<PAGE>

                                                                   EXHIBIT 10.16

                       RESEARCH AND DEVELOPMENT AGREEMENT

                                     BETWEEN

                                 SANKYO CO., LTD

                                       and

                                  ARQULE, INC.

<PAGE>

                                                                   EXHIBIT 10.16

                                Table of Contents

1.       Definitions
         1.1.     "Active Homolog"
         1.2.     "Active ArQule Compound"
         1.3.     "Active Compound"
         1.4.     "Active Sankyo Compound"
         1.5.     "Affiliate"
         1.6.     "Agreement"
         1.7.     "ArQule Compound"
         1.8.     "ArQule Derivative Compound"
         1.9.     "ArQule Patent Rights"
         1,10.    "ArQule Technology"
         1.11.    "Array"
         1.12.    "Base Rate of Interest"
         1.13.    "Chemical Theme"
         1.14.    "Confidential Information"
         1.15.    "Contract Year"
         1.16.    "Derivative Compound"
         1.17.    "Directed Array (tm)"
         1.18.    "Directed Array (tm) Program"
         1.19.    "Disclosing Party"
         1.20.    "Effective Date"
         1.21.    "Extraordinary Expenses"
         1.22.    "FDA"
         1.23.    "Joint Patent Rights"
         1.24.    "Licensed Compound"
         1.25.    "Licensed Compound Set"
         1.26.    "Mapping Array (tm)"
         1.27.    "Mapping Array (tm) Program"
         1.28.    "Net Sales"
         1.29.    "Net Sales Price"
         1.30.    "Party"
         1.31.    "Patent Rights"
         1.32.    "Phase I Clinical Trials"
         1.33.    "Phase II Clinical Trials"
         1.34.    "Phase III Clinical Trials"
         1.35.    "Preclinical Compound"
         1.36.    "Preclinical Development"
         1.37.    "Receiving Party"
         1.38.    "Research Period"
         1.39.    "Research Program"
         1.40.    "Research Plan"
         1.41.    "Royalty-Bearing Product"
         1.42.    "Royalty Period"

<PAGE>

                                                                   EXHIBIT 10.16

         1.42.    "Sankyo Compound"
         1.44.    "Sankyo Derivative Compound
         1.45.    "Sankyo Patent Rights"
         1.46.    "Steering Committee
         1.47.    "Sublicensee"
         1.48.    "Target"
         1.49.    "U.S. Territory"
         1.50     "Valid Claim"
         1.51     "Worldwide Territory `

2.       Management of Research Program
         2.1.     Composition of Steering Committee
         2.2.     Duties of the Steering Committee
         2.3.     Compounds Excluded from the Directed Array (tm) Program
         2.4.     Meetings of the Steering Committee
         2.5.     Cooperation
         2.6.     Visits to Facilities

3.       Mapping Array" (tm) Program
         3.1.     Conduct of Mapping Array (tm) Program
         3.2.     Mutual Disclosure
         3.3.     Reservation of Active ArQule Compounds
         3.4.     Mapping Array (tm) Program Payments
         3.5.     Term of Mapping Array (tm) Program
         3.6.     Performance of Mapping Array (tm) Program

4.       Directed Array (tm) Program
         4.1.     Description of Directed Array (tm) Program
         4.2.     Conduct of Directed Array (tm) Program
         4.3.     Directed Array (tm) Program Payments
         4.3.1.   Delivery Fee
         4.3.2.   Expenses
         4.4.     Term of Directed Array (tm) Program

5.       License Grants: Reversion of Rights
         5.1.     Screening Licenses
         5.2.     Preclinical and Clinical Licenses
         5.3.     Commercialization License
         5.4.     Reversion of Rights: Return of Materials

6.       Ownership of Compounds
         6.1.     Sankyo Compounds; Sankyo Derivative Compounds
         6.2.     ArQule Compounds: ArQule Derivative Compounds

<PAGE>

                                                                   EXHIBIT 10.16

7.       Intellectual Property Rights
         7.1.     Ownership of Patent Rights
         7.2.     Management of Joint Patent Rights
         7.3.     Cooperation of the Parties
         7.4.     Infringement by Third Parties

8.       Payments, Reports, and Records
         8.1.     Milestone Payments
         8.2.     Alternative to Milestone Payments
         8.3.     Royalties
         8.4.     Reports and Payments
         8.5.     Invoices: Payments in U.S. Dollars
         8.6.     Payments in Other Currencies
         8.7.     Records
         8.8.     Late Payments
         8,9.     Withholding Tax Payments
               8.9.1. Payments
               8.9.2. Royalty Payments

9.       Confidential Information
         9.1.     Definition of Confidential Information
         9.2.     Definition of Confidential Information
         9.3.     Obligations
         9.4.     Exceptions
         9.5.     Return of Confidential Information
         9.6.     Survival of Obligations

10.      Representations and Warranties
         10.1.    Authorization

11.      Indemnifications and Insurance
         11.1.    Sankyo Indemnity Obligations
         11.2.    Procedure
         11.3.    Insurance

12.      Term and Termination
         12.1.    Term
         12.2.    Breach of Payment Obligations
         12.3.    Material Breach

<PAGE>

                                                                   EXHIBIT 10.16

         12.4.    Effect of Termination

13.      Miscellaneous
         13.1     Relationship of Parties
         13.2.    Publicity
         13.3.    Non-Solicitation
         13.4.    Governing Law
         13.5.    Dispute Resolution Procedures
         13.6.    Counterparts
         13.7.    Headings
         13.3.    Binding Effect
         13.9.    Assignment
         13.10.   Notices
         13.11.   Amendment and Waiver
         13.12.   Severability
         13.13.   Entire Agreement
         13.14.   Force Majeure

EXHIBIT A

<PAGE>

                                                                   EXHIBIT 10.16

                       RESEARCH AND DEVELOPMENT AGREEMENT

         This Agreement, dated as of November 1, 1997, is between Sankyo Co.,
     LTD ("Sankyo"), a Japanese corporation, having a business address at 5-1,
     Nihonbashi Honcho 3-chome, Chuo-ku Tokyo 103, Japan, and ArQule, Inc.
     ("ArQule"), a Delaware corporation, having a business address at 200 Boston
     Avenue, Medford, Massachusetts, U.S.A.

                                    RECITALS

         WHEREAS, ArQule has developed certain technology that has applications
     in the discovery and development of pharmaceutical compounds;

         WHEREAS, Sankyo desires that ArQule apply its technologies to the
     research and development of pharmaceutical compounds for Sankyo; and

         WHEREAS, in exchange for payment by Sankyo of research funds, milestone
     payments and royalties, ArQule is willing to perform certain research and
     development activities for Sankyo, subject to the terms and conditions of
     this Agreement;

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

1.       Definitions.

         1.1.     "Active Homologs" shall mean any ArQule Derivative Compound or
Sankyo Derivative Compound that exhibits substantial homology with an Active
Compound as determined by the Steering Committee.

         1.2.     `Active ArQule Compound" shall mean any ArQule Compound or
ArQule Derivative Compound which exhibits confirmed significant functional
activity against a Target. The Steering Committee shall establish the criteria
for "significant functional activity" at the time of selection of each Target.

         1.3.     "Active Compound" shall mean any Active ArQule Compound or
Active Sankyo Compound.

         1.4.     "Active Sankyo Compound" shall mean any Sankyo Compound or
Sankyo Derivative Compound which exhibits confirmed significant functional
activity against a Target. The Steering Committee shall establish the criteria
for "significant functional activity" at the time of selection of each Target.

         1.5.     "Affiliate" shall mean a corporation or other legal entity
that controls, is

<PAGE>


                                                                   EXHIBIT 10.16

controlled by, or is under common control with such Party. For purposes of this
definition, "control" means the ownership, directly or indirectly, of fifty
percent. (50%) or more of the outstanding equity securities of a corporation
which are entitled to vote in the election of directors or a fifty percent (50%)
or greater interest in the net assets or profits of an entity which is not a
corporation

         1.6. "Agreement" shall mean this Research and Development Agreement,
together with Exhibit A hereto.

         1.7.    "ArQule Compound" shall mean any organic chemical molecule
that is synthesized by ArQule using its proprietary technology and provided by
ArQule to Sankyo under the Mapping Array (tm) Program.

         1.8.     "ArQule Derivative Compound" shall mean a Derivative Compound
synthesized by ArQule from an ArQule Compound under the Directed Array (tm)
Program described in Section 4.

         1.9.     "ArQule Patent Rights" shall mean Patent Rights controlled or
owned by ArQule as of the Effective Date or during the Research Period; all to
the extent and only to the extent that ArQule now has or hereafter will have the
right to grant licenses, immunities or other rights thereunder.

         1.10.    "ArQule Technology" shall mean all information and data which
is owned by ArQule or licensed by third parties to ArQule prior to or during the
Research Program and is necessary or useful to conduct the screening to discover
Active ArQule Compounds and Active Homologs thereto or to develop, make, use,
sell or seek regulatory approval in any country to market a product containing a
Licensed Compound; all to the extent and only to the extent that ArQule now Las
or hereafter will have the right to grant licenses, immunities or other rights
thereunder.

         1.11.    "Array" shall mean a set of samples of structurally related
chemical compounds arranged in a format such as a microtiter screening plate.

         1.12.    "Base Rate of Interest" shall mean the base rate of interest
declared from time to time by the Bank of Boston.

         1.13.    "Chemical Theme" shall mean the chemical or structural
characteristics shared by a group of compounds as determined by the Steering
Committee pursuant to Section 2,2.

         1.14.    "Confidential Information" shall have the meaning set forth in
Section 9.1.

         1.15.    "Contract Year" shall mean each twelve (12) month period of
the Research Period, commencing on the Effective Date.

         1.16.    "Derivative Compound" shall mean a chemical compound
structurally derived in

<PAGE>

                                                                   EXHIBIT 10.16

one or more steps from another by a process of modification or partial
substitution of at least one component wherein at least one structural feature
is retained at each process step. The number of intermediate steps or compounds
is not relevant to the classification of a compound as a Derivative Compound. A
compound need not have structural similarity to another compound in order to be
classified as a Derivative Compound.

         1.17.    "Directed Array (tm) shall mean an Array comprised of ArQule
Derivative Compounds synthesized by ArQule under the Directed Array (tm) Program
described in Section 4.

         1.18.    "Directed Array (tm) Program" shall mean a Directed Array (tm)
Program conducted by ArQule as set forth in Section 4, with each Directed Array
(tm) Program consisting of multiple Arrays derived from one (1) Sankyo Compound
or one (1) Active ArQule Compound.

         1.19.    "Disclosing Party" shall mean that Party disclosing
Confidential Information to the other Party under Section 9.

         1.20,    "Effective Date" shall mean the first business day of the
month immediately following the date of execution of this Agreement by the
Parties hereto.


         1.21.    "Extraordinary Expenses" shall mean those expenses incurred
from time to time by ArQule in connection with the Directed Array (tm) Program
which are not (a) direct, out-of-pocket costs provided for in the Research Plan
which are directly attributable to the Directed Array (tm) Program or (b) fixed
overhead costs provided for in the Research Plan which are allocable to the
Directed Array (tm) Program.

         1.22.    "FDA" shall mean the United States Food and Drug
Administration (or its foreign equivalent in Japan or Europe).

         1.23.    "Joint Patent Rights" shall mean any Patent Rights that are
jointly owned by the Parties, as set forth in Section 7.1(b).

         1.24.    "License Compound" shall mean any Active Compound or Active
Homolog thereto with respect to which the Steering Committee has designated in
accordance with Sections 2.2 and 3.2.

         1.25.    "Licensed Compound Set" shall mean, with respect to a Licensed
Compound, such Licensed Compound and any Active Homolog thereto.

         1.26.    "Mapping Array (tm) " shall mean an Array of ArQule Compounds
synthesized by ArQule under the Mapping Array (tm) Program set forth in
Section 3.

         1.27.    "Mapping Array (tm) Program" shall mean the Mapping Array (tm)
component of the Research Program as set forth in Section 3.

<PAGE>

                                                                   EXHIBIT 10.16

         1.28. "Net Sales" shall mean the aggregate Net Sales Price of
Royalty-Bearing Products in any Royalty Period.

         1.29. "Net Sales Price" shall mean the gross amount received on
sales by Sankyo, its Affiliates and Sublicensees of Royalty-Bearing Products,
less the following; (i) trade, quantity, and cash discounts or rebates actually
allowed, (ii) credits or allowances given for rejections or returns, and (iii)
freight, shipping, or other costs of transportation charged to a customer. In
any transfers of Royalty-Bearing Products between Sankyo and an Affiliate, the
Net Sales Price shall be calculated based on the final sale of the
Royalty-Bearing Product to an independent third party. In the event that Sankyo
receives non-monetary consideration for any Royalty-Bearing Products, the Net
Sales Price shall be calculated based on the average price charged by Sankyo for
such Royalty-Bearing Products during the preceding Royalty Period.

         1.30.    "Party" means ArQule or Sankyo or their respective Affiliates;
"Parties" means ArQule and Sankyo and theft respective Affiliates,

         1.31.    "Patent Rights" shall mean all rights arising under issued
patents and reissues, reexaminations, extensions and supplementary protection
certificates thereof and all patent applications and any divisions,
continuations, or continuations-in-part thereof or patents issuing thereon,

         1.32,    "Phase I Clinical Trials" shall mean clinical trials in
healthy adults and/or in a small number of patients commencing upon the filing
of a trial protocol with the appropriate regulatory body and designed to
determine the metabolism and pharmacologic actions of a product in humans, the
side effects associated with increasing doses and to gather evidence on
effectiveness and meeting the requirements established by the FDA or by the
equivalent Japanese agency for Phase I clinical trials, The completion of the
Phase I Clinical Trials will be deemed to have occurred upon the first formal
internal issuance of trial results as measured by trial objectives, or in any
event no later than the commencement of the Phase II Clinical Trials.

         1.33.    "Phase II Clinical Trials" shall mean clinical trials in a
small sample of the intended patient population commencing upon the filing of a
trial protocol with the appropriate regulatory body and designed to assess the
efficacy for a specific indication of a compound proposed to be used as a
therapeutic or diagnostic pharmaceutical product, to determine dose tolerance
arid the optimal dose range as well as to gather additional information relating
to safety and potential adverse effects, and meeting the requirements
established by the FDA or the equivalent Japanese agency for Phase H clinical
trials. The completion of the Phase II Clinical Trials will be deemed to have
occurred upon the first formal internal issuance of trial results as measured by
trial objectives, or in any event no later than the commencement of the Phase UI
Clinical Trials.

<PAGE>

                                                                   EXHIBIT 10.16

         1.34.    "Phase III Clinical Trials" shall mean clinical trials
commencing upon the filing of a trial protocol with the appropriate regulatory
body and designed to demonstrate safety and efficacy of a compound proposed to
be used as a prophylactic, therapeutic or diagnostic pharmaceutical product in
an expanded patient population at geographically dispersed study sites, meeting
the requirements established by the FDA or the equivalent Japanese agency for
Phase In clinical trials. The completion of the Phase Ill Clinical Trials will
be deemed to have occurred upon the first formal internal issuance of trial
results as measured by trial objectives, or in any event no later than the
filing of an NDA.

         1.35.    "Preclinical Compound" shall mean any Licensed Compound
selected by Sankyo or an Affiliate of Sankyo to enter into Preclinical
Development.

         1.36.    "Preclinical Development" shall mean, with respect to any
Preclinical Compound, the commencement of potency and efficacy testing in animal
models,

         1.37.    "Receiving Party" mean that Party receiving Confidential
Information under Section 9.1,

         1.38.    "Research Period" shall mean the period during which the
Research Program remains in effect. The duration of the Research Period shall be
a minimum of three (3) years, unless extended by the mutual agreement of the
Parties.

         1.39.    "Research Program" shall mean, collectively, each of the
Directed Array (tm) Programs and the Mapping Array (tm) Program.

         1.40.    "Research Plan" shall mean a plan of research for the Directed
Array (tm) Program covering a minimum of a six-month period, which shall be
updated quarterly pursuant to Section 2.2 to reflect developments during the
previous three (3) months and extended for the subsequent three (3) months. The
parties will begin development of the initial Research Plan by December 31,
1997. The parties will complete the Research Plan for the first Directed Array
(tm) Program by January 31, 1998 and will complete the Research Plan for the
second Directed Array (tm) Program by March 31, 1998. The completed Research
Plan will be attached to this Agreement as & Exhibit A

         1.41.    "Royalty Bearing Product" shall mean a product containing as
one of its constituents (a) any Active ArQule Compound; (b) any ArQule
Derivative Compound; (c) any Sankyo Derivative Compound; or (d) any other
Derivative Compound discovered or designed by Sankyo from any ArQule Compound,
ArQule Derivative Compound or Sankyo Derivative Compound, or otherwise as a
result of information provided by ArQule to Sankyo under the Mapping Array (tm)
Program described in Section 3, or the Directed Array (tm) Program described in
Section 4 developed.

         1.42.    "Royalty Period" shall mean, with respect to each
Royalty-Bearing Product, every calendar quarter, or partial calendar quarter,
commencing with the first commercial sale of

<PAGE>

                                                                   EXHIBIT 10.16

such Royalty-Bearing Product in any country and ending on the later to occur of
(i) the end of the quarter during which all Valid Claims of all Patent Rights
covering such Royalty-Bearing Product expire in the applicable country, or (ii)
ten (10) years after such first commercial sale in the applicable country.

         1.43.    "Sankyo Compound" shall mean any chemical compound provided by
Sankyo or its Affiliates to ArQule under the Directed Array (tm) Program
described in Section 4.

         1.44.    "Sankyo Derivative Compound" shall mean a Derivative Compound
synthesized by ArQule from a Sankyo Compound under the Directed Array (tm)
Program describe in Section 4.

         1.45.    "Sankyo Patent Rights" shall mean Patent Rights controlled or
owned by Sankyo as of the Effective Date or during the Research Period; all to
the extent and only to the extent that Sankyo now has or hereafter will have the
right to grant licenses, immunities or other rights thereunder.

         1.46,    "Steering Committee" shall have the meaning set forth in
Section 2.1.

         1.47.    "Sublicensee" shall mean any non-Affiliate third party
licensed by Sankyo to make, use (except where the right to use accompanies the
sale of any Royalty-Bearing Product by Sankyo or its Affiliates or Sublicensees)
or sell any Royalty-Bearing Product.

         1.48.    "Target" shall mean any biological target selected by
Sankyo for which Sankyo has certain proprietary technology and/or expertise.

         1.49.    "U.S. Territory" shall mean the fifty states comprising the
United States of America and all American possessions.

         1.50.    "Valid Claim" shall mean either (a) 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 (b) a
claim of a pending patent application that has not been abandoned or finally
rejected without the possibility of appeal or refiling.

         1.51.    "Worldwide Territory" shall mean the world excluding the U.S.
Territory.

         1.52.    The above definitions are intended to encompass the defined
terms in both the singular and plural tenses.

2.       Management of Research Program,

<PAGE>



                                                                   EXHIBIT 10.16

         2.1.     Composition of Steering Committee. The Parties hereby
establish a Steering Committee comprised of six (6) members, with three (3)
representatives appointed by each Party. The initial members of the Steering
Committee shall be as follows:

                                                  Sankyo Representative

               Douglas Burdi, Ph.D.

               Dayid L Coffen, Ph.D.

               Kaplan, Ph.D.

A Party may change one or more of its representatives to the Steering Committee
at any time upon notice to the other Party. Each Party will designate one of its
representatives as its team leader.

         2.2.     Duties of the Steering Committee. The Steering Committee shall
direct and administer the Research Program. With respect to each Directed Array
(tm) Program, the Steering Committee shall specifically determine the following:
(i) the appropriate objectives of each Chemical Theme and/or Active Compound to
be submitted to the Directed Array (tm) Program; (ii) the appropriate number and
type of Chemical Themes to be submitted to the Directed Array (tm) Program,
subject to ArQule's right to exclude certain compounds as set forth in Section
2.3 below; (iii) the appropriate number of compounds that ArQule should generate
in a Directed Array (tm) for a particular Chemical Theme; and (iv) the
appropriate amount of each compound in a Directed Array (tm) that ArQule should
deliver to Sankyo for further research and development. The scope of each
Chemical Theme will be determined on the basis of the following criteria: (i)
the specific reaction or reaction sequence used to combine members of two or
more discrete chemical units in which each chemical unit bears the functional
group(s) required for the specific reaction(s) that result in the combination of
the chemical units; and (ii) the extent to which a class of compounds is related
by a recurring structural motif associated with a particular biological
activity. In addition, the Steering Committee shall (i) determine whether any
Active Compound should be designated as a Licensed Compound; (ii) determine and
update the list of Licensed Compounds; (iii) determine the allocation of the
funding and personnel resources to be contributed by ArQule under this
Agreement; (iv) revise and extend the Research Plan each calendar quarter for
the subsequent six (6) months based on prior developments; and (v) resolve
matters involving scientific questions.

         2.3.     Compounds Excluded from the Directed Array (tm) Program.
ArQule shall have the right, at the time Sankyo seeks to include any Active
ArQule Compound or Active Homolog thereto in any Directed Array (tm) Program, to
exclude from such Directed Array (tm) Program any Active ArQule Compound or
Active Homolog thereto that is at that time either (I) included within a
Directed Array (tm) Program for a third party(1) (ii) being optimized by a third
party from a Mapping Array (tm) Program, (iii) previously licensed or reserved
by a third party, or (iv) is

<PAGE>

                                                                   EXHIBIT 10.16

included within an existing ArQule internal development program.

         2.4.     Meetings of the Steering Committee. The Steering Committee
shall communicate regularly, but in no event less than monthly, via written
project status reports through written communications means, including, without
limitation, electronic mail. A member of the committee from each Party will
promptly respond to such communications where appropriate within seven (7) days
of its receipt by such member, In the event that questions or issues arise from
such written communications that cannot be, or are not being effectively
addressed by such written communications, or upon request by any member of the
Steering Committee, the Steering Committee shall promptly conduct one or more
telephone conferences to address such questions or issues and shall prepare and
deliver to each Party a brief written report describing the significant issues
and discussions that take place during such telephone conference(s). A
representative of the Steering Committee jointly appointed by its members shall
provide each member with five (5) business days notice of the time of any such
telephone conferences and the proposed agenda with respect thereto, unless
waived by all members. The Steering Committee shall meet at least once each
quarter at the facilities of ArQule, or at such other times and locations as the
Steering Committee determines. A representative of the Steering Committee
jointly appointed by its members shall provide each member with five (5)
business days notice of the time and location of meetings, unless such notice is
waived by all members. If a designated representative of a Party cannot attend
any meeting of the Steering Committee, 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 Section 2, all actions and
decisions of the Steering Committee will require the unanimous consent of all of
its members. If the Steering Committee fails to reach agreement upon any matter,
the dispute will be resolved in accordance with the procedures set forth in
Section 13.5 below. Within ten (10) days following each quarterly meeting of the
Steering Committee, the Steering Committee shall prepare and deliver, to both
Parties, a written report describing the decisions made, conclusions and actions
agreed upon.

         2.5.     Cooperation. Each Party agrees to provide the Steering
Committee with information and documentation as reasonably required for the
Steering Committee to fulfill its duties under this Agreement. In addition, each
Party agrees to make available its employees and consultants as reasonably
requested by the Steering Committee, The Parties anticipate that members of the
Steering Committee will communicate informally with each other and with
employees and consultants of the Parties on matters relating to the Directed
Array (tm) Program.

         2.6.     Visits to Facilities. Members of the Steering Committee shall
have reasonable access to the facilities of each Party where activities under
this Agreement are in progress, but only during normal business hours and with
reasonable prior notice. Each Party shall bear its own expenses in connection
with such site visits.

3.       Mapping Array (tm) Program.

<PAGE>

                                                                   EXHIBIT 10.16

         3.1,     Conduct of Mapping Array (tm) Program. ArQule will supply
Sankyo with Mapping Arrays (tm) containing approximately one (1) milligram each
of approximately 100,000 different ArQule Compounds during the first Contract
Year- selected by ArQule from the 1996 and 1997 Mapping Arrays (tm) of
approximately 200,000 different ArQule Compounds (which includes approximately
100,000 ArQule Compounds from ArQule's 1996 Mapping Array (tm) and approximately
100,000 ArQule Compounds from ArQule's 1997 Mapping Array (tm)) based on no more
than fifteen (15) Chemical Themes selected by Sankyo and approved by the
Steering Committee. Subject to Section 3.6, ArQule will supply Sankyo with
Mapping Arrays (tm) containing approximately one (1) milligram each of
approximately 100,000 different ArQule Compounds during each subsequent Contract
Year of the term of the Mapping Array (tm) Program provided for in Section 3.5,
selected at the start of such subsequent Contract Year from the then available
Mapping Array (tm) compounds based on no more than fifteen (15) Chemical Themes
selected by Sankyo and approved by the Steering Committee. ArQule agrees to ship
such 100,000 Mapping Array (tm) compounds (i) for the first Contract Year by
December 31, 1997, (ii) for the second Contract Year on or after the earlier to
occur of (a) three (3) months after Sankyo completes initial screening, as
determined by the Steering Committee, of the Mapping Array (tm) compounds
shipped to Sankyo during the first Contract Year, or (ii) July 1, 1999, or
earlier when available if so requested by Sankyo in writing, and (iii) for the
third Contract Year by the end of the second Contract Year. Sankyo agrees to
accept each such shipment of Mapping Array (tm) compounds unless Sankyo has
terminated the Mapping Array (tm) Program pursuant to Section 3.6 prior to the
date of such shipment, provided, however, notwithstanding any such termination
of the Mapping Array (tm) Program, Sankyo agrees to accept any such shipment
requested by Sankyo in writing. Promptly upon its receipt of any such Mapping
Arrays (tm), Sankyo shall commence testing of such Mapping Arrays (tm) for
activity against Targets. Upon the completion by Sankyo of its testing of any
such Mapping Arrays (tm), Sankyo shall promptly provide each member of the
Steering Committee with notice by telefax communication detailing the discovery
of Active Compounds, together with relevant information concerning the
functional activity identified, which telefax shall be followed by a
confirmatory letter,

         3.2.     Mutual Disclosure, Initially, ArQule will identify the
Chemical Themes of each Mapping Array (tm) but not the structures of the
individual ArQule Compounds in the Mapping Arrays (tm). Sankyo may screen the
Mapping Arrays (tm) against any Targets during the term of this Agreement and
thereafter, Initially, Sankyo will not disclose the Targets screened. If Sankyo
detects any Active ArQule Compound in a Mapping Array (tm), ArQule will disclose
(a) the structure of each Active ArQule Compound and (b) the structures, but not
the locations in the Mapping Array (tm), of all other ArQule Compounds in the
Mapping Array (tm) and Sankyo will disclose (a) the identity of the Target and
(b) the level of activity. All such disclosed information shall be treated as
Confidential Information by both Parties. Sankyo shall submit each such Active
ArQule Compound to the Directed Array (tm) Program pursuant to Section 4.
Sankyo, at its discretion, may request that the Steering Committee designate any
such Active ArQule

<PAGE>


                                                                   EXHIBIT 10.16

Compound and Active Homologs thereto as Licensed Compounds comprising a Licensed
Compound Set if such Active ArQule Compound and Active Homologs are still
available as Licensed Compounds, ArQule shall have the right, at the time Sankyo
seeks to designate any Active ArQule Compound or Active Homolog thereto as a
Licensed Compound, to exclude from such Licensed Compound designation any Active
ArQule Compound or Active Homolog thereto that is at that time either (1)
included within a Directed Array (tm) Program for a third party, (ii) being
optimized by a third party from a Mapping Array (tm) Program, (iii) previously
licensed or reserved by a third party, or (iv) is included within an existing
ArQule internal development program. Subject to the foregoing, (a) ArQule shall
notify the Steering Committee that such Active ArQule Compound and Active
Homologs thereto are properly designated as Licensed Compounds and (b) provide
Sankyo with the confirmed chemical composition structure, purity information and
location of all Active ArQule Compounds and Active Homologs thereto so
designated as Licensed Compounds belonging to such Licensed Compound Set.

         3.3.     Reservation of Active ArQule Compounds. Prior to designating
any Active ArQule Compounds and Active Homologs thereto as Licensed Compounds
pursuant to Section 3.2 hereof, Sankyo, at its discretion, may notify ArQule of
its intent to license such Active ArQule Compounds and Active Homologs, and
request a reservation of such Active ArQule Compounds and Active Homologs
thereto (collectively the "Reserved Compounds"). Upon ArQule receiving from
Sankyo (i) a written request to reserve such Reserved Compounds, and (ii)
disclosure of the Target and activity information pursuant to Section 3.2
hereof, ArQule shall reserve such Reserved Compounds for subsequent designation
by Sankyo as Licensed Compounds for a period ending upon the earlier to occur of
(i) Sankyo's notification to ArQule that it no longer has an interest in
licensing or developing such Reserved Compounds, or (ii) sixty (60) days.

         3.4.     In consideration of the performance by ArQule of the Mapping
Array (tm) Program, during each Contract Year, Sankyo shall pay ArQule a
delivery fee equal to $1,000,000 in the initial Contract Year, payable one-third
(1/3) upon the Effective Date and two-thirds (2/3) within thirty (30) days of
the delivery of the Mapping Arrays (tm) to be provided by ArQule in such first
Contract Year. Thereafter, Sankyo shall make the following annual payment to
ArQule during each Contract Year, in the second Contract Year payable in full
with thirty (30) days of the delivery of the Mapping Arrays (tm) to be provided
by ArQule in such Contract Year, and in the third Contract Yeas payable
one-third (1/3) on the first day of such Contract Year and two-thirds (2/3)
within thirty (30) days of the delivery of the Mapping Arrays (tm) to be
provided by ArQule in such Contract Year:

         Annual Payment = $1,000,000 x (1 + CPI)

         Where CPI is a fraction, the numerator of which is the difference
         between the Consumer Price Index (CPI-U; ITS. City Average for all
         items; 1982-84 = 100) as of the last month of the immediately preceding
         Contract Year and the Consumer Price Index as of the month immediately
         preceding the Effective Date and the denominator of which is the
         Consumer Price Index as of the month immediately preceding the
         Effective Date.

<PAGE>


                                                                   EXHIBIT 10.16

         3.5.     The Mapping Array (tm) Program shall commence on the Effective
Date, continue for a period of three (3) Contract Years, unless earlier
terminated as provided in Section 3.6 or Article 12 below. Termination of the
Mapping Array (tm) Program shall have no effect on the continuation of any
Directed Array (tm) Program.

         3.6.     Performance of Mapping Array (tm) Program. Sankyo shall have
the right to terminate the Mapping Array (tm) Program on or before the earlier
to occur of (i) three (3) months after Sankyo completes initial screening, as
determined by the Steering Committee, of the Mapping Array (tm) compounds
shipped to Sankyo during the first Contract Year, or (ii) June 30, 1999, upon
Written notice to ArQule, in the event that (i) ArQule is unable to deliver to
Sankyo Mapping Arrays (tm) containing at least fifteen (15) Chemical Themes (or
a lesser number of Chemical Themes pursuant to selection of such Chemical Themes
in accordance with Section 3.1), (ii) Sankyo fails to obtain any functional
activity, as determined by the Steering Committee, from any Mapping Array (tm)
compound against any Target falling within a broad range of representative
Target categories selected by Sankyo, approved by the Steering Committee and
disclosed by Sankyo to ArQule, (iii) there develops a clear pattern of false
positive screening results attributable to the quality of Mapping Array (tm)
compounds, or (iv) ArQule is consistently unable to provide Mapping Array (tm)
compounds in accordance with purity criteria as determined by the Steering
Committee. ArQule shall be under the obligation to deliver Mapping Arrays (tm)
for the successive Contract Years unless Sankyo exercises its right to terminate
the Mapping Array (tm) Program pursuant to this Section 3.6 by formally
declaring such termination right and notifying ArQule in writing.

4. Directed Array (tm) Program,

         4.1.     Description of Directed Array (tm) Program. Under the
direction of the Steering Committee and in accordance with the Research Plan,
ArQule will synthesize multiple Directed Arrays (tm) of compounds derived from
(i) each Sankyo Compound provided to ArQule by Sankyo and/or (ii) each Active
ArQule Compound provided by ArQule to Sankyo under the Mapping Array (tm)
Program, subject to Section 2.3 above. The Parties intend that, during the
Research Period, ArQule will produce such Directed Arrays (tm) in two (2)
separate Directed Array (tm) Programs, each based on a different Chemical Theme
and intended to produce approximately 1000 compounds, per Contract Year for a
minimum of three (3) Contract Years beginning on the Effective Date. However,
the number of closely related Chemical Themes actually submitted to each
Directed Array (tm) Program for the same Target pursuant to a given Research
Plan and the number of ArQule Derivative Compounds and/or Sankyo Derivative
Compounds actually produced per Chemical Theme will be determined by the
Steering Committee. The Parties also intend that ArQule will produce
approximately twenty (20) milligrams of each ArQule Derivative Compound and/or
Sankyo Derivative Compound in the Directed Arrays (tm), subject to the
availability of the original Sankyo Compounds and/or the ArQule Compounds;
provided, however, that the amount of each ArQule Derivative Compound and/or
Sankyo Derivative Compound that ArQule actually produces will ultimately be
determined by the Steering Committee.

         4.2.     Conduct of Directed Array (tm) Program. The Directed Array
(tm) Program shall be

<PAGE>

                                                                   EXHIBIT 10.16

conducted in a good scientific manner and in compliance with all applicable
legal requirements. The conduct of the Directed Array (tm) Program shall be the
primary responsibility of ArQule with participation by Sankyo. Sankyo shall
propose Chemical Themes to the Steering Committee for inclusion in the Directed
Array (tm) Program. If the Steering Committee approves the inclusion of the
proposed Chemical Theme(1) Sankyo shall provide ArQule with the requisite amount
and purity of Sankyo Compounds for that Chemical Theme, as directed by the
Steering Committee. ArQule shall thereupon diligently synthesize Directed Arrays
(tm) of ArQule Derivative Compounds and/or Sankyo Derivative Compounds, as the
case may be, in accordance with the Research Plan. Sankyo shall, in its
discretion, test all compounds in the Directed Arrays (tm). The Parties shall
continue the procedure described in this Section 4.2 for each Active Compound
until the earliest to occur of (1) the determination by the Steering Committee,
in accordance with Section 2.2, to designate any such Active Compound and any
Active Homolog thereto as a Licensed Compound Set, (ii) the determination by the
Steering Committee to cease further testing of such Active Compound, or (iii)
the termination of this Agreement in accordance with Section

         4.3.     Directed Array (tm) Program Payments.

                  4.3.1.   Delivery Fee. In consideration of the performance by
ArQule of the Directed Array (tm) Program, Sankyo shall pay ArQule a delivery
fee equal to $1,000,000 per Directed Array (tm) Program during the first
Contract Year, payable one-third (1/3) upon commencement of the first Directed
Array (tm) Program and two-thirds (2/3) within thirty (30) days of the delivery
of the final Directed Array (tm) to be provided by ArQule in the first Contract
Year. Thereafter, Sankyo shall make the following annual payment to ArQule
during each Contract Year, payable one-third (1/3) on the first day of such
Contract Year and two-thirds (2/3) within thirty (30) days of the delivery of
the Directed Arrays (tm) to be provided by ArQule in such Contract Year:

         Annual Payment = $1,000,000 x (1 + CPI)

Notwithstanding the foregoing, if the number of Active Compounds submitted to
all Directed Array (tm) Programs exceeds six (6) for the first three (3)
Contract Years, the Parties shall use their respective best efforts to negotiate
a discount for all such additional Active Compounds submitted to the Directed
Array (tm) Program.

                  4.3.2.   Expenses. In addition to the amounts payable pursuant
to Section 4.3.1 above, Sankyo shall pay any and all Extraordinary Expenses of
ArQule, as required and approved by the Steering Committee.

         4.4.     Term of Directed Array (tm) Program. The term of each Directed
Array (tm) Program shall begin upon the commencement of the Research Plan and
terminate no later than the first anniversary of such commencement date unless
extended by the Steering Committee because of extraordinary circumstances. The
period for initiating and completing all Directed Array (tm) Programs commenced
pursuant to Section 4.1 hereof shall terminate at the end of the third Contract
Year, provided, however, that upon six (6) months prior written notice by
Sankyo,

<PAGE>

                                                                   EXHIBIT 10.16

such period may be extended for one additional two (2) year period at Sankyo's
option on terms and conditions to be mutually agreed upon by the Parties.

5.       License Grants; Reversion of Rights.

         5.1.     Screening Licenses ArQule hereby grants to Sankyo, under
ArQule Patent Rights and ArQule Technology (a) a nonexclusive, royalty-free
license (without the right to sublicense) to test each Mapping Array (tm) for
significant functional activity against Targets; and (b) an exclusive,
royalty-free license to test each Directed Array (tm) for significant functional
activity against Targets.

         5.2.     Preclinical and Clinical Licenses. Upon the identification by
Sankyo of any Active Compound and the determination by the Steering Committee
that such Active Compound and any Active Homolog thereto should properly be
designated as a Licensed Compound Set, ArQule shall grant to Sankyo, under any
intellectual property rights covering the composition, manufacture or use of
such Licensed Compound Set, an exclusive, worldwide license (with the right to
grant sublicenses subject to notifying ArQule in advance) to conduct Preclinical
Development, Phase I Clinical Trials, Phase U Clinical Trials and Phase III
Clinical Trials of such Licensed Compound Set, with Sankyo's specific
responsibilities to be determined by the Steering Committee.

         5.3.     Commercialization License. ArQule hereby grants to Sankyo an
exclusive, worldwide royalty-bearing license (with the right to grant
sublicenses subject to notifying ArQule in advance) (i) to make or have made
Royalty-Bearing Products incorporating Licensed Compound Sets for use,
distribution and sale, (ii) to distribute for sale and sell Royalty-Bearing
Products incorporating Licensed Compound Sets, and (iii) to make Active
Compounds within a Licensed Compound Set and sell such Active Compounds to a
Sublicensee that incorporates those compounds in a Royalty-Bearing Product.

         5.4.     Reversion of Rights Return of Materials. In the event that (i)
Sankyo determines not to develop any Active ArQule Compound or Active Homolog
related to such Active ArQule Compound within a Licensed Compound Set or to
discontinue Preclinical Development of all Active ArQule Compounds and Active
Homologs related to such Active ArQule Compound within a Licensed Compound Set;
or (ii) no Active ArQule Compound or Active Homolog related to such Active
ArQule Compound within a Licensed Compound Set is commercially developed within
the timetable specified in the Research Plan, then ArQule shall have the right
to terminate the license granted to Sankyo under Section 5.2 with respect to all
Active ArQule Compounds and Active Homologs related to such Active ArQule
Compounds within such Licensed Compound Set. In such event, ArQule shall
thereafter be free to grant licenses covering such Active ArQule Compounds and
Active Homologs related to such Active ArQule Compounds to third parties. Upon
termination of such license by ArQule, Sankyo shall (i) grant to ArQule an
exclusive, royalty-free license, with the right to grant sublicenses, to
manufacture, use or sell such Active ArQule Compounds and Active Homologs
related to such Active ArQule Compounds under any patent rights of Sankyo
covering the composition or use of such Active ArQule Compounds and Active
Homologs related to such Active ArQule Compounds and (ii)

<PAGE>

                                                                   EXHIBIT 10.16

return to ArQule all Proprietary Materials and Confidential Information supplied
by ArQule which relate to such Active ArQule Compounds and Active Homologs
related to such Active ArQule Compounds. Notwithstanding the foregoing, the
provisions of this Section 5.4 shall not apply to Sankyo Compounds or Sankyo
Derivative Compounds.

6.       Ownership of Compounds.

         6.1.     Sankyo Compounds: Sankyo Derivative Compounds. All Sankyo
Compounds and Sankyo Derivative Compounds shall be owned by Sankyo or its
Affiliates, except, and only to the extent that, with respect to the Directed
Array (tm) Program, ArQule can show that any such compound (i) was under
development by ArQule (including programs with academic collaborators or
corporate partners) before such compound was proposed to be included in the
Directed Array (tm) Program or first synthesized, as the case may be; (ii) was
independently developed by ArQule employees who had no access to Sankyo
Confidential Information regarding the particular compound, or (iii) was already
within a screening array before such compound was proposed to be included in the
Directed Array (tm) Program or was first synthesized, as the case may be.

         6.2.     ArQule Compounds; ArQule Derivative Compounds. All ArQule
Compounds and ArQule Derivative Compounds shall be owned by ArQule except, and
only to the extent that, Sankyo can show that any such compound was in the
possession of Sankyo before it was provided by ArQule to Sankyo or its
Affiliates.

7.       Intellectual Property Rights.

         7.1.     Ownership of Patent Rights

                  (a)      ArQule Patent Rights. Any Patent Rights filed by
         either Party covering Active ArQule Compounds only will be owned solely
         by ArQule except as provided in Section 7.1(b).

                  (b)      Joint Patent Rights. Any Patent Rights (i) filed by
         either Party covering both Active ArQule Compounds and Active Sankyo
         Compounds, (ii) claiming an Active ArQule Compound and uses thereof
         discovered by Sankyo; and/or (iii) claiming an Active Sankyo Compound
         and uses thereof discovered by ArQule, shall be owned jointly by ArQule
         and Sankyo.

                  (c)      Sankyo Patent Rights. Any Patent Rights filed by
         either Party covering solely Active Sankyo Compounds will be owned
         solely by Sankyo.

                  (d)      Patent Rights Generally. Any Patent Rights arising
         out of or related to this Agreement, the ownership of which cannot be
         determined from Subsections a), (b) or (c) of this Section 7.1, will be
         owned by the Party(ies) having inventorship under the patent laws of
         the United States.

<PAGE>

                                                                   EXHIBIT 10.16

         7.2.     Management of Joint Patent Rights. In the case of Joint Patent
Rights, the Parties shall agree on the allocation of responsibility for, and the
expense of, the preparation, filing, prosecution, and maintenance of any Joint
Patent Rights claiming such inventions. In the event of any disagreement
concerning any Joint Patent Rights, the matter shall be resolved by the Steering
Committee or, in the absence thereof, by the President of ArQule and The
Director of the Patent Department of Sankyo. The Party controlling a Joint
Patent Right shall consult with the other Party as to the preparation, filing,
prosecution, and maintenance of such Joint Patent Right reasonably prior to any
deadline or action with the U.S. Patent & Trademark Office or its foreign
equivalent in Japan or Europe, and shall furnish to the other Party copies of
all relevant documents reasonably in advance of such consultation. In the event
that the Party controlling a Joint Patent Right desires to abandon such Joint
Patent Right, or if the Party assuming control of a Joint Patent Right later
declines responsibility for such Joint Patent Right, the controlling Party shall
provide reasonable prior written notice to the other Party of such intention to
abandon or decline responsibility, and such other Party shall have the right, at
its expense, to prepare, file, prosecute, and maintain such Joint Patent Rights.

         7.3.     Cooperation of the Parties. Each Party agrees to cooperate
fully in the preparation, filing, and prosecution of any Patent Rights under
this Agreement. Such cooperation includes, but is not limited to:

                  (a)      executing all papers and instruments, or requiring
         its employees or agents, to execute such papers and instruments, so as
         to effectuate the ownership of Patent Rights set forth in Section 7.1
         above and to enable the other Party to apply for and to prosecute
         patent applications in any country;

                  (b)      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

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

         7.4.     Infringement by Third Parties. ArQule and Sankyo shall each
promptly notify the other in writing of any alleged or threatened infringement
by a third party of any ArQule Patent Right, Sankyo Patent Right or Joint Patent
Right of which they become aware. The parties shall consult concerning the
action(s) to be taken.

8.       Payments. Reports, and Records,

         8.1.     Milestone Payments. In partial consideration of the rights
granted Sankyo under this Agreement, Sankyo shall pay ArQule the following
amounts within thirty (30) days after each occurrence of the following
milestones;

Payment for Royalty

<PAGE>

                                                                   EXHIBIT 10.16

<TABLE>
<CAPTION>
Bearing Products                        Milestone
---------------     ---------------------------------------------------
<S>                 <C>
$        500,000    First IND Filing (or non-U.S. equivalent) for each
                    Royalty-Bearing Product

$        500,000    Completion of Phase I Clinical Trials (or non-U.S.
                    equivalent) for each Royalty-Bearing
                    Product

$        500,000    Completion of Phase II Clinical Trials (or non-U.S.
                    equivalent) for each Royalty-Bearing
                    Product

$      1,000,000    Commencement of Phase III Clinical Trials (or
                    non-U.S. equivalent) for each Royalty-Bearing
                    Product

$        500,000    Completion of Phase III Clinical Trials (or non-
                    U.S. equivalent) for each Royalty-Bearing
                    Product

$      1,000,000    First NDA filing (or non-U.S. equivalent) for each
                    Royalty-Bearing Product

$      2,000,000    Approval of first NDA (or non-U.S. equivalent) for
                    each Royalty-Bearing Product
</TABLE>

Such milestone payments shall be non-refundable and shall not be credited
against royalties payable to ArQule under this Agreement, provided, however,
that twenty-five percent (25%) of any such milestone payments made with respect
to any Royalty-Bearing Product consisting of an ArQule Compound provided to
Sankyo pursuant to the Mapping Array (tm) Program, and not submitted to a
Directed Array (tm) Program, shall be creditable up to $1,000,000 per year
against royalties due ArQule for such Royalty-Bearing Product pursuant to
Section 8.3. Sankyo shall promptly notify ArQule of each occurrence of any of
die foregoing milestones.

         8.2.     Alternative to Milestone Payments. If any time on or before
sixty (60) days prior to the filing of an IND application with respect to any
Royalty-Bearing Product, Sankyo elects, in lieu of paying the foregoing
milestone payments for such Royalty-Bearing Product, to share with ArQule the
proceeds of the commercial exploitation of such Royalty-Bearing Product, it
shall so notify ArQule in writing. Promptly upon its receipt of such written
notice, ArQule shall enter into good faith negotiations with Sankyo for an
appropriate amendment to this Agreement under which either (i) the Parties would
share equally in the aggregate revenues from such Royalty-Bearing Product on a
worldwide basis or (ii) ArQule would be granted the exclusive right to
commercially exploit such Royalty-Bearing Product in certain agreed-upon
territories. If the Parties are unable to reach agreement with respect to the

<PAGE>

                                                                   EXHIBIT 10.16

foregoing by the expiration of sixty (60) days from the commencement of such
negotiations, Sankyo shall remain obligated to pay the full amount of milestone
payments set forth in Section 8.1 above for such Royalty-Bearing Product.

         8.3.     Royalties. In consideration of the licenses granted to Sankyo
hereunder, for each Royalty Period, Sankyo shall pay to ArQule a royalty for
each Royalty-Bearing Product as follows:

<TABLE>
<CAPTION>
 Source of Royalty-Bearing Product      Royalty Rate    (percentage of Net Sales)
 ---------------------------------   ------------------  ------------------------
                                     Worldwide Territory    U.S. Territory
                                     -------------------    ---------------
<S>                                  <C>                    <C>
Sankyo Derivative Compound                   3%                   4%

ArQule Compound or ArQule                    4%                   5%
  Derivative Compound
</TABLE>

         8.4.     Reports and Payments. Within thirty (30) days after the
conclusion of each Royalty Period, Sankyo shall deliver to ArQule a report
containing the following information:

                  (a)      gross sales of Royalty-Bearing Products by Sankyo,

         its Affiliates and Sublicensees during the applicable Royalty Period in
         each country of sale;

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

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

All such reports shall be maintained in confidence by ArQule. If no royalties
are due to ArQule for any reporting period, the report shall so state.
Concurrent with this report, Sankyo shall remit to ArQule any payment due for
the applicable Royalty Period. The method of payment shall be mutually agreed
to. All amounts payable to ArQule under this Section will first be calculated in
the currency of sale and then converted into U.S. dollars in accordance with
Section 8.6, and such amounts shall be paid without deduction of any withholding
taxes, value-added taxes, or other charges applicable to such payments, except
as provided for in Section 8.9.

         8.5.     Invoices; Payments in U.S. Dollars. With the exception of
royalty payments due under Section 8.3, ArQule shall submit invoices to Sankyo
for each payment due ArQule hereunder (including without limitation all payments
due pursuant to Section 3.4, and Sankyo shall pay such invoices within thirty
(30) days of receipt thereof. All payments due under this Agreement shall,
except as provided in Section 8.6 below, be payable in United States dollars.
Conversion of foreign currency to U.S. dollars shall be made at the conversion
rate existing in the United States (as reported in the Wall Street Journal) on
the last working day of the calendar quarter preceding the applicable calendar
quarter. Such payments shall be without deduction of exchange, collection, or
other charges, except as provided for in Section 8.9.

<PAGE>

                                                                   EXHIBIT 10.16

         8.6.     Payments in Other Currencies. 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, Sankyo shall give ArQule prompt written notice of such
restriction, which notice shall satisfy the thirty-day payment deadline
described in Section 8.4. Sankyo shall pay any amounts due ArQule through
whatever lawful methods ArQule reasonably designates; provided, however, that if
ArQule falls to designate such payment method within thirty (30) days after
ArQule is notified of the restriction, then Sankyo may deposit such payment in
local currency to the credit of ArQule in a recognized banking institution
selected by Sankyo and identified by written notice to ArQule, and such deposit
shall fulfill all obligations of Sankyo to ArQule with respect to such payment.

         8.7.     Records. Sankyo and its Affiliates shall maintain complete and
accurate records of Royalty-Bearing Products made, used or sold by them or their
Sublicensees 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 8.4. The relevant Party shall retain such
records relating to a given Royalty Period for at least three (3) years after
the conclusion of that Royalty Period, Each Party (acting as the "Auditing
Party") shall have the right, at its own expense, to cause an independent
certified public accountant to inspect such records of the other Party (the
"Audited Party") during normal business hours for the sole purpose of verifying
any reports and payments delivered under this Agreement. Such accountant shall
not disclose to the Auditing Party any information other than information
relating to accuracy of reports and payments delivered under this Agreement and
shall provide the Audited Party with a copy of any report given to the Auditing
Party. The Parties shall reconcile any underpayment or overpayment within thirty
(30) 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, the Audited Party shall bear the full
cost of such audit. Each party may exercise its rights under this Section only
once every year and only with reasonable prior notice to the other Party.

         8.8.     Late Payments, Any payments by Sankyo that are not paid on or
before the date such payments are due under this Agreement shall bear interest,
to the extent permitted by law, at two percentage points above the Base Rate of
Interest calculated based on the number of days that payment is delinquent.

         8.9.     Withholding Tax Payments,

                  8.9.1.   Payments. All amounts payable under Section 3.4, 4.3
         and 8.1 shall represent the actual proceeds to be received by ArQule
         after any applicable deductions have been made, including without
         limitation any withholding taxes. ArQule agrees to reasonably cooperate
         with Sankyo in obtaining a refund of any withholding taxes paid by
         Sankyo with respect to any payments to ArQule hereunder, In the event
         that ArQule is successful in obtaining any refund of tax withholding
         amounts paid by Sankyo under Sections 3.4, 4.3 and 8.1. of this
         Agreement, ArQule agrees to promptly remit such refund amount received
         by ArQule to Sankyo.

<PAGE>

                                                                   EXHIBIT 10.16

                  8.9.2.   Royalty Payments, Sankyo may only withhold from
         royalties due to ArQule under Section 8.3 amounts for payment of
         Japanese withholding tax that is required by law to be paid to the
         Japanese taxing authority with respect to such royalty amounts due to
         ArQule; provided, however, that such amount withheld shall not exceed
         the lesser of (i) ten percent (10%) of such royalties due to ArQule, or
         (ii) such amount actually creditable by ArQule as a foreign tax credit
         against taxes currently payable by ArQule to the United States
         government; and further provided, however, that in regard to any such
         tax withholding Sankyo shall give ArQule such documents, and provide
         any other cooperation or assistance on a reasonable basis, as may be
         necessary to enable ArQule to claim exemption therefrom, to receive a
         full allowance of such withholding tax or claim a foreign tax credit,
         and Sankyo shall upon ArQule's request give proper evidence as to the
         payment of such tax. In the event that Sankyo is successful in
         obtaining any refund of tax withholding amounts paid by Sankyo under
         Sections 8.3 of this Agreement, Sankyo agrees to promptly remit such
         refund amount received by Sankyo to ArQule,

9. Confidential Information.

         9.1.     Definition of Confidential Information Confidential
Information shall mean any technical or business information furnished by the
Disclosing Party to the Receiving Party in connection with this Agreement and
specifically designated as confidential. Such Confidential Information may
include, without limitation, the identity of a chemical compound, the use of a
chemical compound, trade secrets, know-how, inventions, technical data or
specifications, testing methods, business or financial information, research and
development activities, product and marketing plans, and customer and supplier
information,

         9.2.     Definition of Confidential Information, Confidential
Information that is disclosed in 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.

         9.3.     Obligations. The Receiving Party agrees that it shall:

                  (a)      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;

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

<PAGE>

                                                                   EXHIBIT 10.16

                  (c)      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.

         9.4.     Exceptions. The obligations of the Receiving Party under
Section 9.3 above shall not apply to the extent that the Receiving Party can
demonstrate that certain Confidential Information:

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

                  (b)      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;

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

                  (d)      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

                  (e)      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 theft 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.

         9.5.     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 counsel (for ArQule) and its Legal
Department (for Sankyo) solely for the purpose of monitoring its obligations
under this Agreement.

         9.6.     Survival of Obligations. The obligations set forth in this
Article shall remain in effect for a period of five (5) 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.

<PAGE>

                                                                   EXHIBIT 10.16

10.      Representations and Warranties.

         10.1.    Authorization. Each Party represents and warrants to the other
that it has the legal right and power to enter into this Agreement, to extend
the rights and licenses granted to the other in this Agreement, and to fully
perform its obligations hereunder, and 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.

11.      Indemnification and Insurance,

         11.1.    Sankyo Indemnity Obligations. Sankyo agrees to defend,
indemnify arid hold ArQule, its Affiliates and their respective directors,
officers, employees and agents 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, employees or agents as a result of: (a) actual or asserted violations
of any applicable law or regulation by Sankyo, its Affiliates, sublicensees or
third party manufacturers by virtue of which the Royalty-Bearing Products
manufactured, distributed or sold shall be alleged or determined to be
adulterated, misbranded, mislabeled or otherwise not in compliance with such
applicable law or regulation; (b) claims for bodily injury, death or property
damage attributable to the manufacture, distribution, sale or use of the
Royalty-Bearing Products by Sankyo, its Affiliates, sublicensees or third party
manufacturers; or (c) a recall ordered by a governmental agency, or required by
a confirmed failure, of Royalty-Bearing Products manufactured, distributed, or
sold by Sankyo, its Affiliates, sublicensees or third party manufacturers as
reasonably determined by the Parties hereto.

         11.2.    Procedure. In the event that ArQule or any of its Affiliates
or their respective employees or agents (the "Indemnitee') intends to claim
indemnification under this Article 11, such Party shall promptly notify Sankyo
of any loss, claim, damage, liability or action in respect of which the
Indemnitee intends to claim such indemnification, and Sankyo shall assume the
defense thereof with counsel mutually satisfactory to the Parties; provided,
however, that an Indemnitee shall have the right to retain its own counsel, with
the fees and expenses to be paid by Sankyo, if representation of such Indemnitee
by the counsel retained by Sankyo would be inappropriate due to actual or
potential differing interests between such Indernnitee and any other Party
represented by such counsel in such proceedings. The indemnity agreement in this
Article 11 shall not apply to amounts paid in settlement of any loss; claim,
damage, liability or action if such settlement is effected without the consent
of Sankyo, which consent shall not be withheld unreasonably. The failure to
deliver notice to Sankyo within a reasonable time after the commencement of any
such action, if prejudicial to its ability to defend such action, shall relieve
Sankyo of any liability to the Indemnitee under this Article 11, but the
Omission so to deliver notice to Sankyo will not relieve it of any liability
that it may have to any Indeninitee otherwise than under this Article 11. The
Indemnitee under this Article 11, its employees and agents, shall cooperate
fully with Sankyo and its legal representatives in the investigation of any
action, claim or liability covered by this indemnification.

<PAGE>

                                                                   EXHIBIT 10.16

         11.3.    Insurance. Sankyo shall maintain appropriate product liability
insurance with respect to development, manufacture and sales of the
Royalty-Bearing Products by Sankyo in such amount as Sankyo customarily
maintains with respect to sales of its other products. Sankyo shall each
maintain such insurance for so long as it continues to manufacture or sell the
Royalty-Bearing Products, and thereafter for so long as Sankyo maintains
insurance for itself covering such manufacture or sales.

12.      Term and Termination

         12.1.    Term. This Agreement shall commence on the Effective Date and
shall remain in effect until the expiration of the last Royalty Period covering
any Royalty-Bearing Product, unless earlier terminated as provided in this
Article 12.

         12.2.    Breach of Payment Obligations. In the event that Sankyo fails
to make timely payment of any amounts due to ArQule under this Agreement, ArQule
may terminate this Agreement upon thirty (30) days written notice to Sankyo,
unless Sankyo pays all past-due amounts within such thirty-day notice period.

         12.3.    Material Breach. In the event that either Party continues a
material breach of any of its obligations under this Agreement (other than as
provided in Section 12.2) and such Party fails (i) to remedy that breach within
ninety (90) days after receiving written notice thereof from the other Party or
(ii) to commence dispute resolution pursuant to Section 13.5, within ninety (90)
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.

         12.4.    Effect of Termination. Termination of this Agreement shall not
relieve the Parties of any obligation accruing prior to such termination. The
provisions of Article 5, Article .6, Article 7 and Article S (with respect only
to milestone payments and royalties accrued at the time of termination but not
yet paid), Article 9, Article 11 and Article 13 shall survive the expiration or
termination of this Agreement.

13. Miscellaneous.

         13.1. Relationship of Parties. Nothing in this Agreement is intended or
shall be deemed to constitute a partnership, agency, employer-employee or joint
venture relationship between the Parties. No Party shall incur any debts or make
any commitments for the other, except to the extent, if at all, specifically
provided therein.

         13.2. Publicity. Neither Party shall use the name of the other Party or
reveal the terms of this Agreement in any publicity or advertising without the
prior written approval of the other Party, except that (i) either Party may use
the text of a written statement approved in advance by both Parties without
further approval, (ii) either Party shall have the right to identify the other
Party and to disclose the terms of this Agreement as required by applicable
securities laws or

<PAGE>

                                                                   EXHIBIT 10.16

other applicable law or regulation, and (iii) either Party may use the name of
the other Party and reveal the existence of this Agreement.

         13.3.    Non-Solicitation. During the term of this Agreement and
thereafter for a period of two (2) years, each Party agrees not to seek to
persuade or induce any employee of the other Party to discontinue his or her
employment with that Party in order to become employed by or associated with any
business, enterprise, or effort that is associated with its own business.

         13.4.    Governing Law, This Agreement shall be governed by and
construed in accordance with the laws of the Commonwealth of Massachusetts.

         13.5.    Dispute Resolution Procedures.

(a)      The Parties hereby agree that they will attempt in good faith to
resolve any controversy, claim or dispute ("Dispute") arising out of or relating
to this Agreement promptly by negotiations. Any such Dispute which is not
settled by the Parties within fifteen (15) days after notice of such Dispute is
given by one Party to the other in writing shall be referred to a senior
executive of ArQule and the Director of the Research Institute of Sankyo who are
authorized to settle such Disputes on behalf of their respective companies
("Senior Executives'). The Senior Executives will meet for negotiations within
fifteen (15) days of the end of the 15 day negotiation period referred to above,
at a time and place mutually acceptable to both Senior Executives, If the
Dispute has not been resolved within thirty (30) days after the end of the 15
day negotiation period referred to above (which period may be extended by mutual
agreement), subject to any rights to injunctive relief and unless otherwise
specifically provided for herein, any Dispute will be settled first by
non-binding mediation and thereafter by arbitration as described in subsections
(b) and (c) below.

         (b)      Any Dispute which is not resolved by the Parties within the
time period described in subsection (a) shall be submitted to an alternative
dispute resolution process ("ADR"). Within five (5) business days after the
expiration of the thirty (30) day period set forth in subsection (a), each Party
shall select for itself a representative with the authority to bind such Party
and shall notify the other Party in writing of the name and title of such
representative. Within ten (10) business days after the date of delivery of such
notice, the representatives shall schedule a date for engaging in non-binding
ADR with a neutral mediator or dispute resolution firm mutually acceptable to
both representatives. Any such mediation shall be held in Boston, Massachusetts.
Thereafter, the representatives of the Parties shall engage in good faith in an
ADR process under the auspices of such individual or firm. If the
representatives of the Parties have not been able to resolve the Dispute within
thirty (30) business days after the conclusion of the ADR process, or if the
representatives of the Parties fail to schedule a date for engaging in
non-binding ADR within the ten (10) day period set forth above, the Dispute
shall be settled by binding arbitration as set forth in subsection (c) below. If
the representatives of the Parties resolve the dispute within the thirty (30)
day period set forth above, then such resolution shall be binding upon the
Parties. If either Party fails to abide by such resolution, the other Party can
immediately refer the matter to arbitration under Section 13.5(c).

<PAGE>

                                                                   EXHIBIT 10.16

         (c)      If the Parties have not been able to resolve the Dispute as
provided in subsections (a) and (b) above, the Dispute shall be finally settled
by binding arbitration. Any arbitration hereunder shall be conducted under rules
of the American Arbitration Association. The arbitration shall be conducted
before three arbitrators chosen according to the following procedure: each of
the Parties shall appoint one arbitrator and the two so nominated shall choose
the third. If the arbitrators chosen by the Parties cannot agree on the choice
of the third arbitrator within a period of thirty (30) days after theft
appointment, then the third arbitrator shall be appointed by the Court of
Arbitration of the American Arbitration Association. Any such arbitration shall
be held in Boston, Massachusetts. The arbitrators shall have the authority to
grant specific performance, and to allocate between the Parties the costs of
arbitration in such equitable manner as they determine. The arbitral award (i)
shall be final and binding upon the Parties; and (ii) may be entered in any
court of competent jurisdiction.

         (d)      Nothing contained in this Section or any other provisions of
this Agreement shall be construed to limit or preclude a Party from bringing any
action in any court of competent jurisdiction for injunctive or other
provisional relief to compel the other Party to comply with its obligations
hereunder before or during the pendency of mediation or arbitration proceedings.
The Parties hereby irrevocably consent to submit to the jurisdiction of the
courts of the Commonwealth of Massachusetts and/or any other court having
jurisdiction for this purpose.

         13.6.    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.

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

         13.8.    Binding Effect. This Agreement shall inure to the benefit of
and be binding upon the Parties, their Affiliates, .and their respective lawful
successors and assigns.

         119.     Assignment. This Agreement may not be assigned by either Party
without the prior written consent of the other Party, except that either Party
may assign this Agreement 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.

         13.10.   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 international overnight courier,
confirmed facsimile transmission, or registered or certified mail, return
receipt requested, postage prepaid to the following addresses or facsimile
numbers:

If to Sankyo:                    If to ArQule:
Sankyo Co., LTD                  ArQule, Inc.
2-58, Hiromachi 1-Chome          200 Boston Avenue, Suite 3600
Shinagawa-ku                     Medford, MA 02155
Tokyo 140 Japan                  Attention: Eric B. Gordon

<PAGE>

                                                                   EXHIBIT 10.16

Attention: Hiroshi Fukunai
Tel: 03 3492 3131                Tel: (617) 395-4100
Fax: 03 5436 856/                Fax: (617) 395-1225

                                   with a copy to:
                                 Palmer & Dodge
                                 One Beacon Street
                                 Boston, MA 02108

                                  Attention: Michael Lytton, Esquire
                                 Tel: (617) 573-0327
                                 Fax: (617) 227-4420

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

         13.11.   Amendment and Waiver. This Agreement may be amended,
supplemented, or otherwise modified 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.

         13.12.   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 the Parties shall negotiate in good faith to modify the
Agreement to preserve (to the extent possible) their original intent.

         13.13.   Entire Agreement, This Agreement constitutes the entire
agreement between the Parties with respect to the subject matter hereof and
supersedes all prior agreements or understandings between the Parties relating
to the subject matter hereof.

         13.14.   Force Majeure. Neither Party shall be held liable or
responsible to the other Party, nor be deemed to be in breach of this Agreement,
for failure or delay in fulfilling or performing any provisions of this
Agreement when such failure or delay is caused by or results from any cause
whatsoever outside the reasonable control of the Party concerned including, but
not limited to, fire, explosion, breakdown of plant, strike, lock-out, labor
disputes, casualty or accident, lack or failure of transportation facilities,
flood, lack or failure of sources of supply or of labor, raw materials or
energy, civil commotion, embargo, any law, regulation, decision, demand or
requirement of any national or local government or authority. The Party claiming
relief shall, without delay, notify the other Party by registered airmail or by
telefax of the interruption and cessation thereof and shall use its best efforts
to remedy the effects of such hindrance with all reasonable dispatch. The onus
of proving that any such Force Majeure event exists shall rest upon the Party so
asserting, During the period that one Party is prevented from performing its
obligations under this Agreement due to a Force Majeure event, the other Party
may, in its sole discretion, suspend any obligations that relate thereto. Upon
cessation of such Force Majeure

<PAGE>

                                                                   EXHIBIT 10.16

event the Parties hereto shall use their best efforts to make up for any
suspended obligations. If such Force Majeure event is anticipated to continue,
or has existed for nine (9) consecutive months or more, this Agreement may be
forthwith terminated by either Party by registered airmail or by telefax. In
case of such termination the terminating Party will not be required to pay to
the other Party any indemnity whatsoever.

              [THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]

IN WITNESS WHEREOF, the undersigned have duty executed and delivered this
Agreement as a sealed instrument effective as of the date first above written.

SANKYO CO., LTD                         ARQULE, INC.
By:____________                         By:_______________
Name: Tetsun Hiraoka. Ph.D.             Name: Eric B. Gordon
      ---------------------
Title: Member of the Board and          Title: President and Chief Executive
      ------------------------
    Director of Research Institute

<PAGE>

                                                                   EXHIBIT 10.16
                                       27

                                    EXHIBIT A

                                  Research Plan

                  [THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK]