS.


                                       34
<PAGE>   35
                                   Schedule C

                                    [*****]


--------
 CONFIDENTIAL MATERIALS OMITTED AND FILED SEPARATELY WITH THE SECURITIES
AND EXCHANGE COMMISSION. ASTERISKS DENOTE SUCH OMISSIONS.

                                       35