Document:

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                                                                    EXHIBIT 10.9

                              AMENDED AND RESTATED
                       RESEARCH AND DEVELOPMENT AGREEMENT

      This Agreement, dated as of April 2, 2001, 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 19 Presidential Way, Woburn,
Massachusetts, U.S.A..

                                R E C I T A L S

      WHEREAS, Sankyo and ArQule previously entered into a Research and
Development Agreement dated November 1, 1997 (the "Original Agreement");

      WHEREAS, the activities contemplated by the parties under the Original
Agreement are nearly completed; and

      WHEREAS, the parties desire to complete certain activities under the
Original Agreement and then to continue their relationship by undertaking
additional research and development activities;

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

1.    Definitions.

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

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

      1.3. "Agreement" shall mean this Amended and Restated Research and
Development Agreement, together with Exhibit A hereto.

      1.4. "ArQule Compound" shall mean a chemical compound provided by ArQule
to Sankyo 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.

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      1.5. "ArQule Derivative Compound" shall mean a Derivative Compound
developed from a Licensed Compound in the course of an optimization program for
the molecular Target or other Target (e.g., whole cell screen) against which
such Licensed Compound was initially discovered to have biological activity,
i.e., a compound is not an ArQule Derivative Compound if that compound is
independently developed by Sankyo.

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

      1.7. "Available Compound" shall mean an Active Compound which ArQule has
determined is not (i) licensed or otherwise committed to a third party or (ii)
committed to an internal ArQule program.

      1.8. "Compass Array Library" shall mean 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 Exhibit A
attached hereto.

      1.9. "Confidential Information" shall mean any 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, trade secrets, know-how, inventions, technical data or
specifications, testing methods, business or financial information,
collaboration and development activities, Steering Committee and Research
Committee minutes, royalty reports, product and marketing plans, clinical
development plans, and customer and supplier information..

      1.10. "Derivative Compound" shall mean a chemical compound that was (i)
structurally derived from a parent compound in 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 or (ii)
actually derived from a parent compound using information obtained from testing
one or more parent compounds. 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 the parent compound in order to
be classified as a Derivative Compound.

      1.11. "Directed Array(R) Library" shall mean an Array comprised of
Derivative Compounds synthesized by ArQule under the Directed Array Program. The
description of, and the specifications for, the Directed Array Libraries are set
forth in Exhibit A attached hereto.

      1.12. "Directed Array(SM) Program" shall mean a Directed Array Program
conducted by ArQule for Sankyo as set forth in Section 4 and in accordance with
a Research Plan developed by the Research Committee and approved by the Steering
Committee.

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      1.13. "Discovery Optimization Program" means the discovery optimization
program described in Article 5 below.

      1.14. "Effective Date" shall mean the date first written above.

      1.15. "Extraordinary Expenses" shall mean those expenses incurred from
time to time by ArQule in connection with the Directed Array Program and
approved by the Research Committee and Sankyo which are not (i) direct,
out-of-pocket costs provided for in the Research Plan which are directly
attributable to the Directed Array Program or (ii) fixed overhead costs provided
for in the Research Plan which are allocable to the Directed Array Program.

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

      1.17. "Full-Time Equivalent" or "FTE" shall mean one (1) or more qualified
full-time employee(s) of ArQule who, alone or collectively, spends one hundred
percent (100%) of a forty (40) hour work week on a specific project or task
(which is approximately 1700 man-hours reported at ArQule on the project in one
year).

      1.18. "Licensed Compound" shall mean (i) any ArQule Compound that, as of
the Effective Date, has already been designated as a Licensed Compound under the
Original Agreement and (ii) any Active Compound that the Research Committee
designates as a Licensed Compound in accordance with Section 3.6.

      1.19. "Licensed Compound Set" shall mean 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 Derivative Compounds of such Licensed
Compounds that are synthesized by a party in the course of optimizing those
Licensed Compounds.

      1.20. "Mapping Array(R) Library" shall mean an Array of ArQule Compounds
which ArQule makes available to its collaborators for screening on a
non-exclusive basis. The description of, and the specifications for, the Mapping
Array Libraries are set forth in Exhibit A attached hereto.

      1.21. "Mapping Array(SM) Program" shall mean the component of the Research
Program under which ArQule has provided and will continue to provide Sankyo with
Mapping Array Libraries and under which ArQule will now provide Sankyo with the
Compass Array Library, as further described in Section 3.

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

      1.23. "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

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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.

      1.24. "Party" shall mean ArQule or Sankyo; "Parties" means ArQule and
Sankyo, collectively.

      1.25 "Patent Rights" shall mean 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 Sankyo, 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.
"Sankyo Patent Rights" means Patent Rights that are either (i) assigned solely
to Sankyo, (ii) assigned jointly to Sankyo and a party other than ArQule, or
(iii) licensed to or otherwise controlled by Sankyo, in each case to the extent
that Sankyo 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 Sankyo as joint owners. Joint Patent
Rights will include (i) Patent Rights claiming Joint Technology and (ii) Patent
Rights claiming both ArQule Technology and Sankyo Technology in a single filing.

      1.26. "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.

      1.27. "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
and 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 II 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
III Clinical Trials.

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      1.28. "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
III clinical trials. The completion of the Phase III 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.

      1.29. "Preclinical Development" shall mean the commencement of potency and
efficacy testing of a compound in animal models.

      1.30  "Proprietary Materials" shall mean 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 Sankyo Compounds.

      1.31. "Research Committee" shall mean the research committee established
by the Parties as described in Section 2.1.

      1.32. "Research Period" shall mean the period commencing on the Effective
Date and continuing until June 30, 2004.

      1.33. "Research Program" shall mean, collectively, each of the Directed
Array Programs and the Mapping Array Program.

      1.34. "Research Plan" shall mean a plan of research for the Mapping Array
Program and the Directed Array Programs as developed by the Research Committee
and approved by the Steering Committee.

      1.35. "Royalty-Bearing Product" shall mean a product containing as one of
its constituents (i) any ArQule Compound; (ii) any ArQule Derivative Compound;
(iii) any Sankyo Derivative Compound synthesized by or for ArQule; or (iv) any
other 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 Program or the
Directed Array Program.

      1.36. "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 such Royalty-Bearing Product in any country and
thereafter during which Sankyo has the obligation to pay a royalty pursuant to
Section 8.5.

      1.37. "Sankyo Compound" shall mean any chemical compound provided by
Sankyo or its Affiliates to ArQule under the Directed Array Program.

      1.38. "Sankyo Derivative Compound" shall mean a Derivative Compound
developed from an Sankyo Compound in the course of an optimization program for
the molecular Target or

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other Target (e.g., whole cell screen) against which such Sankyo Compound was
initially discovered to have biological activity, i.e., a compound is not a
Sankyo Derivative Compound if that compound is independently developed by ArQule

      1.39. "Steering Committee" shall mean the steering committee established
by the parties as described in Section 2.2.

      1.40. "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.

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

      1.42. "Technology" shall mean 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 Sankyo, 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. "Sankyo Technology" means Technology that is
either (i) assigned solely to Sankyo, (ii) assigned jointly to Sankyo and a
party other than ArQule, or (iii) licensed to or otherwise controlled by Sankyo,
in each case to the extent that Sankyo 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 Sankyo and one or more employees or
consultants of ArQule in connection with this Agreement.

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

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

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

2.    Management of Research Program.

      2.1. Research Committee.

            2.1.1. Composition of Research Committee. The Parties hereby
establish a Research Committee comprised of six (6) members, with three (3)
representatives appointed by each Party, including one (1) member from each
party who also serves on the Steering Committee. A Party may change one or more
of its representatives to the Research Committee at any time upon notice to the
other Party. Each Party will also designate one of its representatives as its
team leader.

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            2.1.2. Duties of the Research Committee. The Research Committee
shall direct and administer the Research Program. Specifically, the Research
Committee shall develop and revise the Research Plan. In addition, the Research
Committee shall (i) designate Active Compounds as Licensed Compounds as
described in Section 3.6.; (ii) maintain and update the list of Licensed
Compounds; (iii) determine the allocation of the funding and personnel resources
to be contributed by ArQule for each Directed Array Program; and (iv) resolve
matters involving scientific questions.

            2.1.3. Meetings of the Research Committee. The Research 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
Research Committee, the Research 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 Research 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 Research Committee shall meet quarterly with the
location alternating between ArQule and Sankyo, or at such other times and
locations as the Research Committee determines. A representative of the Research
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 Research 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. All actions and decisions of the Research Committee will require the
unanimous consent of all of its members. If the Research Committee fails to
reach agreement upon any matter, the dispute will be referred to the Steering
Committee for resolution. Within ten (10) days following each quarterly meeting
of the Research Committee, the Research Committee shall prepare and deliver, to
both Parties, a written report describing the decisions made, conclusions and
actions agreed upon.

      2.2. Steering Committee.

            2.2.1. Composition of Steering Committee. The Parties hereby
establish a Steering Committee with equal membership from each party. A Party
may change one or more of its representatives to the Steering Committee at any
time upon notice to the other Party.

            2.2.2. Duties of Steering Committee. The Steering Committee will
have overall authority to direct the collaboration and exclusive approval
authority over financial decisions and other decisions relating to contractual
or business issues. Specifically, the Steering Committee will (i) approve
Research Plans and updates to Research Plans, (ii) resolve disputes and

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deadlocks within the Research Committee, and (iii) review and approve resource
allocation decisions for Directed Array Programs.

            2.2.3. Meetings of the Steering Committee. The Steering Committee
shall meet at least once every six (6) months with the location alternating
between ArQule and Sankyo. 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. 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 referred to the dispute resolution procedures set forth in
Section 13.5. Within ten (10) days following each 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.

      2.3. Cooperation. Each Party agrees to provide the Research Committee and
Steering Committee with information and documentation as reasonably required for
the Research Committee and 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 Research Committee and Steering
Committee. The Parties anticipate that members of the Research Committee and
Steering Committee will communicate informally with each other and with
employees and consultants of the Parties on matters relating to the Directed
Array Program.

      2.4. Visits to Facilities. Members of the Research Committee and 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 Program.

      3.1. Prior Mapping Array Program. Sankyo acknowledges that, prior to the
Effective Date, ArQule previously delivered to Sankyo, and Sankyo accepted,
approximately 400,000 ArQule Compounds within Mapping Array Libraries produced
by ArQule from 1996 through 1999. Sankyo further acknowledges that such ArQule
Compounds were fully satisfactory to Sankyo. ArQule acknowledges that Sankyo has
fully paid for such ArQule Compounds, except that ArQule remains eligible to
receive milestone and royalty payments on Royalty-Bearing Products as set forth
in Sections 8.3. and 8.5.

      3.2. Compass Array Library. ArQule will supply Sankyo with one (1) copy of
the portion of the Compass Array Library corresponding to Mapping Array
Libraries produced in calendar year 2000 within two (2) weeks after the
Effective Date and one (1) copy of the portion of the Compass Array Library
corresponding to Mapping Array Libraries produced in calendar year 2001 by March
1, 2002. ArQule will not disclose the structures of ArQule Compounds in the
Compass Array Library and Sankyo will have no obligation to disclose its
Targets. Sankyo

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will promptly screen the Compass Array Library against its Targets. When Sankyo
detects Active Compounds in the Compass Array Library, Sankyo will promptly
inform ArQule through the Research Committee.

      3.3. Mapping Array Library. During the period from the Effective Date
through March 31, 2003 upon the written request of Sankyo, ArQule will promptly
deliver to Sankyo any Mapping Array Libraries selected by Sankyo. Promptly upon
its receipt of any such Mapping Array Libraries, Sankyo shall test such Mapping
Array Libraries for activity against the relevant Targets. In addition, Sankyo
may continue to screen all Mapping Array Libraries received prior to the
Effective Date against any Targets. Initially, ArQule will identify the Chemical
Themes of each Mapping Array Library in Markush format but not the structures of
the individual ArQule Compounds in the Mapping Array Library, and Sankyo will
not disclose the Targets screened. If Sankyo detects Active Compounds, Sankyo
shall promptly provide ArQule with notice by telefax communication of the
spatial location of Active Compounds in the Mapping Array Libraries, which
telefax shall be followed by a confirmatory letter.

      3.4. Mutual Disclosure. ArQule will promptly determine whether the Active
Compounds identified by Sankyo in the Mapping Array Libraries are Available
Compounds, and then promptly notify Sankyo of such determination. If any Active
Compound is not an Available Compound, ArQule shall not disclose the structure
and Sankyo shall have no rights under this Agreement with respect to that Active
Compound. If an Active Compound is an Available Compound, ArQule shall reserve
such Active Compound as an Available Compound to Sankyo under this Agreement,
which means that ArQule shall not thereafter (i) license or otherwise commit
that Active Compound to a third party or (ii) commit that Active Compound to an
internal ArQule program as long as that Active Compound is under reservation by
Sankyo. ArQule then shall disclose to Sankyo (i) the structure of such Available
Compound correlated to its well location and (ii) upon request of Sankyo, the
structures but not the locations of inactive ArQule Compounds in the same
Mapping Array Library, and Sankyo shall disclose to ArQule (i) the identity of
the Target and (ii) the level of activity. All such disclosed information shall
be treated as Confidential Information by both Parties.

      3.5. Resynthesis. During the period from the Effective Date through March
31, 2003, ArQule shall resynthesize and deliver to Sankyo an additional 5 mg
quantity of any Available Compound requested by Sankyo to enable Sankyo to
conduct confirmatory screening activities. Sankyo shall provide ArQule with
written notice of the Available Compounds that Sankyo desires to have
resynthesized by ArQule, in accordance with the specifications set forth in
Exhibit A. In each case the actual amount of, and delivery schedule for,
resynthesized Available Compounds will be determined by the Research Committee.
ArQule will continue to reserve all of the Available Compounds from the same
Mapping Array Library for a period of ninety (90) days after Sankyo receives at
least one resynthesized Available Compound from that Mapping Array Library. The
Steering Committee may extend this reservation period for one or more Available
Compounds.

      3.6. Designation of Licensed Compounds. At the request of Sankyo, the
Research Committee will review and consider the pertinent confirmatory data and,
after consideration, designate confirmed Available Compounds as "Licensed
Compounds" under this Agreement.

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Sankyo acknowledges that an Active Compound that Sankyo desires to designate as
a Licensed Compound may not retain its status as an Available Compound if the
reservation period expired for that Active Compound. Therefore, if an Active
Compound is no longer reserved (i.e., the reservation period expired), ArQule
must determine whether that Active Compound is still an Available Compound
before the Research Committee may designate the Active Compound as a Licensed
Compound. Upon the designation of an ArQule Compound as a Licensed Compound, the
licenses set forth in Section 6.2. shall automatically apply. 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.

      3.7. Optimization Rights. During the Research Period, Sankyo may submit
Licensed Compound Sets to ArQule for inclusion in the Directed Array Program. At
any time, Sankyo may conduct optimization of any Licensed Compound Set. In the
event that Sankyo conducts optimization of a Licensed Compound Set, then at the
request of Sankyo, ArQule will provide Sankyo with synthetic protocols to enable
Sankyo to make those Licensed Compounds.

      3.8. Extension Right. If ArQule continues to offer the Mapping Array
Program during the year 2002, Sankyo may extend on the same terms the supply of
ArQule Compounds in the form of the Compass Array Library and the Mapping Array
Libraries through December 31, 2002 upon written notice to ArQule which is
received by ArQule not later than July 1, 2001.

4.    Directed Array Program.

      4.1. Prior Directed Array Programs. Sankyo acknowledges that ArQule has
satisfactorily completed four (4) of the total of six (6) Directed Array
Programs committed under the Original Agreement. ArQule acknowledges that Sankyo
has fully paid for the completed Directed Array Programs, except that ArQule
remains eligible to receive milestone and royalty payments on Royalty-Bearing
Products as set forth in Sections 8.3. and 8.5. ArQule and Sankyo both agree
that the two (2) uncompleted Directed Array Programs under the Original
Agreement shall be completed not later than July 1, 2001 under the terms and
conditions of the Original Agreement.

      4.2. Description of Directed Array Program. Under the direction of the
Research Committee and in accordance with the Research Plan, ArQule will
synthesize multiple Directed Array Libraries of ArQule Derivative Compounds or
Sankyo Derivative Compounds that meet the specifications set forth on Exhibit A.
The Parties intend that, during each year of the Directed Array Program (July 1
to June 30), Sankyo will submit to ArQule and ArQule will perform one (1)
Directed Array Program, with each Directed Array Program based on a different
chemotype or chemical theme and intended to produce approximately 1000
compounds. However, the actual conduct of the Directed Array Programs, the
actual numbers of compounds produced in each Directed Array Program, and the
specifications of the compounds produced in each Directed Array will be
determined by the Research Committee and documented in the Research Plan,
subject to the authority of the Steering Committee.

      4.3. Conduct of Directed Array Program. Each Directed Array Program shall
be conducted pursuant to the Research Plan in a good scientific manner and in
compliance with all

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applicable legal requirements. The conduct of each Directed Array Program shall
be the primary responsibility of ArQule with participation by Sankyo. ArQule
shall commit a total of four (4) FTEs per year (July 1 to June 30) to each
Directed Array Program (including two synthetic organic chemists), subject to
adjustment by the Steering Committee; provided, however, that ArQule shall have
no obligation to commit more than a total of four (4) FTEs per year to the
Directed Array Program unless Sankyo funds such additional FTEs as described
below. Sankyo shall propose projects to the Steering Committee for inclusion as
a Directed Array Program. If the Steering Committee approves the inclusion of
the proposed project, ArQule shall thereupon diligently synthesize Directed
Array Libraries of ArQule Derivative Compounds or Sankyo Derivative Compounds in
accordance with the Research Plan; provided that ArQule shall have the right to
decline to synthesize any compound that (i) was under development by ArQule
(including programs with academic collaborators or corporate partners) before
such compound was specifically proposed to be included in the Directed Array
Program or (ii) was already within a screening library before such compound was
specifically proposed to be included in the Directed Array Program. Sankyo shall
provide ArQule with the requisite amount and purity of Sankyo Compounds, as
directed by the Research Committee, for any Directed Array Programs based on
such Sankyo Compounds. Sankyo shall, in its discretion, test all compounds in
the Directed Array Libraries. If Sankyo desires to increase the number of
Directed Array Programs under this Agreement, Sankyo will notify ArQule through
the Research Committee and the parties will discuss the matter.

      4.4. Term of Directed Array Programs. The Parties shall perform the
Directed Array Programs under this Agreement during the Research Period.

5.    Discovery Optimization Program.

      5.1. Description of Discovery Optimization Program. In a Discovery
Optimization Program, ArQule and Sankyo produce one or more compound series for
a particular Target with the goal of generating an IND candidate that is ready
for preclinical GLP toxicology studies. The Discovery Optimization Program has
three stages:

            Stage 1 - Lead Generation

            The first stage of the Discovery Optimization Program will generate
            Active Compounds from the Compass Array Library as described above.
            The objective of the first stage is to identify novel chemotypes
            within the ArQule Compound repository. The ability to prioritize
            Active Compounds from the Compass Array Library may be facilitated
            by analyzing the initial screening data in combination with
            cytochrome P450 inhibition and cellular viability data.

            Stage 2 - Lead Qualification

            The second stage of the Discovery Optimization Program will seek to
            qualify Active Compounds through in vitro ADMET profiles and
            additional biological assays. Intial SAR will be developed by
            screening selected Mapping Array Libraries that represent novel
            chemotypes identified in the Compass Array

<PAGE>

            Library. The combination of initial SAR and some in vitro
            ADMET profiling will enable the identification of qualified Active
            Compounds that are amenable to additional lead optimization efforts.

            Stage 3 - Lead Optimization

            The third stage of the Discovery Optimization Program will progress
            one of the Targets through lead optimization to identify qualified
            Active Compounds and at least one preclinical GLP toxicology
            candidate. During this stage of the program, several iterations of
            Derivative Compound synthesis and optimization will be executed in
            parallel with in vitro ADMET profiling and biological assays for
            potency and selectivity.

      5.2. Option for Discovery Optimization Program. ArQule grants Sankyo the
option to enter into a Discovery Optimization Program for up to two (2) Licensed
Compound Sets at any time during the Research Period. Sankyo may exercise this
option by furnishing ArQule with written notice to that effect, which notice
must be received by ArQule during the Research Period. If Sankyo elects to
exercise this option, Sankyo and ArQule will negotiate in good faith the terms
and conditions of the program, including without limitation the payments and
deliverables. If the Parties have not entered into a binding letter of agreement
on the terms and conditions of the program within ninety (90) days after ArQule
receives notice from Sankyo, then the option right shall expire and ArQule shall
have no further obligation to enter into a Discovery Optimization Program with
Sankyo for that Licensed Compound Set.

6.    License Grants; Reversion of Rights.

      6.1. Screening License. Subject to the terms and conditions of this
Agreement, ArQule hereby grants to Sankyo and its Affiliates under ArQule Patent
Rights and ArQule Technology a nonexclusive, royalty-free license (without the
right to sublicense) to test the ArQule Compounds for significant functional
activity against Targets.

      6.2  Development and Commercialization License. Subject to the terms and
conditions of this Agreement, ArQule hereby grants to Sankyo 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, including the right to
            develop Derivative 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
            manufacture, use, sell, and import Licensed Compounds; 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

<PAGE>

            synthesis methods within the ArQule Patent Rights and ArQule
            Technology to make Royalty-Bearing Products.

Sankyo 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 Derivative Compounds based on Licensed Compounds,
but does not extend to the composition or use of Derivative Compounds. Sankyo
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 method from a
third party and, in such event, ArQule may require Sankyo to enter into a
separate sublicense agreement before such license grant shall take effect. In
the event that Sankyo decides to sublicense its rights under this Section to a
third party, Sankyo shall furnish ArQule with written notice of the sublicense
grant and shall ensure that all sublicense agreements conform to this Agreement.

      6.3. Reversion of Rights.

            6.3.1. Status Reports. Sankyo will furnish ArQule with a brief
semi-annual statement, within thirty (30) days after June 30 and December 31 of
each calendar year, that describes the status of each Licensed Compound Set
which remains under development by Sankyo as a Royalty-Bearing Product. After
Sankyo completes development of a Royalty-Bearing Product, Sankyo will promptly
notify ArQule of the first commercial sale of that Royalty-Bearing Product in
each country. In addition, Sankyo agrees to inform ArQule at least once each
calendar year regarding the status of any Sankyo Derivative Compounds that
Sankyo develops based on Sankyo Derivative Compounds synthesized by ArQule under
this Agreement.

            6.3.2.. Return of ArQule Compounds. In the event that Sankyo ceases
to use diligent efforts to develop, manufacture, market, and sell at least one
Licensed Compound or Derivative Compound within a Licensed Compound Set as a
Royalty-Bearing Product, including without limitation the cessation of efforts
to optimize or develop such Licensed Compound Set, then (i) rights in any ArQule
Compounds within such Licensed Compound Set shall revert to ArQule, (ii) all
licenses granted to Sankyo under this Agreement with respect to such ArQule
Compounds shall terminate, and (iii) Sankyo shall assign to ArQule the ownership
of such ArQule Compounds.

7.    Intellectual Property.

      7.1. Rights in Compounds. Sankyo shall have the sole right to prepare,
file, prosecute, and maintain Patent Rights that claim the composition or use of
ArQule Derivative Compounds or Sankyo Derivative Compounds developed by either
Party under this Agreement. ArQule shall assign to Sankyo all right, title, and
interest in any Patent Rights filed by Sankyo that claim the composition or use
of such ArQule Derivative Compounds or Sankyo Derivative Compounds. Therefore,
such Patent Rights are considered Sankyo Patent Rights under this Agreement
rather than Joint Patent Rights.

      7.2. 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

<PAGE>

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 the following manner:

      (i)   ArQule shall have sole ownership of all right, title, and interest
            in ArQule Patent Rights and ArQule Technology;

      (ii)  Sankyo shall have sole ownership of all right, title, and interest
            in Sankyo Patent Rights and Sankyo Technology; and

      (iii) ArQule and Sankyo shall have joint ownership of all right, title,
            and interest in Joint Patent Rights and Joint Technology.

      7.3. Management of Patent Rights. Sankyo shall have sole responsibility
for, and control over, the management of Sankyo Patent Rights and ArQule shall
have sole responsibility for, and control over, the management of ArQule Patent
Rights. Each Party will bear its own expenses in connection with such 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.

      7.4. 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 Sankyo in the preparation, filing, and
prosecution of any Patent Rights that ArQule has assigned to Sankyo pursuant to
Section 7.1. Such cooperation includes, but is not limited to:

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

<PAGE>

      7.5. Infringement.

            7.5.1. Offensive Actions. With respect to infringement of any Sankyo
Patent Right claiming the composition or use of a Licensed Compound, ArQule
Derivative Compound, or Royalty-Bearing Product, Sankyo 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, Sankyo shall be exclusively
entitled to all proceeds or recoveries resulting therefrom, but from such
proceeds or recoveries Sankyo shall pay ArQule a royalty in accordance with
Section 8.5. on damages recovered for sales lost to the infringer. In the event
that Sankyo declines to enforce such Patent Right with respect to a
Royalty-Bearing Product where the sales of the alleged infringer are at least
twenty percent (20%) of the 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.

            7.5.2. Defensive Actions. Sankyo 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 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 Sankyo of the infringement action and
Sankyo 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
Sankyo within a reasonable time shall relieve Sankyo of its indemnity obligation
under this Section to the extent such failure prejudices the ability of Sankyo
to defend such action. ArQule shall cooperate fully with Sankyo and its legal
representatives in the investigation and defense of the action. In the event of
a settlement, Sankyo 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.

8.    Payments, Reports, and Records.

      8.1. Mapping Array Program.

            8.1.1. Compass Array Library Delivery Fee. In partial consideration
of the delivery of the calendar year 2000 and 2001 portion of the Compass Array
Library (as described in Section 3.2.), Sankyo agrees to pay ArQule a delivery
fee in the amount $500,000, with $250,000 payable within two (2) weeks after the
Effective Date and $250,000 payable on March 1, 2002.

            8.1.2. Mapping Array Library Delivery Fee. In partial consideration
of the delivery of up to five (5) Mapping Array Libraries per calendar quarter
from the Effective Date through March 31, 2003 (as described in Section 3.3.),
Sankyo agrees to pay ArQule a delivery fee in the amount of $1,200,000 in eight
(8) equal installments of $150,000, payable within two

<PAGE>

(2) weeks after the Effective Date and thereafter on the first day of each
calendar quarter until the last payment is made on January 1, 2003. If Sankyo
does not request its full allocation of five (5) Mapping Array Libraries in a
given calendar quarter, ArQule shall have no obligation to provide Sankyo with
the shortfall in any subsequent calendar quarter. If Sankyo receives more than
five (5) Mapping Array Libraries in a given calendar quarter, as requested by
Sankyo, Sankyo agrees to pay ArQule $20,000 for each such additional Mapping
Array Library within thirty (30) days of receipt.

            8.1.3. Resynthesis Compounds. In partial consideration of the
delivery of up to fifteen (15) resynthesis compounds (as described in Section
3.5.) per calendar quarter from the Effective Date through March 31, 2003,
Sankyo agrees to pay ArQule a delivery fee in the amount of $300,000 in eight
(8) equal installments of $37,500, payable within two (2) weeks after the
Effective Date and thereafter on the first day of each calendar quarter until
the last payment is made on January 1, 2003. If Sankyo does not receive its full
allocation of fifteen (15) resynthesis compounds in a given calendar quarter,
ArQule shall have no obligation to provide Sankyo with the shortfall in any
subsequent calendar quarter. If Sankyo receives more than fifteen (15)
resynthesis compounds in a given calendar quarter, as requested by Sankyo,
Sankyo agrees to pay ArQule $2,500 for each such additional resynthesis compound
within thirty (30) days of receipt. In addition, if ArQule produces more than 5
mg of a resynthesis compound, as directed by the Research Committee and approved
by Sankyo, Sankyo will pay ArQule an additional fee that will be determined by
the Steering Committee on a case-by-case basis.

    8.2. Directed Array Programs. In partial consideration of the conduct of
the Directed Array Programs by ArQule, Sankyo agrees to pay ArQule a total of
$3,750,000 in twelve (12) equal installments of $312,500, payable on July 1,
2001 and thereafter on the first day of each calendar quarter during the
Research Period until the last payment is made on April 1, 2004. Sankyo and
ArQule acknowledge that this payment is intended to apply to the four (4) FTEs
committed by ArQule to the Directed Array Programs each year (July 1 to June
30). If Sankyo desires to access additional ArQule FTEs to support Directed
Array Programs, and ArQule provides the requested FTEs, Sankyo will pay ArQule
for these additional FTEs at the rate of $250,000 per FTE per year, payable
quarterly in advance. In addition to the amounts payable for the FTEs applied to
the Directed Array Programs, Sankyo shall pay any and all Extraordinary Expenses
of ArQule, as requested by the Research Committee and approved by Sankyo.

    8.3. Milestone Payments. In partial consideration of the activities
undertaken by ArQule and the licenses granted by ArQule under this Agreement,
Sankyo shall pay ArQule the following amounts within thirty (30) days after each
occurrence of the following milestones:

<TABLE>
<CAPTION>
Payment for
Royalty-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
</TABLE>

<PAGE>

<TABLE>
<S>            <C>
$  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 Program, and not submitted to a Directed
Array Program, shall be creditable up to $1,000,000 per year against royalties
due ArQule for such Royalty-Bearing Product pursuant to Section 8.5. Sankyo
shall promptly notify ArQule of each occurrence of any of the foregoing
milestones.

      8.4. 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. In addition, such amendment shall provide that Subsection 7.5.2.
shall not apply with respect to such Royalty-Bearing Product and that ArQule
shall indemnify Sankyo with respect to such Royalty-Bearing Product in
substantially the form set forth in Section 11.1. If the Parties are unable to
reach agreement with respect to the 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.

      8.5. Royalties. In partial consideration of the activities undertaken by
ArQule and the licenses granted by ArQule under this Agreement, Sankyo shall pay
to ArQule a royalty for each Royalty-Bearing Product as follows:

<PAGE>

<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>

A blended royalty rate of 3.5% for the Worldwide Territory and 4.5% for the U.S.
Territory shall apply if a Royalty-Bearing Product is based on (i) both a Sankyo
Derivative Compound and either an ArQule Compound or ArQule Derivative Compound
or (ii) an ArQule Derivative Compound that is developed by Sankyo from a
Licensed Compounds without any contribution from ArQule in a Directed Array
Program under this Agreement. This royalty obligation shall commence with the
first commercial sale of a Royalty-Bearing Product in any country and shall
continue on a country-by-country basis until the expiration of the last to
expire of any Patent Rights covering that Royalty-Bearing Product or, in any
country in which the Royalty-Bearing Product is not covered by a Patent Right,
for a period of ten (10) years from the date of first commercial sale of that
Royalty-Bearing Product in that country.

      8.6. Reports and Payments. Within sixty (60) days after the conclusion of
each Royalty Period, Sankyo shall deliver to ArQule a report containing the
following information:

      (i)   gross sales of Royalty-Bearing Products by Sankyo, its Affiliates
            and Sublicensees during the applicable Royalty Period in each
            country of sale;

      (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.

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 8.7., 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 8.11.

      8.7. Invoices; Payments in U.S. Dollars. With the exception of royalty
payments due under Section 8.5, ArQule shall submit invoices to Sankyo for each
payment due ArQule hereunder, and Sankyo shall pay such invoices within sixty
(60) days of receipt thereof. All payments due under this Agreement shall,
except as provided in Section 8.8. 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>

      8.8. 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 sixty-day payment deadline described in Section 8.6. Sankyo
shall pay any amounts due ArQule through whatever lawful methods ArQule
reasonably designates; provided, however, that if ArQule fails 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.

      8.9. 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 8.6. 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. During the Royalty Period and thereafter
for a period of three (3) years, 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.

      8.10. 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 prime rate of
interest as reported in the Wall Street Journal on the date payment is due,
calculated based on the number of days that payment is delinquent.

      8.11. Withholding Tax Payments.

             8.11.1. Payments. All amounts payable under this Section 8 except
royalties payable under Section 8.5. 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 exemption therefrom, a full allowance of such
withholding tax or a foreign tax credit paid by Sankyo under this Agreement,
ArQule agrees to promptly remit such refund amount received by ArQule to Sankyo.

<PAGE>

             8.11.2. Royalty Payments. Sankyo may only withhold from royalties
due to ArQule under Section 8.5. 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 ten percent (10%) of such royalties due to ArQule; 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
8.5. of this Agreement, Sankyo agrees to promptly remit such refund amount
received by Sankyo to ArQule.

9.    Confidential Information and Proprietary Materials.

      9.1. Confidential Information.

            9.1.1. Designation 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.

            9.1.2. 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

                  (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.

            9.1.3. Exceptions. The obligations of the Receiving Party under
Section 9.1.2. above shall not apply to the extent that the Receiving Party can
demonstrate that certain Confidential Information:

<PAGE>

                  (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 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.

            9.1.4. 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.

      9.2. Proprietary Materials.

            9.2.1. Ownership. Sankyo acknowledges and agrees that the ArQule
Compounds and any other Proprietary Materials provided to Sankyo and its
Affiliates under this Agreement are and shall remain the property of ArQule.
ArQule acknowledges and agrees that any Sankyo Compounds and any other
Proprietary Materials provided to ArQule under this Agreement are and shall
remain the property of Sankyo. The foregoing notwithstanding, the Parties agree
that ownership of any intellectual property rights in ArQule Derivative
Compounds shall be determined in accordance with Section 6.

            9.2.2. Restrictions on Use and Transfer. Sankyo shall use the ArQule
Compounds only for the purposes contemplated by this Agreement, and shall not
transfer the ArQule Compounds to any third party without the prior written
consent of ArQule. Except as expressly permitted herein, Sankyo shall not
attempt to identify the ArQule Compounds in the Mapping Array Libraries or
Compass Array Libraries. In the case of Proprietary Materials other than ArQule
Compounds, the Recipient agrees to use such Proprietary Materials only for the

<PAGE>

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 Section 9.2.2.

            9.2.3.. 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 the disposition of unused
ArQule Compounds shall be made in accordance with Section 12.4.

            9.2.4. Compliance with Law. The Recipient agrees to comply with all
international, national, 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.

            9.2.5.. 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. 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.

      9.3. Survival of Obligations. The obligations set forth in this Section 9
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 and Proprietary Materials to the Disclosing
Party shall survive until fulfilled.

10.   Representations and Warranties.

      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.

<PAGE>

11.   Indemnification and Insurance.

      11.1. Sankyo Indemnity Obligations. Sankyo agrees to defend, indemnify and
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 Section 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 Indemnitee and any other Party
represented by such counsel in such proceedings. The indemnity agreement in this
Section 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 Section 11, but the
omission so to deliver notice to Sankyo will not relieve it of any liability
that it may have to any Indemnitee otherwise than under this Section 11. The
Indemnitee under this Section 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.

      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.

<PAGE>

      12.1. Term. This Agreement shall commence on the Effective Date and
shall remain in effect until the expiration of the Research Period, 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 commits 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 7, Article 8 (with respect only to research-related
payments accrued at the time of termination but not yet paid and with respect to
milestone and royalty payments), Article 9, and Article 11, and Sections 6.2.,
6.3., 12.4., 13.3., 13.4., 13.5., and 13.10, shall survive the expiration or
termination of this Agreement. In addition, if ArQule terminates this Agreement
pursuant to Section 12.3., the provisions of Section 9.3.2. shall immediately
apply to all ArQule Compounds.

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 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.

<PAGE>

      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, but in the absence agreement the firm shall be the Center
      for Public Resources Institute for Dispute Resolution. 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).

                  (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 their appointment,
      then the third arbitrator shall be appointed by the Court of

<PAGE>

      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.

      13.9. 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                     19 Presidential Way
Shinagawa-ku                                Woburn, MA  01801
Tokyo 140 Japan                             Attention:  President
Attention:  Junichi Ryokai
Tel: 03 3492 3131                           Tel: (781) 994-0300
Fax: 03 5436 8561                           Fax: (781) 503-0009

                                            with a copy to:

<PAGE>

                                            Same Address
                                            Attention:  General Counsel
                                            Tel: (781) 994-0300
                                            Fax: (781) 503-0009

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 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.

<PAGE>

              [THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]

<PAGE>

      IN WITNESS WHEREOF, the undersigned have duly 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: Tetsuo Hiraoka                               Name: Stephen A. Hill, M.D.
Title: Executive Managing Director                 Title: President and Chief
       General Manager, Research Institute         Executive Officer

<PAGE>

                                   EXHIBIT A

                             Compound Specifications

1.    Compass Array Library.

The Compass Array Library is a diverse subset of approximately 25,000 compounds
that have computationally selected to represent at least 12.5% of the Mapping
Array Libraries to be generated during 2000 and 2001.

ArQule will provide approximately 1mg of each Compass Array compound dissolved
in 250 (mu)L of 100% DMSO (10 mM). The compounds will be provided in 96-well
plates with 80 filled wells per plate. Because ArQule performs 25% quality
control analysis of each Mapping Array Library corresponding to the Compass
Array Library, the purity and confirmation of molecular weight is similar to the
Mapping Array Library, as described below. A Markush structure file defining
each chemical theme is supplied with every shipment.

2.    Mapping Array Libraries.

The Mapping Array repository is a diverse screening library. The Mapping Array
Libraries produced in the year 2000 contain approximately 200,000 compounds. The
Mapping Array Libraries planned for production in the year 2001 will contain
approximately 200,000 compounds.

ArQule will provide 1 mg of each Mapping Array compound dissolved in 250(mu)L of
10mM 100% DMSO. The compounds will be provided in 96-well plates with up to 80
filled wells per plate. ArQule performs 25% quality control analysis of each
Mapping Array Library by HPLC/UV/ELSD for purity and flow injection mass
spectrometry for confirmation of molecular weight. Each Mapping Array Library is
on average more than 85% pure as determined by HPLC analysis. A Markush
structure file defining each chemical theme is supplied with every shipment.

3.    Confirmation Samples and Resynthesized Compounds.

As determined by the Research Committee, ArQule shall resynthesize and deliver
to Sankyo approximately five (5) mg of any Available Compound to enable Sankyo
to conduct screening activities in accordance with Subsection 3.2. ArQule will
resynthsize up to fifteen (15) compounds per quarter (60 annually), subject to
payments described in Section 8.1.3. ArQule will provide each resynthesized
compound as a dry solid, power or oil with a purity of 95% based on HPLC/UV,
ELSD.

                                     -30-

<PAGE>

4.    Directed Array Compounds.

Unless otherwise agreed to by the Research Committee, all ArQule Compounds
delivered as part of the Directed Arrays will be provided 30 mmol of compound in
DMSO in 96-well plates with up to 80 filled wells per plate. ArQule performs
100% quality control analysis of each Directed Array compound tested by
HPLC/UV/ELSD. The average purity of each compound is 85% as determined by HPLC
analysis. An SD file is supplied with every shipment.<PAGE>

                                                                   EXHIBIT 10.12

                               AMENDMENT NO. 1 TO
                      COMPOUND SUPPLY AND LICENSE AGREEMENT

      This Amendment No. 1, dated as of August __, 2000 (the "Effective Date"),
is between ArQule, Inc. ("ArQule"), a Delaware Corporation, and the R.W. Johnson
Pharmaceutical Research Institute ("PRI"), a division of Ortho-McNeil
Pharmaceutical, Inc., a Delaware Corporation.

                                 R E C I T A L S

      WHEREAS, PRI and ArQule entered into a Compound Supply and License
Agreement dated December 15, 1998 (the "Agreement") pursuant to which, among
other things, ArQule supplies PRI with Mapping Array Sets (as defined in the
Agreement);

      WHEREAS, ArQule has developed compound libraries that constitute diverse
subsets of its Mapping Array Sets, which ArQule has named Compass Array Sets (as
defined below);

      WHEREAS, PRI desires to access Compass Array Sets that correspond to
Mapping Array Sets produced by ArQule after June 30, 1999 and thereafter during
the term of the Agreement, and ArQule is willing to furnish PRI with such
Compass Array Sets under the terms and conditions of this Amendment; and

      WHEREAS, PRI and ArQule desire to make certain other revisions to the
Agreement, as specified in this Amendment.

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

1. Definitions. Capitalized terms used in this Amendment and not otherwise
defined herein shall have the meanings ascribed to such terms in the Agreement.

      1.1. Section 1.4 of the Agreement is hereby deleted and replaced with the
following:

                  "ArQule Compound" means a chemical compound provided by
                  ArQule to PRI under this Agreement, and specifically includes
                  all compounds in the Mapping Array Sets and Compass Array
                  Sets provided to PRI under the Mapping Array Program.

      1.2. The following definition is hereby added to the Agreement:

                  "Compass Array(TM) Set" means a set of ArQule Compounds
                  consisting of a diverse subset of each Mapping Array Set
                  produced by ArQule. Each Compass Array Set currently includes
                  at least approximately 12.5% of the total ArQule Compounds in

<PAGE>

            the corresponding Mapping Array Set to represent the chemical
            diversity present in that Mapping Array Set.

2. The following caption, "3.1 Delivery of Array Sets," is hereby added under
the caption, "3. Conduct of Mapping Array Program."

3. Section 3.1. is hereby redesignated Subsection 3.1.2.

4. The following subsection is hereby added to the Agreement:

                  3.1.1. Delivery of Compass Array Sets. ArQule shall furnish
      PRI with approximately 150 microliters of a 10 millimolar solution in DMSO
      of each ArQule Compound that is within the Compass Array Sets
      corresponding to the Mapping Array Sets delivered to PRI from July 1, 1999
      and thereafter during the term of the Agreement. The Compass Array Sets
      are delivered in 96 well microtiter plate format. The ArQule Compounds in
      each Compass Array Set shall have an average purity level of at least
      eighty-five percent (85%) as measured by standard analytical chemistry
      methods used at ArQule. ArQule shall use diligent efforts to deliver to
      PRI the Compass Array Sets as follows:

      (i)   within thirty (30) days after the Effective Date of this Amendment
            for Compass Array Sets corresponding to the Mapping Array Sets
            delivered to PRI from July 1, 1999 through December 31, 1999;

      (ii)  within ninety (90) days after the Effective Date of this Amendment
            for Compass Array Sets corresponding to the Mapping Array Sets
            delivered to PRI from January 1, 2000 through June 30, 2000; and

      (iii) for Compass Array Sets corresponding to Mapping Array Sets delivered
            to PRI after June 30, 2000, within one calendar quarter after PRI
            receives the corresponding Mapping Array Set.

      Except as provided in Section 3.3. below, ArQule shall have no
      obligation to identify the individual ArQule Compounds in the
      Compass Array Sets and PRI shall have no obligation to identify its
      Targets.

5. Section 3.2. is hereby deleted in its entirety and replaced with the
following:

            3.2. Screening of ArQule Compounds. Subject to the terms and
      conditions of this Agreement, ArQule hereby grants PRI and its Affiliates
      a nonexclusive, worldwide license (without the right to sublicense) under
      the ArQule Patent Rights and other rights in ArQule Technology to screen
      the ArQule Compounds in the Compass Array Sets and Mapping Array Sets
      against any Targets within the Screening Field. PRI agrees to use efforts
      consistent with its normal scientific practices to screen the ArQule
      Compounds in

                                        2
<PAGE>

      the Compass Array Sets and Mapping Array Sets against its Targets in the
      Screening Field.

6. The following sentence is hereby added to the end of Subsection 3.3.1. of the
Agreement:

      "PRI shall confirm its initial screening results for Licensed Compounds
      according to its usual internal procedures prior to confirmation with
      resynthesized compounds pursuant to Subsection 3.3.2. below. Once PRI
      confirms activity for a Licensed Compound, PRI shall disclose to ArQule
      the Target and the level of activity for such Licensed Compound.

7. Subsection 3.3.2. is hereby deleted in its entirety and replaced with the
following:

                  3.3.2. Resynthesized Compounds. If PRI requests resynthesized
      samples of a Licensed Compound, ArQule will supply PRI with a sufficient
      quantity (determined by the Research Committee but not more than 25 mg) of
      the resynthesized Licensed Compound to confirm activity and perform
      secondary assays within twenty-one (21) days from the date requested,
      unless synthesis starting materials are unavailable for such resynthesized
      Active Compound, subject to a maximum of forty (40) such requests in any
      one month. Within ninety (90) days after receiving the resynthesized
      Active Compound from ArQule to confirm activity, subject to extension by
      the Research Committee, PRI shall notify ArQule whether activity is
      confirmed.

8. In Subsection 3.3.3. entitled "Activation of Development Licenses", delete
the first sentence and replace with the following:

      "If PRI does not confirm activity within the ninety-day confirmation
      period for a resynthesized Licensed Compound, or if PRI has no further
      interest in that Licensed Compound for any other reason, the Licensed
      Compound shall revert to ArQule as provided in Section 7.5.

9. The following subsection is hereby added to the Agreement:

      3.3.4. Activity Reports. Within thirty (30) days after the conclusion of
      each calendar quarter, PRI shall furnish ArQule with a report that sets
      forth for each assay type the percentage of Active Compounds identified by
      PRI during that quarter in primary screens and confirmatory screens of
      each Compass Array Set and Mapping Array Set. For purposes of this
      Section, the term "assay type" shall mean a bound receptor, soluble
      receptor, enzyme, or whole cell assay.

10. The parties acknowledge and agree that, in accordance with the provisions of
this Amendment, ArQule has been relieved of its obligation to provide PRI with
confirmation samples as originally set forth in the first sentence of Subsection
3.3.2. of the Agreement and has accepted an obligation to furnish PRI with
Compass Array Sets under paragraph 4 of this Amendment (addition of new
Subsection 3.1.1). Accordingly, the parties further agree that the $350,000
resupply fee referenced in Section 5.2. of the Agreement as an allocation of the
annual delivery fee shall be substituted by a $350,000 service fee under the
same terms for the

                                        3
<PAGE>

preparation and delivery of the Compass Array Sets pursuant to this Amendment.
This change is merely a change in allocation and does not affect the total
amount of the annual delivery fee or any other payment terms under the
Agreement.

      IN WITNESS WHEREOF, the undersigned have duly executed and delivered this
Amendment No. 1 as a sealed instrument effective as of the date first above
written.

R.W. JOHNSON PHARMACEUTICAL RESEARCH INSTITUTE

By:
   _________________________________________
Name:
Title:

ARQULE, INC.

By:
   _________________________________________
Name:
Title:

                                        4

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