10-K

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2008 COMMISSION FILE NUMBER: 000-21429

ARQULE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

DELAWARE
(STATE OR OTHER JURISDICTION OF
INCORPORATION OR ORGANIZATION) 04-3221586
(I.R.S. EMPLOYER
IDENTIFICATION NO.)

19 PRESIDENTIAL WAY, WOBURN, MASSACHUSETTS 01801
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES INCLUDING ZIP CODE)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
(781) 994-0300

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

(TITLE OF EACH CLASS)	NAME OF EACH EXCHANGE ON WHICH REGISTERED
COMMON STOCK, $.01 PAR VALUE	The NASDAQ Stock Market LLC (NASDAQ Global Market)

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

NONE

        Indicate by check mark if the registrant is a well-known issuer, as defined in Rule 405 of the Securities Act. Yes o    No ý

        Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o    No ý

        Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý    No o

        Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

        Indicate by check mark whether the registrant is large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check One)

Large accelerated filer o Accelerated filer ý Non-accelerated filer o
(Do not check if a smaller reporting company) Smaller reporting company o

        Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o    No ý

        The aggregate market value of voting and non-voting common stock held by non-affiliates of the registrant as of June 30, 2008 was: $143,107,829

        There were 44,559,652 shares of the registrant's Common Stock outstanding as of February 20, 2009.

DOCUMENTS INCORPORATED BY REFERENCE

        Portions of the definitive proxy statement for the Registrant's Annual Meeting of Shareholders to be held on May 14, 2009, which will be filed with the Securities and Exchange Commission not later that 120 days after the registrant's fiscal year end of December 31, 2008, are incorporated by reference into Part III of the Form 10-K.

IMPORTANT FACTORS REGARDING FORWARD-LOOKING STATEMENTS

        You should carefully consider the risks described below together with all of the other information included in this Form 10-K, including Item 1A "Risk Factors," before making an investment decision. An investment in our common stock involves a high degree of risk. We operate in a dynamic and rapidly changing industry that involves numerous uncertainties. The risks and uncertainties described below are not the only ones we face. Other risks and uncertainties, including those that we do not currently consider material, may impair our business. If any of the risks discussed below actually occur, our business, financial condition, operating results or cash flows could be materially adversely affected. This could cause the trading price of our common stock to decline, and you may lose all or part of your investment.

        This Form 10-K, including information incorporated herein by reference, contains forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. All statements that are not descriptions of historical fact are forward-looking statements, based on estimates, assumptions and projections that are subject to risks and uncertainties. These statements can generally be identified by use of forward looking terminology such as "believes", "expects", "intends", "may", "will", "plans", "should", "anticipates," "potential" or similar terminology. Although we believe that the expectations reflected in such forward looking statements are reasonable as of the date thereof, such expectations are based on certain assumptions regarding the progress of product development efforts under collaborative agreements, the execution of new collaborative agreements, receipt of potential milestones and royalties under our collaborative agreements, government regulations, reliance on third parties to conduct clinical trials and perform research and analysis services, adequate financial resources, changes in economic and business conditions, and other factors relating to our growth. Such expectations may not materialize if product development efforts, including any necessary trials of our potential drug candidates, are delayed or suspended, if our compounds fail to demonstrate safety and efficiency, if positive early results are not repeated in later studies or in humans, if the therapeutic and value of our compounds are not realized, if planned acquisitions or negotiations with potential collaborators are delayed or unsuccessful, if we are unsuccessful at integrating acquired assets or technologies, or if other assumptions prove incorrect. The forward-looking statements contained herein represent the judgment of ArQule as of the date of this Form 10-K. ArQule disclaims any intent or obligation to update any forward-looking statement except to the extent required by law.

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PART I

ITEM 1.    BUSINESS

BUSINESS OVERVIEW

        We are a clinical-stage biotechnology company organized as a Delaware corporation in 1993 and engaged in the research and development of innovative cancer therapeutics directed toward molecular targets that we believe play critical roles in the development of human cancers. Our mission is to discover and develop novel products that target multiple tumor types, act selectively against cancer cells and are well tolerated by patients. We believe our clinical stage products represent potential best-in-class or first-in-class small molecule candidates with differentiated mechanisms of action.

        Our products and research programs are based on our understanding of biological processes that lead to the proliferation and metastasis of cancer cells, combined with our ability to generate product candidates possessing certain pre-selected, drug-like properties and designed to act with specificity against cancer cells. We believe that these qualities, when present from the earliest stages of product development, increase the likelihood of producing safe, effective and marketable drugs. We believe that our combined expertise in cancer biology and chemistry differentiates us from many companies at a similar stage of development.

        Our lead product is ARQ 197, an orally administered inhibitor of the c-Met receptor tyrosine kinase. ARQ 197 is currently being evaluated as monotherapy and in combination therapy in a Phase 2 clinical development program that includes trials in Microphthalmia Transcription Factor ("MiT")-associated tumors, non-small cell lung cancer ("NSCLC"), pancreatic adenocarcinoma and hepatocellular carcinoma ("HCC"). We have licensed commercial rights to ARQ 197 for human cancer indications to Daiichi Sankyo Co., Ltd. ("Daiichi Sankyo") in the U.S., Europe, South America and the rest of the world, excluding Japan and certain other Asian countries, where we have licensed commercial rights to Kyowa Hakko Kirin Co., Ltd. ("Kyowa Hakko Kirin"). Our separate agreements with these partners provide for possible future milestone payments, royalties on product sales, and development funding, in addition to payments that we have already received.

        Our product pipeline offers the potential for multiple therapeutic candidates based on diverse biological targets, mechanisms of action and chemistry. The most advanced of these programs is focused on the development of inhibitors of the Eg5 kinesin spindle protein, which include ARQ 621, for which we have filed an Investigational New Drug Application ("IND"). We have completed certain Phase 2 proof-of-principle trials with ARQ 501, a first-generation, intravenously administered novel activator of the cell's DNA damage response mechanism mediated by the E2F-1 transcription factor, and we have filed an IND for ARQ 761, a second-generation molecule from our E2F-1 program. We are in pre-clinical development with an inhibitor of the BRAF kinase.

        Our drug discovery efforts are focused primarily on the ArQule Kinase Inhibitor Platform ("AKIP™"), which we employ to generate a new class of compounds designed to inhibit a variety of kinases potently, selectively and without competing with adenosine triphosphate ("ATP"), an energy source for cells. We are currently assessing the potential of multiple kinases in oncology and other therapeutic areas as targets for this drug discovery platform, and we are seeking to generate and validate compounds that inhibit these kinase targets. We have signed a drug discovery agreement with Daiichi Sankyo that utilizes the capabilities of the AKIP platform to discover compounds that inhibit two such kinase targets in the field of oncology.

        All of our drug discovery efforts, including our kinase platform, are supported by the expertise we have derived from our heritage as a combinatorial chemistry company. This expertise, which has been validated through collaborations with Pfizer Inc. ("Pfizer"), Wyeth, Solvay and other corporate partners, is married to innovative biology to create a discovery engine marked by speed, efficiency and flexibility.

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CLINICAL STAGE PRODUCTS

ARQ 197

Introduction

        ARQ 197 is an orally available, small molecule that inhibits c-Met, the receptor tyrosine kinase of hepatocyte growth factor (HGF). Activation of c-Met is believed to play key roles in cancer cell growth, survival, angiogenesis, invasion and metastasis. The inappropriate expression of c-Met in many cancers and its role in controlling multiple signal transduction pathways involved in tumor growth and metastasis render it a compelling target for cancer therapy.

        ARQ 197 is a specific inhibitor of c-Met and does not compete with ATP for its binding to this kinase. We believe this specificity may help confer an attractive therapeutic profile based on a combination of safety and anti-cancer activity. In clinical studies to date, treatment with ARQ 197 has been well tolerated both as a single agent and in combination therapy, and objective tumor responses and prolonged stable disease have been observed across broad ranges of doses and tumors.

Clinical Trials

Phase 1

        We initiated a first Phase 1 clinical trial with ARQ 197 in late 2005. This open label, dose escalation trial included patients with multiple metastatic tumor types who had disease progression when treated with available therapy or for whom no standard systemic therapy existed. The primary objectives of the trial were to determine tolerability, safety and a recommended dosing regimen for Phase 2 trials.

        At the 2007 Annual Meeting of the American Society of Clinical Oncology ("ASCO") on June 2, 2007, we announced available data from this trial demonstrating that treatment with ARQ 197 was well tolerated over extended dosing periods, with approximately 60 percent of the evaluable patient population experiencing partial responses, minor responses or stable disease lasting eight weeks or longer. As measured by RECIST criteria (Response Evaluation Criteria in Solid Tumors), a partial response is at least a 30 percent decrease in target lesions, progressive disease is at least a 20 percent increase in target lesions, and stable disease is neither shrinkage sufficient to qualify for partial response nor increase sufficient to qualify for progressive disease. Minor response is not defined by RECIST criteria, but we define evidence of target lesion shrinkage of less than 30 percent as a minor response. Findings from this study resulted in a recommended Phase 2 dose of 120 mg twice daily (240 mg daily).

        Cancer patients tolerated treatment with ARQ 197 in this trial well. Most adverse events were mild and transient. No drug-related grade three or four adverse events (as defined by the National Cancer Institute) were reported. No dose-limiting toxicities were observed. Substantial plasma exposure, at levels several times the efficacious concentration predicted from in vitro studies, was maintained with oral dosing. Patient compliance with dosing was high, and there were no treatment interruptions due to adverse events.

        An analysis of tumor image data from this trial was presented at the 2007 AACR-NCI-EORTC International Conference on October 24, 2007. Findings from this analysis support a viable hypothesis of anti-metastatic effect conferred by ARQ 197 that merits additional investigation.

        Following a review of a subsequent Phase 1 trial with ARQ 197 conducted at the Royal Marsden Hospital (see next section, Phase 1 Dosing and Tissue Biopsy Study: Royal Marsden Hospital), the protocol for this first Phase 1 study was amended to enroll a cohort of patients treated at 360 mg twice daily. Future evaluations of active patients will occur periodically under the study protocol as part of our effort to generate potential signals of anti-cancer activity in other tumor types.

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Phase 1 Dosing and Tissue Biopsy Study: Royal Marsden Hospital

        Investigators at the Royal Marsden Hospital in the United Kingdom have conducted a Phase 1, dose-escalation clinical trial with ARQ 197, employing a twice daily continuous dosing schedule. Data from this trial were presented at the 2008 Annual Meeting of ASCO, showing that the compound is safe and well tolerated at oral doses up to 300 mg twice daily, with the dose-limiting toxicity ("DLT") of reversible neutropenia observed at 400 mg twice daily. Investigators reported that among the 11 evaluable patients in the trial to that date, stable disease was observed in seven patients, and prolonged stable disease (greater than 12 weeks) by RECIST for up to 32 weeks in five patients with multiple tumor types, including melanoma (two patients), Merkel cell carcinoma, chrondrosarcoma, and gastric cancer.

        Investigators established 300 mg twice daily as the maximum tolerated dose ("MTD") and recommended Phase 2 dose for ARQ 197. Pharmacokinetic parameters increased linearly with dosing up to 300 mg twice daily. Immunohistochemistry studies confirmed that ARQ 197 inhibited phosphorylated c-Met and phosphorylated focal adhesion kinase (FAK) expression in tumor biopsy samples from patient cohorts treated with doses from 100 mg twice daily to 300 mg twice daily. Analysis of blood samples showed a reduction in circulating endothelial cells, suggesting the anti-angiogenic potential of ARQ 197, a finding that will be explored further in additional patients. The trial is continuing to explore the relevance of additional biomarkers, which may increase our understanding of the therapeutic activity of this compound and the related course of the disease, as well as to generate potential signals of anti-cancer activity in other tumor types.

Phase 2

        We are currently conducting Phase 2 clinical trials with ARQ 197 in four tumor types: (1) MiT-associated tumors, (2) NSCLC, (3) pancreatic adenocarcinoma, and (4) HCC. The dose level of ARQ 197 employed in all of these trials is 360 mg twice daily, reflecting a small increase above the MTD of 300 mg twice daily established in the Royal Marsden trial. This increase results from a bioequivalence analysis related to formulation improvements. Our initial clinical trial dose of ARQ 197, 120 mg twice daily, was based on earlier Phase 1 data related to anti-cancer activity observed with this dose and on plasma exposure data generated before an MTD was identified. We believe that the higher 360 mg twice daily dose will maximize the therapeutic benefit of this compound. We and our partner, Daiichi Sankyo, may consider trials in additional tumor types based on our expanding knowledge from the current development programs and the potential broad-spectrum utility of ARQ 197 on c-Met-mediated oncogenic processes in a variety of cancers, as well as its potential use in combination with established anti-cancer therapies.

MiT Tumor Trial

        MiT tumors include clear cell sarcoma (CCS), alveolar soft parts sarcoma (ASPS) and translocation-associated renal cell carcinoma (RCC). They are linked biologically through a common chromosomal abnormality that drives the over-expression of c-Met and the development of cancer. We have demonstrated the ability of ARQ 197 to inhibit activation of c-Met and to kill clear cell sarcoma cells in vitro.

        In October 2007, we initiated a Phase 2 trial in MiT tumors that employed the original dose of 120 mg twice daily. The dose was increased to 360 mg twice daily in October 2008 following the identification of an MTD in the Royal Marsden trial. The primary objective of the trial is to determine the overall response rate in patients treated with ARQ 197. Secondary objectives include the evaluation of progression-free survival time, as well as six-month and one-year overall survival in these patients.

        During the first stage of the study, 23 patients were enrolled and treated with the 120 mg dose. As announced on October 2, 2008, among 14 patients evaluable for efficacy, a partial response was

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observed in a patient with clear cell sarcoma, and 10 patients demonstrated stable disease. Based on the achievement of the protocol-defined endpoint of an objective response in the first stage of this trial, we have proceeded to the second stage, where approximately 22 additional patients will be enrolled at the 360 mg dose level. We have also increased the dose administered to several patients from the first stage who are continuing to participate in this trial.

Pancreatic Adenocarcinoma Trial

        In pancreatic cancer, between 78 and 88 percent of tumor tissue samples from patients are estimated to contain over-expressed c-Met, indicating that the c-Met signaling pathway may play a role in the development of this disease and that inhibition of this pathway may represent a viable therapeutic intervention. ARQ 197 has shown anti-cancer activity in animal models of human pancreatic cancer.

        In October 2007, we initiated an open-label, randomized Phase 2 trial in Eastern Europe in which approximately 72 patients were expected to be treated with either ARQ 197 or gemcitabine. Eligible patients were randomized to receive either 120 mg of ARQ 197 orally twice daily or intravenous infusion of gemcitabine at a dose of 1000 mg/m² (meter squared) and evaluated for overall survival, progression-free survival and overall response rate.

        A review of interim data from this trial conducted in 2008, supported by discussions with key opinion leaders, suggests that chemotherapy is a preferable approach to kinase inhibition, particularly among the late-stage cancer patients who have been enrolled in this trial, and highlight the genetic complexity of pancreatic cancer that has been underscored by the limited therapeutic benefit of targeted drugs administered as monotherapy. We believe that targeted therapy such as ARQ 197 may be best employed in the context of combination therapy. Consequently, we are planning to modify the original pancreatic clinical trial protocol by adding a combination arm that will consist of ARQ 197 at 360 mg twice daily in combination with gemcitabine. To proceed with this plan, we will first need to confirm the safety of this combination compared to both individual arms. Based on a review of data generated in all arms, we will make a decision about initiating an additional Phase 2 randomized study to evaluate gemcitabine alone against gemcitabine in combination with ARQ 197 at 360 mg twice daily.

Non-Small Cell Lung Cancer

        Scientific data show that the development of resistance in patients with NSCLC to therapy with inhibitors of the epidermal growth factor receptor ("EGFR"), such as erlotinib, may be linked to an increase in c-Met signaling. We believe the inhibition of c-Met may offer a new strategy in overcoming this resistance and treating these tumors. In addition, pre-clinical efficacy studies in NSCLC cells have demonstrated synergy between ARQ 197 and erlotinib in halting cancer cell proliferation.

        In March 2008, we initiated a Phase 1/2 clinical trial program of ARQ 197 administered in combination with erlotinib in non-small cell lung cancer. The Phase 1 lead-in trial in this program was designed to determine the safety, tolerability and recommended Phase 2 dose of ARQ 197 when administered in combination with erlotinib in patients with these tumors. During 2008, we successfully completed the Phase 1 trial, demonstrating that the combination of ARQ 197 and erlotinib was well tolerated at the recommended dose for each drug. We began enrolling patients in the randomized Phase 2 trial in October 2008. The Phase 2 trial is a randomized, double-blind trial comparing combination therapy with ARQ 197, and erlotinib, against erlotinib and placebo. We expect to enroll approximately 155 patients, with the primary endpoint being progression-free survival.

Hepatocellular Carcinoma

        Scientific literature provides evidence of the aberrant activation of the c-Met cell signaling pathway in HCC. The dysregulation of c-Met and hepatocyte growth factor expression has been shown to be

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common in this disease and associated with poor prognoses in patients with HCC. We believe that ARQ 197 offers an attractive opportunity for physicians based on its selectivity for c-Met, demonstrated signs of activity in clinical trials to date, and favorable side effect profile, which suggest its utility as monotherapy and its potential value in combination with existing therapies.

        We initiated a Phase 1-2 clinical trial program of ARQ 197 in HCC in March 2009. This program is expected to include trials of ARQ 197 both as single agent and in combination therapy with established and potential therapeutic alternatives in HCC. We plan to dose the first patient in the Phase 1 ARQ 197 monotherapy safety trial in HCC in February 2009. Pending the successful completion of this study, we will move into a Phase 2, single agent trial and also explore a Phase 1-2 combination therapy trial program with sorafenib.

Additional Clinical Activities

        In addition to the Phase 2 indications described above, we are pursuing certain clinical research, within the context of ongoing trials, which is focused on the generation of anti-cancer signals in other indications. We are also seeking to augment the scope of our clinical development with ARQ 197 in cooperation with our partners, Daiichi Sankyo and Kyowa Hakko Kirin, which may lead to trials in additional indications.

ARQ 501, ARQ 761 and ARQ 171: the E2F-1 Program

        ARQ 501, ARQ 761, and ARQ 171 are designed to kill cancer cells selectively while sparing normal cells through the direct activation of DNA damage response/checkpoint pathways believed to be regulated by the E2F-1 regulatory protein, thereby restoring the ability of the cell to recognize DNA damage and initiating the process of apoptosis, or programmed cell death, in these cells. ARQ 501 is the first product generated in this program, while ARQ 761 and ARQ 171 are second-generation compounds.

        Roche had an option to license from us worldwide rights for the development and commercialization of all products resulting from our E2F-1 program in the field of cancer therapy based on delivery of a clinical data package from certain trials with ARQ 501, as well as a recommended Phase 2 dose for a second-generation E2F-1 compound. Roche notified us in December 2008 that it did not intend to exercise its option to license the E2F-1 program, and therefore Roche's rights to develop and commercialize product candidates under our agreement terminated at the end of 2008. On January 30, 2009, the Company notified Roche that, in accordance with the terms of the agreement, it had exercised its right to terminate the agreement. As a result, all rights and licenses granted by the Company to Roche under the agreement will also be terminated. We retain all rights to the E2F-1 program, have filed an IND for ARQ 761 and are currently exploring options for the future development of this compound.

PRECLINICAL AND DISCOVERY PROGRAMS

        We have a number of pre-clinical and research-stage programs based on product candidates directed toward molecular targets that we believe play critical roles in the development of human cancers and therefore may be attractive points for therapeutic intervention. The targets, mechanisms of action and chemistry related to compounds generated from these programs differ, offering the potential for multiple therapeutic opportunities.

ARQ 621: Eg5 Inhibitor

        In December 2008, the U.S. Food and Drug Administration ("FDA") accepted an IND for ARQ 621, a product generated from our most advanced pre-clinical program, focused on inhibition of the Eg5 kinesin spindle protein. Eg5 is a member of the kinesin motor protein super family, each

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member of which is believed to have a specific role in mitosis. Recent scientific literature on the additional role of Eg5 as a potential oncogene (cancer-causing gene) confirms the validity of this protein as a cancer therapy target. ARQ 621 has been shown pre-clinically to inhibit Eg5 potently and selectively and to induce cell death across multiple human cancer cell lines in vitro and in vivo, with low bone marrow toxicity in multiple animal models. We plan to initiate a Phase 1 trial with this compound in the first half of 2009.

Additional Pre-Clinical Program

        The FDA has also accepted an IND for ARQ 761, a second-generation E2F-1 activator, and we are currently exploring options for the future development of this compound. The molecular target of our next most advanced pre-clinical program is the BRAF Kinase. Mutations of this enzyme have been associated with malignant melanomas in human patients, and we are pursuing pre-clinical development of a lead candidate from this program.

AKIP™ Discovery Platform

        During 2008, we elucidated a novel binding mode of ARQ 197 to its target, the c-Met receptor kinase. We have completed initial research in the human kinome (consisting of 518 human kinase genes), and we have identified similar binding sites in more than 100 kinases, which has led to the establishment of the AKIP™ platform. We believe we have within this platform the capability to design novel kinase inhibitors that encompass new chemical spaces for an expanding intellectual property estate.

        We are actively designing such compounds and performing in silico (computer) screening to identify new libraries of lead compounds that can be synthesized and purified using our proprietary robotic parallel chemistry platform, which includes high throughput chemical purification capabilities. This platform is coupled with a high throughput robotic-assisted kinase screen and biophysical assay.

        We believe the application of the discovery engine based on these capabilities will enable us to identify multiple chemical scaffolds for lead compound optimization directed to kinase targets in a short period of time relative to drug discovery timelines. Furthermore, the ability of small molecules that inhibit kinases without competing with ATP for binding (the ATP binding site is highly conserved across different kinases) can lead to fewer off-target side effects.

        We anticipate that the resulting kinase inhibitors can be applied to a variety of therapeutically relevant kinases implicated in a broad range of human diseases in addition to cancer. We will seek to expand the applications of this proprietary drug discovery platform through additional collaborative research programs as well as through our own internal discovery and development activities in multiple therapeutic areas.

        In November 2008, we entered into our first collaboration utilizing the AKIP™ platform capabilities in an agreement with Daiichi Sankyo. Pursuant to this agreement, we are applying our proprietary technology and know-how from this platform for the discovery of selective inhibitors of two target kinases in the field of oncology.

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PRODUCT PORTFOLIO

ALLIANCES

Daiichi Sankyo Co., Ltd.

        We have entered into two agreements with Daiichi Sankyo that form the basis of a strategic relationship for the development and discovery of novel oncology therapeutics. The first of these agreements described in a binding letter of intent signed on November 7, 2008 and superseded by a definitive agreement signed on December 18, 2008, is focused on the co-development of ARQ 197 to treat cancer. The second, signed on November 7, 2008, is focused on the application of our AKIP™ platform to develop a new generation of highly selective, anti-cancer kinase inhibitors.

ARQ 197 Agreement

        We have entered into a license, co-development and co-commercialization agreement with Daiichi Sankyo under which the two companies will collaborate to conduct research, clinical trials and the commercialization of ARQ 197 in human cancer indications in the U.S., Europe, South America and the rest of the world, excluding Japan, China (including Hong Kong), South Korea and Taiwan, where Kyowa Hakko Kirin has exclusive rights for development and commercialization.

        The agreement provides for a $60 million cash upfront licensing payment from Daiichi Sankyo to us, which we received in December 2008. In addition, it includes significant development and sales milestone payments. We and Daiichi Sankyo will co-develop and share equally the costs of Phase 2 and Phase 3 clinical studies, with our share of Phase 3 costs payable solely from milestone and royalty payments by Daiichi Sankyo. Upon commercialization, we will receive tiered double-digit royalties from Daiichi Sankyo on net sales of ARQ 197 commensurate with the magnitude of the transaction. We retain the option to participate in the commercialization of ARQ 197 in the U.S. On a combined basis, our agreements with Daiichi Sankyo and Kyowa Hakko Kirin (see Kyowa Hakko Kirin below), include

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total upfront payments of $90 million and provide for total upfront and potential milestone payments in excess of $750 million.

        The duration and termination of the agreement is tied to future events. Unless earlier terminated due to breach, insolvency or upon 90 days notice if prior to Phase 3 clinical trials or 180 days notice if on or after the beginning of Phase 3 clinical trials by Daiichi, the agreement shall continue until the later of (i) such time as Daiichi is no longer developing at least one licensed product or (ii) if Daiichi has commercialized a licensed product or products, such time as all royalty terms for all licensed products have ended. The royalty term, on a country-by country basis for a product, ends as of the later of (i) the expiration of the last valid claim under a patent covering the manufacture, use, or sale of a licensed product or (ii) a certain number of years from the date of the commercial sale of the licensed product in such country.

        We believe this alliance with Daiichi Sankyo will help realize the therapeutic potential of ARQ 197 and define its utility as monotherapy and as part of combination therapy in multiple cancer indications. It also allows us to establish a founding commercial presence in the U.S. that will complement Daiichi Sankyo's primary commercialization effort for ARQ 197.

Kinase Inhibitor Discovery Agreement

        We have entered into a research collaboration, exclusive license and co-commercialization agreement with Daiichi Sankyo under which we will apply our proprietary technology and know-how from our AKIP™ platform for the discovery of therapeutic compounds that selectively inhibit certain kinases. The agreement defines two such kinase targets, and Daiichi Sankyo will have an option to license compounds directed to these targets following the completion of certain pre-clinical studies.

        The agreement provides for a $15 million upfront payment, which we have received, and payments in research support for the first two years of the collaboration, licensing fees for compounds discovered as a result of this research, milestone payments related to clinical development, regulatory review and sales, and royalty payments. We retain the option to co-commercialize licensed products developed under this agreement in the U.S.

        The duration and termination of the agreement is tied to future events. Unless earlier terminated due to breach, insolvency or upon 90 days notice by Daiichi, the agreement terminates on the later of (i) the expiration of the research collaboration period, or (ii) various periods specified in the agreement for development and commercialization of products. If Daiichi has commercialized a licensed product or products, the agreement will continue in force until such time as all royalty terms for all licensed products have ended. The royalty term, on a country-by country basis for a product, ends as of the later of (i) the expiration of the last valid claim under a patent covering the manufacture, use, or sale of a licensed product or (ii) a certain number of years from the date of the commercial sale of the licensed product in such country.

Kyowa Hakko Kirin Co., Ltd.

        On April 27, 2007, we announced an exclusive license agreement with Kyowa Hakko Kirin to develop and commercialize ARQ 197 in Japan and parts of Asia. The agreement includes $123 million in upfront and potential development milestone payments from Kyowa Hakko Kirin to ArQule, including $30 million in upfront licensing payments that we received in 2007. In addition, the agreement includes sales milestone payments.

        In addition to the upfront and possible development and regulatory milestone payments totaling $123 million, the Company will be eligible for future milestone payments based on the achievement of certain levels of net sales. The Company will recognize the payments, if any, as revenue in accordance with its revenue recognition policies. As of December 31, 2008, the Company has not recognized any

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revenue from these sales milestone payments, and there can be no assurance that it will do so in the future.

        The duration and termination of the agreement is tied to future events. Unless earlier terminated due to breach, insolvency or upon 90 days notice by Kyowa, the agreement terminates on the date that the last royalty term expires in all countries in the territory. The royalty term ends as of the later of (i) the expiration of the last pending patent application or expiration of the patent in the country covering the manufacture, use, or sale of a licensed product or (ii) a certain number of years from the date of the commercial launch in such country of such license product.

        Upon commercialization, ArQule will receive tiered royalties in the mid-teen to low-twenty percent range from Kyowa Hakko Kirin on net sales of ARQ 197. Kyowa Hakko Kirin will be responsible for clinical development costs and commercialization of the compound in certain Asian countries, consisting of Japan, China (including Hong Kong), South Korea and Taiwan.

        In February 2008, we received a $3 million milestone payment from Kyowa Hakko Kirin marking the initiation by Kyowa Hakko Kirin of a Phase 1, dose escalation trial in Japan with ARQ 197. This payment was made under the terms of the exclusive license agreement between the two companies.

BUSINESS STRATEGY

2009 Operational Goals

ARQ 197 / c-Met Program

        During 2009, we will pursue the clinical development of ARQ 197 through:

•

completion of patient enrollment in the Phase 2 monotherapy trial in MiT tumors and preparation to move into Phase 3 if Phase 2 endpoints are met;

•

substantial completion of patient enrollment in our randomized Phase 2 combination therapy trial in NSCLC with erlotinib;

•

initiation of patient enrollment in the pharmacokinetic combination trial with gemcitabine as part of the modified pancreatic cancer program;

•

completion of enrollment in the Phase 1 monotherapy trial in HCC and, pending the results of that trial, initiation of Phase 2 trials in monotherapy and/or combination therapy with sorafenib;

•

initiation of patient enrollment in the pharmacokinetic combination trial with sorafenib.

Corporate Partnerships

        We will integrate our clinical development activities related to ARQ 197 with Daiichi Sankyo, and we will work closely with both Daiichi Sankyo and Kyowa Hakko Kirin to coordinate a global development plan for ARQ 197. These efforts will include the exploration of additional trials and the ongoing evaluation of clinical data generated during the year to determine our advanced clinical development and regulatory strategy.

Pipeline

        We plan to advance our pre-clinical pipeline of product candidates through:

•

completion of our Phase 1 trial with ARQ 621;

•

identification of an additional candidate for IND filing in the first half of 2010.

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AKIP™ Discovery Platform

        We will pursue the development of this platform under our agreement with Daiichi Sankyo, which is focused on two kinase targets in the field of oncology. We will seek to enter into additional collaborations that apply the capabilities of this platform toward validated kinase targets in oncology or another therapeutic area. In addition, we will independently identify and conduct pre-clinical development with proprietary product candidates generated from this platform.

Drug Discovery and Development Strategy

        Our strategy for developing the Company and specific compounds into commercial products has the following components:

        Grow organically and through business development.    We plan to grow both organically and through business development activities that take advantage of our product and technology assets. Organic growth will be based on our advancement of internally defined product candidates from pre-clinical through clinical development. These candidates will be based upon scientific platforms within the Company and directed toward targets with validated roles in oncogenic processes and potentially in other therapeutic areas. Their design will be informed by our combined expertise in chemistry and cancer biology that we believe differentiates us from many of our competitors.

        Simultaneously, we will consider a broad range of business development activities potentially encompassing product and technology acquisitions, licensing agreements and corporate combinations that will help expand the overall scope of product development and potentially accelerate the implementation of a commercialization infrastructure. Such activities offer the opportunity to leverage the capabilities of a potential partner with resources complementary to ours in drug discovery and development. We may also continue to invest in technology and personnel to enhance or expand our capabilities in drug discovery.

        Focus on cancer, a market with a large unmet need.    Cancer is the second most common cause of death in the western world. According to the American Cancer Society, approximately 565,000 cancer-related deaths were projected to occur and 1.4 million new cases were projected to be diagnosed in the U.S. during 2008. Demographic trends and improved screening are expected to increase the rate of cancer diagnoses, as 85 percent of cancers occur in the over-55 year old population. The National Cancer Institute estimates that between 2001 and 2005 the median age of cancer patients at death was 73, and the overall healthcare cost of cancer in the U.S. during 2007 was $219 billion.

        Medical therapy for cancer has historically included surgery, cytotoxic (poisonous to cells) chemotherapy and radiation. While chemotherapies have evolved, many are still harmful to all rapidly dividing cells. More recently, a number of alternative therapies that are target specific have been introduced. We believe that targeted approaches to treating cancer, such as those we are pursuing, have the potential to be more selective for cancer cells than traditional chemotherapies.

        Cancer compounds are eligible for potential accelerated regulatory approval, and we will pursue opportunities for such approval as appropriate. Once on the market, with supportive data the agents may be approved for additional indications.

        Utilize our AKIP discovery platform.    We have elucidated a novel binding mode of ARQ 197 to its target, the c-Met receptor kinase. We have completed initial research in the human kinome (consisting of 518 human kinase genes) and identified similar binding sites in more than 100 kinases, which has led to the establishment of the AKIP platform. We believe we have within this platform the capability to design novel kinase inhibitors with an expanding intellectual property estate that encompasses new chemical spaces.

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        We anticipate that application of this discovery engine will lead to the identification of multiple chemical scaffolds for lead compound optimization directed to kinase targets in a short period of time relative to drug discovery timelines. We believe the resulting kinase inhibitors can be applied to a variety of therapeutically relevant kinases implicated in a broad range of human diseases in addition to cancer, and we will seek to expand this proprietary drug discovery platform through additional collaborative research programs as well as through our own internal discovery and development activities in multiple therapeutic areas.

        Benefit from the resources and strengths of collaborators.    In April 2007, we announced that we entered into an exclusive license agreement with Kyowa Hakko Kirin to develop and commercialize ARQ 197 in Japan and parts of Asia, and in November 2008, we entered into a strategic relationship with Daiichi Sankyo to develop and commercialization ARQ 197 in those areas of the world not covered by the Kyowa Hakko Kirin agreement, as well as to develop a new generation of highly selective kinase inhibitors by applying our AKIP™ platform. We benefit from the resources and expertise of these partners, and we intend to pursue future partnership arrangements as appropriate when the capabilities of a potential partner complement our strengths in drug discovery and development.

        Continue to exploit our strength in chemistry for drug discovery and development.    We have developed a chemistry-based drug discovery technology platform designed to create small molecules that possess drug-like characteristics. We believe that identifying drug-like characteristics early in discovery increases the likelihood that small molecules reaching preclinical development will have a greater potential to become medicines. Without such a technology platform, the traditional approach is to develop small molecules that have demonstrated activity toward biological targets, with little regard for whether the molecules otherwise would make good medicines. In our view, a drug that has the best set of drug-like characteristics for its indication (i.e., one that is the most effective and has the fewest side effects) will ultimately generate the most revenue in its category, even if it is not the first to become available on the market.

PATENTS AND PROPRIETY RIGHTS

        We rely principally on patent and trade secret protection for our intellectual property, both in the U.S. and other countries. While many patent applications have been filed in the U.S., the European Union ("E.U.") and other foreign countries with respect to our cancer programs, the majority of these have not yet been issued or allowed. The patent positions of companies in the biotechnology industry and the pharmaceutical industry are highly uncertain and involve complex legal and factual questions. Therefore, we cannot predict the breadth of claims, if any, that may be allowed under any of our patent applications, or the enforceability of any of our issued patents.

        Patents extend for varying periods according to the date of patent filing or grant and the legal term of patents in the various countries where patent protection is obtained. The actual protection afforded by a patent, which can vary from country to country, depends on the type of patent, the scope of its coverage and the availability of legal remedies in the country.

        As and when needed to support our current or future research and development programs, we may from time to time obtain rights under patents and other intellectual property owned by other parties through permanent or limited duration licenses or assignments of relevant intellectual property. These may include exclusive and nonexclusive licenses from medical and academic institutions, and industry sources as well as generally available commercial licenses. For our current clinical and research programs, we are not a party to any material intellectual property agreement under which we could lose access to a technology necessary to continue research and development of our products if we failed to fulfill our obligations thereunder. We anticipate that we will continue to seek intellectual property

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rights from external sources where the applicable technology complements our research and development efforts.

        We currently have an issued composition of matter patent for the Company's lead compound in its c-Met program, ARQ 197, in Japan. This issued and allowed patent will expire in February 2026. We also have an issued patent in the U.S. relating to the preparation of an intermediate in the synthesis of ARQ 197, which expires in December 2020. In addition, we have pending U.S., European and other foreign applications covering the composition of this compound, pharmaceutical compositions containing this compound, and the therapeutic uses of this compound in the treatment of cancer.

        With respect to the E2F-1 Program, we have issued patents and pending applications that cover the formulations, syntheses and therapeutic uses of ARQ 501 in the treatment of cancer. ARQ 501 is derived from a naturally occurring substance, and we do not have patents that cover the composition of this compound. Our current lead compound in the E2F-1 Program, ARQ 761, is a reformulation of ARQ 501 and we have pending U.S., European and other foreign applications covering the composition of this compound, pharmaceutical compositions containing this compound, and the therapeutic uses of this compound in the treatment of cancer. Our issued and allowed patents for the E2F-1 Program have expiration dates which range from February 2018 to July 2025.

        In an effort to maintain the confidentiality and ownership of our trade secrets and proprietary information, we require all of our employees and consultants to sign confidentiality agreements. Employees and consultants involved in scientific and technical endeavors also sign invention assignment agreements. We intend these confidentiality and assignment agreements to protect our proprietary information by controlling the disclosure and use of technology to which we have rights. These agreements also provide that we will own all the proprietary technology developed at ArQule or developed using our resources.

        "ArQule", the ArQule logo, "Directed Array", "Mapping Array" and "AMAP" are trademarks of ArQule that are registered or entitled to be registered in the U.S. Patent and Trademark Office. The terms "AMAP", "ArQule Reactor", "Compass Array", "Custom Array", "MapMaker", "Optimal Chemical Entities", "OCEs", "Parallel Track", and "PrepQule" are trademarks of ArQule. The term "Activated Checkpoint Therapy" is a registered trademark of ArQule.

COMPETITION

        The pharmaceutical and biotechnology industries are highly competitive. We face intense competition from organizations such as large pharmaceutical companies, biotechnology companies and academic and research organizations. The major pharmaceutical and biotechnology organizations competing with us have greater capital resources, larger overall research and development staff and facilities and considerably more experience in drug development and commercialization. Consequently, we face competition on several fronts, including:

•

competition for collaborators and investors;

•

recruitment and retention of highly qualified scientific and management personnel;

•

competition for qualified subjects for our clinical studies of our drug candidates, which may result in longer and more costly clinical trials;

•

with respect to our cancer drug development programs, other companies have potential drugs in preclinical and clinical trials that may result in effective, commercially successful treatments for the same cancers we target;

•

advancement of a discovery and development portfolio of anti-cancer candidates that are selective for cancer cells and applicable across a broad spectrum of cancer types;

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•

securing partners to co-develop and advance our drug candidates through later-stage clinical trials and beyond.

        In the area of small molecule anti-cancer therapeutics, we have identified a number of companies that have clinical development programs and focused research and development in small molecule approaches to cancer, including: Ariad Pharmaceuticals, Inc., Array BioPharma Inc., Astex Therapeutics, Cell Genesys, Inc., Cell Therapeutics, Inc., Curis, Inc., Cytokinetics, Inc., Exelixis, Inc., Idera Pharmaceuticals, Inc., Infinity Pharmaceuticals, Inc., Kosan Biosciences, Inc., Onyx Pharmaceuticals, Inc., OSI Pharmaceuticals, Inc., Oxigene, Inc., Pharmacopeia, Inc., Plexxikon, Inc.,Telik, Inc., and Vertex Pharmaceuticals Inc.

        In addition, with respect to ARQ 197, we are aware of a number of companies that are or may be pursuing a number of different approaches to c-Met inhibition, including Amgen Inc., AVEO Pharmaceuticals, Inc., Bristol-Myers Squibb Company, Cephalon, Inc., Compugen Ltd., Eli Lilly & Company, Exelixis, Inc., Genentech, Inc., GlaxoSmithKline, Johnson & Johnson, Merck & Co., Inc., Methylgene Inc., Pfizer, Schering-Plough, and Supergen Inc. There can be no assurance that our competitors will not develop more effective or more affordable products or technology or achieve earlier product development and commercialization than ArQule, thus rendering our technologies and/or products obsolete, uncompetitive or uneconomical.

GOVERNMENT REGULATION

        Virtually all pharmaceutical and biotechnology products that our collaborative partners or we develop will require regulatory approval by governmental agencies prior to commercialization. The nature and the extent to which these regulations apply vary depending on the nature of the products. In particular, human pharmaceutical products are subject to rigorous preclinical and clinical testing and other approval procedures by the FDA or the applicable regulatory authorities in countries other than the U.S. Various federal and, in some cases, state statutes and regulations also govern or influence the manufacturing, safety, labeling, storage, record keeping and marketing of these products. The process of obtaining these approvals and the subsequent compliance with appropriate statutes and regulations are time consuming and require substantial resources, and the outcome of these regulatory activities is uncertain.

        Generally, in order to gain marketing authorization, a company first must conduct preclinical studies in the laboratory and in animal models to gain preliminary information on a compound's activity and to identify potential safety problems. Preclinical studies must be conducted in accordance with applicable regulations of the relevant regulatory authority (e.g. FDA in the U.S., European Medicines Evaluation Agency ("EMEA") in E.U.). The results of these studies are submitted as a part of an IND application with the FDA or a Clinical Trial Application ("CTA") application with the appropriate regulatory authority outside of the United States. The regulatory agency involved must review the data in the application before human clinical trials of an investigational drug can commence. If the regulatory authority does not object, a drug developer can begin clinical trials after expiration of a specified statutory period following submission of the application. Notwithstanding that the regulatory authority did not respond during the thirty-day, post-submission review period, the regulatory authority may at any time re-evaluate the adequacy of the application and require additional information about any aspect of the IND or CTA application and corresponding clinical trial, e.g. preclinical testing, drug formulation and manufacture, dosing regimens and drug administration or potential safety risks.

        In order to eventually commercialize any products, we or our collaborator will be required to initiate and oversee clinical studies under an IND or CTA to demonstrate the safety and efficacy that are necessary to obtain marketing approval. Clinical trials are normally done in three phases and generally take several years, but may take longer to complete. Furthermore, a regulatory authority may suspend clinical trials at any time if it believes that the subjects participating in trials are being exposed

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to unacceptable risks or if the regulatory authority finds deficiencies in the conduct of the trials or other problems with our product under development.

        After completion of clinical trials of a new product, regulatory marketing approval must be obtained. If the product is classified as a new pharmaceutical, our collaborator or we will be required to file a New Drug Application ("NDA") or Marketing Authorization Application (MAA), and receive approval before commercial marketing of the drug. The marketing application contains, among other things, the results of the non-clinical and clinical testing of the drug. Marketing applications submitted to any regulatory authority can take several years to obtain approval and the regulatory authority is not obligated to grant approval at all. A regulatory agency can condition marketing approval on the conduct of costly post-marketing follow-up studies or can place restrictions on the sale or marketing of the drug in order to manage risks.

        Even if regulatory clearances are obtained, a marketed product is subject to continual review and ongoing regulatory obligations. If and when a regulatory authority approves any of our or our collaborators' products under development, the manufacture and marketing of these products will be subject to continuing regulation, including compliance with current Good Manufacturing Practices ("cGMP"), adverse event reporting requirements and prohibitions on promoting a product for unapproved uses or making false or misleading statements or omissions with respect to a drug in advertising or promotion. Later discovery of previously unknown problems or failure to comply with the applicable regulatory requirements may result in restrictions on the marketing of a product or withdrawal of the product from the market as well as possible civil or criminal sanctions. Various federal and, in some cases, state statutes and regulations also govern or influence the manufacturing, safety, labeling, storage, record keeping and marketing of pharmaceutical products.

        For marketing outside the U.S., we or our partners will be subject to foreign regulatory requirements governing human clinical trials, marketing approval and post-marketing activities for pharmaceutical products and biologics. The requirements governing the conduct of clinical trials, product licensing, pricing and reimbursement vary widely from country to country.

EMPLOYEES

        As of February 1, 2009, we employed 107 people in Woburn, Massachusetts. Of that total, 77 are engaged in research and development and 30 in general and administration, and 42 hold Ph.D.s, 5 hold M.D.s and 25 hold Masters in the Sciences.

CERTAIN OTHER INFORMATION

        We file annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission ("SEC"). You may read and copy any document we file at the SEC's Public Reference Room at 100 F Street, N.E., Washington D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the public reference room. The SEC maintains a website at http://www.sec.gov that contains reports, proxy and information statements and other information concerning filers. We also maintain a web site at http://www.arqule.com that provides additional information about our company and links to documents we file with the SEC. The Company's Corporate Governance Guidelines; the charters of the Audit Committee, the Compensation, Nominating and Governance Committee, and the Science Committee; and the Code of Conduct are also available on the Company's website.

EXECUTIVE OFFICERS

        Set forth below is certain information regarding our current executive officers, including their respective ages as of February 1, 2009. Paolo Pucci's appointment as Chief Executive Officer and a member of the board of directors was announced on April 15, 2008. He succeeds Dr. Stephen A. Hill,

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the previous President and Chief Executive Officer, who joined Solvay Pharmaceuticals, Inc. (U.S.) as President and Chief Executive Officer on April 1, 2008. The appointment of Dr. Brian Schwartz as Chief Medical Officer was announced on June 20, 2008. Dr. Schwartz succeeds Dr. Nigel Rulewski. Peter Lawrence was named President in April 2008, in addition to his existing position as Chief Operating Officer.

NAME	AGE		POSITION
Paolo Pucci		47	Chief Executive Officer and a Director
Peter S. Lawrence		45	President and Chief Operating Officer
Dr. Brian Schwartz		47	Chief Medical Officer
Dr. Thomas C.K. Chan		53	Chief Scientific Officer

Paolo Pucci
Chief Executive Officer

        Mr. Pucci joined ArQule as Chief Executive Officer and a member of the board of directors in June 2008 from Bayer A.G., where he served as senior vice president and president in charge of the Bayer-Schering Pharmaceuticals Global Oncology/Specialized Therapeutics Business Units. Previously Mr. Pucci was senior vice president of Bayer Pharmaceuticals Global Specialty Business Unit, president of U.S. Pharmaceutical Operations and a member of the Bayer Pharmaceuticals Global Management Committee. At Bayer, Mr. Pucci was involved in a broad range of activities related to Nexavar® (sorafenib), an oral multiple kinase inhibitor to treat liver and kidney cancers. These activities included clinical development, regulatory review, corporate alliance management, product launch and marketing. Mr. Pucci joined Bayer as head of its Italian Pharmaceutical operations in 2001. Prior to Bayer, Mr. Pucci held positions of increasing responsibility with Eli Lilly, culminating with his appointment as managing director, Eli Lilly Sweden AB. At Lilly, his responsibilities included operations, sales, marketing and strategic planning. Mr. Pucci holds an MBA from the University of Chicago and is a graduate of the Universita Degli Studi Di Napoli in Naples, Italy.

Peter S. Lawrence
President and Chief Operating Officer

        Mr. Lawrence joined ArQule as Executive Vice President and Chief Business Officer in April 2006. He was named Chief Operating Officer in October 2007 and President in April 2008. Previously he was at Pod Venture Partners, an international venture capital firm which he co-founded in 2001 and where he most recently served as general partner. He helped drive the strategic growth of that firm, including deal sourcing and structuring, syndication and business expansion activities. Previously, Mr. Lawrence was an attorney and partner at Mintz, Levin, Cohn, Ferris Glovsky and Popeo, P.C., from 1991 to 2001. At Mintz Levin, he served as external corporate counsel to public and private companies, managed a transactional legal practice and provided strategic guidance to clients through periods of rapid growth and transformative corporate events. His public financing experiences include the initial public offering and numerous financings for America Online Inc. (AOL), as well as public financings for Biogen, Human Genome Sciences, Hybridon and many other companies. He worked on numerous mergers and acquisitions, including Roche/Compuchem, AOL/Time Warner, Steinway Piano, DEC/Intel, and Mitotix/GPC Biotech. Mr. Lawrence worked at Gaston & Snow from 1989 to 1991 in the firm's Corporate Law Department. He holds a Bachelor's degree from Amherst College and a J.D. from Boston University School of Law.

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Brian Schwartz, M.D.
Chief Medical Officer

        Dr. Schwartz joined ArQule in July 2008 from Ziopharm Oncology, Inc., where as Senior Vice president, clinical and regulatory affairs, and Chief Medical Officer he built and led clinical, regulatory, and quality assurance departments responsible for the development of new cancer drugs. Prior to Ziopharm, Dr. Schwartz held a number of positions at Bayer Healthcare. His experience in oncology has encompassed the clinical development of novel cytostatic, cytotoxic and immunological agents. At Bayer, Dr. Schwartz was a key physician responsible for the global clinical development of sorafenib (Nexavar®) and led the clinical team through a successful Phase 3 trial in renal cell cancer, leading to U.S. Food and Drug Administration (FDA) approval. He has extensive regulatory experience working with the FDA's Oncology Division, the European Medicines Evaluation Agency (EMEA), and numerous other health authorities. Dr. Schwartz has also been responsible for U.S. clinical and regulatory activities, including Phase 4 studies and interactions with the National Cancer Institute and other oncology cooperative groups. Dr. Schwartz received his medical degree from the University of Pretoria, South Africa, practiced medicine, and worked at the University of Toronto prior to his career in industry.

Thomas C. K. Chan, Ph.D.
Chief Scientific Officer

        Dr. Chan joined ArQule in December 2005 as Vice President, pharmacology and toxicology. He was named Chief Scientific Officer in January 2008 and manages all research and early development activities, including new oncology drug candidate selection at ArQule. He is also responsible for toxicology and clinical pharmacology of the Company's drug candidates currently in human clinical trials. Dr. Chan was previously at MacroChem Corporation from 2001 to 2005, where he served as Chief Technology Officer and Vice President, research and development. He was also Senior Director, pharmacology and toxicology, at EPIX Medical, Inc. from 1997 to 2000, and Director of therapeutic development at Creative Biomolecules from 1993 to 1997. Prior to his career in industry, Dr. Chan held a number of academic appointments, most recently as a director of the Purdue University Cancer Center and a tenured professor at Purdue University and Indiana University. He is a member of several NIH Study Sections and consults for the U.S. Department of Defense on their prostate and breast cancer research programs. Dr. Chan received his doctorate in pharmacology/toxicology from the University of British Columbia, and he was a postdoctoral fellow in hematology/oncology at the Cancer Center of the University of California, San Diego School of Medicine.

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ITEM 1A.    RISK FACTORS

RISKS RELATING TO OUR INDUSTRY AND BUSINESS STRATEGY

Development of our products is at an early stage and may not successfully develop a drug candidate that becomes a commercially viable drug.

        The discovery and development of drugs is inherently risky and involves a high rate of failure. Discovery and development of commercial drugs are relatively new to us. Our drug candidates and drug research programs are in early stages and require significant, time-consuming and costly research and development, testing and regulatory approvals.

        Our leading clinical-stage product candidate, ARQ 197, is based on inhibition of the c-Met receptor tyrosine kinase. Two of our other product candidates, ARQ 501 (Phase 2) and ARQ 761 (IND filed), are based on the DNA damage response mechanism mediated by the E2F-1 transcription factor and a third, ARQ 621 (IND filed), is based on inhibition of the Eg5 kinesin spindle protein. Although drugs have been approved that inhibit the activity of protein kinases and other enzymes and mitotic proteins such as tubulins, to our knowledge, no company has received regulatory approval for a drug based on the specific proteins targeted by any of our product candidates. Our approaches and scientific platforms may not lead to the development of approvable or marketable drugs.

        In addition to our clinical-stage programs, we have a limited number of pre-clinical and research-stage programs in our pipeline. Our viability as a company depends, in part, on our ability to continue to create drug candidates for ourselves and our collaborators. Numerous significant factors will affect the success of our drug research and development efforts, including the biology and chemistry complexity involved, availability of appropriate technologies, the uncertainty of the scientific process and the capabilities and performance of our employees. Our research and development capabilities may not be adequate to develop additional, viable drug candidates.

We must show the safety and efficacy of our product candidates through expensive, time consuming preclinical testing and clinical trials, the results of which are uncertain and governed by exacting regulations.

        Our product candidates are in clinical or preclinical stages of development and may not prove to be sufficiently safe or effective in more advanced human clinical trials. We will need to conduct extensive further testing of all of our product candidates, expend significant additional resources and possibly partner emerging programs to realize commercial value from any of our product candidates.

        Before obtaining regulatory approvals for the commercial sale of our products, we must demonstrate through preclinical studies (laboratory or animal testing) and clinical trials (human testing) that our proposed products are safe and effective for use in each target indication. This testing is expensive and time-consuming, and failure can occur at any stage. If we terminate a preclinical or clinical program, we will have expended resources in an effort that will not provide a return on our investment and missed the opportunity to have allocated those resources to potentially more productive uses.

        Clinical trials must meet FDA and foreign regulatory requirements. We have limited experience in designing, conducting and managing the preclinical studies and clinical trials necessary to obtain regulatory approval for our product candidates in any country. We or our collaborative partners may encounter problems in clinical trials that may cause us or the FDA or foreign regulatory agencies to delay, suspend or terminate our clinical trials at any phase. These problems could include our inability to manufacture or obtain sufficient quantities of materials produced in accordance with current Good Manufacturing Practice, or cGMP, for use in our clinical trials, conduct clinical trials at our preferred sites, enroll a sufficient number of patients for our clinical trials at one or more sites, or begin or successfully complete clinical trials in a timely fashion, if at all. Furthermore, we, the FDA or foreign regulatory agencies may suspend clinical trials of our product candidates at any time if we or they

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believe the subjects participating in the trials are being exposed to unacceptable health risks as a result of adverse events occurring in our trials or if we or they find deficiencies in the clinical trial process or conduct of the investigation.

        Acceptable results from initial preclinical studies and clinical trials of products under development are not necessarily indicative of results that will be obtained from subsequent or more extensive preclinical studies and clinical testing in humans. Clinical trials may not demonstrate sufficient safety and efficacy to obtain the required regulatory approvals or result in marketable products. Failure to adequately demonstrate the safety and efficacy of a product under development will delay and could prevent its regulatory approval.

        A number of companies in the pharmaceutical industry, including biotechnology companies, have suffered significant setbacks in advanced clinical trials, even after generating promising results in earlier trials.

        Though it is part of our strategy to pursue clinical development to take advantage of available accelerated regulatory approval processes, there is no guarantee that our product candidates will show the evidence predictive of clinical benefit necessary to qualify for such regulatory treatment.

Delays in clinical testing could result in increased costs to us and delay our ability to obtain regulatory approval and commercialize our product candidates.

        Clinical trials typically take several years to complete. The duration and cost of clinical trials will vary greatly depending on the nature, complexity, and intended use of the drug being tested. We may not complete clinical testing within the time frame we have planned, or at all. At any time, a clinical trial can be placed on "clinical hold" or temporarily or permanently stopped for a variety of reasons, principally for safety concerns. We may experience numerous unforeseen events during, or as a result of, the clinical trial process that could delay or prevent us from receiving regulatory approval or commercializing our product candidates, including the following:

•

our clinical trials may produce negative or inconclusive results, and we may decide, or regulators may require us, to provide additional information about formulation or manufacture of our product candidates or clinical trial design or to conduct additional clinical and/or pre-clinical testing or to abandon programs;

•

trial results may not meet the level of statistical significance required by the FDA or other regulatory agencies;

•

enrollment in our clinical trials for our product candidates may be slower than we anticipate, resulting in significant delays;

•

we, or regulators, may suspend or terminate our clinical trials if the participating patients are being exposed to unacceptable health risks;

•

the effects of our product candidates on patients may not be the desired effects or may include undesirable side effects or other characteristics that may delay or preclude regulatory approval or limit their commercial use, if approved; and

•

the FDA or other regulatory agencies may lack experience in evaluating the safety and efficacy of drugs based on our development platforms, which could lengthen the regulatory review process.

        Completion and duration of clinical trials depends on, among other things, our ability to enroll a sufficient number of patients, which is a function of many factors, including:

•

the incidence among the general population of diseases which contain therapeutic endpoints chosen for evaluation;

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•

the eligibility criteria defined in the protocol;

•

the size of the patient population required for analysis of the trial's therapeutic endpoints;

•

our ability to recruit clinical trial investigators and sites with the appropriate competencies and experience;

•

our ability to obtain and maintain patient consents; and

•

competition for patients by clinical trial programs for other treatments.

We have limited clinical development and commercialization experience.

        We have limited experience conducting clinical trials and have never obtained regulatory approvals for any drug. To date, we have filed five IND applications, and we have initiated eleven Phase 1 clinical trials of which eight have been completed, and six Phase 2 clinical trials of which three have been completed. We have not conducted a Phase 3, or pivotal, clinical trial, filed an NDA or commercialized a drug. We have no experience as a company in the sale, marketing or distribution of pharmaceutical products and do not currently have a sales and marketing organization. Developing commercialization capabilities will be expensive and time-consuming, and could delay any product launch. We may not be able to develop a successful commercial organization. To the extent we are unable or determine not to acquire these resources internally, we will be forced to rely on third-party clinical investigators, clinical research organizations, marketing organizations or our collaboration partners. If we were unable to establish adequate capabilities independently or with others, our drug development and commercialization efforts could fail, and we may be unable to generate product revenues.

If our drug discovery and development programs do not progress as anticipated, our revenue and stock price could be negatively impacted.

        We estimate the timing of a variety of preclinical, clinical, regulatory and other milestones for planning purposes, including when a drug candidate is expected to enter clinical trials, how soon patients will be recruited and enrolled in these trials, when a clinical trial will be completed and when an application for regulatory approval will be filed. We base our estimates on facts that are currently known to us and on a variety of assumptions, many of which are beyond our control. If we or our collaborators do not achieve milestones when anticipated, we will not receive the corresponding revenue, and our stock price could decline. In addition, our research and clinical testing may be delayed or abandoned if we or our competitors subsequently discover other compounds that show improved safety or efficacy compared to our product candidates, which could limit our ability to generate revenues, cause us to incur additional expense and cause the market price of our common stock to decline significantly.

RISKS RELATED TO OUR FINANCIAL CONDITION

We have incurred significant losses since our inception and anticipate that we will incur significant continued losses for the next several years, and our future profitability is uncertain.

        From our inception in 1993 through December 31, 2008, we have incurred cumulative losses of approximately $332 million. These losses have resulted principally from the costs of our research activities, acquisitions, enhancements to our technology and clinical trials. In the past we derived our revenue primarily from license and technology transfer fees and payments for compound deliveries associated with our discontinued chemistry services operations; research and development funding paid under our agreements with collaboration partners; and to a limited extent, milestone payments.

        We expect our expenses to increase significantly as we spend additional amounts to fund research, development, clinical testing and commercialization of our drug candidates. We currently have two

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product candidates in various stages of clinical development. We have filed an IND for a product candidate for which we expect a clinical trial to commence in the second quarter of 2009 and we anticipate filing an IND application for an additional product candidate in the second quarter of 2010. As a result, we will need to generate significant additional revenues to achieve profitability.

        To attain profitability, we will need to develop clinical products successfully and market and sell them effectively, either by ourselves or with collaborators. We have never generated revenue from the commercialization of our product candidates, and there is no guarantee that we will be able to do so. Even if were to generate product revenues and achieve profitability, we may not be able to maintain or increase profitability. Because of the numerous risks and uncertainties associated with the development of drugs, we are unable to predict the extent of any future losses or when we will become profitable, if at all. If we fail to become profitable, or if we are unable to fund our continuing losses, we may be unable to continue our business.

We may need substantial additional funding and due to global capital and credit market conditions or for other reasons, we may be unable to raise capital when needed, or on terms favorable to us, which could force us to delay, reduce or eliminate our drug discovery, product development and commercialization activities.

        Volatility and disruption in the global capital and credit markets in 2008 have led to a tightening of business credit and investment capital in the United States and internationally. If global economic and financial market conditions deteriorate or remain weak for an extended period of time, our efforts to raise capital will face additional difficulties.

        Developing drugs, conducting clinical trials, and commercializing products are expensive. Our future funding requirements will depend on many factors, including:

•

the progress and cost of our ongoing and future collaborative and independent clinical trials and other research and development activities and our ability to share such costs of our clinical development efforts with third parties;

•

the costs and timing of obtaining regulatory approvals;

•

the costs of filing, prosecuting, maintaining, defending and enforcing any patent applications, claims, patents and other intellectual property rights;

•

the cost and timing of securing manufacturing capabilities for our clinical product candidates and commercial products, if any;

•

the costs and timing of commercializing our product candidates, including establishing or contracting for sales, marketing and distribution capabilities, if any such candidates receive regulatory approval for commercial sale; and

•

the costs of any acquisitions of or investments in businesses, products and technologies.

        We may seek the capital necessary to fund our operations through public or private equity offerings, debt financings, and collaboration and licensing arrangements. To the extent that we raise additional capital through the sale of equity or convertible debt securities, our stockholders' ownership interests will be diluted and the terms of such securities may include liquidation or other preferences that adversely affect our stockholders' rights. Other debt-financing arrangements may require us to pledge certain assets and enter into covenants that would restrict certain business activities or our ability to incur further indebtedness. If we raise additional funds through collaboration and licensing arrangements with third parties, we may have to relinquish rights to certain product candidates that we might otherwise seek to develop or commercialize independently, or grant licenses on terms that are not favorable to us. There can be no assurance that sufficient funds will be available to us when required, on satisfactory terms, or at all. If we are unable to obtain additional funds when needed, we may have to delay, reduce the scope of or eliminate some of our development and commercialization

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programs, or obtain funds through other arrangements on unattractive terms, which could prevent us from successfully executing our business strategy.

Funds associated with certain of our auction rate securities may not be accessible for an undetermined period of time and our auction rate securities may experience a decline in value, which would adversely affect our liquidity.

        We have invested a portion of our available cash in a certain type of debt obligation known as auction rate securities. Our auction rate securities ("ARS") are obligations backed by U.S. federal and state agencies and, consequently, have strong credit ratings. Generally, ARS are structured with short-term interest reset dates, but with contractual maturities that can be well in excess of ten years. At the end of each reset period, investors have the right to sell their ARS or continue to hold the securities at par value and receive interest payments. If an auction for ARS fails, i.e. sell orders exceed buy orders and, therefore, under auction rules none of the securities may be sold, the principal amounts of ARS for which the auction failed would not be accessible by investors until a successful auction occurred, a buyer was found outside the auction process or the underlying securities matured.

        Auction failures occurred during 2008 with respect to certain of our ARS thereby rendering illiquid our ARS holdings, which as of December 31, 2008 were $65.3 million at par value. As a result of this occurrence, on July 8, 2008, we entered into a collateralized, revolving credit line agreement for up to $47.5 million with UBS Bank USA (the "Facility"). The Facility is secured by a first priority lien and security interest in the ARS held by us in an account with UBS Financial Services Inc., an affiliate of UBS Bank USA. UBS Financial Services had served as our financial advisor with respect to our ARS holdings and had purchased them on our behalf. The credit line is uncommitted and any outstanding balance, including interest, is payable upon demand. The current balance under the Facility is $46.1 million.

        On November 3, 2008, we accepted an offer by UBS AG, the parent of UBS Bank USA and UBS Financial Services Inc., of certain rights to cause UBS AG to purchase our ARS. The repurchase rights were offered in connection with UBS AG's obligations under settlement agreements with the U.S. Securities and Exchange Commission and other federal and state regulatory authorities. The offering, the settlement agreements, and the respective rights and obligations of the parties, including a release by us of UBS AG and its employees and agents from certain specified claims relating to UBS AG's marketing and sale of auction rate securities, are described in a prospectus issued by UBS AG dated October 7, 2008.

        In accordance with the offering by UBS AG, the Facility will be treated as a "no net cost loan" as defined in the prospectus. As such, the Facility will remain payable on demand; however, if UBS Bank should exercise its right to demand repayment of any portion of our indebtedness prior to the date we can exercise our repurchase rights (other than for reasons specified in the prospectus), UBS AG and certain of its affiliates will arrange for alternative financing on terms and conditions substantially the same as those contained in the Facility. If alternative financing cannot be established, then UBS AG or one of its affiliates is required purchase our pledged ARS at par.

        As a result of accepting UBS AG's offer, if our ARS have not previously been sold by us or by UBS AG on our behalf, we can require UBS AG to repurchase our ARS at par value at any time during the period from June 30, 2010 through July 2, 2012. Proceeds of sales of our ARS will first be applied to repayment of the Facility with the balance for our account.

        UBS AG's obligations under the offer are not secured by its assets and do not require UBS AG to obtain any financing to support its obligations. UBS AG has disclaimed any assurance that it will have sufficient financial resources to satisfy its obligations. If UBS AG does not have sufficient financial resources to meet its obligations under its offering, we may not have access to the full principal amount of our ARS.

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We have federal and state net operating losses ("NOL") and research and development credit carryforwards which, if we were to become profitable, could be used to offset/defer federal and state income taxes. Such carryforwards may not, under certain circumstances related to changes in ownership of our stock, be available to us.

        As of December 31, 2008, we had federal NOL, state NOL, and research and development credit carryforwards of approximately $203 million, $138 million and $18 million respectively, which expire at various dates through 2028. Such carryforwards could potentially be used to offset certain future federal and state income tax liabilities. Utilization of carryforwards may be subject to a substantial annual limitation pursuant to Section 382 of the Internal Revenue Code of 1986, as amended, as well as similar state provisions due to ownership changes that have occurred previously or that could occur in the future. In general, an ownership change, as defined by Section 382, results from transactions increasing the ownership of certain shareholders or public groups in the stock of a corporation by more than 50 percentage points over a three-year period. Since the Company's formation, the Company has raised capital through the issuance of capital stock on several occasions which, combined with the purchasing shareholders' subsequent disposition of those shares, may have resulted in a change of control, as defined by Section 382, or could result in a change of control in the future upon subsequent disposition. If we have experienced a change of control at any time since Company formation or experience one in the future, utilization of our carryforwards would be subject to an annual limitation under Section 382. Any limitation may result in expiration of a portion of the carryforwards before utilization. If we were not able to utilize our carryforwards, we would be required to use our cash resources to pay taxes that would otherwise have been offset, thereby reducing our liquidity.

RISKS RELATED TO REGULATORY APPROVAL

Our product candidates are subject to a lengthy and uncertain regulatory process that may not result in the necessary regulatory approvals, which would adversely affect our ability to commercialize products. We have only limited experience in regulatory affairs.

        Our product candidates, as well as the activities associated with their research, development and commercialization, are subject to extensive regulation by the FDA in the United States and by comparable authorities in other countries, for example EMEA in the E.U. These regulations govern or influence the manufacturing, assessment of benefit and risk, safety, labeling, storage, records and marketing of these products.

        Failure to obtain regulatory approval for a product candidate would prevent us from commercializing that product candidate. We have not applied for or received regulatory approval to market any of our product candidates in any jurisdiction and have only limited experience in preparing and filing the applications necessary to gain regulatory approvals. The process of obtaining regulatory approvals is expensive, often takes many years, if approval is obtained at all, and can vary substantially based upon the type, complexity and novelty of the product candidates involved.

        The regulatory process requires preclinical testing, and data obtained from preclinical and clinical activities are susceptible to varying interpretations, which could delay, limit or prevent regulatory approval. In addition, the results of later trials may not confirm the positive results of earlier preclinical studies or trials. Delays or rejections may also be encountered based upon changes in regulatory policy for product approval during the period of product development and regulatory agency review. Changes in regulatory approval policy, regulations or statutes or the process for regulatory review during the development or approval phases of our product candidates may cause delays in the approval or rejection of an application. We are currently in Phase 2 clinical testing of ARQ 501 and in Phase 1 and Phase 2 clinical testing of ARQ 197. We expect Phase 1 testing of ARQ 621 to commence in the second quarter of 2009. We have never conducted a Phase 3, or pivotal, clinical trial, nor have we filed or prosecuted the applications necessary to gain regulatory approvals.

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        A company first must conduct preclinical studies in the laboratory and in animal models to gain preliminary information on a candidate compound's activity and to identify potential safety problems. Preclinical studies must be conducted in accordance with applicable regulations of the relevant regulatory authority (e.g. FDA in the United States, EMEA in E.U.). The results of these studies are submitted as a part of an IND application with the FDA or a CTA application with the appropriate regulatory authority outside of the United States. The regulatory agency involved must review the data in the application before human clinical trials of an investigational drug can commence. If the regulatory authority does not object, a drug developer can begin clinical trials after expiration of a specified statutory period following submission of the application. Notwithstanding that the regulatory authority did not respond during the thirty-day, post-submission review period, the regulatory authority may at any time re-evaluate the adequacy of the application and require additional information about any aspect of the IND or CTA application and corresponding clinical trial, e.g. preclinical testing, drug formulation and manufacture, dosing regimens and drug administration or potential safety risk. Before a new marketing application can be filed with the FDA or other regulatory authority, the product candidate must undergo extensive clinical trials. Any clinical trial may fail to produce results satisfactory to the regulatory authority, typically for lack of safety or efficacy or for safety risks. For example, the regulatory authority could determine that the design of a clinical trial is inadequate to produce reliable results or convincing results.

Even if our drug candidates obtain regulatory approval, we and our collaborators will be subject to ongoing government regulation.

        Even if regulatory authorities approve any of our drug candidates, the manufacture, marketing and sale of these drugs will be subject to strict and ongoing regulation. Compliance with such regulations may consume substantial financial and management resources and expose us and our collaborators to the potential for other adverse circumstances. For example, a regulatory authority can place restrictions on the sale or marketing of a drug in order to manage the risks identified during initial clinical trials or after the drug is on the market. A regulatory authority can condition the approval for a drug on costly post-marketing follow-up studies. Based on these studies, if a regulatory authority does not believe that the drug demonstrates a clinical benefit to patients or an acceptable safety profile, it could limit the indications for which a drug may be sold or revoke the drug's marketing approval. In addition, identification of certain side effects either during clinical trials or after a drug is on the market may result in reformulation of a drug, additional preclinical and clinical trials, labeling changes, termination of ongoing clinical trials or withdrawal of approval. Any of these events could delay or prevent us from generating revenue from the commercialization of these drugs and cause us to incur significant additional costs.

Even if we or our collaborators bring products to market, we may be unable to effectively price our products or obtain adequate reimbursement for sales of our products, which would have an adverse effect on our revenues.

        Third party payors, such as government and private insurance plans, frequently require companies to provide rebates and predetermined discounts from list prices and are increasingly challenging the prices charged for pharmaceuticals and other medical products. Our products may not be considered cost-effective, and reimbursement to the patient may not be available or be sufficient to allow the sale of our products on a competitive basis. We, or our collaborators, may not be able to negotiate favorable reimbursement rates for our products. If we, or our collaborators, fail to obtain an adequate level of reimbursement for our products by third-party payors, sales of the drugs would be adversely affected or there may be no commercially viable market for the products.

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We face potential liability related to the privacy of health information we obtain from research institutions.

        Most health care providers, including research institutions from which we or our collaborators obtain patient information, are subject to privacy regulations promulgated under the Health Insurance Portability and Accountability Act of 1996, or HIPAA. Although we are not directly regulated by HIPAA, we could face substantial criminal penalties if we knowingly receive individually identifiable health information from a health care provider or research institution that has not satisfied HIPPA's disclosure standards. In addition, certain state privacy laws may apply directly to our operations and/or those of our collaborators and may impose restrictions on our use and dissemination of individuals' health information. Moreover, patients about whom we or our collaborators obtain information, as well as the providers who share this information with us, may have contractual rights that limit our ability to use and disclose the information. Claims that we have violated individuals' privacy rights or breached our contractual obligations, even if we are not found liable, could be expensive and time-consuming to defend and could result in adverse publicity that could harm our business.

RISKS RELATED TO COLLABORATIONS

Part of our business strategy involves collaborative out-licensing of our drug candidates while retaining commercialization or co-promotional rights in parts of the world. We may not be able to find collaborators or successfully form suitable collaborations to further our drug development and commercialization efforts.

        We may seek collaborators for our drug development and commercialization efforts. We may enter into these collaborations to obtain external financing for drug development and to obtain access to drug development and commercialization expertise. The availability of partners depends on the willingness of pharmaceutical and biotechnology companies to collaborate in drug discovery activities. Only a limited number of pharmaceutical and biotechnology companies would fit our requirements. The number could decline further through consolidation, or the number of collaborators with interest in our drugs could decline. If the number of our potential collaborators were to decline, the remaining collaborators may be able to negotiate terms less favorable to us.

        We face significant competition in seeking drug development collaborations, both from other biotechnology companies and from the internal capabilities and compound pipelines of the pharmaceutical and biotechnology companies themselves. This competition is particularly intense in the oncology field. Our ability to interest such companies in forming co-development and commercialization arrangements with us will be influenced by, among other things:

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the compatibility of technologies;

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the potential partner's acceptance of our approach to drug discovery;

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the novelty, quality and commercial potential of any drug candidate we may succeed in developing; and

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our ability, and collaborators' perceptions of our ability, to achieve intended results in a timely fashion, with acceptable quality and cost.

        Even if we are able to gain the interest of potential drug development partners, the negotiation, documentation and implementation of collaborative arrangements are complex and time-consuming. Collaborations may not be available on commercially acceptable terms and, if formed, may not be commercially successful or, if successful, may not realize sufficient benefit for us. If we are unable to form collaborations, we may not gain access to the financial resources and industry expertise necessary to develop and commercialize drug products or successfully market any products we develop on our own and, therefore, be unable to generate revenue from our products.

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Our success depends in part on the efforts of our current and possible future collaborators, who will likely have substantial control and discretion over the continued development and commercialization of drug candidates which are the subjects of our collaborations.

        Our current collaborators, Kyowa Hakko Kirin and Daiichi Sankyo have, and future collaborators will have significant discretion in determining the efforts and amount of resources that they dedicate to our collaborations. Our collaborators may determine not to proceed with clinical development or commercialization of a particular drug candidate for a number of reasons that are beyond our control, even under circumstances where we might have continued such a program. In addition, our rights to receive milestone payments and royalties from our collaborators will depend on our collaborators' abilities to establish the safety and efficacy of our drug candidates, obtain regulatory approvals and achieve market acceptance of products developed from our drug candidates. We may also depend on our collaborators to manufacture clinical scale quantities of some of our drug candidates and, possibly, for commercial scale manufacture, distribution and direct sales. Our collaborators may not be successful in manufacturing our drug candidates or successfully commercializing them.

        We face additional risks in connection with our existing and future collaborations, including the following:

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our collaborators may develop and commercialize, either alone or with others, products that are similar to or competitive with the products that are the subject of the collaboration with us;

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our collaborators may underfund or not commit sufficient resources to the testing, marketing, distribution or other development of our drug candidates;

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our collaborators may not properly maintain or defend our intellectual property rights or they may utilize our proprietary information in such a way as to invite litigation that could jeopardize or potentially invalidate our intellectual property or proprietary information or expose us to potential liability;

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our collaborators may encounter conflicts of interest, changes in business strategy or other business issues which could adversely affect their willingness or ability to fulfill their obligations to us (for example, pharmaceutical and biotechnology companies historically have re-evaluated their priorities following mergers and consolidations, which have been common in recent years in these industries); and

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disputes may arise between us and our collaborators delaying or terminating the research, development or commercialization of our drug candidates, resulting in significant litigation or arbitration that could be time-consuming and expensive, or causing collaborators to act in their own self-interest and not in the interest of our stockholders;

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we might not have the financial or human resources to meet our obligations or take advantage of our rights under the terms of our existing and future collaborations; and

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our existing collaborators may exercise their respective rights to terminate without cause their collaborations with us, in which event, we might not be able to complete development and commercialization of ARQ 197 and other drug candidates on our own.

We may not receive any further milestone, royalty or license payments under our current collaborations.

        Although we have received license fees and other payments to date under our current drug development collaborations with Kyowa Hakko Kirin and Daiichi Sankyo, we may not receive any royalty payments or additional license and milestone fees under such agreements. Our receipt of any future milestone, royalty or license payments depends on many factors, including whether our collaborators want or are able to continue to pursue potential drug candidates, intellectual property

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issues, unforeseen complications in the development or commercialization process, and the ultimate commercial success of the drugs.

RISKS RELATED TO RELATIONSHIPS WITH THIRD PARTY VENDORS

We rely heavily on third parties such as contract research organizations, to conduct clinical trials and perform research and analysis services for us. If third parties upon which we rely do not perform as contractually required or expected, we may not be able to develop further, obtain regulatory approval for or commercialize our product candidates.

        We do not have the ability or the human resources to perform all of the testing or conduct all of the clinical trials that are necessary in connection with the development of our product candidates. We are using third-party clinical research organizations to oversee many of our ongoing clinical trials and expect to use the same or similar organizations for certain of our future clinical trials. Our reliance on these third parties reduces our control over these activities. We may face delays outside of our control if these parties do not perform their obligations in a timely or competent fashion or if we are forced to change service providers or if the quality or accuracy of the data they obtain is compromised due to their failure to adhere to our clinical protocols or regulatory requirements or for other reasons. These risks are heightened if we conduct clinical trials outside of the United States, where it may be more difficult to ensure that studies are conducted in compliance with FDA requirements. Any third party that we hire to conduct clinical trials may also provide services to our competitors, which could compromise the performance of their obligations to us. If we experience significant delays in the progress of our clinical trials and in our plans to file NDAs, the commercial prospects for product candidates could be harmed and our ability to generate product revenue would be delayed or prevented.

We have limited manufacturing experience. We primarily rely on third parties to provide sufficient quantities of our product candidates to conduct pre-clinical and clinical studies. We have no control over our manufacturers' and suppliers' compliance with manufacturing regulations, and their failure to comply could interrupt our drug supply.

        To date, our product candidates have been manufactured in relatively small quantities for preclinical and clinical trials. We have no experience in manufacturing any of our product candidates on a large scale and have contracted with third party manufacturers to provide material for clinical trials and to assist in the development and optimization of our manufacturing processes and methods. Our ability to conduct clinical trials and commercialize our product candidates will depend on the ability of such third parties to manufacture our products on a large scale at a competitive cost and in accordance with cGMP and other regulatory requirements. Significant scale-up of manufacturing may result in unanticipated technical challenges and may require additional validation studies that the FDA must review and approve. If we are not able to obtain contract cGMP manufacturing on commercially reasonable terms, obtain or develop the necessary materials and technologies for manufacturing, or obtain intellectual property rights necessary for manufacturing, we may not be able to conduct or complete clinical trials or commercialize our product candidates. There can be no assurance that we will be able to obtain such requisite terms, materials, technologies and intellectual property necessary to successfully manufacture our product candidates for clinical trials or commercialization. Our product candidates require precise, high-quality manufacturing. The failure to achieve and maintain these high manufacturing standards, including the incidence of manufacturing errors, could result in patient injury or death, product recalls or withdrawals, delays or failures in product testing or delivery, cost overruns or other problems that could seriously hurt our business.

        The facilities used by our contract manufacturers may undergo inspections by the FDA for compliance with cGMP regulations before our product candidates produced there can receive marketing approval. If these facilities do not satisfy cGMP requirements in connection with the

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manufacture of our product candidates, we may need to conduct additional validation studies, or find alternative manufacturing facilities, either of which would result in significant cost to us as well as a delay of up to several years in obtaining approval for any affected product candidate. In addition, after approval of a product candidate for commercial use, our contract manufacturers and any alternative contract manufacturer we may utilize will be subject to ongoing periodic inspection by the FDA and corresponding state and foreign agencies for compliance with cGMP regulations, similar foreign regulations and other regulatory standards. We do not have control over our contract manufacturers' compliance with these regulations and standards. Any failure by our third-party manufacturers or suppliers to comply with applicable regulations could result in sanctions being imposed (including fines, injunctions and civil penalties), failure of regulatory authorities to grant marketing approval of our product candidates, delays, suspension or withdrawal of approvals, license revocation, seizures or recalls of product candidates or products, operating restrictions and criminal prosecution.

Materials necessary to manufacture our product candidates currently under development may not be available on commercially reasonable terms, or at all, which may delay our development and commercialization of these drugs.

        Some of the materials necessary for the manufacture of our product candidates currently under development may, from time to time, be available either in limited quantities, or from a limited number of manufacturers, or both. We and/or our collaborators need to obtain these materials for our clinical trials and, potentially, for commercial distribution when and if we obtain marketing approval for these compounds. Suppliers may not sell us these materials at the time we need them or on commercially reasonable terms. If we are unable to obtain the materials needed for the conduct of our clinical trials, product testing and potential regulatory approval could be delayed, adversely impacting our ability to develop the product candidates. If it becomes necessary to change suppliers for any of these materials or if any of our suppliers experience a shutdown or disruption in the facilities used to produce these materials, due to technical, regulatory or other problems, it could significantly hinder or prevent manufacture of our drug candidates and any resulting products.

RISKS RELATED TO OUR COMMON STOCK

Our stock price may be extremely volatile.

        The trading price of our common stock has been highly volatile. We believe the trading price of our common stock will remain highly volatile and may fluctuate substantially due to factors such as:

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adverse results or delays in clinical trials;

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announcement of FDA approval or non-approval, or delays in the FDA review process, of our or our collaborators' product candidates or those of our competitors or actions taken by regulatory agencies with respect to our, our collaborators' or our competitors' clinical trials;

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announcement of new products by us or our competitors;

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quarterly variations in our or our competitors' results of operations, including as a result of recognition of upfront licensing or other fees, the timing and amount of expenses incurred for clinical development, regulatory approval and commercialization of our product candidates;

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litigation, including intellectual property infringement lawsuits, involving us;

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financing transactions;

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developments in the biotechnology and pharmaceutical industries;

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the general performance of the equity markets and in particular the biopharmaceutical sector of the equity markets;

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departures of key personnel or board members;

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developments concerning current or future collaborations;

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FDA or international regulatory actions affecting our industry generally; and

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third-party reimbursement policies.

        This volatility and general market declines in our industry over the past several years have affected the market prices of securities issued by many companies, often for reasons unrelated to their operating performance, and may adversely affect the price of our common stock. In the past, securities class action litigation has often been instituted following periods of volatility in the market price of a company's securities. A securities class action suit against us could result in potential liabilities, substantial costs and the diversion of management's attention and resources, regardless of the outcome of the action.

Some of our existing stockholders can exert control over us, and their interests could conflict with the best interests of our other stockholders.

        Due to their combined stock holdings, our principal stockholders (stockholders holding more than 5% of our common stock), acting together, may be able to exert significant influence over all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. In addition, this concentration of ownership may delay or prevent a change in control of our company, even when a change may be in the best interests of our stockholders. Furthermore, the interests of these stockholders may not always coincide with our interests as a company or the interests of other stockholders. Accordingly, these stockholders could cause us to enter into transactions or agreements that would not be widely viewed as beneficial.

        If our officers, directors or principal stockholders sell substantial amounts of our common stock (including shares issued upon the exercise of options and warrants) in the public market, the market price of our common stock could fall. These sales also might make it more difficult for us to sell equity or equity- related securities in the future at a time and price that we deem appropriate.

Anti-takeover provisions in our charter documents and under Delaware law could make an acquisition of us, which may be beneficial to our stockholders, more difficult and may prevent or deter attempts by our stockholders to replace or remove our current management.

        Provisions in our corporate charter and bylaws and Delaware law may discourage, delay or prevent an acquisition of our company, a change in control, or attempts by our stockholders to replace or remove members of our current Board of Directors. Because our Board of Directors is responsible for appointing the members of our management team, these provisions could in turn affect any attempt by our stockholders to replace current members of our management team. These provisions include:

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a Board of Directors having three classes of directors with a three-year term of office that expires as to one class each year, commonly referred to as a "staggered board";

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a prohibition on actions by our stockholders by written consent;

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the inability of our stockholders to call special meetings of stockholders;

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the ability of our Board of Directors to issue preferred stock without stockholder approval, which could be used to institute a "poison pill" that would work to dilute the stock ownership of a potential hostile acquirer, effectively preventing acquisitions that have not been approved by our Board of Directors;

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limitations on the removal of directors; and

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advance notice requirements for director nominations and stockholder proposals.

        Moreover, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which prohibits a person who owns in excess of 15% of our outstanding voting stock from merging or combining with us for a period of three years after the date of the transaction in which the person acquired in excess of 15% of our outstanding voting stock, unless the merger or combination is approved in a prescribed manner. As a result, it is difficult for a third party to acquire control of us without the approval of our Board of Directors and, therefore, mergers with and acquisitions of us that our stockholders may consider in their best interests may not occur.

Because we do not intend to pay dividends, stockholders will benefit from an investment in our common stock only if it appreciates in value.

        We have never declared or paid any cash dividends on our common stock. We currently intend to retain our future earnings, if any, to finance the expansion of our business and do not expect to pay any cash dividends in the foreseeable future. As a result, the success of an investment in our common stock will depend entirely upon any future appreciation. There is no guarantee that our common stock will appreciate in value or even maintain the price at which stockholders have purchased their shares.

RISKS RELATING TO COMPETITION

The drug research and development industry is highly competitive, and we compete with some companies that have a broader range of capabilities and better access to resources than we do.

        The pharmaceutical and biotechnology industries are characterized by rapid and continuous technological innovation. We compete with companies worldwide that are engaged in the research and discovery, licensing, development and commercialization of drug candidates, including, in the area of small molecule anti-cancer therapeutics, biotechnology companies such as Ariad Pharmaceuticals, Inc.; Array BioPharma Inc.; Astex Therapeutics; Cell Genesys, Inc.; Cell Therapeutics, Inc.; Curis, Inc.; Exelixis, Inc.; Idera Pharmaceuticals, Inc.; Infinity Pharmaceuticals, Inc.; Onyx Pharmaceuticals, Inc.; OSI Pharmaceuticals, Inc.; Oxigene, Inc.; Pharmacopeia, Inc.; Plexxikon, Inc. Telik, Inc.; and Vertex Pharmaceuticals, Inc. and many others.

        With respect to ARQ 197 specifically, we are aware of a number of biotechnology and pharmaceutical companies that are or may be pursuing approaches to c-Met inhibition, including Amgen Inc.; AVEO Pharmaceuticals, Inc.; Bristol-Myers Squibb Company; Cephalon, Inc.; Compugen Ltd.; Eli Lilly & Company; Exelixis, Inc.; Genentech, Inc.; GlaxoSmithKline; Johnson & Johnson; Merck & Co., Inc.; Methylgene Inc.; Pfizer Inc, Schering-Plough; and Supergen Inc. and others.

        Even if we are successful in bringing products to market, we face substantial competitive challenges in effectively marketing and distributing our products. Companies and research institutions, including large pharmaceutical companies with much greater financial resources and more experience in developing products, conducting clinical trials, obtaining FDA and foreign regulatory approvals and bringing new drugs to market are developing products within the field of oncology. Some of these entities already have competitive products on the market or product candidates in more advanced stages of development than we do. By virtue of having or introducing competitive products on the market before us, these entities may gain a competitive advantage. In addition, there may be product candidates of which we are not aware at an earlier stage of development that may compete with our product candidates. Some of our competitors have entered into collaborations with leading companies within our target markets.

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        We are in a rapidly evolving field of research. Consequently, our technology may be rendered non-competitive or obsolete by approaches and methodologies discovered by others, both before and after we have gone to market with our products. We also face competition from existing therapies that are currently accepted in the marketplace and from the impact of adverse events in our field that may affect regulatory approval or public perception.

        We anticipate that we will face increased competition in the future as new companies enter the market and advanced technologies become available. If we are unable to successfully compete in our chosen field, we will not become profitable.

We may not be able to recruit and retain the scientists and management we need to compete.

        Our success depends on our ability to attract, retain and motivate highly skilled scientific personnel and management, and our ability to develop and maintain important relationships with leading academic institutions, clinicians and scientists. We are highly dependent on our senior management and scientific staff, and the loss of the services of one or more of our other key employees could have an adverse effect on the successful completion of our clinical trials or the commercialization of our product candidates.

        We compete intensely with pharmaceutical and biotechnology companies, including our collaborators, medicinal chemistry outsourcing companies, contract research and manufacturing organizations, and academic and research institutions in the recruitment of scientists and management. The shortage of personnel with experience in drug development could lead to increased recruiting, relocation and compensation costs, which may exceed our expectations and resources. If we cannot hire additional qualified personnel, the workload may increase for both existing and new personnel. If we are unsuccessful in our recruitment efforts, we may be unable to execute our strategy.

RISKS RELATED TO INTELLECTUAL PROPERTY

Our patents and other proprietary rights may fail to protect our business. If we are unable to adequately protect our intellectual property, third parties may be able to use our technology which could adversely affect our ability to compete in the market.

        To be successful and compete, we must obtain and protect patents on our products and technology and protect our trade secrets. Where appropriate, we seek patent protection for certain aspects of the technology we are developing, but patent protection may not be available for some of our product candidates or their use, synthesis or formulations. The patent position of biotechnology firms is highly uncertain, involves complex legal and factual questions, and has recently been the subject of much litigation. No consistent policy has emerged from the U.S. Patent and Trademark Office or the courts regarding the breadth of claims allowed or the degree of protection afforded under many biotechnology patents. In addition, there is a substantial backlog of biotechnology patent applications at the U.S. Patent and Trademark Office. As a consequence of these factors, the approval or rejection of patent applications may take several years.

        We do not know whether our patent applications will result in issued patents. In addition, the receipt of a patent might not provide much practical protection. If we receive a patent with a narrow scope it will be easier for competitors to design products that do not infringe our patent. We cannot be certain that we will receive any additional patents, that the claims of our patents will offer significant protection for our technology, or that our patents will not be challenged, narrowed, invalidated or circumvented.

        Competitors may interfere with our patent protection in a variety of ways. Competitors may claim that they invented the claimed invention before us. Competitors may also claim that we are infringing on their patents and that, therefore, we cannot practice our technology as claimed under our patents.

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Competitors may also contest our patents by showing the patent examiner that the invention was not original, was not novel or was obvious. In litigation, a competitor could claim that our issued patents are not valid for a number of reasons. If a court agrees, our patents could be narrowed, invalidated or rendered unenforceable, or we may be forced to stop using the technology covered by these patents or to license the technology from third parties. As a company, we have no meaningful experience with competitors interfering with our patents or patent applications and therefore may not have the experience we would need to aggressively protect our patents should such action become necessary.

        The laws of some foreign countries do not protect intellectual property rights to the same extent as the laws of the United States. Many companies have encountered significant problems in protecting and defending such rights in foreign jurisdictions. Many countries, including certain countries in Europe, have compulsory licensing laws under which a patent owner may be compelled to grant licenses to third parties. In addition, many countries limit the enforceability of patents against government agencies or government contractors. In these countries, the patent owner may have limited remedies, which could materially diminish the value of the patent. Compulsory licensing of life-saving drugs is also becoming increasingly popular in developing countries either through direct legislation or international initiatives. Such compulsory licenses could be extended to include some of our product candidates, which could limit our potential revenue opportunities. Moreover, the legal systems of certain countries, particularly certain developing countries, do not favor the aggressive enforcement of patent and other intellectual property protection, which makes it difficult to stop infringement.

        Drug candidates we develop that are approved for commercial marketing by the FDA would be subject to the provisions of the Drug Price Competition and Patent Term Restoration Act of 1984, known as the "Hatch-Waxman Act." The Hatch- Waxman Act provides companies with marketing exclusivity for varying time periods during which generic versions of a drug may not be marketed and allows companies to apply to extend patent protection for up to five additional years. It also provides a means for approving generic versions of a drug once the marketing exclusivity period has ended and all relevant patents have expired. The period of exclusive marketing, however, may be shortened if a patent is successfully challenged and defeated, which could reduce the amount of revenue we receive for such product.

Agreements we have with our employees, consultants and collaborators may not afford adequate protection for our trade secrets, confidential information and other proprietary information.

        In addition to patent protection, we also rely on copyright and trademark protection, trade secrets, and know-how. It is unclear whether our trade secrets and know-how will prove to be adequately protected. To protect our trade secrets and know-how, we require our employees, consultants and advisors to execute agreements regarding the confidentiality and ownership of such proprietary information. We cannot guarantee, however, that these agreements will provide us with adequate protection against improper use or disclosure of confidential information and there may not be adequate remedies in the event of unauthorized use or disclosure. Our employees, consultants or advisors may unintentionally or willfully disclose our information to competitors. In addition, in some situations, these agreements may conflict with, or be subject to, the rights of third parties with whom our employees, consultants or advisors had or have previous employment or consulting relationships. Like patent litigation, enforcing a claim that a third party illegally obtained and is using our trade secrets is expensive and time-consuming and the outcome is unpredictable. In addition, courts outside the United States are sometimes less willing than our federal and state courts to protect trade secrets. Furthermore, others may independently develop substantially equivalent knowledge, methods and know-how. Our failure or inability to protect our proprietary information and techniques may inhibit or limit our ability to compete effectively or exclude certain competitors from the market.

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Our success will depend partly on our ability to operate without infringing upon or misappropriating the proprietary rights of others.

        There are many patents in our field of technology and we cannot guarantee that we do not infringe on those patents or that we will not infringe on patents granted in the future. If a patent holder believes a product of ours infringes on its patent, the patent holder may sue us even if we have received patent protection for our technology.

        If we do not prevail in litigation or if other parties have filed, or in the future should file, patent applications covering products and technologies that we have developed or intend to develop, we may have to obtain licenses from third parties, which may not be available on commercially reasonable terms, or at all, and may require us to pay substantial royalties or grant a cross-license to some of our patents to another patent holder. Additionally, we may have to change the formulation of a product candidate so that we do not infringe third- party patents. Such reformulation may be impossible to achieve or which may require substantial time and expense. If we are unable to cost-effectively redesign our products so they do not infringe a patent, we may be unable to sell some of our products. Any of these occurrences will result in lost revenues and profits for us.

The drug research and development industry has a history of patent and other intellectual property litigation, and we may be involved in costly intellectual property lawsuits.

        The drug research and development industry has a history of patent and other intellectual property litigation, and we believe these lawsuits are likely to continue. Legal proceedings relating to intellectual property would be expensive, take significant time and divert management's attention from other business concerns. We face potential patent infringement suits by companies that control patents for drugs or potential drugs similar to our product candidates or other suits alleging infringement of their intellectual property rights. There could be issued patents of which we are not aware that our products infringe or patents that we believe we do not infringe that we are ultimately found to infringe. The publication of discoveries in the scientific or patent literature frequently occurs substantially later than the date on which the underlying discoveries were made and patent applications were filed. Because patent applications can take many years to issue, there may be currently pending applications of which we are unaware that may later result in issued patents that we infringe with our drug candidates or resulting products. In addition, technology created under our research and development collaborations may infringe the intellectual property rights of third parties, in which case we may not receive milestone or royalty revenue from those collaborations.

        If we do not prevail in an infringement lawsuit brought against us, we might have to pay substantial damages and we could be required to stop the infringing activity or obtain a license to use the patented technology or redesign our products so as not to infringe the patent. We may not be able to enter into licensing arrangements at a reasonable cost or effectively redesign our products. Any inability to secure licenses or alternative technology could delay the introduction of our products or prevent us from manufacturing or selling products.

RISKS RELATED TO EMPLOYEES AND FACILITIES

Our operations could be interrupted by damage to our laboratory facilities.

        Our operations are dependent upon the continued use of our specialized laboratories and equipment in Woburn, Massachusetts. Catastrophic events, including fires or explosions, could damage our laboratories, equipment, scientific data, work in progress or inventories of chemical compounds and biological materials and may materially interrupt our business. We employ safety precautions in our laboratory activities in order to reduce the likelihood of the occurrence of these catastrophic events; however, we cannot eliminate the chance that such an event will occur. Rebuilding our facilities could

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be time consuming and result in substantial delays in our development of products and in fulfilling our agreements with our collaborators.

Security breaches may disrupt our operations and adversely affect our operating results.

        Our network security and data recovery measures may not be adequate to protect against computer viruses, break-ins, and similar disruptions from unauthorized tampering with our computer systems. The misappropriation, theft, sabotage or any other type of security breach with respect to any of our proprietary and confidential information that is electronically stored, including research or clinical data, could have a material adverse impact on our business, operating results and financial condition. Additionally, any break-in or trespass of our facilities that results in the misappropriation, theft, sabotage or any other type of security breach with respect to our proprietary and confidential information, including research or clinical data, or that results in damage to our research and development equipment and assets could have a material adverse impact on our business, operating results, and financial condition.

RISKS RELATED TO PRODUCT LIABILITY

If our use of chemical and biological materials and hazardous materials violates applicable laws or causes personal injury, we may be liable for damages.

        Our drug discovery activities, including the analysis and synthesis of chemical compounds, involve the controlled use of chemicals, including flammable, combustible, toxic and radioactive materials that are potentially hazardous if misused. Federal, state and local laws and regulations govern our use, storage, handling and disposal of these materials. These laws and regulations include the Resource Conservation and Recovery Act, the Occupational Safety and Health Act, local fire and building codes, regulations promulgated by the Department of Transportation, the Drug Enforcement Agency and the Department of Energy, the Department of Health and Human Services, and the laws of Massachusetts where we conduct our operations. We may incur significant costs to comply with these laws and regulations in the future and current or future environmental laws and regulations may impair our research, development and production efforts. Notwithstanding our extensive safety procedures for handling and disposing of materials, the risk of accidental contamination or injury from these materials cannot be completely eliminated. In the event of an accident, our business could be disrupted and we could be liable for damages. Our liability may exceed our insurance coverage and our total assets and have a negative impact on our financial condition and results of operations.

We may be exposed to potential liability related to the development, testing or manufacturing of compounds we develop and our insurance coverage may not be sufficient to cover losses.

        We are developing, clinically testing and manufacturing potential therapeutic products for use in humans. In connection with these activities, we could be liable if persons are injured or die while using these drugs. We may have to pay substantial damages and/or incur legal costs to defend claims resulting from injury or death, and we may not receive expected royalty or milestone payments if commercialization of a drug is limited or ended as a result of such claims. We have product liability and clinical trial insurance that contains customary exclusions and provides coverage per occurrence at levels, in the aggregate, which we believe are customary and commercially reasonable in our industry given our current stage of drug development. Our product liability insurance does not cover every type of product liability claim that we may face or loss we may incur and may not adequately compensate us for the entire amount of covered claims or losses or for the harm to our business reputation. Also, we may be unable to maintain our current insurance policies or obtain and maintain necessary additional coverage at acceptable costs, or at all.

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ITEM 1B.    UNRESOLVED STAFF COMMENTS

        None.

ITEM 2.    PROPERTIES

        In November 1999, we moved our main operations to a new facility in Woburn, Massachusetts, which includes approximately 128,000 square feet of laboratory and office space. This facility was designed to our specific requirements. In March 2001, we purchased this building and the land on which it sits and a developable adjacent parcel of land for $18.2 million and $2.3 million, respectively, in an arms-length transaction with the original developer.

        On May 2, 2005, we completed a transaction to sell the Woburn facility and simultaneously lease the facility from the purchaser. The lease was subsequently amended on June 30, 2005. Under the terms of the transaction, the purchaser obtained two parcels of land and our headquarters building in exchange for a cash payment of approximately $40.1 million. We are leasing our existing facility and the associated land for a period of ten years at an average annual rental rate of $3.4 million. We also have options to extend the lease term for up to an additional ten years. See Note 7, "Property and Equipment" in the Notes to Consolidated Financial Statements appearing in Item 8 in this Annual Report on Form 10-K.

        In March 2002, we entered into an eight year lease with Pacific Shores Development LLC for approximately 34,000 square feet of laboratory and office space in Redwood City, California. We took occupancy in September 2002. Each base lease payment, the first of which was due and paid in September 2002, is $75,823 per month, subject to annual escalation provisions. In the third quarter of 2004, we entered into a sublease for the California facility. See Note 10, "Restructuring Actions" in the Notes to Consolidated Financial Statements appearing in Item 8 in this Annual Report on Form 10-K.

ITEM 3.    LEGAL PROCEEDINGS

        None.

ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

        No matters were submitted to stockholders for a vote during the fourth quarter of 2008.

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PART II

ITEM 5.    MARKET FOR THE REGISTRANT'S COMMON STOCK, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

STOCK PERFORMANCE GRAPH

        The following graph shows the cumulative total stockholder return on our common stock over the period from December 31, 2003 to December 31, 2008, as compared with that of the NASDAQ Stock Market Index (U. S. Companies) and the NASDAQ Biotechnology Index, based on an initial investment of $100 in each on December 31, 2003. Total stockholder return is measured by dividing share price change plus dividends, if any, for each period by the share price at the beginning of the respective period, and assumes reinvestment of dividends.

COMPARISON OF CUMULATIVE TOTAL RETURN OF ARQULE, INC.,
NASDAQ STOCK MARKET (U.S. COMPANIES) INDEX
AND NASDAQ BIOTECHNOLOGY INDEX

	12/31/03		12/31/04		12/31/05		12/31/06		12/31/07		12/31/08
ArQule, Inc.		100.00		118.65		125.41		121.31		118.85		86.48
NASDAQ Market (U.S. Companies) Index		100.00		108.84		111.16		122.11		132.42		63.80
NASDAQ Biotechnology Index		100.00		106.13		109.14		110.25		115.30		100.75

        ArQule's common stock is traded on the NASDAQ Global Market under the symbol "ARQL".

        The following table sets forth, for the periods indicated, the range of the high and low sale prices for ArQule's common stock:

	HIGH		LOW
2007
First Quarter	$	7.72	$	5.78
Second Quarter		10.59		6.85
Third Quarter		8.25		5.47
Fourth Quarter		8.34		5.60
2008
First Quarter	$	6.09	$	3.53
Second Quarter		4.55		3.25
Third Quarter		4.06		2.30
Fourth Quarter		4.70		1.75
2009
First Quarter (through February 20, 2009)	$	4.91	$	3.40

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        As of February 20, 2009, there were approximately 104 holders of record and approximately 6,616 beneficial shareholders of our common stock.

Dividend Policy

        We have never paid cash dividends on our common stock and we do not anticipate paying any cash dividends in the foreseeable future. We currently intend to retain future earnings, if any, for use in our business.

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ITEM 6.    SELECTED FINANCIAL DATA

        The following selected financial data have been derived from our audited historical consolidated financial statements, certain of which are included elsewhere in this Annual Report on Form 10-K. The following selected financial data should be read in conjunction with our consolidated financial statements and related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" appearing elsewhere in this Annual Report on Form 10-K.

        All current year and comparative prior period amounts have been restated to reflect our discontinued chemistry services operations. See Note 3 to our Consolidated Financial Statements for further information concerning discontinued operations.

        This data is in thousands, except per share data.

			YEAR ENDED DECEMBER 31,
			2008*			2007*			2006*			2005			2004
STATEMENT OF OPERATIONS DATA:
Revenue:
Research and development revenue(a)(b)(c)(d)			$	14,141		$	9,165		$	6,626		$	6,628		$	5,012
Costs and expenses:
	Research and development			49,629			53,727			47,428			24,646			20,181
	General and administrative			16,918			15,069			11,560			8,688			8,982
	Restructuring charges/(credits)(e)			—			—			—			—			(983	)
		Total costs and expenses		66,547			68,796			58,988			33,334			28,180
Loss from continuing operations				(52,406	)		(59,631	)		(52,362	)		(26,706	)		(23,168	)
Interest income				3,342			6,259			5,139			3,700			1,271
Interest expense				(472	)		—			—			(369	)		(185	)
Other income (expense)(f)				(1,328	)		—			—			—
Loss on investment(g)				—			—			—			(250	)		—
Net loss from continuing operations				(50,864	)		(53,372	)		(47,223	)		(23,625	)		(22,082	)
Income from discontinued operations(h)				—			—			15,783			16,105			17,161
Net loss(i)			$	(50,864	)	$	(53,372	)	$	(31,440	)	$	(7,520	)	$	(4,921	)
Basic and diluted income (loss) per share:
Net loss from continuing operations			$	(1.16	)	$	(1.33	)	$	(1.33	)	$	(0.68	)	$	(0.77	)
Income from discontinued operations(h)				—			—			0.45			0.46			0.60
			$	(1.16	)	$	(1.33	)	$	(0.88	)	$	(0.22	)	$	(0.17	)
Weighted average common shares outstanding—basic and diluted				43,870			40,040			35,539			34,619			28,819

*

As a result of the adoption of Statement of Financial Accounting Standards ("SFAS") No. 123(R), Share Based Payment, as of January 1, 2006, all share-based payments have been recognized in the statements of operations based on their fair values. The Company adopted the modified prospective transition method permitted under SFAS No. 123(R) and, consequently, has not adjusted results from prior years. Stock-based compensation expense related to SFAS 123(R) was approximately $5.7 million, $5.0 million and $3.2 million for the years ended December 31, 2008, 2007 and 2006, respectively.

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	DECEMBER 31,
	2008		2007		2006		2005		2004
Cash, cash equivalents and marketable securities short-term(j)(k)	$	141,890	$	135,082	$	95,832	$	140,643	$	71,365
Marketable securities long-term		64,219		—		—		—		—
	$	206,109	$	135,082	$	95,832	$	140,643	$	71,365
Working capital		59,680		111,797		80,557		105,646		54,782
Notes payable		47,750		—		—		—		—
Total assets(l)		214,212		142,210		104,820		156,684		120,218
Long-term debt		—		—		—		—		17
Total stockholders' equity(j)(k)		43,467		88,041		79,954		105,458		82,452

(a)

In April 2004, ArQule entered into an alliance with Roche to discover and develop drug candidates targeting the E2F biological pathway. Roche provided immediate research funding of $15 million, and provided financial support for ongoing research and development through the first quarter of 2008.

(b)

In April 2007, ArQule entered into an exclusive license agreement with Kyowa Hakko Kirin to develop and commercialize ARQ 197 in Japan and parts of Asia. The agreement includes upfront licensing fees of $30 million, which were received in 2007. In addition the agreement provides for potential development milestones of $93 million, sales milestones and royalty payments upon commercialization.

(c)

In November 2008, ArQule and Daiichi Sankyo entered into a research collaboration, exclusive license and co-commercialization agreement for the discovery of therapeutic compounds that selectively inhibit certain kinases. The agreement includes upfront licensing fees of $15 million, which were received in 2008, payments for research support for the first and second years of the collaboration, and licensing fees for compounds discovered as a result of this research. ArQule will also receive milestone payments related to clinical development, regulatory review and sales and royalty payments on net sales of compounds from the collaboration.

(d)

In December 2008, ArQule entered into an exclusive license agreement with Daiichi Sankyo to develop and commercialize ARQ 197 in U.S., Europe, South America and the rest of the world, excluding Japan and parts of Asia. The agreement includes upfront licensing fees of $60 million, which were received in 2008. In addition the agreement provides for potential development milestones of $560 million, sales milestones and royalty payments upon commercialization.

(e)

In October 2003, we completed an agreement with InPharmatica Ltd. to sell certain assets of our former operations in the United Kingdom and to assign our facility obligation. As a result, we reversed $0.3 million of restructuring accrual to reflect a change in our original estimate of the remaining lease obligation and assumed sublease income in the United Kingdom. In December 2003, the adequacy of the restructuring accrual and assumed sublease income relative to the lease commitment in Redwood City, California was reassessed and, based on deteriorating market conditions, an additional provision of $1.5 million was recorded, to increase our restructuring accrual.

(f)

In the fourth quarter of 2008, we agreed to participate in a settlement agreement with UBS AG whereby we received a Put Option to repurchase $62.4 million of our auction rate securities at par value at any time during the period from June 30, 2010 through July 2, 2012. We accounted for the Put Option as a freestanding financial instrument and elected to record the value under the fair value option of SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. The fair value of the Put Option of $6.7 million was recorded in 2008 as a credit to other income (expense) in the statement of operations. Simultaneously, the Company, pursuant to SFAS No. 115,

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Accounting for Certain Investments in Debt and Equity Securities, transferred these auction rate securities from available-for-sale to trading securities. The transfer to trading securities reflects the Company's intent to exercise the Put Option during the period June 30, 2010 to July 2, 2012. This resulted in an other-than-temporary impairment of $8.0 million in 2008 which was recorded in other income (expense) in the statement of operations.

(g)

In the second quarter of 2005, we recorded a non-cash loss of $0.25 million to write-off the carrying value of an investment in a privately-held proteomic company.

(h)

In the fourth quarter of 2006, we completed our exit from our chemistry services operations and disposed of the related assets. Pursuant to SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, we have reported the results of the chemistry services operations as discontinued operations in 2006, since the related cash flows of our chemistry services operations were eliminated from our ongoing operations and we do not have any significant continuing involvement in the operations of the component or the assets that were disposed.

(i)

Net loss for 2004 includes a $0.6 million fourth quarter adjustment for a loss on the sublease of our Medford facility. See Note 15, "Commitments and Contingencies" in the Notes to Consolidated Financial Statements appearing in Item 8 of this Annual Report on Form 10-K.

(j)

In January 2005, we completed a stock offering in which we sold 5.79 million shares of common stock at a price of $5.25 for net proceeds of $28.3 million after commissions and offering expenses.

(k)

In June 2007, we completed a stock offering in which we sold 7.0 million shares of common stock at a price of $7.75 for net proceeds of $50.5 million after commissions and offering expenses. In July 2007, we sold an additional 0.5 million shares of common stock upon exercise of a portion of the underwriters over-allotment option at a price of $7.75 for net proceeds of $3.6 million after offering expenses.

(l)

In June 2005, we completed a transaction to sell our headquarters facility in Woburn, Massachusetts, and to simultaneously lease the facility from the purchaser. We received a cash payment of approximately $39.3 million, net of commissions and closing costs, and entered into a ten year lease at an average annual rental rate of $3.4 million. As a result of the transaction, we reduced our net fixed assets by $33.7 million, representing the net book value of the real estate sold, and realized a gain on the sale of $5.5 million, which was deferred and is being amortized over the initial ten-year term of the lease as a reduction in rent expense.

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ITEM 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW

        We are a clinical-stage biotechnology company organized as a Delaware corporation in 1993 and engaged in the research and development of innovative cancer therapeutics directed toward molecular targets that we believe play critical roles in the development of human cancers. Our mission is to discover and develop novel products that target multiple tumor types, act selectively against cancer cells and are well tolerated by patients. We believe our clinical stage products represent potential best-in-class or first-in-class small molecule candidates with differentiated mechanisms of action.

        Our products and research programs are based on our understanding of biological processes that lead to the proliferation and metastasis of cancer cells, combined with our ability to generate product candidates possessing certain pre-selected, drug-like properties and designed to act with specificity against cancer cells. We believe that these qualities, when present from the earliest stages of product development, increase the likelihood of producing safe, effective and marketable drugs. We believe that our combined expertise in cancer biology and chemistry differentiates us from many companies at a similar stage of evolution.

        Our lead product is ARQ 197, an orally administered inhibitor of the c-Met receptor tyrosine kinase. ARQ 197 is currently being evaluated as monotherapy and in combination therapy in a Phase 2 clinical development program that includes trials in Microphthalmia Transcription Factor ("MiT")-associated tumors, non-small cell lung cancer ("NSCLC"), pancreatic adenocarcinoma and hepatocellular carcinoma ("HCC"). We have licensed commercial rights to ARQ 197 for human cancer indications to Daiichi Sankyo Co., Ltd. ("Daiichi Sankyo") in the U.S., Europe, South America and the rest of the world, excluding Japan and certain other Asian countries, where we have licensed commercial rights to Kyowa Hakko Kirin Co., Ltd. ("Kyowa Hakko Kirin"). Our separate agreements with these partners provide for possible future milestone payments, royalties on product sales, and development funding, in addition to payments that we have already received.

        Our product pipeline offers the potential for multiple therapeutic candidates based on diverse biological targets, mechanisms of action and chemistry. The most advanced of these programs is focused on the development of inhibitors of the Eg5 kinesin spindle protein, which include ARQ 621, for which we have filed an Investigational New Drug Application ("IND"). We have completed certain Phase 2 proof-of-principle trials with ARQ 501, a first-generation, intravenously administered novel activator of the cell's DNA damage response mechanism mediated by the E2F-1 transcription factor, and we have filed an IND for ARQ 761, a second-generation E2F-1 activator. We are in pre-clinical development with an inhibitor of the BRAF kinase.

        Our drug discovery efforts are focused primarily on the ArQule Kinase Inhibitor Platform ("AKIP™"), which we employ to generate a new class of compounds designed to inhibit a variety of kinases potently, selectively and without competing with adenosine triphosphate ("ATP"), an energy source for cells. We are currently assessing the potential of multiple kinases in oncology and other therapeutic areas as targets for this drug discovery platform, and we are seeking to generate and validate compounds that inhibit these kinase targets. We have signed a drug discovery agreement with Daiichi Sankyo that leverages the capabilities of the AKIP platform to discover compounds that inhibit two such kinase targets in the field of oncology.

        All of our drug discovery efforts, including our kinase platform, are supported by the expertise we have derived from our heritage as a combinatorial chemistry company. This expertise, which has been validated through collaborations with Pfizer, Wyeth, Solvay and other corporate partners, is married to state-of-the-art biology to create a discovery engine marked by speed, efficiency and flexibility.

        In September 2005, we announced a strategic decision to exit our pre-existing chemistry services operations in order to focus operationally on developing our oncology portfolio. Revenue from our

42

chemistry services operations terminated in 2006 as a result of our strategic decision to no longer provide these services and the subsequent decision by Pfizer to terminate its Collaborative Agreement ("Agreement") with us effective May 22, 2006. We did not incur any financial penalty as a result of termination. We continued to provide chemistry services to Pfizer pursuant to the Agreement through the effective date of termination. Since December 2001, we produced for Pfizer annually an average of approximately 160,000 synthetic chemical compounds and received average annual cash payments of approximately $50 million for those compounds and related services. The Agreement provided for six months prior written notice by either party to the other for termination without cause and, in the event of termination by Pfizer, certain payments to us. In accordance with these provisions, we received approximately $19.8 million in December 2005 in connection with the termination.

        We considered the chemistry services asset group to be a "component of an entity," as defined in SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets ("SFAS 144"), since it comprised operations and cash flows that were clearly distinguished, operationally and for financial reporting purposes, from the remainder of the Company's operations. Pursuant to SFAS 144, we reported the results of the chemistry services component as discontinued operations in the year ended December 31, 2006, since their related cash flows were eliminated from our ongoing operations and we did not have any significant continuing involvement in the operations of the component or the assets that were disposed.

        We have incurred a cumulative net loss of $332 million from inception through December 31, 2008. We expect research and development costs to increase in 2009, due to clinical testing of our lead product candidates. Although we have generated positive cash flow from operations for six consecutive years from 2000-2005, these cash flows were attributable to our discontinued chemistry services operations. We recorded a net loss for all but one of those years. We recorded a net loss for 2006, 2007 and 2008, and expect a net loss for 2009.

        Our revenue consists primarily of development funding from our alliances with Roche, Daiichi Sankyo and Kyowa Hakko Kirin. Revenue and expenses fluctuate from quarter to quarter based upon a number of factors, notably: the timing and extent of our cancer related research and development activities together with the length and outcome of our clinical trials. On December 17, 2008, Roche notified the Company of its intention not to exercise its option to license the E2F program. Roche's rights to develop and commercialize potential drugs under the agreement terminated as of December 31, 2008. As a result, the Company will not receive any further payments under this agreement.

        On December 18, 2008, we entered into a license, co-development and co-commercialization agreement with Daiichi Sankyo to conduct research, clinical trials and the market launch of ARQ 197 in human cancer indications in the U.S., Europe, South America and the rest of the world, excluding Japan, China (including Hong Kong), South Korea and Taiwan, where Kyowa Hakko Kirin has exclusive rights for development and commercialization. The agreement provides for a $60 million cash upfront licensing payment from Daiichi Sankyo to us, which we received in December 2008 and an additional $560 million in potential development and sales milestone payments. We and Daiichi Sankyo will share equally the costs of Phase 2 and Phase 3 clinical studies, with our share of Phase 3 costs payable solely from milestone and royalty payments by Daiichi Sankyo. Upon commercialization, we will receive tiered, double-digit royalties from Daiichi Sankyo on net sales of ARQ 197 commensurate with the magnitude of the transaction. We retain the option to participate in the commercialization of ARQ 197 in the U.S. Revenue for this agreement is recognized using the contingency-adjusted performance model with an estimated development period through December 2013. For the year ended December 31, 2008, $0.4 million was recognized as revenue. At December 31, 2008, $59.6 million remains in deferred revenue.

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        The duration and termination of the agreement is tied to future events. Unless earlier terminated due to breach, insolvency or upon 90 days notice if prior to phase 3 clinical trials or 180 days notice if on or after the beginning of phase 3 clinical trials by Daiichi, the agreement shall continue until the later of (i) such time as Daiichi is no longer developing at least one licensed product or (ii) if Daiichi has commercialized a licensed product or products, such time as all royalty terms for all licensed products have ended. The royalty term, on a country-by country basis for a product, ends as of the later of (i) the expiration of the last valid claim under a patent covering the manufacture, use, or sale of a licensed product or (ii) a certain number of years from the date of the commercial sale of the licensed product in such country.

        On November 7, 2008, we entered into a research collaboration, exclusive license and co-commercialization agreement with Daiichi Sankyo under which we will apply our proprietary technology and know-how from our AKIP™ platform for the discovery of therapeutic compounds that selectively inhibit certain kinases. The agreement defines two such kinase targets, and Daiichi Sankyo will have an option to license compounds directed to these targets following the completion of certain pre-clinical studies. The agreement provides for a $15 million upfront payment, which we received in November 2008, research support payments for the first two years of the collaboration, $3.6 million of which we received in December 2008, licensing fees for compounds discovered as a result of this research, milestone payments related to clinical development, regulatory review and sales, and royalty payments on net sales of compounds from the collaboration. We retain the option to co-commercialize licensed products developed under this agreement in the U.S. Revenue for this agreement is recognized using the contingency-adjusted performance model with an estimated performance period through November 2012. For the year ended December 31, 2008, $0.7 million was recognized as revenue. At December 31, 2008, $17.9 million remains in deferred revenue.

        The duration and termination of the agreement is tied to future events. Unless earlier terminated due to breach, insolvency or upon 90 days notice by Daiichi, the agreement terminates on the later of (i) the expiration of the research collaboration period, or (ii) various periods specified in the agreement for development and commercialization of products. If Daiichi has commercialized a licensed product or products, the agreement will continue in force until such time as all royalty terms for all licensed products have ended. The royalty term, on a country-by country basis for a product, ends as of the later of (i) the expiration of the last valid claim under a patent covering the manufacture, use, or sale of a licensed product or (ii) a certain number of years from the date of the commercial sale of the licensed product in such country.

        On April 27, 2007, we entered into an exclusive license agreement with Kyowa Hakko Kirin to develop and commercialize ARQ 197, a small molecule, selective inhibitor of the c-Met receptor tyrosine kinase, in Japan and parts of Asia. A $3 million portion of an upfront licensing fee was received by the Company under this agreement in the first quarter of 2007 and an additional $27 million in upfront licensing fees was received on May 7, 2007. The agreement includes $123 million in upfront and potential development milestone payments from Kyowa Hakko Kirin to ArQule, including the $30 million cash upfront licensing payments. In February 2008, we received a $3 million milestone payment from Kyowa Hakko Kirin. Upon commercialization, ArQule will receive tiered royalties in the mid-teen to low-twenty percent range from Kyowa Hakko Kirin on net sales of ARQ 197. Kyowa Hakko Kirin will be responsible for all clinical development costs and commercialization of the compound in certain Asian countries, consisting of Japan, China (including Hong Kong), South Korea and Taiwan.

        In addition to the upfront and possible regulatory milestone payments totaling $123 million, the Company will be eligible for future milestone payments based on the achievement of certain levels of net sales. The Company will recognize the payments, if any, as revenue in accordance with its revenue recognition policies. As of December 31, 2008, the Company has not recognized any revenue from these sales milestone payments, and there can be no assurance that it will do so in the future.

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        The duration and termination of the agreement is tied to future events. Unless earlier terminated due to breach, insolvency or upon 90 days notice by Kyowa Hakko Kirin, the agreement terminates on the date that the last royalty term expires in all countries in the territory. The royalty term ends as of the later of (i) the expiration of the last pending patent application or expiration of the patent in the country covering the manufacture, use, or sale of a licensed product or (ii) a certain number of years from the date of the commercial launch in such country of such license product.

        Revenue for this agreement is recognized using the contingency-adjusted performance model with an estimated development period through April 2016. For the year ended December 31, 2008, $4.0 million was recognized as revenue. At December 31, 2008 $27.7 million remains in deferred revenue.

        On April 2, 2004, we announced an alliance with Hoffmann-La Roche ("Roche") to discover and develop drug candidates targeting the E2F biological pathway, including ARQ 501, and ARQ 171. Under the terms of the agreement, Roche obtained an option to license drugs resulting from our E2F program in the field of cancer therapy and provided immediate research funding of $15 million and financial support for ongoing research and development. Roche had an option to license from us worldwide rights for the development and commercialization of all products resulting from the E2F-1 program in the field of cancer therapy based on our delivery of a clinical data package from certain trials with ARQ 501, as well as a recommended Phase 2 dose for a second-generation E2F-1 compound.

        On December 17, 2008, Roche notified the Company of its intention not to exercise its option to license the E2F program. Roche's rights to develop and commercialize potential drugs under the agreement terminated as of December 31, 2008. As a result, the Company will not receive any further payments under this agreement. On January 30, 2009, the Company notified Roche that, in accordance with the terms of the agreement, it had exercised its right to terminate the agreement. As a result, all rights and licenses granted by the Company to Roche under the agreement will also be terminated.

        Under this agreement we received approximately $33 million in research and development support from Roche, all of which has been recognized as revenue through December 31, 2008. In the year ended December 31, 2008, we recognized revenue from Roche of approximately $8.2 million, including $1.6 million of deferred revenue upon the termination of the Roche alliance agreement in 2008. Revenue of approximately $6.6 million was recognized in each of the years ended December 31, 2007 and 2006. No further revenues will be recognized under the collaboration with Roche.

LIQUIDITY AND CAPITAL RESOURCES

	December 31,								% increase (decrease)
	2008		2007			2006			2007 to 2008			2006 to 2007
	(in millions)
Cash, cash equivalents and marketable Securities short-term	$	141.9	$	135.1		$	95.8			5.0	%		41	%
Marketable securities long-term		64.2		—			—			—			—
Notes payable		47.8		—			—			—			—
Working capital		59.7		111.8			80.6			(47	)%		39	%
	2008		2007			2006
	(in millions)
Cash flow from:
Operating activities	$	27.5	$	(16.0	)	$	(47.8	)
Investing activities		55.3		(35.8	)		47.3
Financing activities		48.3		56.3			2.0

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        Cash flow from operating activities.    Our uses of cash for operating activities have primarily consisted of salaries and wages for our employees, facility and facility-related costs for our offices and laboratories, fees paid in connection with preclinical and clinical studies, laboratory supplies and materials, and professional fees. The sources of our cash flow from operating activities have consisted primarily of payments from our collaborators for services performed or upfront payments for future services. In 2008, our net source of cash was primarily driven by the difference between cash receipts from our collaborators, and payments for operating expenses which resulted in a net cash inflow of $27.5 million.

        Cash flow from investing activities.    Our net cash provided by investing activities of $55.3 million in 2008 was comprised of net sales of marketable securities of $58.7 million, partially offset by acquisitions of fixed assets of $3.5 million. The composition and mix of cash, cash equivalents and marketable securities may change frequently as a result of the Company's constant evaluation of conditions in financial markets, the maturity of specific investments, and our near term liquidity needs.

        Our cash equivalents and marketable securities include US Treasury bill funds, money market funds and US federal and state agency backed certificates, including auction rate securities that have investment grade ratings.

        Our cash equivalents and our portfolio of marketable securities are subject to market risk due to changes in interest rates. Fixed rate interest securities may have their market value adversely impacted due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, our future investment income may fall short of expectation due to changes in interest rates or we may suffer losses in principal if we are forced to sell securities that decline in market value due to changes in interest rates.

        Auction rate securities are structured with short-term interest reset dates of generally less than 90 days, but with contractual maturities that can be well in excess of ten years. At the end of each reset period, which occurs every seven to twenty-eight days, investors can sell or continue to hold the securities at par value. If any of our auction rate securities were to fail an auction, due to sell orders exceeding buy orders, the funds associated with a failed auction would not be accessible until a successful auction occurred, a buyer was found outside the auction process, the underlying securities matured or a settlement with the underwriter is reached.

        Beginning in the first quarter of 2008 and throughout 2008, certain auction rate securities failed auction due to sell orders exceeding buy orders. On November 3, 2008, the Company accepted an offer (the "Offering") by UBS AG ("UBS") of certain rights ("Put Option") to cause UBS to purchase auction rate securities owned by the Company. The repurchase rights were offered in connection with UBS AG's obligations under settlement agreements with the U.S. Securities and Exchange Commission and other federal and state regulatory authorities. The Offering, the settlement agreements, and the respective rights and obligations of the parties, including a release by the Company of UBS and its employees and agents from all claims except claims for consequential damages relating to UBS's marketing and sale of auction rate securities, are described in a prospectus issued by UBS dated October 7, 2008.

        As a result of accepting the Offering, the Company received a Put Option from UBS to repurchase the securities at par value at any time during the period from June 30, 2010 through July 2, 2012, if the Company's auction rate securities have not previously been sold by the Company or by UBS on its behalf. The Company has accounted for the Put Option as a freestanding financial instrument and elected to record the value under the fair value option of SFAS No. 159. As a result, $6.7 million was recorded to other income which represents the fair value of the Put Option during the year ended December 31, 2008. Simultaneously, the Company, pursuant to SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities, transferred these auction rate securities from available-for-sale to trading securities. The transfer to trading securities reflects the Company's intent

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to exercise the Put Option during the period June 30, 2010 to July 2, 2012. As a result of our intention to exercise the Put Option, we no longer demonstrate the ability and intent to hold our auction rate securities and recorded an other- than temporary -impairment totaling $8.0 million which was recorded in other income (expense) in the statement of operations in the year ended December 31, 2008.

        ArQule's marketable securities portfolio as of December 31, 2007 was $124.2 million. The portfolio included $92.6 million (at cost) invested in auction rate securities of which, $67.7 million (at cost) were associated with auctions that failed subsequent to February 12, 2008. In the year ended December 31, 2008, ArQule sold $27.3 million (at cost) of auction rate securities that were held at December 31, 2007. ArQule's marketable securities portfolio as of December 31, 2008 was $65.3 million (at cost) invested in auction rate securities all of which were associated with auctions that failed subsequent to February 12, 2008.

        On July 8, 2008, we entered into a collateralized, revolving credit line agreement for up to $47.5 million with UBS Bank USA (the "Facility"). The Facility is secured by a first priority lien and security interest in the auction rate securities held by us in an account with UBS Financial Services Inc., an affiliate of UBS Bank USA. The credit line is uncommitted and any outstanding balance, including interest, is payable upon demand. Variable rate advances under the Facility currently bear interest at LIBOR plus 100 basis points and interest will be payable monthly. The Facility replaced the $15 million standard margin loan agreement with UBS Financial Services Inc. that we entered into on May 8, 2008. In July 2008, we drew down $46.1 million under the Facility. The funds will be available for research and development efforts, including clinical trials, and for general corporate purposes, including working capital.

        In accordance with the Offering by UBS, the $46.1 million borrowed under the Facility remains payable on demand; however, if UBS Bank USA should exercise its right to demand repayment of any portion of the Company's indebtedness prior to the date the Company can exercise its repurchase rights (other than for reasons specified in the prospectus), UBS and certain of its affiliates will arrange for alternative financing on terms and conditions substantially the same as those contained in the Facility. If alternative financing cannot be established, then UBS or one of its affiliates will purchase the Company's pledged auction rate securities at par.

        We believe these terms represent a positive step toward the resolution of the illiquidity of our auction rate securities investments. Given these terms, and taking into account the financial impact of our two agreements with Daiichi Sankyo, including a cumulative $75 million in cash and upfront payments and certain anticipated milestone and cost-sharing provisions, we expect that our available cash and cash equivalents, including cash received under our auction rate security credit line agreement (as described above), together with cash from operations and investment income, will be sufficient to finance our working capital and capital requirements through at least the end of 2011.

        Cash flow from financing activities.    Our net cash provided by financing activities of $48.3 million in the year ended December 31, 2008 was primarily from the $46.1 million we borrowed under our collateralized, revolving credit line agreement (as described above) and the $1.7 million we borrowed under a margin loan agreement with another financial institution collateralized by $2.9 million of our auction rate securities.

        Our net cash provided by financing activities of $56.3 million in the year ended December 31, 2007 was comprised primarily of the proceeds from our June 2007 stock offering, wherein we sold 7 million shares of common stock at $7.75 per share for aggregate net proceeds of $50.5 million after commissions and offering expenses. During July 2007, the Company received net proceeds of $3.6 million when the underwriters exercised a portion of their over-allotment option and purchased an additional 502,000 shares of common stock. Stock option exercises and employee stock plan purchases provided additional cash inflow of $2.2 million.

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        Our cash requirements may vary materially from those now planned depending upon the results of our drug discovery and development strategies, our ability to enter into additional corporate collaborations and the terms of such collaborations, results of research and development, unanticipated required capital expenditures, competitive and technological advances, acquisitions and other factors. We cannot guarantee that we will be able to develop any of our drug candidates into a commercial product. It is likely we will need to raise additional capital or incur indebtedness to continue to fund our operations in the future. Our ability to raise additional funds will depend on financial, economic and market conditions and due to global capital and credit market conditions or for other reasons, we may be unable to raise capital when needed, or on terms favorable to us. If necessary funds are not available, we may have to delay, reduce the scope of, or eliminate some of our development programs, potentially delaying the time to market for any of our product candidates.

        Our contractual obligations were comprised of the following as of December 31, 2008 (in thousands):

		Payment due by period
Contractual Obligations		Total		Less than 1 year		1 - 3 years		3 - 5 years		More than 5 years
Notes payable		$	47,750	$	47,750	$	—	$	—	$	—
Operating lease obligations			21,881		3,982		6,999		6,646		4,254
Purchase obligations			8,955		8,955		—		—		—
	Total	$	78,586	$	60,687	$	6,999	$	6,646	$	4,254

        Included in the total minimum payments for operating leases is approximately $715 related to abandoned real estate in California, net of contractual sublease income. This net amount has been accrued as a liability as a part of the Company's restructuring charge in 2002 and subsequently adjusted in 2003 and 2004. Purchase obligations are comprised primarily of outsourced preclinical and clinical trial expenses and payments to license certain intellectual property to support the Company's research efforts. Interest on notes payable is variable and is excluded from the table above. Notes payable of $46.1 million currently bear interest at a rate not to exceed our weighted average auction rate security coupon rate and $1.7 million currently bear interest at LIBOR plus 125 basis points.

DISCONTINUED OPERATIONS

        On September 27, 2005, we announced our intention to exit our chemistry services operations. We received notice on December 2, 2005 that Pfizer had elected to terminate our Collaboration Agreement ("the Agreement"), pursuant to its terms, effective May 22, 2006. The Agreement provided for six months prior written notice by either party to the other for termination without cause and, in the event of termination by Pfizer, certain payments to us. In accordance with these provisions, we received approximately $19.8 million in December 2005 in connection with the termination. This amount was recorded as deferred revenue and was recognized as revenue when compounds were delivered through the termination date. We have fulfilled our compound production obligations under the Agreement, recognized the remaining deferred revenue, and ceased chemistry services operations in 2006.

        The net book value of the assets associated with the chemistry services operations, which totaled $1.4 million, approximated the fair market value of the underlying assets. In December 2006, we completed the sale of the chemistry services assets, which consisted of commercially available laboratory instrumentation, for approximately $1.3 million, net of disposal costs.

        We considered the chemistry services asset group to be a "component of an entity" (as defined in SFAS 144) since it comprised operations and cash flows that were clearly distinguished, operationally and for financial reporting purposes, from the remainder of the Company's operations. Pursuant to SFAS 144, we reported the results of the chemistry services component as discontinued operations in

48

the year ended December 31, 2006, since their related cash flows were eliminated from our ongoing operations and we do not have any significant continuing involvement in the operations of the component or the assets that were disposed.

        The following table presents operating results for the discontinued chemical services operations in 2006 (in thousands):

		2006
Revenue		$	26,718
Costs and expenses:
	Cost of revenue		8,375
	Restructuring charge		2,498
Total costs and expenses.			10,873
Loss from disposition of assets.			(62	)
Income from discontinued operations.		$	15,783

        Historically, ArQule entered into various collaborative agreements with pharmaceutical and biotechnology companies under which ArQule produced and delivered compound arrays and provided research and development services. Revenue elements from collaborative agreements included non-refundable technology transfer fees, funding of compound development work, payments based upon delivery of specialized compounds meeting collaborators' specific criteria and certain milestones and royalties on product sales.

        Compound development revenue was derived from the following contractual elements in 2006 (in thousands):

	2006
Non-refundable technology transfer payments	$	5
Payments based on delivery of specialized compounds		25,963
Milestone payments		750
Total compound development revenue	$	26,718

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

        A "critical accounting policy" is one which is both important to the portrayal of the Company's financial condition and results and requires management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Management believes the following are critical accounting policies. For additional information, please see the discussion of our significant accounting policies in Note 2 to the Consolidated Financial Statements included in Item 8 of this Form 10-K.

Research and Development Revenue

        The Company's revenue recognition policies are in accordance with the SEC's Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements, as amended by SEC Staff Accounting Bulletin No. 104, Revenue Recognition, and for revenue arrangements entered into after June 30, 2003, Emerging Issues Task Force ("EITF") Issue No. 00-21, Revenue Arrangements with Multiple Deliverables ("EITF 00-21").

        Research and development revenue is generated primarily through collaborative research and development agreements. The terms of the agreements may include nonrefundable upfront payments,

49

funding for research and development, milestone payments and royalties on any product sales derived from collaborations.

        Research and development payments from our collaborators are recognized as research and development revenue using the contingency adjusted performance model. Under this model, when payments are earned, revenue is immediately recognized on a pro-rata basis in the period we achieve the milestone based on the time elapsed from inception of the agreement to the time the milestone is earned over the estimated duration of the development period under the agreement. Thereafter, the remaining portion of the milestone payment is recognized on a straight-line basis over the remaining estimated development period under the agreement. This estimated development period may ultimately be shorter or longer depending upon the outcome of the development work, resulting in accelerated or deferred recognition of the development revenue. Royalty payments will be recognized as revenue when earned. The costs associated with satisfying research and development contracts are included in research and development expense as incurred.

Restructuring Charges/Credits

        Accruals for abandoned facilities under lease require significant management judgment and the use of estimates, including assumptions concerning the ability of a sublessee to fulfill its contractual sublease obligations. In the third quarter of 2004, we entered into a sublease for the Company's abandoned facility in Redwood City, California. The term of the sublease extends through 2010, the remaining term of the Company's primary lease. As a result of signing the sublease, we adjusted our accrual for abandoned facilities to reflect the full amount of the anticipated sublease income to be received. This assumption about the subleasee's ability to fulfill its contractual obligation is based on an analysis of their financial position and ability to generate future working capital. If the subleasee is unable to meet its obligations, and the Company is unable to enter into another sublease for the facility, ArQule may be required to adjust its restructuring accrual and record additional restructuring expense of up to $1.1 million.

Impairment or Disposal of Long-Lived Assets

        We assess our long-lived assets for impairment whenever events or changes in circumstances (a "triggering event") indicate that the carrying value of a group of long-lived assets may not be recoverable in accordance with SFAS 144.

        On September 27, 2005, we announced our intention to exit our chemistry services operations when we had completed our existing Agreement with Pfizer in 2008. We concluded that our intention to exit our chemistry services operations was a triggering event and that an impairment review was required. As a result of that review, we determined that the anticipated undiscounted future cash flows from our chemistry services operations exceeded the net carrying value of the group of long-lived assets attributed to those operations, and therefore there was no impairment in the quarter ended September 30, 2005.

        On December 2, 2005, we received notice that Pfizer had elected to terminate the Agreement, pursuant to the Agreement's terms, effective May 22, 2006. We concluded that notification from Pfizer was also a triggering event and performed a second impairment review. As a result of this second review, we again determined that the anticipated undiscounted future cash flows from our chemistry services operations exceeded the net carrying value of the group of long-lived assets attributed to those operations, and therefore there was no impairment in the quarter ended December 31, 2005. Based on our decision to exit our chemistry services operations, in 2005 we adjusted the depreciable lives on fixed assets used exclusively in those operations in order to fully depreciate the remaining book value of those assets over the remaining period that we will provide services to Pfizer.

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        We were contractually required to perform under the terms of the Agreement until May 22, 2006 and, as such, the assets of the chemistry services operations were considered "held for use" at December 31, 2005. Although we were actively seeking a potential buyer for the chemistry services operations, the uncertainty of us successfully completing a sale transaction within one year, or deciding to abandon the assets, precluded us from classifying the assets of the chemistry services operations as "assets to be disposed of by sale" at December 31, 2005.

        In the third quarter ended September 30, 2006, it became probable that we would sell the chemistry services operations, eliminate the associated cash flows, and have no continuing involvement in the chemistry services operations. Accordingly, the chemistry services operations was reported as "discontinued operations" in our statements of operations in accordance with SFAS 144.

        The net book value of the assets associated with the chemistry services operations, which totaled $1.4 million, approximated the fair market value of the underlying assets. In December 2006, management completed the sale of the chemistry services assets, which consisted of commercially available laboratory instrumentation, for approximately $1.3 million, net of direct costs to sell such assets.

Sale Leaseback Accounting

        On May 2, 2005, we completed a transaction to sell our Woburn headquarters facility and two parcels of land in exchange for a cash payment of $39.3 million, net of commissions and closing costs. Simultaneously with that sale, we entered into an agreement to lease back the entire facility and the associated land. The lease was subsequently amended on June 30, 2005. The amended lease has a term of ten years with an average annual rental rate of $3.4 million. We also have options to extend the lease term for up to an additional ten years. In accordance with SFAS No. 98, Accounting for Leases, we are applying sale leaseback accounting to the transaction and are treating the lease as an operating lease. As a result of this transaction, we reduced our net fixed assets by $33.7 million, representing the net book value of the assets sold on the date of the lease amendment, and realized a gain on the sale of $5.5 million, which has been deferred and will be amortized over the initial ten year lease term as a reduction in rent expense.

RESULTS OF OPERATIONS

        The following results of operations for the years ended December 31, 2008, 2007 and 2006 exclude the effect of discontinued operations:

Revenue

							% increase (decrease)
	2008		2007		2006		2008 to 2007			2006 to 2007
	(in millions)
Research and development revenue	$	14.1	$	9.2	$	6.6		54	%		38	%

        2008 as compared to 2007:    Research and development revenue is comprised of revenue from the Kyowa Hakko Kirin exclusive license agreement, the Daiichi development and research collaborations agreements entered into in 2008, and the Roche alliance agreement. Following the termination of the Roche alliance agreement in 2008, $1.6 million of deferred revenue was recognized in 2008, in addition to the $6.6 million recurring annual amount. No further revenues will be recognized under the collaboration with Roche.

        2007 as compared to 2006:    Research and development revenue is comprised of revenue from the Roche alliance agreement and from the Kyowa Hakko Kirin exclusive license agreement entered into in 2007.

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Research and development

							% increase (decrease)
	2008		2007		2006		2007 to 2008			2006 to 2007
	(in millions)
Research and development	$	49.6	$	53.7	$	47.4		(8	)%		13	%

Overview

        Our research and development expense consists primarily of salaries and related expenses for personnel, costs of contract manufacturing services, costs of facilities and equipment, fees paid to professional service providers in connection with our clinical trials, fees paid to research organizations in connection with preclinical animal studies, costs of materials used in research and development, consulting, license, and sponsored research fees paid to third parties and depreciation of associated laboratory equipment. We expect our research and development expense to increase as we continue to develop our portfolio of oncology programs.

        We have not accumulated and tracked our internal historical research and development costs or our personnel and personnel-related costs on a program-by-program basis. Our employee and infrastructure resources are allocated across several projects, and many of our costs are directed to broadly applicable research endeavors. As a result, we cannot state the costs incurred for each of our oncology programs on a program-by-program basis, or the cost to support our alliance agreement with Roche. The expenses incurred by us to third-parties for preclinical and clinical trials in 2008 and since inception of each program were as follows (in millions):

Oncology program	Current status		2008		Program-to-date
E2F modulation—ARQ 501		Phase 2	$	2.3	$	29.7
E2F modulation—ARQ 171		Phase 1		—		5.2
cMet inhibition—ARQ 197		Phase 2		15.0		34.2

        Our future research and development expenses in support of our current and future oncology programs will be subject to numerous uncertainties in timing and cost to completion. We test potential products in numerous preclinical studies for safety, toxicology, and efficacy. We then may conduct multiple clinical trials for each product. As we obtain results from trials, we may elect to discontinue or delay clinical trials for certain products in order to focus our resources on more promising products. Completion of clinical trials may take several years or more, but the length of time generally varies substantially according to the type, complexity, novelty, and intended use of a product. It is not unusual for the preclinical and clinical development of these types of products to each take nine years or more, and for total development costs to exceed $500 million for each product.

        We estimate that clinical trials of the type generally needed to secure new drug approval are typically completed over the following timelines:

Clinical Phase	Estimated Completion Period
Phase 1		1 - 2 years
Phase 2		2 - 3 years
Phase 3		2 - 4 years

        The duration and the cost of clinical trials may vary significantly over the life of a project as a result of differences arising during clinical development, including, among others, the following:

•

the number of clinical sites included in the trials;

•

the length of time required to enroll suitable patient subjects;

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•

the number of patients that ultimately participate in the trials;

•

the duration of patient follow-up to ensure the absence of long-term adverse safety events; and

•

the efficacy and safety profile of the product.

        An element of our business strategy is to pursue the research and development of a broad pipeline of products. This is intended to allow us to diversify the risks associated with our research and development expenditures. To the extent we are unable to maintain a broad pipeline of products, our dependence on the success of one or a few products increases.

        Our strategy includes entering into alliance arrangements with third parties to participate in the development and commercialization of our products, such as our collaboration agreements with Daiichi and Kyowa Hakko Kirin. In the event that third parties have control over the clinical trial process for a product, the estimated completion date would largely be under control of that third party rather than under our control. We cannot forecast with any degree of certainty whether our products will be subject to future collaborative arrangements or how such arrangements would affect our development plans or capital requirements.

        As a result of the uncertainties discussed above, we are unable to determine the duration and completion costs of our oncology programs or when and to what extent we will receive cash inflows from the commercialization and sale of a product. Our inability to complete our oncology programs in a timely manner or our failure to enter into collaborative agreements, when appropriate, could significantly increase our capital requirements and could adversely impact our liquidity. These uncertainties could force us to seek additional, external sources of financing from time-to-time in order to continue with our strategy. Our inability to raise additional capital, or to do so on terms reasonably acceptable to us, would jeopardize the future success of our business.

        2008 as compared to 2007:    The $4.1 million decrease in research and development expense in 2008 is primarily due to (i) a decrease of $7.4 million in outsourced costs related to the phase 1 and 2 clinical programs with ARQ 501 and ARQ 171, (ii) a decrease of $4.5 million in connection with the Company's sponsored research agreement with Boston Biomedical Institute ("BBI") that was completed in 2008, (iii) a $1.4 million increase in outsourced costs related to the phase 1 and 2 clinical programs for ARQ 197 (iv) an increase of $2.8 million in other outsourced preclinical and product development costs, and (v) $3.7 million in additional personnel costs, including $0.5 million incurred in conjunction with the separation agreement of our prior chief medical officer. At December 31, 2008, we had 77 employees dedicated to our research and development program, down from 78 employees at December 31, 2007.

        2007 as compared to 2006:    The $6.3 million increase in research and development expense in 2007 is primarily due to (i) a $10.9 million increase in outsourced costs related to the phase 1 and 2 clinical programs for ARQ 197, (ii) an increase of $4.7 million in connection with the Company's sponsored research agreement with BBI, and (iii) a decrease of $7.5 million in outsourced costs related to the phase 1 and 2 clinical programs with ARQ 501. At December 31, 2007, we had 78 employees dedicated to our research and development program, down from 93 employees at December 31, 2006.

53

General and administrative

							% increase (decrease)
	2008		2007		2006		2007 to 2008			2006 to 2007
	(in millions)
General and administrative	$	16.9	$	15.1	$	11.6		12	%		30	%

        2008 compared to 2007:    General and administrative expense increased $1.8 million in 2008 primarily due to increased stock-based compensation expense resulting from senior management transitions. General and administrative headcount was 30 at December 31, 2008, compared to 32 at December 31, 2007.

        2007 compared to 2006:    General and administrative expense increased $3.5 million in 2007 primarily due to increased personnel-related costs of $2.6 million, including stock-based compensation expense of $1.6 million and $0.7 million of facility costs which are no longer absorbed by the chemical services operations. General and administrative headcount was 32 at December 31, 2007, compared to 33 at December 31, 2006.

Restructuring

        In December 2002, we announced a major restructuring of our operations in order to realign our workforce and expedite the transition towards becoming a drug discovery company. The restructuring actions included closing our facilities in Redwood City, California and Cambridge, United Kingdom.

        The facility-related accrual, which represents the difference between our lease obligation for the California facility and the amount of sublease payments it will receive under its sublease agreement, will be paid out through 2010.

        On January 19, 2006, our Board of Directors authorized termination benefits for employees in connection with a plan of termination for our discontinued chemistry services operations. The termination benefits, which affected 104 employees, consisted of cash payments and continuation of health care benefits. In 2006, a restructuring charge of $2.5 million was recorded pursuant to this action and is included in the 2006 Consolidated Statement of Operations as part of "Income from discontinued operations". As of December 31, 2006, all affected employees had been separated from the Company and the restructuring costs were fully paid.

        Activities against the restructuring accrual in 2007 and 2008 were as follows (in thousands):

		Balance as of December 31, 2006		2007 Provisions		2007 Payments			Balance as of December 31, 2007
Facility-related		$	2,044	$	—	$	(678	)	$	1,366
	Total restructuring accrual	$	2,044	$	—	$	(678	)	$	1,366

		Balance as of December 31, 2007		2008 Provisions		2008 Payments			Balance as of December 31, 2008
Facility-related		$	1,366	$	—	$	(628	)	$	738
	Total restructuring accrual	$	1,366	$	—	$	(628	)	$	738

54

Interest income, interest expense and other income (expense)

								% increase (decrease)
	2008			2007		2006		2007 to 2008			2006 to 2007
	(in millions)
Interest income	$	3.3		$	6.3	$	5.1		(47	)%		22	%
Interest expense		(0.5	)		—		—		—			—
Other income (expense)		(1.3	)		—		—		—			—

        Interest income is comprised primarily of interest income derived from our portfolio of cash and investments. Interest income decreased in 2008 due to lower interest rates earned on our portfolio. Interest expense in 2008 was incurred on our notes payable. Other income (expense) in 2008 includes an other-than-temporary impairment of our auction rate securities of $8.0 million, partially offset by a $6.7 million gain upon recognition of the fair value of our auction rate security Put Option received from our 2008 settlement agreement with UBS.

RECENT ACCOUNTING PRONOUNCEMENTS

        Effective January 1, 2008, we implemented SFAS No. 157, Fair Value Measurement, or SFAS 157, for our financial assets and liabilities that are re-measured and reported at fair value at each reporting period, and non-financial assets and liabilities that are re-measured and reported at fair value at least annually. In accordance with the provisions of FSP FAS 157-2, Effective Date of Financial Accounting Standards Board ("FASB") Statement No. 157, we deferred the implementation of SFAS 157 as it relates to our non-financial assets and non-financial liabilities that are recognized and disclosed at fair value in the financial statements on a nonrecurring basis until January 1, 2009. We are evaluating the impact this standard will have on our financial statements.

        On December 12, 2007, EITF 07-01, Accounting for Collaborative Arrangements Related to the Development and Commercialization of Intellectual Property, or EITF 07-01, was issued. EITF- 07-01 prescribes the accounting for collaborations. It requires certain transactions between collaborators to be recorded in the income statement on either a gross or net basis within expenses when certain characteristics exist in the collaboration relationship. EITF 07-01 is effective for all of our collaborations existing after January 1, 2009. The adoption of this standard will not have a material impact on our financial statements or results of operations.

        On December 4, 2007, SFAS No. 141(R), Business Combinations, or SFAS 141(R), was issued. This Standard will require an acquiring company to measure all assets acquired and liabilities assumed, including contingent considerations and all contractual contingencies, at fair value as of the acquisition date. In addition, an acquiring company is required to capitalize IPR&D and either amortize it over the life of the product, or write it off if the project is abandoned or impaired. The Standard is effective for transactions occurring on or after January 1, 2009. There was no significant impact to the Company's Consolidated Financial Statements from the adoption of SFAS 141(R),

ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

        We own financial instruments that are sensitive to market risk as part of our investment portfolio. We have implemented policies regarding the amount and credit ratings of investments. Our investment portfolio is used to preserve our capital until it is used to fund operations, including our research and development activities. Our investments are evaluated quarterly to determine the fair value of the portfolio.

        Our cash and marketable securities include US Treasury bill funds, money market funds, and U.S. federal and state agency backed certificates, including auction rate securities that have strong credit ratings.

55

        Our cash equivalents and our portfolio of marketable securities are subject to market risk due to changes in interest rates. Fixed rate interest securities may have their market value adversely impacted due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, our future investment income may fall short of expectation due to changes in interest rates or we may suffer losses in principal if we are forced to sell securities that decline in market value due to changes in interest rates.

        Auction rate securities are securities that are structured with short-term interest reset dates of generally less than 90 days, but with contractual maturities that can be well in excess of ten years. At the end of each reset period, which occurs every seven to twenty-eight days, investors can sell or continue to hold the securities at par value. If any of our auction rate securities were to fail an auction, due to sell orders exceeding buy orders, the funds associated with a failed auction would not be accessible until a successful auction occurred, a buyer was found outside the auction process, the underlying securities matured or a settlement with the underwriter is reached.

        Beginning in the first quarter of 2008 and throughout 2008, certain auction rate securities failed auction due to sell orders exceeding buy orders. On November 3, 2008, the Company accepted an offer (the "Offering") by UBS AG ("UBS") of certain rights ("Put Option") to cause UBS to purchase auction rate securities owned by the Company. The repurchase rights were offered in connection with UBS AG's obligations under settlement agreements with the U.S. Securities and Exchange Commission and other federal and state regulatory authorities. The offering, the settlement agreements, and the respective rights and obligations of the parties, including a release by the Company of UBS and its employees and agents from all claims except claims for consequential damages relating to UBS's marketing and sale of auction rate securities, are described in a prospectus issued by UBS dated October 7, 2008.

        As a result of accepting UBS's offer, the Company received a Put Option from UBS to repurchase the securities at par value at any time during the period from June 30, 2010 through July 2, 2012, if the Company's auction rate securities have not previously been sold by the Company or by UBS on its behalf. The Company has accounted for the Put Option as a freestanding financial instrument and elected to record the value under the fair value option of SFAS No. 159. As a result, $6.7 million was recorded in other income (expense) which represents the fair value of the Put Option during the year ended December 31, 2008. Simultaneously, the Company pursuant to SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities, transferred these auction rate securities from available-for-sale to trading securities. The transfer to trading securities reflects the Company's intent to exercise the Put Option during the period June 30, 2010 to July 2, 2012. As a result of our intention to exercise the Put Option, we no longer demonstrate the ability and intent to hold our auction rate securities and recorded an other-than-temporary impairment totaling $8.0 million which was recorded as other expense in the year ended December 31, 2008.

        ArQule's marketable securities portfolio as of December 31, 2007 was $124.2 million. The portfolio included $92.6 million (at cost) invested in auction rate securities of which, $67.7 million (at cost) were associated with auctions that failed subsequent to February 12, 2008. In the year ended December 31, 2008, ArQule sold $27.3 million (at cost) of auction rate securities that were held at December 31, 2007. ArQule's marketable securities portfolio as of December 31, 2008 was $65.3 million (at cost) invested in auction rate securities all of which were associated with auctions that failed subsequent to February 12, 2008. On July 8, 2008, we entered into a collateralized, revolving credit line agreement for up to $47.5 million with UBS Bank USA (the "Facility"). In July 2008, we drew down $46.1 million under the Facility.

        In accordance with the offering by UBS, the Facility remains payable on demand; however, if UBS Bank should exercise its right to demand repayment of any portion of the Company's indebtedness prior to the date the Company can exercise its repurchase rights (other than for reasons specified in the prospectus), UBS and certain of its affiliates will arrange for alternative financing on terms and conditions substantially the same as those contained in the Facility. If alternative financing cannot be established, then UBS or one of its affiliates will purchase the Company's pledged auction rate securities at par.

56

ITEM 8.    CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

	Page
Report of Independent Registered Public Accounting Firm	58
Consolidated Balance Sheets at December 31, 2008 and 2007	59
Consolidated Statements of Operations for the years ended December 31, 2008, 2007 and 2006	60
Consolidated Statements of Stockholders' Equity and Comprehensive Loss for the years ended December 31, 2008, 2007 and 2006	61
Consolidated Statements of Cash Flows for the years ended December 31, 2008, 2007 and 2006	62
Notes to Consolidated Financial Statements	63

57

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of ArQule, Inc.

        In our opinion, the accompanying consolidated balance sheets and related consolidated statements of operations, of stockholders' equity and comprehensive loss, and of cash flows present fairly, in all material respects, the financial position of ArQule, Inc. and its subsidiaries at December 31, 2008 and 2007, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2008 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2008 based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management's Report on Internal Control Over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on these financial statements and on the Company's internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

        As discussed in Note 14 to the consolidated financial statements, the Company changed the manner in which it accounts for income tax contingencies in 2007.

        A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

        Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ PricewaterhouseCoopers LLP

Boston, Massachusetts
March 6, 2009

58

ARQULE, INC.

CONSOLIDATED BALANCE SHEETS

				December 31,
				2008			2007
				(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
ASSETS
Current assets:
	Cash and cash equivalents			$	141,890		$	10,835
	Marketable securities				—			124,247
	Prepaid expenses and other current assets				772			1,426
			Total current assets		142,662			136,508
Marketable securities-long term					64,219			—
Property and equipment, net					5,620			3,911
Other assets					1,711			1,791
			Total assets	$	214,212		$	142,210
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
	Accounts payable and accrued expenses			$	14,260		$	14,162
	Notes payable				47,750			—
	Current portion of deferred revenue				20,420			9,997
	Current portion of deferred gain on sale leaseback				552			552
			Total current liabilities		82,982			24,711
Restructuring accrual, net of current portion					78			738
Deferred revenue, net of current portion					84,693			25,176
Deferred gain on sale leaseback, net of current portion					2,992			3,544
			Total liabilities		170,745			54,169
Commitments and contingencies (Note 15)					—			—
Stockholders' equity:
		Preferred stock, $0.01 par value; 1,000,000 shares authorized; no shares issued or outstanding			—			—
		Common stock, $0.01 par value; 100,000,000 shares authorized; 44,153,237 and 43,761,113 shares issued and outstanding at December 31, 2008 and 2007, respectively			442			438
Additional paid-in capital					375,478			369,196
Accumulated other comprehensive loss					—			(4	)
Accumulated deficit					(332,453	)		(281,589	)
			Total stockholders' equity		43,467			88,041
			Total liabilities and stockholders' equity	$	214,212		$	142,210

The accompanying notes are an integral part of these consolidated financial statements.

59

ARQULE, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

			YEAR ENDED DECEMBER 31,
			2008			2007			2006
			(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenue:
	Research and development revenue		$	14,141		$	9,165		$	6,626
Costs and expenses:
	Research and development			49,629			53,727			47,428
	General and administrative			16,918			15,069			11,560
				66,547			68,796			58,988
		Loss from continuing operations		(52,406	)		(59,631	)		(52,362	)
Interest income				3,342			6,259			5,139
Interest expense				(472	)		—			—
Other income (expense)				(1,328	)		—			—
Net loss from continuing operations				(50,864	)		(53,372	)		(47,223	)
Income from discontinued operations				—			—			15,783
		Net loss	$	(50,864	)	$	(53,372	)	$	(31,440	)
Basic and diluted income (loss) per share:
		Net loss from continuing operations	$	(1.16	)	$	(1.33	)	$	(1.33	)
		Income from discontinued operations		—			—			0.45
Net loss per share			$	(1.16	)	$	(1.33	)	$	(0.88	)
Weighted average common shares outstanding-basic and diluted				43,870			40,040			35,539

The accompanying notes are an integral part of these consolidated financial statements.

60

ARQULE, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE LOSS

(IN THOUSANDS, EXCEPT SHARE DATA)

	COMMON STOCK
							ACCUMULATED OTHER COMPREHENSIVE INCOME/(LOSS)
	SHARES		PAR VALUE		ADDITIONAL PAID-IN CAPITAL					ACCUMULATED DEFICIT			STOCKHOLDERS' EQUITY			TOTAL COMPREHENSIVE LOSS
Balance at December 31, 2005		35,297,932	$	353	$	302,730	$	(848	)	$	(196,777	)	$	105,458
Stock option exercises and issuance of stock		382,557		4		1,538								1,542
Employee stock purchase plan		131,220		1		479								480
Stock based compensation expense						3,218								3,218
Change in unrealized loss on marketable securities								696						696		$	696
Net loss											(31,440	)		(31,440	)		(31,440	)
Balance at December 31, 2006		35,811,709		358		307,965		(152	)		(228,217	)		79,954
2006 Comprehensive loss																$	(30,744	)
Stock option exercises and issuance of stock		351,621		4		1,757								1,761
Employee stock purchase plan		95,783		1		474								475
Stock based compensation expense						4,971								4,971
Issuance of common stock from stock offering, net		7,502,000		75		54,029								54,104
Change in unrealized loss on marketable securities								148						148		$	148
Net loss											(53,372	)		(53,372	)		(53,372	)
Balance at December 31, 2007		43,761,113		438		369,196		(4	)		(281,589	)		88,041
2007 Comprehensive loss																$	(53,224	)
Stock option exercises and issuance of stock		246,931		2		180								182
Employee stock purchase plan		145,193		2		394								396
Stock based compensation expense						5,708								5,708
Change in unrealized loss on marketable securities								4						4		$	4
Net loss											(50,864	)		(50,864	)		(50,864	)
Balance at December 31, 2008		44,153,237	$	442	$	375,478	$	—		$	(332,453	)	$	43,467
2008 Comprehensive loss																$	(50,860	)

The accompanying notes are an integral part of these consolidated financial statements.

61

ARQULE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

				YEAR ENDED DECEMBER 31,
				2008			2007			2006
				(IN THOUSANDS)
Cash flows from operating activities:
	Net loss			$	(50,864	)	$	(53,372	)	$	(31,440	)
	Income from discontinued operations				—			—			(15,783	)
	Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
		Depreciation and amortization			1,702			1,714			2,254
		Amortization of premium/discount on marketable securities			20			26			179
		Amortization of deferred gain on sale leaseback			(552	)		(552	)		(552	)
		Non-cash stock compensation.			5,708			4,971			3,218
		Gain on auction rate security rights			(6,684	)		—			—
		Other than temporary impairment on auction rate securities			8,012			—			—
		Loss on disposal of fixed assets.			14			160			4
	Changes in operating assets and liabilities:
		Accounts receivable			—			—			6
		Prepaid expenses and other current assets			654			736			(906	)
		Other assets			80			486			(442	)
		Accounts payable and accrued expenses			98			3,886			4,961
		Restructuring accrual, net of current portion.			(660	)		(628	)		(681	)
		Deferred revenue			69,940			26,597			(1,610	)
	Net cash used in operating activities from discontinued operations.				—			—			(7,046	)
			Net cash provided by (used in) operating activities		27,468			(15,976	)		(47,838	)
Cash flows from investing activities:
	Purchases of marketable securities				(8,789	)		(181,555	)		(85,570	)
	Proceeds from sale or maturity of marketable securities				67,473			147,020			132,335
	Additions to property and equipment				(3,519	)		(1,236	)		(814	)
	Proceeds from disposal of property and equipment				94			—			—
	Net cash provided by investing activities from discontinued operations				—			—			1,302
			Net cash provided by (used in) investing activities		55,259			(35,771	)		47,253
Cash flows from financing activities:
	Proceeds from notes payable				47,750			—			—
	Proceeds from registered direct stock offering, net				—			54,104			—
	Proceeds from issuance of common stock				578			2,236			2,022
			Net cash provided by financing activities		48,328			56,340			2,022
Net increase in cash and cash equivalents.					131,055			4,593			1,437
Cash and cash equivalents, beginning of period					10,835			6,242			4,805
Cash and cash equivalents, end of period				$	141,890		$	10,835		$	6,242

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

        During 2008, the Company paid interest on debt of $472 and in 2007 and 2006 paid no interest.

The accompanying notes are an integral part of these consolidated financial statements.

62

ARQULE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

1. ORGANIZATION AND NATURE OF OPERATIONS

        We are a clinical-stage biotechnology company organized as a Delaware corporation in 1993 and engaged in the research and development of innovative cancer therapeutics directed toward molecular targets that we believe play critical roles in the development of human cancers. Our mission is to discover and develop novel products that target multiple tumor types, act selectively against cancer cells and are well tolerated by patients.

        Our lead product is ARQ 197, an orally administered inhibitor of the c-Met receptor tyrosine kinase. ARQ 197 is currently being evaluated as monotherapy and in combination therapy in a Phase 2 clinical development program. We have licensed commercial rights to ARQ 197 for human cancer indications to Daiichi Sankyo Co., Ltd. in the U.S., Europe, South America and the rest of the world, excluding Japan and certain other Asian countries, where we have licensed commercial rights to Kyowa Hakko Kirin.

        Our product pipeline offers the potential for multiple therapeutic candidates based on diverse biological targets, mechanisms of action and chemistry. The most advanced of these programs is focused on the development of inhibitors of the Eg5 kinesin spindle protein, which include ARQ 621, for which we have filed an Investigational New Drug Application ("IND").

        Our drug discovery efforts are focused primarily on the ArQule Kinase Inhibitor Platform ("AKIP™"), which we are leveraging to generate a new class of compounds designed to inhibit a variety of kinases potently, selectively and without competing with adenosine triphosphate ("ATP"), an energy source for cells. We have maintained the know-how associated with our combinatorial chemistry expertise, developed and validated in the course of our previous chemistry services collaborations with companies in the pharmaceutical and biotechnology industries, and combined it with our biology expertise.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

        Significant accounting policies followed in the preparation of these financial statements are as follows:

Basis of Consolidation

        The consolidated financial statements include the accounts of ArQule, Inc. and its wholly-owned subsidiary ArQule U.K. Ltd., (collectively, "we", "us", "our" and the "Company"). All intercompany transactions and balances have been eliminated. In February 2005, ArQule U.K. Ltd. was formally dissolved.

Use of Estimates

        The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.

63

ARQULE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Cash Equivalents and Marketable Securities

        We consider all highly liquid investments purchased within three months of original maturity date to be cash equivalents. We invest our available cash primarily in money market mutual funds, U.S. federal and state agency backed certificates, including auction rate certificates, corporate bonds and other investment grade debt securities that have strong credit ratings. Auction rate securities are structured with short-term interest reset dates of generally less than 90 days, but with contractual maturities that can be well in excess of ten years. At the end of each reset period, which occurs every seven to twenty-eight days, investors can sell or continue to hold the securities at par value. We account for our marketable securities in accordance with SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities ("SFAS No. 115"). We classify our marketable securities as available-for-sale at the time of purchase and re-evaluate such designation as of each consolidated balance sheet date. The Company classifies its investments as either current or long-term based upon the investments' contractual maturities and the Company's ability and intent to convert such instruments to cash within one year.

        We determine on a quarterly basis the fair value of our investment portfolio. Our securities are recorded on our balance sheet at fair value. Unrealized gains and losses on securities are included in stockholders' equity, net of related tax effects. We evaluate our investments periodically for possible other-than-temporary impairment by reviewing factors such as the length of time and extent to which fair value has been below the cost basis, the financial condition of the issuer and our ability and intent to hold the investment for a period of time which may be sufficient for anticipated recovery of market value. We record an impairment charge to the extent that the carrying value of our available for sale securities exceeds the estimated fair value of the securities and the decline in value is determined to be other-than-temporary.

Fair Value of Financial Instruments

        At December 31, 2008 our financial instruments consist of cash, cash equivalents, accounts payable, accrued expenses and notes payable. The carry amount of these financial instruments approximate their fair values. At December 31, 2008, our financial instruments also included marketable securities and an auction rate security Put Option which are reported at fair value. At December 31, 2007 our financial instruments consist of cash, cash equivalents, marketable securities, accounts payable and accrued expenses. The carry amount of these financial instruments approximate their fair values.

Investments in Non-Marketable Equity Securities

        Investments in non-marketable equity securities are accounted for under the cost method if ArQule owns less than 20 percent of the outstanding stock of the investee and our management determines we do not exert significant influence over the management of the investee. We assess the fair value of investments in non-marketable equity securities quarterly, or whenever events or changes in circumstances indicate the carrying value may not be recoverable. In the event fair value is determined to be less than the carrying value of an investment, the carrying value is written down to fair value if the decline in value is significant and is deemed to be other than temporary. Since there is no readily available market information concerning the fair value of these investments, such assessments require significant management judgment in analyzing the investee's financial position and

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(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

projected future financial results and cash flows. Although our best estimates of fair value are based upon available information, the use of different estimates could yield different conclusions concerning the recoverability of the carrying value of investments.

Property and Equipment

        Property and equipment are recorded at cost and depreciated using the straight-line method over their estimated useful lives. Assets under capital leases and leasehold improvements are amortized over the shorter of their estimated useful lives or the term of the respective leases by use of the straight-line method. Maintenance and repair costs are expensed as incurred.

Revenue Recognition—Research and Development Revenue

        The Company's revenue recognition policies are in accordance with the SEC's Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements, as amended by SEC Staff Accounting Bulletin No. 104, Revenue Recognition, and for revenue arrangements entered into after June 30, 2003, EITF Issue No. 00-21, Revenue Arrangements with Multiple Deliverables ("EITF 00-21").

        Research and development revenue is generated primarily through collaborative research and development agreements. The terms of the agreements may include nonrefundable upfront payments, funding for research and development, milestone payments and royalties on any product sales derived from collaborations.

        Research and development payments from our collaborators are recognized as research and development revenue using the contingency adjusted performance model. Under this model, when payments are earned, revenue is immediately recognized on a pro-rata basis in the period we achieve the milestone based on the time elapsed from inception of the agreement to the time the milestone is earned over the estimated duration of the development period under the agreement. Thereafter, the remaining portion of the milestone payment is recognized on a straight-line basis over the remaining estimated development period under the agreement. This estimated development period may ultimately be shorter or longer depending upon the outcome of the development work, resulting in accelerated or deferred recognition of the development revenue. Royalty payments will be recognized as revenue when earned. The costs associated with satisfying research and development contracts are included in research and development expense as incurred.

Research and Development Costs

        Costs of internal research and development, which are expensed as incurred, are comprised of the following types of costs incurred in performing research and development activities and those incurred in connection with research and development revenue: salaries and benefits, allocated overhead and occupancy costs, clinical trial and related clinical manufacturing costs, contract services, and other outside costs. We incurred research and development expenses of $49,629 $53,727, and $47,428, in 2008, 2007, and 2006, respectively.

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(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Restructuring Charges/Credits

        The Company accounts for restructuring charges/credits in accordance with SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. Accruals are established for one-time employee termination benefits in the same period that the appropriate level of management and the Board of Directors approve and commit the Company to a termination that meets the following criteria and has been communicated to employees: (i) specifically identifies the number, location and job level of employees to be terminated, (ii) specifies the benefits terminated employees are to receive, and (iii) assures that employees will be terminated within sixty days. Accruals are established for property and equipment and facility-related costs for facilities that have been abandoned and which have no future economic benefit to the Company at the time the Company ceases to occupy the facility.

        Accruals for property and equipment and facility related costs of abandoned facilities require significant management judgment and the use of estimates, including assumptions concerning our ability to sublease certain operating leases for abandoned real estate and the ability of a sublessee to fulfill its contractual sublease obligation. Estimates of the time required to sublease facilities and sublease rates the Company will receive are based on management's analysis of the local real estate markets and general economic conditions in the regions of the abandoned facilities. If either the time it takes to sublease these facilities or the actual sublease rates achieved differ from the Company's assumptions, we may be required to adjust our restructuring accrual and record a restructuring charge or credit. When abandoned facilities are subleased, the Company must estimate the ability of the sublessee to satisfy the contractual lease obligation based on its financial position and projected ability to generate future working capital. If the sublessee's actual performance on the sublease is different from the Company estimates, we may be required to adjust our restructuring accrual and record a restructuring charge or credit.

Impairment or Disposal of Long-Lived Assets

        We assess our long-lived assets for impairment whenever events or changes in circumstances (a "triggering event") indicate that the carrying value of a group of long-lived assets may not be recoverable in accordance with SFAS 144.

        On September 27, 2005, we announced our intention to exit our chemistry services operations when the Agreement with Pfizer ended in 2008. We concluded that our intention to exit our chemistry services operations was a triggering event and that an impairment review was required. As a result of that review, we determined that the anticipated undiscounted future cash flows from our chemistry services operations exceeded the net carrying value of the group of long-lived assets attributed to those operations, and therefore there was no impairment in the quarter ended September 30, 2005.

        On December 2, 2005, we received notice that Pfizer had elected to terminate the Agreement, pursuant to the Agreement terms, effective May 22, 2006. We concluded that notification from Pfizer was also a triggering event and performed a second impairment review. As a result of this second review, we again determined that the anticipated undiscounted future cash flows from our chemistry services operations exceeded the net carrying value of the group of long-lived assets attributed to those operations, and therefore there was no impairment in the quarter ended December 31, 2005.

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2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

        We were contractually required to perform under the terms of the Agreement until May 22, 2006 and, as such, the assets of the chemistry services operations were considered "held for use" at December 31, 2005. Although we were actively seeking a potential buyer for the chemistry services operations, the uncertainty of us successfully completing a sale transaction within one year, or deciding to abandon the assets, precluded us from classifying the assets of the chemistry services operations as "assets to be disposed of by sale" at December 31, 2005.

        In the third quarter ended September 30, 2006, it became probable that we would sell the chemistry services operations, eliminate the associated cash flows, and have no continuing involvement in the chemistry services operations. Accordingly, the chemistry services operations was reported as "discontinued operations" in our statements of operations in accordance with SFAS 144.

        The net book value of the assets associated with the chemistry services operations, which totaled $1.4 million, approximated the fair market value of the underlying assets. In December 2006, management completed the sale of the chemistry services assets, which consisted of commercially available laboratory instrumentation, for approximately $1.3 million, net of direct costs to sell such assets.

Segment Data

        Management uses consolidated financial information in determining how to allocate resources and assess performance. For this reason, we have determined that we are principally engaged in one operating segment. See Note 16 with respect to significant customers. Substantially all of our revenue since inception has been generated in the United States and substantially all of our long-lived assets are located in the United States.

Income Taxes

        Income taxes have been accounted for using the asset and liability method. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance against deferred tax assets is recorded if, based upon the weight of all available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.

Earnings (Loss) Per Share

        The computations of basic and diluted earnings (loss) per common share from continuing and discontinued operations are based upon the weighted average number of common shares outstanding and potentially dilutive securities. Potentially dilutive securities include stock options. Options to purchase 5,600,583, 4,477,862 and 3,872,946 shares of common stock were not included in the 2008,

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(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

2007 and 2006 computations of diluted net loss per share, respectively, because inclusion of such shares would have an anti-dilutive effect.

Stock-Based Compensation

        Effective January 1, 2006, we adopted the provisions of SFAS No. 123(R) ("SFAS 123(R)"), Share- Based Payment, which establishes accounting for equity instruments exchanged for employee services. Under the provisions of SFAS 123(R), stock-based compensation cost is measured at the grant date, based on the calculated fair value of the award, and is recognized as an expense over the employees' requisite service period (generally the vesting period of the equity grant).

        The following table presents stock-based compensation expense for the years ended December 31, 2008, 2007 and 2006 included in our Consolidated Statements of Operations (in thousands):

		2008		2007		2006
Research and development		$	1,615	$	2,118	$	1,556
General and administrative			4,093		2,853		1,325
Discontinued operations			—		—		337
	Total compensation expense	$	5,708	$	4,971	$	3,218

        In the years ended December 31, 2008, 2007 and 2006, no stock-based compensation expense was capitalized and there were no recognized tax benefits associated with the stock-based compensation charge. The stock-based compensation charge reduced basic and diluted net loss in the years ended December 31, 2008, 2007 and 2006 by $0.13, $0.12 and $0.09 per share, respectively.

        We estimate the fair value of stock options using the Black-Scholes valuation model. Key input assumptions used to estimate the fair value of stock options include the exercise price of the award, expected option term, expected volatility of our stock over the option's expected term, risk-free interest rate over the option's expected term, and the expected annual dividend yield. We believe that the valuation technique and approach utilized to develop the underlying assumptions are appropriate in calculating the fair values of our stock options granted in the year ended December 31, 2008, 2007 and 2006.

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(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

        The fair value of stock options and employee stock purchase plan shares granted in the years ended December 31, 2008, 2007and 2006 respectively were estimated on the grant date using the Black-Scholes option-pricing model with the following assumptions:

	2008			2007			2006
Dividend yield(1)		0.0	%		0.0	%		0.0	%
Expected volatility factor(2)		53 - 60	%		55 - 62	%		63 - 90	%
Risk free interest(3)		1.6 - 3.2	%		3.3 - 4.9	%		4.3 - 4.9	%
Expected term, excluding options issued pursuant to the Employee Stock Purchase Plan(4)		5.6 - 6.2 years			4.0 - 5.9 years			3.9 - 4.9 years
Expected term—Employee Stock Purchase Plan(5)		6 months			6 months			6 months

(1)

We have historically not paid dividends on our common stock and we do not anticipate paying any dividends in the foreseeable future.



(2)

Measured using an average of historical daily price changes of our stock. The weighted average expected volatility in 2008, 2007 and 2006 was approximately 55%, 61% and 90%, respectively.



(3)

The risk-free interest rate for periods equal to the expected term of share option based on the U.S. Treasury yield in effect at the time of grant.



(4)

The expected term is the number of years that we estimate, based on historical experience, that options will be outstanding before exercise or cancellation. The range in expected term is the result of certain groups of employees exhibiting different exercising behavior.



(5)

The expected term of options issued in connection with our Employee Stock Purchase Plan is 6 months based on the terms of the plan.

Comprehensive Income (Loss)

        Other comprehensive income (loss) refers to revenues, expenses, gains and losses that under accounting principles generally accepted in the United States of America are included in comprehensive income (loss) but are excluded from net income (loss) as these amounts are recorded directly as an adjustment to stockholders' equity, net of tax. Our other comprehensive income was $4, $148 and $696 in 2008, 2007 and 2006 respectively, composed of unrealized gains and losses on marketable securities.

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(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Recent Accounting Pronouncements

        Effective January 1, 2008, we implemented SFAS No. 157, Fair Value Measurement, or SFAS 157, for our financial assets and liabilities that are re-measured and reported at fair value at each reporting period, and non-financial assets and liabilities that are re-measured and reported at fair value at least annually. In accordance with the provisions of FSP FAS 157-2, Effective Date of FASB Statement No. 157, we deferred the implementation of SFAS 157 as it relates to our non-financial assets and non-financial liabilities that are recognized and disclosed at fair value in the financial statements on a nonrecurring basis until January 1, 2009. We are evaluating the impact this standard will have on our financial statements.

        On December 12, 2007, EITF 07-01, Accounting for Collaborative Arrangements Related to the Development and Commercialization of Intellectual Property, or EITF 07-01, was issued. EITF- 07-01 prescribes the accounting for collaborations. It requires certain transactions between collaborators to be recorded in the income statement on either a gross or net basis within expenses when certain characteristics exist in the collaboration relationship. EITF 07-01 is effective for all of our collaborations existing after January 1, 2009. The adoption of this standard will not have a material impact on our financial statements or results of operations.

        On December 4, 2007, SFAS No. 141(R), Business Combinations, or SFAS 141(R), was issued. This Standard will require an acquiring company to measure all assets acquired and liabilities assumed, including contingent considerations and all contractual contingencies, at fair value as of the acquisition date. In addition, an acquiring company is required to capitalize IPR&D and either amortize it over the life of the product, or write it off if the project is abandoned or impaired. The Standard is effective for transactions occurring on or after January 1, 2009. There was no significant impact to the Company's Consolidated Financial Statements from the adoption of SFAS 141(R),

3. DISCONTINUED OPERATIONS

        On September 27, 2005, we announced our intention to exit our chemistry services operations. We received notice on December 2, 2005 that Pfizer had elected to terminate our Collaboration Agreement, pursuant to its terms, effective May 22, 2006. The Agreement provided for six months prior written notice by either party to the other for termination without cause and, in the event of termination by Pfizer, certain payments to us. In accordance with these provisions, we received approximately $19.8 million in December 2005 in connection with the termination. This amount was recorded as deferred revenue and was recognized as revenue when compounds were delivered through the termination date. We have fulfilled our compound production obligations under the Agreement, recognized the remaining deferred revenue, and ceased chemistry services operations in 2006.

        The net book value of the assets associated with the chemistry services operations, which totaled $1.4 million, approximated the fair market value of the underlying assets. In December 2006, we completed the sale of the chemistry services assets, which consisted of commercially available laboratory instrumentation, for approximately $1.3 million, net of disposal costs.

        We considered the chemistry services asset group to be a "component of an entity" as defined in SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets ("SFAS 144"), since it comprised operations and cash flows that were clearly distinguished, operationally and for financial

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(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

3. DISCONTINUED OPERATIONS (Continued)

reporting purposes, from the remainder of the Company's operations. Pursuant to SFAS 144, we reported the results of the chemistry services component as discontinued operations in the year ended December 31, 2006, since its related cash flows were eliminated from our ongoing operations and we do not have any significant continuing involvement in the operations of the component or the assets that were disposed.

        The following table presents operating results for the discontinued chemical services operations in 2006:

		2006
Revenue		$	26,718
Costs and expenses:
	Cost of revenue		8,375
	Restructuring charge		2,498
Total costs and expenses			10,873
Loss from disposition of assets			(62	)
Income from discontinued operations		$	15,783

Revenue Recognition—Compound Development Revenue (Discontinued Operations)

        Historically, ArQule entered into various collaborative agreements with pharmaceutical and biotechnology companies under which ArQule produced and delivered compound arrays and provided research and development services. Revenue elements from collaborative agreements included non-refundable technology transfer fees, funding of compound development work, payments based upon delivery of specialized compounds meeting collaborators' specific criteria and certain milestones and royalties on product sales.

        Pfizer notified us in December 2005 that, in accordance with the provisions of the Collaborative Agreement ("Agreement") with ArQule, it was terminating their collaboration with us effective May 22, 2006. In accordance with the terms of the Agreement we received $19.8 million in December 2005 in connection with the termination. We were required to perform under the terms of the contract during the period from Pfizer's termination notification to us through the effective termination date of the contract, and we recognized revenue based on the total number of compounds delivered to Pfizer during that time.

        Compound development revenue was derived from the following contractual elements in 2006:

	2006
Non-refundable technology transfer payments	$	5
Funding of compound development		—
Payments based on delivery of specialized compounds		25,963
Milestone payments		750
Total compound development revenue	$	26,718

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(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

3. DISCONTINUED OPERATIONS (Continued)

Cost of Compound Development Revenue (Discontinued Operations)

        Cost of compound development revenue represents the actual costs incurred in connection with performance pursuant to our chemistry-based collaborative agreements and the costs incurred to develop and produce compounds under these agreements. These costs consist primarily of payroll and payroll-related costs, chemicals, supplies and overhead expenses.

4. RELATED PARTIES

        In January 2007, we entered into a $5.0 million, sponsored research agreement with the newly established Boston Biomedical, Inc. ("BBI"), an independent corporation led by our former chief scientific officer. BBI conducts scientific research under the agreement that includes a number of in vivo and in vitro studies, reports and publications related to mechanisms of action and biomarkers for our lead products, which are in human clinical trials. As of December 31, 2008, our responsibilities under this agreement have been fulfilled, and no further payments are due to BBI from us. See Note 17 to the consolidated financial statements for further terms of the agreement.

5. COLLABORATIONS AND ALLIANCES

Daiichi Sankyo Co., Ltd. Kinase Inhibitor Discovery Agreement

        On November 7, 2008, we entered into a research collaboration, exclusive license and co-commercialization agreement with Daiichi Sankyo under which we will apply our proprietary technology and know-how from our AKIP™ platform for the discovery of therapeutic compounds that selectively inhibit certain kinases. The agreement defines two such kinase targets, and Daiichi Sankyo will have an option to license compounds directed to these targets following the completion of certain pre-clinical studies.

        The agreement provides for a $15 million upfront payment, which we received in November 2008, research support payments for the first and second years of the collaboration, $3.6 million of which we received in December 2008, licensing fees for compounds discovered as a result of this research, milestone payments related to clinical development, regulatory review and sales, and royalty payments on net sales of compounds from the collaboration. We retain the option to co-commercialize licensed products developed under this agreement in the U.S.

        The duration and termination of the agreement is tied to future events. Unless earlier terminated due to breach, insolvency or upon 90 days notice by Daiichi, the agreement terminates on the later of (i) the expiration of the research collaboration period, or (ii) various periods specified in the agreement for development and commercialization of products. If Daiichi has commercialized a licensed product or products, the agreement will continue in force until such time as all royalty terms for all licensed products have ended. The royalty term, on a country-by country basis for a product, ends as of the later of (i) the expiration of the last valid claim under a patent covering the manufacture, use, or sale of a licensed product or (ii) a certain number of years from the date of the commercial sale of the licensed product in such country.

        Revenue for this agreement is recognized using the contingency-adjusted performance model with an estimated performance period through November 2012. For the year ended December 31, 2008,

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5. COLLABORATIONS AND ALLIANCES (Continued)

$0.7 million was recognized as revenue. At December 31, 2008, $17.9 million remains in deferred revenue.

Daiichi Sankyo Co., Ltd. ARQ 197 Agreement

        On December 18, 2008, we entered into a license, co-development and co-commercialization agreement with Daiichi Sankyo to conduct research, clinical trials and the market launch of ARQ 197 in human cancer indications in the U.S., Europe, South America and the rest of the world, excluding Japan, China (including Hong Kong), South Korea and Taiwan, where Kyowa Hakko Kirin has exclusive rights for development and commercialization.

        The agreement provides for a $60 million cash upfront licensing payment from Daiichi Sankyo to us, which we received in December 2008 and an additional $560 million in potential development and sales milestone payments. We and Daiichi Sankyo will share equally the costs of Phase 2 and Phase 3 clinical studies, with our share of Phase 3 costs payable solely from milestone and royalty payments by Daiichi Sankyo. Upon commercialization, we will receive tiered, double-digit royalties from Daiichi Sankyo on net sales of ARQ 197 commensurate with the magnitude of the transaction. We retain the option to participate in the commercialization of ARQ 197 in the U.S.

        The duration and termination of the agreement is tied to future events. Unless earlier terminated due to breach, insolvency or upon 90 days notice if prior to phase 3 clinical trials or 180 days notice if on or after the beginning of phase 3 clinical trials by Daiichi, the agreement shall continue until the later of (i) such time as Daiichi is no longer developing at least one licensed product or (ii) if Daiichi has commercialized a licensed product or products, such time as all royalty terms for all licensed products have ended. The royalty term, on a country-by country basis for a product, ends as of the later of (i) the expiration of the last valid claim under a patent covering the manufacture, use, or sale of a licensed product or (ii) a certain number of years from the date of the commercial sale of the licensed product in such country.

        Revenue for this agreement is recognized using the contingency-adjusted performance model with an estimated development period through December 2013. For the year ended December 31, 2008, $0.4 million was recognized as revenue. At December 31, 2008, $59.6 million remains in deferred revenue.

Kyowa Hakko Kirin Co., Ltd. Licensing Agreement

        On April 27, 2007, we entered into an exclusive license agreement with Kyowa Hakko Kirin to develop and commercialize ARQ 197, a small molecule, selective inhibitor of the c-Met receptor tyrosine kinase, in Japan and parts of Asia. A $3 million portion of an upfront licensing fee was received by the Company under this agreement in the first quarter of 2007 and an additional $27 million in upfront licensing fees was received on May 7, 2007. The agreement includes $123 million in upfront and potential development milestone payments from Kyowa Hakko Kirin to ArQule, including the $30 million cash upfront licensing payments. In February 2008, we received a $3 million milestone payment from Kyowa Hakko Kirin. Upon commercialization, ArQule will receive tiered royalties in the mid -teen to low-twenty percent range from Kyowa Hakko Kirin on net sales of ARQ 197. Kyowa Hakko Kirin will be responsible for all clinical development costs and commercialization of

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(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

5. COLLABORATIONS AND ALLIANCES (Continued)

the compound in certain Asian countries, consisting of Japan, China (including Hong Kong), South Korea and Taiwan.

        In addition to the upfront and possible regulatory milestone payments totaling $123 million, the Company will be eligible for future milestone payments based on the achievement of certain levels of net sales. The Company will recognize the payments, if any, as revenue in accordance with its revenue recognition policies. As of December 31, 2008, the Company has not recognized any revenue from these sales milestone payments, and there can be no assurance that it will do so in the future.

        The duration and termination of the agreement is tied to future events. Unless earlier terminated due to breach, insolvency or upon 90 days notice by Kyowa Hakko Kirin, the agreement terminates on the date that the last royalty term expires in all countries in the territory. The royalty term ends as of the later of (i) the expiration of the last pending patent application or expiration of the patent in the country covering the manufacture, use, or sale of a licensed product or (ii) a certain number of years from the date of the commercial launch in such country of such license product.

        Revenue for this agreement is recognized using the contingency-adjusted performance model with an estimated development period through April 2016. For the year ended December 31, 2008, $4.0 million was recognized as revenue. At December 31, 2008 $27.7 million remains in deferred revenue.

Roche Research and Development Alliance

        On April 2, 2004, we announced an alliance with Hoffmann-La Roche ("Roche") to discover and develop drug candidates targeting the E2F biological pathway, including ARQ 501, and ARQ 171.Under the terms of the agreement, Roche obtained an option to license drugs resulting from our E2F program in the field of cancer therapy and provided immediate research funding of $15 million and financial support for ongoing research and development.

        Roche had an option to license from us worldwide rights for the development and commercialization of all products resulting from the E2F-1 program in the field of cancer therapy based on our delivery of a clinical data package from certain trials with ARQ 501, as well as a recommended Phase 2 dose for a second-generation E2F-1 compound.

        On December 17, 2008, Roche notified the Company of its intention not to exercise its option to license the E2F program. Roche's rights to develop and commercialize potential drugs under the agreement terminated as of December 31, 2008. As a result, the Company will not receive any further payments under this agreement. On January 30, 2009, the Company notified Roche that, in accordance with the terms of the agreement, it had exercised its right to terminate the agreement. As a result, all rights and licenses granted by the Company to Roche under the agreement will also be terminated.

        Under this agreement we received approximately $33 million in research and development support from Roche, all of which has been recognized as revenue through December 31, 2008. In the year ended December 31, 2008, we recognized revenue from Roche of approximately $8.2 million, including $1.6 million of deferred revenue upon the termination of the Roche alliance agreement in 2008. Revenue of approximately $6.6 million was recognized in each of the years ended December 31, 2007and 2006. No further revenues will be recognized under the collaboration with Roche.

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(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

5. COLLABORATIONS AND ALLIANCES (Continued)

Chemistry-Based Collaborations (Discontinued Operations)

        In the past, we have entered into chemistry-based collaborations with a number of companies, including Pfizer, Bayer AG, GlaxoSmithKline plc, Sankyo Company, Ltd., Wyeth Pharmaceuticals, Solvay, Johnson & Johnson, and the Novartis Institute for BioMedical Research, Inc., an affiliate of Novartis AG. These collaborations have generally involved the production of chemical compounds and compound screening. We have fulfilled our obligations under these collaborations. Some of these collaborations contain trailing obligations of our collaborators to make, under specified circumstances, development milestone and royalty payments to us in the event products developed under these collaborations are commercialized. There can be no assurance that ArQule will receive any payments under these collaborations.

6. MARKETABLE SECURITIES AND FAIR VALUE MEASUREMENTS

        We account for our marketable securities in accordance with SFAS No. 115. We generally classify our marketable securities as available-for-sale at the time of purchase and re-evaluate such designation as of each consolidated balance sheet date. Our marketable securities are classified as cash equivalents if the original maturity, from the date of purchase, is ninety days or less and as short-term investments if the original maturity, from the date of purchase, is in excess of ninety days since we generally intend to convert them into cash as necessary to meet our liquidity requirements.

        Our marketable securities are reported at fair value with the related unrealized gains and losses included in accumulated other comprehensive income (loss), a component of stockholders' equity, net of tax. Realized gains or losses on the sale of marketable securities are determined using the specific-identification method. We evaluate our investments periodically for possible other-than-temporary impairment by reviewing factors such as the length of time and extent to which fair value has been below cost basis, the financial condition of the issuer and our ability and intent to hold the investment for a period of time which may be sufficient for anticipated recovery of market value as well as other factors relevant to the specific securities being evaluated such as agency credit ratings and the probability of collecting amounts due based on the contractual terms of the security. We record an impairment charge to the extent that the carrying value of our available for sale securities exceeds the estimated fair value of the securities and the decline in value is determined to be other-than-temporary. Certain of our marketable securities are classified as trading securities and any changes in the fair value of those securities are recorded as other income (expense) in the statement of operations.

        We invest our available cash primarily in money market mutual funds, and U.S. federal and state agency backed certificates, including auction rate securities, that have strong credit ratings. Auction rate securities are structured with short-term interest reset dates of generally less than 90 days, but with contractual maturities that can be well in excess of ten years. At the end of each reset period, which occurs every seven to twenty-eight days, investors can sell or continue to hold the securities at par value. If any of our auction rate securities were to fail an auction, due to sell orders exceeding buy orders, the funds associated with a failed auction would not be accessible until a successful auction occurred, a buyer was found outside the auction process, the underlying securities matured or a settlement with the underwriter is reached.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

6. MARKETABLE SECURITIES AND FAIR VALUE MEASUREMENTS (Continued)

        Beginning in the first quarter of 2008 and throughout 2008, certain auction rate securities failed auction due to sell orders exceeding buy orders. On November 3, 2008, the Company accepted an offer ("the Offering") by UBS AG ("UBS") of certain rights ("Put Option") to cause UBS to purchase auction rate securities owned by the Company. The repurchase rights were offered in connection with UBS AG's obligations under settlement agreements with the U.S. Securities and Exchange Commission and other federal and state regulatory authorities. The offering, the settlement agreements, and the respective rights and obligations of the parties, including a release by the Company of UBS and its employees and agents from all claims except claims for consequential damages relating to UBS's marketing and sale of auction rate securities, are described in a prospectus issued by UBS dated October 7, 2008.

        As a result of accepting UBS's offer, the Company received a Put Option from UBS to repurchase the securities at par value at any time during the period from June 30, 2010 through July 2, 2012, if the Company's auction rate securities have not previously been sold by the Company or by UBS on its behalf. The Company has accounted for the Put Option as a freestanding financial instrument and elected to record the value under the fair value option of SFAS No. 159. As a result, $6.7 million was recorded to other income (expense) which represents the fair value of the Put Option during the year ended December 31, 2008. Simultaneously, the Company, pursuant to SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities, transferred these auction rate securities from available-for-sale to trading securities. The transfer to trading securities reflects the Company's intent to exercise the Put Option during the period June 30, 2010 to July 2, 2012. As a result of our intention to exercise the Put Option, we no longer demonstrate the ability and intent to hold our auction rate securities and recorded an other- than -temporary -impairment totaling $8.0 million which was recorded as other expense in the year ended December 31, 2008.

        ArQule's marketable securities portfolio as of December 31, 2007 was $124.2 million. The portfolio included $92.6 million (at cost) invested in auction rate securities of which, $67.7 million (at cost) were associated with auctions that failed subsequent to February 12, 2008. In the year ended December 31, 2008, ArQule sold $27.3 million (at cost) of auction rate securities that were held at December 31, 2007. ArQule's marketable securities portfolio as of December 31, 2008 was $65.3 million (at cost) invested in auction rate securities all of which were associated with auctions that failed subsequent to February 12, 2008. On July 8, 2008, we entered into a collateralized, revolving credit line agreement for up to $47.5 million with UBS Bank USA (the "Facility"). In July 2008, we drew down $46.1 million under the Facility.

        In accordance with the offering by UBS, the Facility remains payable on demand; however, if UBS Bank should exercise its right to demand repayment of any portion of the Company's indebtedness prior to the date the Company can exercise its repurchase rights (other than for reasons specified in the prospectus), UBS and certain of its affiliates will arrange for alternative financing on terms and conditions substantially the same as those contained in the Facility. If alternative financing cannot be established, then UBS or one of its affiliates will purchase the Company's pledged auction rate securities at par.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

6. MARKETABLE SECURITIES AND FAIR VALUE MEASUREMENTS (Continued)

        The Company has no available-for-sale marketable securities at December 31, 2008. The following is a summary of the fair value of available-for-sale marketable securities we held at December 31, 2007:

December 31, 2007		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Security type
	Time deposits	$	6,169	$	—	$	(1	)	$	6,168
	Corporate bonds and notes		25,190		14		(17	)		25,187
	Auction rate securities		92,892		—		—			92,892
Total marketable securities		$	124,251	$	14	$	(18	)	$	124,247

        The following is a summary of the fair value of trading securities we held at December 31, 2008:

December 31, 2008		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Security type
	Auction rate securities	$	65,547	$	—	$	(8,012	)	$	57,535
	Auction rate put option		—		6,684		—			6,684
Total marketable securities		$	65,547	$	6,684	$	(8,012	)	$	64,219

        The Company had no trading securities at December 31, 2007.

        The underlying collateral of our auction rate securities consists primarily of student loans, the majority of which are supported by the federal government as part of the Federal Family Education Loan Program (FFELP). The credit ratings for all of our auction rate securities were AAA when originally purchased. At December 31, 2008, $62.2 million at par value were rated AAA and $3.1 million at par value were rated AA. In January and February 2009, $7.3 million of auction rate securities at par value were downgraded to A3 and $1.2 million of auction rate securities at par value were downgraded to Baa1 by Moody's Investor Services.

        The Company's marketable securities at December 31, 2008 are classified as trading securities and accordingly any future gains and losses will be recorded as other income (expense) in the statement of operations.

        Effective January 1, 2008, we implemented SFAS No. 157, Fair Value Measurement, or SFAS 157, for our financial assets and liabilities that are re-measured and reported at fair value at each reporting period, and non-financial assets and liabilities that are re-measured and reported at fair value at least annually. In accordance with the provisions of FASB Staff Position No. FAS 157-2, Effective Date of FASB Statement No. 157, we have elected to defer implementation of SFAS 157 as it relates to our non-financial assets and non-financial liabilities that are recognized and disclosed at fair value in the financial statements on a nonrecurring basis until January 1, 2009. We are evaluating the impact, if any, this Standard will have on our non-financial assets and liabilities.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

6. MARKETABLE SECURITIES AND FAIR VALUE MEASUREMENTS (Continued)

        The adoption of SFAS 157 for our financial assets and liabilities and non-financial assets and liabilities that are re-measured and reported at fair value at least annually did not have a material impact on our financial results.

        The following table presents information about our assets that are measured at fair value on a recurring basis as of December 31, 2008, and indicates the fair value hierarchy of the valuation techniques we utilized to determine such fair value. In general, fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities. Fair values determined by Level 2 inputs utilize data points that are observable such as quoted prices, interest rates and yield curves. Fair values determined by Level 3 inputs are unobservable data points for the asset or liability, and includes situations where there is little, if any, market activity for the asset or liability:

	December 31, 2008		Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Cash equivalents	$	139,370	$	139,370	$	—	$	—
Marketable securities—long term		64,219		—		—		64,219
Total	$	203,589	$	139,370	$	—	$	64,219

        Our marketable securities-long term consist of auction rate securities and the related Put Option. Due to the lack of market quotes relating to our auction rate securities, the fair value measurements for our auction rate securities have been estimated using an income approach model (discounted cash flow analysis), which is exclusively based on Level 3 inputs. The model considers factors that reflect assumptions market participants would use in pricing including among others, the collateralization underlying the investments, the creditworthiness of the counterparty, the expected future cash flows, liquidity premiums, the probability of successful auctions in the future, and interest rates. The assumptions used are subject to volatility and may change as the underlying sources of these assumptions and markets conditions change.

        Due to the lack of market quotes relating to our Put Option, the fair value measurements for our Put Option have been estimated using a valuation approach commonly used for forward contracts in which one party agrees to sell a financial instrument (generating cash flows) to another party at a particular time for a predetermined price, which is exclusively based on Level 3 inputs. In this approach the present value of all expected future cash flows are subtracted from the current fair value of the security, and the resulting value is calculated as a future value at an interest rate reflective of counterparty risk. The assumptions used are subject to volatility and may change as the underlying sources of these assumptions and markets conditions change.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

6. MARKETABLE SECURITIES AND FAIR VALUE MEASUREMENTS (Continued)

        The following tables roll forward the fair value of our auction rate securities, whose fair value is determined by Level 3 inputs:

		Amount ($ in millions)
Balance at December 31, 2007		$	92.9
	Total other -than-temporary impairment included in other income (expense)		(8.0	)
	Total gain on auction rate securities put option included in other income (expense)		6.7
	Settlements		(27.4	)
Balance at December 31, 2008		$	64.2

7. PROPERTY AND EQUIPMENT

        Property and equipment consist of the following at December 31, 2008 and 2007:

	USEFUL LIFE ESTIMATED (YEARS)		2008		2007
Machinery and equipment		5	$	11,344	$	12,971
Leasehold improvements		3 - 10		4,478		2,257
Furniture and fixtures		7		1,175		1,209
Computer equipment		3		3,487		5,729
Construction-in-progress		—		45		124
				20,529		22,290
Less: Accumulated depreciation and amortization				14,909		18,379
			$	5,620	$	3,911

        On May 2, 2005, we completed a transaction to sell our Woburn headquarters facility and two parcels of land in exchange for a cash payment, net of commissions and closing costs, of $39,331. Simultaneous with that sale, we entered into an agreement to lease back the entire facility and the associated land. The lease was subsequently amended on June 30, 2005. The amended lease has a term of ten years with an average annual rental rate of $3,409. We also have options to extend the lease term for up to an additional ten years. In accordance with SFAS No. 98, Accounting for Leases, we are applying sale leaseback accounting to the transaction and are treating the lease as an operating lease. As a result of this transaction, we reduced our net fixed assets by $33,709, representing the net book value of the assets sold on the date of the lease amendment, and realized a gain on the sale of $5,477, which was deferred and is being amortized over the initial ten year lease term as a reduction in rent expense.

        In December 2006, we completed the sale of the assets, which consisted of commercially available laboratory instrumentation, from our discontinued chemistry service operations. These assets had a net

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

7. PROPERTY AND EQUIPMENT (Continued)

book value of $1,364 and were sold for $1,302 net of direct costs to sell such assets, resulting in a $62 loss on disposal.

8. OTHER ASSETS

        Other assets include the following at December 31, 2008 and 2007:

	2008		2007
Security deposits	$	988	$	976
Prepaid rent, net of current portion		672		769
Other long-term prepaid assets		51		46
Total other assets	$	1,711	$	1,791

9. ACCOUNTS PAYABLE AND ACCRUED EXPENSES

        Accounts payable and accrued expenses include the following at December 31, 2008 and 2007:

	2008		2007
Accounts payable	$	495	$	548
Accrued payroll		2,671		1,954
Accrued outsourced pre-clinical and clinical fees		8,669		9,307
Accrued professional fees		1,037		496
Accrued restructuring-current portion		660		629
Other accrued expenses		728		1,228
	$	14,260	$	14,162

10. RESTRUCTURING ACTIONS

        In December 2002, we announced a major restructuring of our operations in order to realign our workforce and expedite the transition towards becoming a drug discovery company. The restructuring actions included closing our facilities in Redwood City, California and Cambridge, United Kingdom.

        The facility-related accrual, which primarily represents the difference between the Company's lease and other facility related obligations for its California facility and the amount of sublease and other payments it will receive under its sublease agreement, will be paid out through 2010. The portions of the restructuring accrual that are expected to be paid out within one year and longer than one year are included in the Consolidated Balance Sheet under "Accounts payable and accrued expenses" and "Restructuring accrual, net of current portion," respectively.

        Accruals for abandoned facilities under lease require significant management judgment and the use of estimates, including assumptions concerning the ability of a sublessee to fulfill its contractual sublease obligation. As a result of signing the sublease for the California facility, we adjusted our accrual for abandoned facilities to reflect the full amount of the anticipated sublease income to be received. This assumption about the sublessee's ability to fulfill its contractual obligation is based on an

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

10. RESTRUCTURING ACTIONS (Continued)

analysis of their financial position and ability to generate future working capital. If the sublessee is unable to meet its obligations, and the Company is unable to enter into another sublease for the facility, ArQule may be required to adjust its restructuring accrual and record additional restructuring expense of up to $1.1 million.

        On January 19, 2006, our Board of Directors authorized termination benefits for employees in connection with a plan of termination for our chemistry services operations. The termination benefits, which affected 104 employees, consisted of cash payments and continuation of health care benefits. In 2006, a restructuring charge of $2.5 million was recorded pursuant to this action and is included in the 2006 Consolidated Statement of Operations as part of "Income from discontinued operations". As of December 31, 2006, all affected employees had been separated from the Company and the restructuring costs were fully paid.

        Activities against the restructuring accrual in 2007 and 2008 were as follows:

		Balance as of December 31, 2006		2007 Provisions		2007 Payments			Balance as of December 31, 2007
Facility-related		$	2,044	$	—	$	(678	)	$	1,366
	Total restructuring accrual	$	2,044	$	—	$	(678	)	$	1,366

		Balance as of December 31, 2007		2008 Provisions		2008 Payments			Balance as of December 31, 2008
Facility-related		$	1,366	$	—	$	(628	)	$	738
	Total restructuring accrual	$	1,366	$	—	$	(628	)	$	738

11. NOTES PAYABLE

        On July 8, 2008, we entered into a collateralized, revolving credit line agreement for up to $47.5 million with UBS Bank USA (the "Facility"). The Facility is secured by a first priority lien and security interest in the auction rate securities held by us in an account with UBS Financial Services Inc., an affiliate of UBS Bank USA. The credit line is uncommitted and any outstanding balance, including interest, is payable upon demand. Variable rate advances under the Facility currently bear interest at LIBOR plus 100 basis points and interest is payable monthly. The Facility replaced the $15 million standard margin loan agreement with UBS Financial Services Inc. that we entered into on May 8, 2008. The funds are available for research and development efforts, including clinical trials, and for general corporate purposes, including working capital. In July 2008, we drew down $46.1 million under the Facility and that amount is reported as note payable.

        On November 3, 2008, the Company accepted an offer ("the Offering") by UBS of certain rights to cause UBS to purchase auction rate securities owned by the Company. The repurchase rights were offered in connection with UBS AG's obligations under settlement agreements with the U.S. Securities and Exchange Commission and other federal and state regulatory authorities. The offering, the settlement agreements, and the respective rights and obligations of the parties, including a release by the Company of UBS and its employees and agents from all claims except claims for consequential

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

11. NOTES PAYABLE (Continued)

damages relating to UBS's marketing and sale of auction rate securities, are described in a prospectus issued by UBS dated October 7, 2008.

        In accordance with the offering by UBS, the Facility will be treated as a "no net cost loan" as defined in the prospectus. As such, the Facility will remain payable on demand; however, if UBS Bank should exercise its right to demand repayment of any portion of the Company's indebtedness prior to the date the Company can exercise its repurchase rights (other than for reasons specified in the prospectus), UBS and certain of its affiliates will arrange for alternative financing on terms and conditions substantially the same as those contained in the Facility. If alternative financing cannot be established, then UBS or one of its affiliates will purchase the Company's pledged auction rate securities at par.

        In October 2008, we entered into a margin loan agreement with another financial institution collateralized by $2.9 million of our auction rate securities and borrowed $1.7 million which is the maximum amount allowed under this facility. Interest expense was $472 for the year ended December 31, 2008. There was no interest expense for the years ended December 31, 2007 and 2006.

12. STOCKHOLDERS' EQUITY

Preferred Stock

        We are authorized to issue up to one million shares of preferred stock. As of December 31, 2008 and 2007, there were no outstanding shares of preferred stock. Our Board of Directors will determine the terms of the preferred stock if and when the shares are issued.

Common Stock

        Our amended Certificate of Incorporation authorizes the issuance of up to 100 million shares of $0.01 par value common stock.

        In June 2007, we completed a stock offering in which we sold 7.0 million shares of common stock at a price of $7.75 for net proceeds of $50.5 million after commissions and offering expenses. In July 2007, we sold an additional 0.5 million shares of common stock upon exercise of a portion of the underwriters over allotment option at a price of $7.75 for net proceeds of $3.6 million after offering expenses.

        At December 31, 2008, we have 1,348,335 common shares reserved for future issuance under the Employee Stock Purchase Plan ("Purchase Plan") and for the exercise of common stock options pursuant to the 1994 Amended and Restated Equity Incentive Plan ("Equity Incentive Plan") and the 1996 Amended and Restated Director Stock Option Plan ("Director Plan").

        In January 2005, we completed a stock offering whereby we sold 5.79 million shares of common stock at $5.25 per share for aggregate net proceeds of $28.3 million after commissions and offering expenses.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

13. STOCK OPTION PLANS

        During 2005, our shareholders approved an amendment to the Equity Incentive Plan to increase the number of shares available to 9,600,000. All shares are awarded at the discretion of our Board of Directors in a variety of stock based forms including stock options and restricted stock. Pursuant to the Equity Incentive Plan, incentive stock options may not be granted at less than the fair market value of our common stock at the date of the grant, and the option term may not exceed ten years. Stock options issued pursuant to the Equity Incentive Plan generally vest over four years. For holders of 10% or more of our voting stock, options may not be granted at less than 110% of the fair market value of the common stock at the date of the grant, and the option term may not exceed five years. Stock appreciation rights granted in tandem with an option shall have an exercise price not less than the exercise price of the related option. As of December 31, 2008, no stock appreciation rights have been issued. At December 31, 2008, there were 743,905 shares available for future grant under the Equity Incentive Plan.

        During 2005, our shareholders approved an amendment to the Director Plan to increase the number of shares available to 500,500. In May 2006, our shareholders approved an amendment to the Director Plan to increase the number of options granted to the Chairman of the Board and Directors. Under the terms of the Director Plan, options to purchase shares of common stock are automatically granted (A) to the Chairman of the Board of Directors (1) upon his or her initial election or appointment in the amount of 25,000 and vesting over three years and (2) upon his or her re-election or continuation on our board immediately after each annual meeting of stockholders in the amount of 15,000 and vesting immediately, and (B) to each other Director (1) upon his or her initial election to our board in the amount of 20,000 and vesting over three years and (2) upon his or her re-election or continuation on our board in the amount of 10,000 and vesting immediately. All options granted pursuant to the Director Plan have a term of ten years with exercise prices equal to fair market value on the date of grant. In May 2007, our shareholders approved an amendment to the Director Plan to increase the number of shares available from 500,500 to 750,500. Through December 31, 2008, options to purchase 576,466 shares of common stock have been granted under this plan of which 431,834 shares are currently exercisable. As of December 31, 2008, 264,534 shares are available for future grant.

        For the year ended December 31, 2007, stock-based compensation expense of $637, included in research and development, was related to Boston Biomedical, Inc. transition costs (see Note 17, Boston Biomedical, Inc. Collaboration in this Form 10-K). Additionally in the year ended December 31, 2007, $438 of stock-based compensation expense was incurred in conjunction with the acceleration of vesting of 103,798 stock options and the extension of the post-employment exercise period of 395,942 stock options held by certain employees who will meet eligibility criteria for a retirement benefit within the next four years. On October 4, 2007, the exercise period associated with 1,115,000 stock options was extended and the vesting of 165,625 stock options was accelerated in conjunction with an amendment to the CEO's employment agreement. The amount of stock option expense associated with this amendment was $703 and $1,406 in the year ended December 31, 2007 and 2008, respectively.

        During 2008, we issued 12,000 fully-vested options to certain members of our Scientific Advisory Board under the Equity Incentive Plan. In 2007 and 2006, we issued 27,500 and 15,000 of such grants, respectively. Compensation expense in 2008, 2007 and 2006 was $48, $121 and $74, respectively.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

13. STOCK OPTION PLANS (Continued)

        Option activity under the Plans for the years ended December 31, 2006, 2007 and 2008 was as follows:

Stock Options	Number of Shares			Weighted Average Exercise Price
Outstanding as of December 31, 2005		4,084,265		$	7.41
Granted		1,464,260			5.70
Exercised		(348,403	)		4.40
Cancelled		(1,327,176	)		8.50
Outstanding as of December 31, 2006		3,872,946			6.66
Granted		1,334,825			6.60
Exercised		(355,029	)		5.14
Cancelled		(374,880	)		6.46
Outstanding as of December 31, 2007		4,477,862			6.78
Granted		1,737,378			4.16
Exercised		—			—
Cancelled		(614,657	)		6.59
Outstanding as of December 31, 2008		5,600,583		$	5.99
Exercisable as of December 31, 2008		2,993,879		$	6.78
Weighted average grant-date fair value of options granted during the year ended December 31, 2008				$	2.23

        The following table summarizes information about options outstanding at December 31, 2008:

	Options Outstanding						Options Exercisable
Range of Exercise Prices	Number Outstanding at December 31, 2008		Weighted Average Remaining Contractual Life		Weighted Average Exercise Price		Exercisable as of December 31, 2008		Weighted Average Exercise Price
$  2.35 -  2.80		21,000		9.8	$	2.39		—	$	—
2.80 -   5.60		2,750,016		6.6		4.36		1,315,703		4.59
5.60 -   8.40		2,331,678		6.2		6.27		1,186,287		6.27
8.40 - 11.20		228,580		4.4		9.52		222,580		9.52
11.20 - 14.00		119,675		2.8		13.32		119,675		13.32
14.00 - 16.80		250		2.6		14.98		250		14.98
16.80 - 19.60		36,384		1.9		18.20		36,384		18.20
19.60 - 22.40		85,500		1.3		20.04		85,500		20.04
22.40 - 25.20		7,500		1.9		23.13		7,500		23.13
25.20 - 28.00		20,000		2.1		28.00		20,000		28.00
		5,600,583		6.1	$	5.99		2,993,879	$	6.78

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

13. STOCK OPTION PLANS (Continued)

        The aggregate intrinsic value of options outstanding at December 31, 2008 was $668, of which $211 related to exercisable options. The weighted average fair value of options granted in year ended December 31, 2008, 2007and 2006 was $2.23, $3.46, and $4.03 per share, respectively. The intrinsic value of options exercised in the year ended December 31, 2008, 2007, and 2006 was $0, $1,173, and $317, respectively.

        Shares vested, expected to vest and exercisable as of December 31, 2008 are as follows:

	Shares		Weighted-Average Exercise Price		Weighted-Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value
Vested and unvested expected to vest at December 31, 2008		5,369,004	$	5.99		6.1	$	631
Exercisable at December 31, 2008		2,993,879	$	6.78		4.4	$	211

        The total compensation cost not yet recognized as of December 31, 2008 related to non-vested option awards was $5.4 million, which will be recognized over a weighted-average period of 2.9 years. During the year ended December 31, 2008, there were 337,500 shares forfeited with a weighted average grant date fair values of $3.44 per share. The weighted average remaining contractual life for options exercisable at December 31, 2008 was 4.4 years.

        On January 19, 2006, we granted 40,860 shares of restricted stock to employees of our chemistry services business, which vested upon their separation from ArQule pursuant to a plan of termination (See Note 10, Restructuring Actions). Through December 31, 2006, 3,880 shares were forfeited, and the remaining 36,980 shares were fully vested. The shares of restricted stock were issued at no cost to the recipients. The fair value of the restricted stock at the time of grant was $5.73 per share, and was expensed ratably over the vesting period. We recognized share-based compensation expense related to the restricted stock of $212 for the year ended December 31, 2006.

        In 1996, the stockholders adopted the Purchase Plan. This plan enables eligible employees to exercise rights to purchase our common stock at 85% of the fair market value of the stock on the date the right was granted or the date the right is exercised, whichever is lower. Rights to purchase shares under the Purchase Plan are granted by the Board of Directors. The rights are exercisable during a period determined by the Board of Directors; however, in no event will the period be longer than twenty-seven months. The Purchase Plan is available to substantially all employees, subject to certain limitations. In May 2005, our shareholders approved an amendment to the Purchase Plan to increase the aggregate number of shares of the Company's common stock that may be issued from 1,020,000 shares to 1,230,000 shares. In May 2007, our shareholders approved an amendment to the Purchase Plan to increase the aggregate number of shares of the Company's common stock that may be issued from 1,230,000 shares to 1,600,000. As of December 31, 2008, 1,260,104 shares have been purchased and 339,896 shares are available for future sale under the Purchase Plan.

14. INCOME TAXES

        There was no current or deferred tax expense for the year ended December 31, 2008, 2007, or 2006.

85

ARQULE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

14. INCOME TAXES (Continued)

        The following is a reconciliation between the U.S. federal statutory rate and the effective tax rate for continuing operations for the years ended December 31, 2008, 2007 and 2006:

	2008			2007			2006
Income tax (benefit) expense at statutory rate	$	(17,294	)	$	(18,147	)	$	(16,056	)
State tax (benefit) expense, net of Federal tax (benefit) expense		(3,096	)		(3,118	)		(2,799	)
Permanent items		7			982			688
Effect of change in valuation allowance		22,377			21,776			19,662
Tax credits		(2,043	)		(2,202	)		(2,001	)
Other		49			709			506
Tax expense	$	—		$	—		$	—

        The income tax effect of temporary differences comprising the deferred tax assets and deferred tax liabilities on the accompanying balance sheets is a result of the following at December 31, 2008 and 2007:

		2008			2007
Deferred tax assets:
	Pre-operating costs capitalized for tax purposes	$	—		$	21
	Net operating loss carryforwards		71,508			62,045
	Tax credit carryforwards		16,388			14,345
	Equity based compensation		3,517			1,085
	Book depreciation in excess of tax		2,661			3,053
	Reserves and accruals		256			291
	Deferred revenue		9,909			1,564
	Loss on investment		2,013			2,013
	Other		590			48
			106,842			84,465
	Valuation allowance		(106,842	)		(84,465	)
Deferred tax liabilities			—			—
	Net deferred tax assets	$	—		$	—

        Total valuation allowance increased by $22,377 for the year ended December 31, 2008. As required by SFAS No. 109, Accounting for Income Taxes, we have evaluated positive and negative evidence bearing upon the realizability of our deferred tax assets, which are comprised principally of federal net operating loss ("NOL"), net capital loss and research & development credit carryforwards. We have determined that it is more likely than not that we will not recognize the benefits of our federal and state deferred tax assets and, as a result, we have established a full valuation allowance against our net deferred tax assets as of December 31, 2008.

        As of December 31, 2008, we had federal NOL, state NOL, and research and development credit carryforwards of approximately $203,285, $138,319 and $18,250 respectively, which can be used to offset

86

ARQULE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

14. INCOME TAXES (Continued)

future federal and state income tax liabilities and expire at various dates through 2028. Federal net capital loss carryforwards of approximately $5,000 can be used to offset future federal capital gains and expire in 2010. Approximately $17,450 of our federal NOL and $1,508 of our state NOL were generated from excess tax deductions from share-based awards, the tax benefit of which will be credited to additional paid-in-capital when the deductions reduce current taxes payable.

        We adopted the provisions of FASB Interpretation No. 48 ("FIN 48") Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109 ("SFAS 109") on January 1, 2007. As a result of the implementation of FIN 48, we recorded no adjustment for unrecognized income tax benefits. At the adoption date of January 1, 2007 and also at December 31, 2008, we had no unrecognized tax benefits. We do not expect that the total amount of unrecognized tax benefits will significantly increase in the next twelve months. We recognize interest and penalties related to uncertain tax positions in income tax expense. As of December 31, 2008, we had no accrued interest or penalties related to uncertain tax positions. The tax years 2005 through 2008 remain open to examination by the major taxing jurisdictions to which we are subject, which is primarily the U.S. Prior tax year remain open to the extent of net operating loss and tax credit carryforwards.

        Utilization of NOL and R&D credit carryforwards may be subject to a substantial annual limitation due to ownership change limitations that have occurred previously or that could occur in the future pursuant to Section 382 of the Internal Revenue Code of 1986, as amended, as well as similar state provisions. These ownership changes may limit the amount of NOL and R&D credit carryforwards that can be utilized annually to offset future taxable income and tax, respectively. In general, an ownership change, as defined by Section 382, results from transactions increasing the ownership of certain shareholders or public groups in the stock of a corporation by more than 50 percentage points over a three-year period. Since the Company's formation, the Company has raised capital through the issuance of capital stock on several occasions which, combined with the purchasing shareholders' subsequent disposition of those shares, may have resulted in a change of control, as defined by Section 382, or could result in a change of control in the future upon subsequent disposition. The Company has not currently completed a study to assess whether a change of control has occurred or whether there have been multiple changes of control since the Company's formation due to the significant complexity and cost associated with such study and that there could be additional changes in control in the future. If we have experienced a change of control at any time since Company formation, utilization of our NOL or R&D credit carryforwards would be subject to an annual limitation under Section 382. Any limitation may result in expiration of a portion of the NOL or R&D credit carryforwards before utilization. Further, until a study is completed and any limitation known, no amounts are being presented as an uncertain tax position under FIN 48.

87

ARQULE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

15. COMMITMENTS AND CONTINGENCIES

Leases

        We lease facilities under non-cancelable operating leases. At December 31, 2008, the minimum lease commitments for all leased facilities, net of sublease income, are as follows:

YEAR ENDING DECEMBER 31,	OPERATING LEASES
2009	$	3,982
2010		3,476
2011		3,523
2012		3,573
2013		3,073
Thereafter		4,254
Total minimum lease payments	$	21,881

        Included in the total minimum payments for operating leases is approximately $715 related to unoccupied real estate in California, net of contractual sublease income, which is accrued as a net liability as a part of the Company's restructuring accrual (See Note 10).

        Rent expense under non-cancelable operating leases was approximately $2,883, $2,935, and $3,142 for the years ended December 31, 2008, 2007, and 2006, respectively. Sublease income, which is recorded as a reduction of rent expense, was approximately $519, $425, and $402 and for the years ended December 31, 2008, 2007and 2006 respectively.

16. CONCENTRATION OF CREDIT RISK

        Revenue from one customer represented approximately 58% of total revenue during 2008, 72% in 2007 and 100% in 2006. In 2008, revenue from another customer represented approximately 29% of total revenue, and approximately 25% in 2007. There was no accounts receivable balance at December 31, 2008 or 2007.

17. BOSTON BIOMEDICAL, INC. COLLABORATION

        In January 2007, we entered into a $5.0 million, sponsored research agreement with the newly established Boston Biomedical, Inc. ("BBI"), an independent corporation led by our former chief scientific officer. Approximately 26 former employees of ArQule joined BBI.

        BBI conducted scientific research under the agreement that included a number of in vivo and in vitro studies, reports and publications related to mechanisms of action and biomarkers for our clinical-stage products. These products included ARQ 197, ARQ 501 and ARQ 171. We retain all intellectual property and technology rights related to research conducted by BBI employees under the contract. ArQule has no equity position in BBI.

        In connection with the foregoing events, on January 26, 2007, our former chief scientific officer entered into a separation agreement and general release with us and was paid a lump sum severance payment comprised of (i) one year's salary in the amount of $321 (ii) the average of his cash bonuses

88

ARQULE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

17. BOSTON BIOMEDICAL, INC. COLLABORATION (Continued)

over the last two years in the amount of $110 and (iii) the amount of $113 to which he was entitled under our Annual Incentive Program for fiscal year 2006.

        In addition, he was granted an option to purchase 64,375 shares of our common stock, which was fully vested and exercisable on the date of grant. This grant expired on December 31, 2008. His previously vested option grants covering 216,250 shares were amended to extend the exercise period through December 31, 2007, all of which were exercised. In connection with his appointment as Chairman of our Scientific Advisory Board, he was granted an additional option to purchase 12,500 shares, which is fully vested and exercisable on the date of grant and will expire ten years after the date of grant. As a result of his separation from service, all his unvested options have lapsed.

        Approximately 26 of our former employees joined BBI in January 2007 and each employee who transitioned to BBI executed and delivered a Separation Agreement and General Release. In consideration for entering into such agreement, each employee received a fully-vested option to purchase shares of our common stock with an exercise period terminating on December 31, 2008, as well as an amendment to their previously vested stock options to extend the exercise period through December 31, 2007. The total number of fully vested stock options issued to these employees was 87,500, of these 10,200 were exercised and ` expired as of December 31, 2008. The total number of stock options that were amended to extend the exercise period was 92,504, of these 65,602 were exercised and 26,902 expired as of December 31, 2008. As a result of separation of service all unvested options of such employees have lapsed.

        In the first quarter of 2007, we expensed approximately: $431 related to lump sum cash payments under the separation and general release agreement with our former chief scientific officer, as well as certain non-cash charges for stock based compensation, including $201 for stock options granted to him; and $168 arising from the extension of the exercise period of his vested options. Additionally, in the first quarter of 2007, we expensed approximately $197 for stock options granted to other employees related to their separation agreements and releases, and $71 arising from the extension of the exercise period of their vested options.

        Through December 31, 2008, in connection with the BBI sponsored research agreement, we incurred $4,809 of research and development expense. As of December 31, 2008, our responsibilities under this agreement have been fulfilled, and no further payments are due to BBI from us.

89

ARQULE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

18. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

	FIRST QUARTER			SECOND QUARTER			THIRD QUARTER			FOURTH QUARTER
2008
Net revenues	$	3,527		$	2,583		$	2,664		$	5,367
Net loss from continuing operations		(13,914	)		(16,040	)		(11,281	)		(9,629	)
Basic and diluted loss per share:
Net loss per share	$	(0.32	)	$	(0.37	)	$	(0.26	)	$	(0.22	)

	FIRST QUARTER			SECOND QUARTER			THIRD QUARTER			FOURTH QUARTER
2007
Net revenues	$	1,652		$	2,235		$	2,736		$	2,542
Net loss from continuing operations		(14,504	)		(13,361	)		(11,118	)		(14,389	)
Basic and diluted loss per share:
Net loss per share	$	(0.40	)	$	(0.36	)	$	(0.26	)	$	(0.33	)

90

ITEM 9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

        None.

ITEM 9A.    CONTROLS AND PROCEDURES

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

        Our management, with the participation of our Chief Executive Officer and President and Chief Operating Officer (Principal Financial Officer), evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2008. The term "disclosure controls and procedures," as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended ("Exchange Act"), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to provide reasonable assurance that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company's management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and our management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of December 31, 2008, our Chief Executive Officer and President and Chief Operating Officer (Principal Financial Officer) concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

Management's Report on Internal Control Over Financial Reporting

        Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal Control—Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2008.

        The effectiveness of our internal control over financial reporting as of December 31, 2008 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which is included herein.

Changes in Internal Control

        There has been no change in our internal control over financial reporting during the quarter ended December 31, 2008 that has materially affected or is reasonably likely to materially affect our internal control over financial reporting.

ITEM 9B.    OTHER INFORMATION

        None.

91

PART III

        Except as otherwise indicated, the following information required by the Instructions to Form 10-K is incorporated herein by reference from various sections of the ArQule, Inc. Proxy Statement for the annual meeting of shareholders to be held on May 14, 2009, as summarized below:

ITEM 10.    DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE

        "Election of Directors;" "Section 16(a) Beneficial Ownership Reporting Compliance;" "Corporate Governance;" and "Board Committees and Meetings."

        Information regarding the executive officers of the Company is incorporated by reference from "Executive Officers of the Registrant" at the end of Item 1 of this report.

ITEM 11.    EXECUTIVE COMPENSATION

        "Compensation Discussion and Analysis;" "Executive Compensation;" "Director Compensation;" "Compensation, Nominating and Governance Committee Interlocks and Insider Participation;" and "Compensation Committee Report."

ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

        "Share Ownership of Certain Beneficial Owners" and "Securities Authorized for Issuance Under Equity Compensation Plans."

ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

        "Certain Relationships and Related Transactions" and "Director Independence."

ITEM 14.    PRINCIPAL ACCOUNTING FEES AND SERVICES

        Fees paid to the Company's independent registered public accounting firm are disclosed under the caption "Ratification of the Selection of an Independent Registered Public Accountants."

PART IV

ITEM 15.    EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES

(a) 1. FINANCIAL STATEMENTS

        The financial statements are listed under Item 8 of this report.

2. FINANCIAL STATEMENT SCHEDULES

        The financial statement schedules are omitted from this report because they are not applicable or required information and are shown in the financial statements of the footnotes thereto.

92

3. EXHIBITS

EXHIBIT NO.			DESCRIPTION
	3.1		Amended and Restated Certificate of Incorporation of the Company. Filed as Exhibit 3.1 to the Company's Registration Statement on Form S-1 (File No. 333-22945) and incorporated herein by reference.
	3.2		Certificate of Amendment to Amended and Restated Certificate of Incorporation filed as Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2006 (File No. 000-21429) and incorporated herein by reference.
	3.3		Amended and Restated By-laws of the Company. Filed as Exhibit 3.1 to the Company's Current Report on Form 8-K filed on November 19, 2007 (File No. 000-21429) and incorporated herein by reference.
	4.1		Specimen Common Stock Certificate. Filed as Exhibit 4.1 to the Company's Registration Statement on Form S-1 (File No. 333-11105) and incorporated herein by reference.
	10.1	*	Amended and Restated 1994 Equity Incentive Plan, as amended through May 11, 2005. Filed as Exhibit 4 to the Company's Registration Statement on Form S-8 filed on September 30, 2005 (File No. 333-128740) and incorporated herein by reference.
	10.2	*	Amended and Restated 1996 Employee Stock Purchase Plan. Filed as Annex B to the Company's Definitive Proxy Statement filed on April 16, 2007 (File No. 000-21429) and incorporated herein by reference.
	10.3	*	Amended and Restated 1996 Director Stock Option Plan. Filed as Annex A to the Company's Definitive Proxy Statement filed on April 16, 2007 (File No. 000-21429) and incorporated herein by reference.
	10.4	*	2005 Director Stock Compensation Plan. Filed as Exhibit 4 to the Company's Registration Statement on Form S-8 filed on December 6, 2005 (File No. 333-130159) and incorporated herein by reference.
	10.5		Lease by and between Pacific Shores Center LLC and the Company, dated March 1, 2002. Filed as Exhibit 10.40 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2002 (File No. 000-21429) and incorporated herein by reference.
	10.6	*	Employment Agreement between the Company and Stephen A Hill, dated January 1, 2004. Filed as Exhibit 10.45 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2003 filed with the Commission on March 12, 2004 (File No. 000-21429) and incorporated herein by reference.
	10.7	+	Strategic Alliance Agreement by and between F. Hoffmann—La Roche Ltd., Hoffmann—La Roche Inc. and the Company dated April 1, 2004. Filed as Exhibit 10.49+ to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2004 filed with the Commission on May 7, 2004 (File No. 000-21429) and incorporated herein by reference.
	10.8		Form of Agreement of Purchase and Sale between ARE-MA Region No. 20, LLC and the Company, dated April 28, 2005. Filed as Exhibit 10.1 to the Company's Current Report on Form 8-K filed with the Commission on May 6, 2005 (File No. 000-21429) and incorporated herein by reference.

93

EXHIBIT NO.			DESCRIPTION
	10.9		Amended and Restated Lease by and between ARE-MA Region No. 20, LLC and the Company, dated June 30, 2005. Filed as Exhibit 10.21 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2005 filed with the Commission on August 5, 2005 (file No. 000-21429) and incorporated herein by reference.
	10.10	*	Employment Agreement between the Company and Peter S. Lawrence, dated April 13, 2006. Filed as Exhibit 10.1 to the Company's Current Report on Form 8-K dated April 18, 2006 (File No. 000-21429) and incorporated herein by reference.
	10.11	*	Employment Agreement between the Company and Nigel J. Rulewski, MD, dated August 1, 2006. Filed as Exhibit 10.1 to the Company's Current Report on Form 8-K dated August 1, 2006 (File No. 000-21429) and incorporated herein by reference.
	10.12	+	Exclusive License Agreement, by and between the Company and Kyowa Hakko Kogyo Co., Ltd. Filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2007 filed with the Commission on August 7, 2007 (File No. 000-21429) and incorporated herein by reference.
	10.13	*	Amendment to Employment Agreement, dated as of October 4, 2007, by and between the Company and Peter S. Lawrence. Filed as Exhibit 10.1 to the Company's Current Report on Form 8-K filed on October 10, 2007 (File No. 000-21429), and incorporated herein by reference.
	10.14	*	Amendment to Employment Agreement, dated as of October 4, 2007, by and between the Company and Stephen A. Hill. Filed as Exhibit 10.3 to the Company's Current Report on Form 8-K filed on October 10, 2007 (File No. 000-21429), and incorporated herein by reference.
	10.15	*	Amendment to Employment Agreement, effective as of January 7, 2008, by and between the Company and Stephen A. Hill. Filed as Exhibit 10.1 to the Company's Current Report on Form 8-K filed on January 8, 2008 (File No. 000-21429), and incorporated herein by reference.
	10.16	*	Form of Incentive Stock Option Agreement. Filed as Exhibit 10.16 to the Company's Annual Report on Form 10-K filed on March 17, 2008 (File No. 000-21429), and incorporated herein by reference.
	10.17	*	Form of Non-Statutory Stock Option Agreement. Filed as Exhibit 10.17 to the Company's Annual Report on Form 10-K filed on March 17, 2008 (File No. 000-21429), and incorporated herein by reference.
	10.18	*	Second Amendment to Employment Agreement, dated April 14, 2008, by and between ArQule, Inc. and Peter S. Lawrence. Filed as Exhibit 10.4 to the Registrant's Current Report on Form 8-K, filed on April 18, 2008 (File No. 000-21429) and incorporated by reference herein.
	10.19	*	Employment Agreement, dated as of April 15, 2008, by and between ArQule, Inc. and Paolo Pucci. Filed as Exhibit 10.4 to the Registrant's Current Report on Form 8-K, filed on April 18, 2008 (File No. 000-21429) and incorporated by reference herein.
	10.20	*	Separation Agreement and General Release, effective as of July 22, 2008, by and between ArQule, Inc. and Nigel J. Rulewski. Filed as Exhibit 10.1 to the Registrant's Current Report on Form 8-K, filed on July 24, 2008 (File No. 000-21429) and incorporated by reference herein.

94

EXHIBIT NO.			DESCRIPTION
	10.21		Collateralized, revolving credit line agreement, dated July 8, 2008, by and between ArQule, Inc. and UBS Bank USA. Filed as Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2008, filed with the Commission on November 10, 2008 (File No. 000-21429) and incorporated herein by reference
	10.22	+	Collaborative Research, Development and License Agreement, dated November 7, 2008, by and between ArQule, Inc. and Daiichi Sankyo Co., Ltd. Filed herewith.
	10.23	+	License, Co-Development and Co-Commercialization Agreement, dated December 18, 2008, by and between ArQule, Inc. and Daiichi Sankyo Co., Ltd. Filed herewith.
	23.1		Consent of PricewaterhouseCoopers LLP, an Independent Registered Public Accounting Firm, filed herewith.
	31.1		Rule 13a-14(a) Certificate of Chief Executive Officer, filed herewith.
	31.2		Rule 13a-14(a) Certificate of Principal Financial Officer, filed herewith.
	32		Rule 13a-14(b) Certificate of Chief Executive Officer and Principal Financial Officer, filed herewith.

*

Indicates a management contract or compensatory plan.

+

Certain confidential material contained in the document has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 406 of the Securities Act of 1933, as amended or Rule 24b-2 of the Securities and Exchange Act of 1934, as amended.

95

SIGNATURES

        Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

ARQULE, INC.
By:	/s/ PAOLO PUCCI Paolo Pucci Chief Executive Officer
Date: March 6, 2009

        Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

SIGNATURE	TITLE	DATE
/s/ PAOLO PUCCI Paolo Pucci	Chief Executive Officer and Director (Principal Executive Officer)	March 6, 2009
/s/ PETER S. LAWRENCE Peter S. Lawrence	President and Chief Operating Officer (Principal Financial Officer)	March 6, 2009
/s/ ROBERT J. WEISKOPF Robert J. Weiskopf	Vice President of Finance, Corporate Controller and Treasurer (Principal Accounting Officer)	March 6, 2009
/s/ PATRICK J. ZENNER Patrick J. Zenner	Director—Chairman of the Board	March 6, 2009
/s/ TIMOTHY C. BARABE Timothy C. Barabe	Director	March 6, 2009
/s/ RONALD M. LINDSAY Ronald M. Lindsay	Director	March 6, 2009
/s/ MICHAEL D. LOBERG Michael D. Loberg	Director	March 6, 2009
/s/ WILLIAM G. MESSENGER William G. Messenger	Director	March 6, 2009
/s/ NANCY A. SIMONIAN Nancy A. Simonian	Director	March 6, 2009

96

EX-10.22

Exhibit 10.22

COLLABORATIVE RESEARCH, DEVELOPMENT

AND LICENSE AGREEMENT

between

ARQULE, INC.

and

DAIICHI SANKYO CO., LTD

November 7, 2008

[*] = CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.  CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.  OMITTED TEXT IS INDICATED BY AN “*”.

TABLE OF CONTENTS

		Page
1.	DEFINITIONS	1
2.	ADMINISTRATION OF THE COLLABORATION	23
2.1	Joint Executive Committee	23
2.2	Joint Research Committee	26
2.3	US Co-Commercialization Committee	29
2.4	Alliance Management	30
2.5	Interests of the Parties	30
2.6	Appointment Not an Obligation; No Breach	30
3.	RESEARCH PROGRAM	30
3.1	Objectives of the Research Program	30
3.2	Annual Research Plans	31
3.3	Conduct of Research Program	31
3.4	Records	33
3.5	Selection of DS Targets	34
3.6	Designation and Advancement of Collaboration Compounds	37
3.7	Supply of Collaboration Compounds	37
3.8	Supply of Proprietary Materials	38
3.9	Determination of IC50	38
3.10	Research Collaboration Period	38
4.	DEVELOPMENT PROGRAM; COMMERCIALIZATION OF LICENSED PRODUCTS	39
4.1	Objectives of the Development Program	39
4.2	Responsibility for Development and Commercialization of Licensed Products	39
4.3	Development Plans	39
4.4	Commercial Assessment	40
4.5	Licensed Product Commercialization Plans	40
4.6	Manufacture and Supply of Licensed Products	40
4.7	Development and Commercialization Diligence	41
4.8	Compliance	41
4.9	Exchange of Reports; Information; Updates	42
4.10	Development and Commercialization Rights and Restrictions	43
4.11	Expansion of the Field	46
5.	COMPENSATION	47
5.1	Upfront Fee	47
5.2	License Fee	47
5.3	Research Funding	47
5.4	Milestone and Royalty Payments	48

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6.	TREATMENT OF CONFIDENTIAL INFORMATION; PUBLICITY; NON-SOLICITATION	49
6.1	Confidentiality	49
6.2	Publicity	50
6.3	Publications and Presentations	51
6.4	AKIP Platform Technology	52
6.5	Prohibition on Solicitation	52
7.	LICENSE GRANTS; EXCLUSIVITY	52
7.1	DS Option	52
7.2	Research Licenses	54
7.3	Development Licenses	54
7.4	Commercialization License	55
7.5	Right to Sublicense	56
7.6	No Other Rights	56
7.7	Exclusivity	56
8.	INTELLECTUAL PROPERTY RIGHTS	57
8.1	ARQULE Intellectual Property Rights	57
8.2	DS Intellectual Property Rights	57
8.3	Joint Technology and Joint Patent Rights	58
8.4	Patent Coordinators	58
8.5	Inventorship	58
8.6	Cooperation	58
9.	FILING, PROSECUTION AND MAINTENANCE OF PATENT RIGHTS	59
9.1	Patent Filing, Prosecution and Maintenance	59
9.2	Legal Actions	62
9.3	Trademark and Copyright Prosecution, Defense and Enforcement	66
10.	TERM AND TERMINATION	67
10.1	Term	67
10.2	Termination	67
10.3	Consequences of Termination of Agreement	68
10.4	Surviving Provisions	72
11.	REPRESENTATIONS AND WARRANTIES	73
11.1	Mutual Representations and Warranties	73
11.2	ARQULE’s Representations and Warranties	73
12.	INDEMNIFICATION	74
12.1	Indemnification of DS by ARQULE	74
12.2	Indemnification of ARQULE by DS	74
12.3	Conditions to Indemnification	75
12.4	Warranty Disclaimer	75
12.5	No Warranty of Success	75
12.6	Limited Liability	76

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13.	MISCELLANEOUS	76
13.1	Arbitration	76
13.2	Notices	78
13.3	Governing Law	79
13.4	Binding Effect	79
13.5	Headings	80
13.6	Counterparts	80
13.7	Amendment; Waiver	80
13.8	No Third Party Beneficiaries	80
13.9	Purposes and Scope	80
13.10	Assignment and Successors	80
13.11	Force Majeure	81
13.12	Interpretation	81
13.13	Integration; Severability	81
13.14	Further Assurances	81

List of Schedules

Schedule 1Research Stages/Advancement Criteria

Schedule 2DS Target List

Schedule 3Milestone and Royalty Provisions to Be Negotiated pursuant to Section 5.4 and Included in License Agreements

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COLLABORATIVE RESEARCH, DEVELOPMENT AND LICENSE AGREEMENT

This COLLABORATIVE RESEARCH DEVELOPMENT AND LICENSE AGREEMENT (this “Agreement”) is entered into as of November 7, 2008, by and between ARQULE, Inc., a Delaware corporation with offices at 19 Presidential Way, Woburn, MA 01801-5140 (“ARQULE”), and Daiichi Sankyo Co., Ltd, a Japanese company organized under the laws of Japan with offices at 3-5-1 Nihonbashi Honcho, Chuo-ku, Tokyo 103-8426, Japan (“DS”).  Each of DS and ARQULE is sometimes referred to individually herein as a “Party” and collectively as the “Parties.”

WHEREAS, ARQULE has developed and controls certain proprietary technology and know-how used for the discovery and development of therapeutics that inhibit kinases; and

WHEREAS, DS has expertise in pharmaceutical research, development and commercialization; and

WHEREAS, the Parties desire to enter into a collaboration for the purposes of identifying kinase inhibitors for research, development and optimization and of developing and commercializing products containing or derived from such optimized kinase inhibitors.

NOW, THEREFORE, in consideration of the mutual covenants contained herein, and for other good and valuable consideration, the Parties hereto, intending to be legally bound, hereby agree as follows:

1.DEFINITIONS

Whenever used in this Agreement with an initial capital letter, the terms defined in this Article 1 shall have the meanings specified.

1.1“AAA” means the American Arbitration Association.

1.2“Abandoned DS Target” means any DS Target with respect to which DS determines, in its sole discretion, to discontinue further research as part of the Research Program pursuant to Section 3.5.2(a).

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1.3“Advancement” or “Advance” means, with respect to a Collaboration Compound, the decision by the JRC to advance such Collaboration Compound from one Research Stage to the next succeeding Research Stage.

1.4“Advancement Criteria” means the guideline criteria to be used by the JRC in order to Advance a Collaboration Compound through each Research Stage of the Research Program.  For purposes of clarity, the Advancement Criteria as of the Effective Date are set forth in Schedule 1 attached hereto, which Schedule 1 may be amended from time to time by the Parties.

1.5“Adverse Event” means any untoward, undesired or unplanned medical occurrence in a human clinical trial subject or a patient, which occurrence has a temporal relationship to administration of a Licensed Product, whether or not considered related to the Licensed Product, including, without limitation, any undesirable sign (including abnormal laboratory findings of clinical concern), symptom or disease associated with the use of such Licensed Product.

1.6“Affiliate” means, with respect to any Person, any other Person that, directly or indirectly through one or more affiliates, controls, or is controlled by, or is under common control with, such Person.  For purposes of this definition, “control” means (a) ownership of fifty percent (50%) or more of the shares of stock entitled to vote for the election of directors in the case of a corporation, or fifty percent (50%) or more of the equity interests in the case of any other type of legal entity, (b) status as a general partner in any partnership, or (c) any other arrangement whereby a Person controls or has the right to control the board of directors of a corporation or equivalent governing body of an entity other than a corporation.

1.7“AKIP Platform Technology” means both (a) the proprietary Technology Controlled by ARQULE and used for the identification and development of kinase inhibitors and (b) data and information relating to the structure and mechanism of inhibition of kinase inhibitors that are identified through the use of such proprietary Technology.

1.8“Annual Net Sales” means, with respect to any Calendar Year, the aggregate amount of the Net Sales for such Calendar Year.

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1.9“Annual Research Plan” means, with respect to each DS Target, the written plan describing the research activities to be carried out by each Party for such DS Target during the Research Collaboration Period in conducting each Research Stage of the Research Program pursuant to this Agreement, which shall include the objectives of, and the allocation of resources (including the FTE Funding Commitment) with respect thereto, as such written plan may be amended, modified or updated, as further described in Section 3.2.

1.10“Applicable Laws” means Federal, state, local, national and supra-national laws, statutes, rules and regulations, including any rules, regulations, guidance, guidelines or requirements of Regulatory Authorities, national securities exchanges or securities listing organizations, that are in effect from time to time during the Term and apply to a particular activity hereunder.

1.11“ARQULE Background Technology” means any Technology that is used by ARQULE, or provided by ARQULE for use, in the Research Program that is (a) Controlled by ARQULE as of the Effective Date or (b) conceived or first reduced to practice by employees of, or consultants to, ARQULE after the Effective Date other than in the conduct of ARQULE Research Activities and without the use in any material respect of any DS Technology, DS Patent Rights or DS Materials.  For purposes of clarity, ARQULE Background Technology (a) shall include the AKIP Platform Technology, and (b) shall not include Collaboration Compounds, ARQULE Program Technology or ARQULE’s interest in Joint Technology.

1.12“ARQULE Decision” means a decision with respect to the following issues:  (a) the application by ARQULE of the AKIP Platform Technology against *; (b) whether * is to incur any *; (c) whether * is to incur any * in the performance of * and (d) the designation of any *.

1.13“ARQULE Materials” means any Proprietary Materials that are Controlled by ARQULE and used by ARQULE, or provided by ARQULE for use, in the Research Program and/or the Development Program.  For purposes of clarity, ARQULE Materials shall include all Compounds provided by ARQULE for use in the Research Program.

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1.14“ARQULE Patent Rights” means any Patent Rights Controlled by ARQULE that contain one or more claims that cover ARQULE Technology.

1.15“ARQULE Program Technology” means (a) any Program Technology that is conceived or first reduced to practice by employees of, or consultants to, ARQULE, alone or jointly with any Third Party, without the use in any material respect of any DS Technology, DS Patent Rights, DS Materials or Joint Technology; (b) any Program Technology, regardless of whether conceived or first reduced to practice by employees of, or consultants to, ARQULE, DS, or both Parties, alone or jointly with any Third Party, that relates to, or constitutes, AKIP Platform Technology, and (c) all Collaboration Compounds.

1.16“ARQULE Research Activities” means all activities specified to be conducted by ARQULE in any Annual Research Plan (or amendment thereto) that are (a) approved by the JRC and (b) to the extent involving matters that are ARQULE Decisions, approved by ARQULE in accordance with Section 2.1.5.  For purposes of clarity, unless otherwise set forth in any Annual Research Plan, ARQULE Research Activities shall include (a) all Feasibility Assessment Activities and (b) all Assay Development and Hit Generation activities and Hit to Lead activities to be conducted as part of the Research Program.

1.17“ARQULE Technology” means, collectively, ARQULE Background Technology and ARQULE Program Technology.

1.18“Backup Compound” means, with respect to any Primary Development Compound, any other Collaboration Compound that is designated by DS at any time before the expiration of the DS Option Period for the DS Target of such Primary Development Compound, that (a) has the same DS Target as such Primary Development Compound, and (b) satisfies Minimum Requirement; provided, that, no Collaboration Compound shall, after becoming a Waived Compound or Terminated Compound, be designated by DS as a Backup Compound.

1.19“Blocked Target” means any Target listed on the Blocked Target List that may not be designated as a DS Target under this Agreement.  For purposes of clarity, a Target may only be designated by ARQULE as a Blocked Target if (a) *, (b) *

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with respect to a license, collaboration or similar agreement relating to compounds against such Target, or (c) *.

1.20“Business Day” means any day on which banking institutions in Tokyo are open for business.

1.21“Calendar Quarter” means each successive period of three (3) consecutive calendar months commencing on January 1, April 1, July 1 or October 1, as the case may be, and ending on March 31, June 30, September 30 or December 31, respectively; provided, that, the initial Calendar Quarter shall commence on the Effective Date and end on December 31, 2008 and the final Calendar Quarter shall end on the appropriate anniversary of the Effective Date.

1.22“Calendar Year” means each successive period of twelve (12) months commencing on January 1 and ending on December 31.

1.23“Challenge” means any challenge to the validity or enforceability of any of the Licensed Patent Rights in the absence of a material breach of this Agreement, including without limitation by (a) filing a declaratory judgment action in which any of the Licensed Patent Rights is alleged to be invalid or unenforceable; (b) citing prior art pursuant to 35 U.S.C. §301, filing a request for re-examination of any of the Licensed Patent Rights pursuant to 35 U.S.C. §302 and/or §311, or provoking an interference with an application for any of the Licensed Patent Rights pursuant to 35 U.S.C. §135; or (c) filing or commencing any re-examination, opposition, cancellation, nullity or similar proceedings against any of the Licensed Patent Rights in any country.

1.24“Clinical Trial” means, collectively, a Phase I Clinical Trial, Phase II Clinical Trial or Phase III Clinical Trial.

1.25“Co-Commercialize” or “Co-Commercialization Activities” means with respect to any Co-Commercialized Licensed Product, the joint Detailing of such Co-Commercialized

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Licensed Product in the Co-Commercialization Territory using a coordinated sales force consisting of representatives of both Parties.

1.26“Co-Commercialization Option Period” means, with respect to each Licensed Product, the period commencing on the date of exercise by DS of the DS Option and the grant of the exclusive licenses with respect to such Licensed Product and continuing until the later of (a) * (*) days prior to the Initiation of the first Phase III Clinical Trial with respect to that Licensed Product, or (b) * (*) days after DS gives ARQULE a Phase III Notice pursuant to Section4.10.2(a)(i).

1.27“Co-Commercialization Territory” means the United States.

1.28“Collaboration” means the alliance of ARQULE and DS established pursuant to this Agreement for the purposes of identifying, researching and Developing Collaboration Compounds and Commercializing Licensed Products in the Field in the Territory.

1.29“Collaboration Compound” means any Compound that is identified or synthesized by either Party in the conduct of the Research Program.

1.30“Commercialization” or “Commercialize” means any and all activities directed to the commercialization of a Licensed Product under the Licensed Product Trademarks selected by DS after Commercialization Regulatory Approval has been obtained, including marketing, manufacturing for commercial sale, promoting, detailing, distributing, offering to sell and selling a Licensed Product, importing a Licensed Product for sale, conducting post-marketing human clinical studies and interacting with Regulatory Authorities regarding the foregoing.  When used as a verb, “to Commercialize” and “Commercializing” means to engage in Commercialization and “Commercialized” has a corresponding meaning.

1.31“Commercially Reasonable Efforts” means (a) with respect to activities of ARQULE in the Research Program and/or in the Commercialization of any Co-Commercialized Licensed Products, the efforts and resources comparable to those undertaken by ARQULE in pursuing the research, discovery or commercialization of proprietary materials and the development of product candidates, as applicable, that are not subject to the Collaboration and that are at an equivalent stage of development or commercialization and have similar market

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potential and are at a similar stage in their lifecycle; and (b) with respect to activities of DS in the Research Program, the Development of a particular Licensed Product or the Commercialization of a particular Licensed Product (including any Co-Commercialized Licensed Products), the efforts and resources comparable to those undertaken by DS in pursuing intellectual property protection and development of product candidates and commercialization of products, as applicable, that are not subject to the Collaboration and that are at an equivalent stage of development or commercialization and have similar market potential and are at a similar stage in their lifecycle.  For purposes of both (a) and (b) above, all relevant factors as measured by the facts and circumstances at the time such efforts are due shall be taken into account, including, as applicable and without limitation, mechanism of action; efficacy and safety; product profile; actual or anticipated Regulatory Authority approved labeling; and the nature and extent of market exclusivity (including patent coverage, proprietary position and regulatory exclusivity; cost, time required for and likelihood of obtaining Commercialization Regulatory Approval; competitiveness of alternative products and market conditions; actual or projected profitability and availability of capacity to manufacture and supply for commercial sale).

1.32“Commercialization Regulatory Approval” means, with respect to any Licensed Product, the Regulatory Approval required by Applicable Laws to sell such Licensed Product for use in the Field in a country or region in the Territory.  “Commercialization Regulatory Approval” shall include, without limitation, the approval of any Drug Approval Application.  For purposes of clarity, “Commercialization Regulatory Approval” in the United States shall mean final approval of an NDA for the first Indication or sNDA for an additional Indication permitting marketing of the applicable Licensed Product in interstate commerce in the United States, “Commercialization Regulatory Approval” in the European Union shall mean marketing authorization for the applicable Licensed Product pursuant to Council Directive 2001/83/EC, as amended, or Council Regulation 2309/93/EEC, as amended and “Commercialization Regulatory Approval” in Japan shall mean final approval of an application submitted to the Ministry of Health, Labor and Welfare and the publication of a New Drug Approval Information Package permitting marketing of the applicable Licensed Product in Japan, as any of the foregoing may be amended from time to time.

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1.33         “Committee” means, collectively, the JEC, the JRC, and the USCC.

1.34         “Compound” means any kinase inhibitor having a molecular weight less than *.

1.35         “Confidential Information” means (a) with respect to ARQULE, all tangible embodiments of ARQULE Technology, (b) with respect to DS, all tangible embodiments of DS Technology and (c) with respect to each Party, (i) all tangible embodiments of Joint Technology and (ii) all information, Technology and Proprietary Materials disclosed or provided by or on behalf of such Party (the “disclosing Party”) to the other Party (the “receiving Party”) or to any of the receiving Party’s employees, consultants, Affiliates or sublicensees (or Sublicensees, as the case may be); provided, that, none of the foregoing shall be Confidential Information if: (A) as of the date of disclosure, it is known to the receiving Party or its Affiliates as demonstrated by contemporaneous credible written documentation, other than by virtue of a prior confidential disclosure to such receiving Party; (B) as of the date of disclosure it is in the public domain, or it subsequently enters the public domain through no fault of the receiving Party; (C) it is obtained by the receiving Party from a Third Party having a lawful right to make such disclosure free from any obligation of confidentiality to the disclosing Party; or (D) it is independently developed by or for the receiving Party without reference to or use of any Confidential Information of the disclosing Party as demonstrated by contemporaneous credible written documentation.  For purposes of clarity, unless excluded from Confidential Information pursuant to the proviso at the end of the preceding sentence, any scientific, technical or financial information of a Party that is disclosed at any meeting of any Committee or disclosed through an audit report shall constitute Confidential Information of the disclosing Party.  Subject to the rights of the Parties to make disclosures as set forth in Article 6, the terms of this Agreement shall constitute Confidential Information of each Party.

1.36         “Contract Year” means (a) the period beginning on the Effective Date and ending on the first anniversary of the last day of the calendar month in which the Effective Date falls and (b) each succeeding twelve (12) month period thereafter.

1.37         “Control” or “Controlled” means (a) with respect to Technology or Patent Rights, the possession by a Party of the right to grant a license or sublicense to such Technology

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or Patent Rights as provided herein without the payment of additional consideration to, and without violating the terms of any agreement or arrangement with, any Third Party and without violating any Applicable Laws and (b) with respect to Proprietary Materials, the possession by a Party of the right to supply such Proprietary Materials to the other Party as provided herein without the payment of additional consideration to, and without violating the terms of, any agreement or arrangement with any Third Party, and without violating any Applicable Laws.

1.38         “CTN” means the notification submitted to the Japanese Ministry of Health, Labor and Welfare prior to the Initiation of a clinical trial in Japan.

1.39         “Derived” means identified, obtained, developed, created, synthesized, generated, designed or resulting from, based upon, containing or incorporating; conjugated to or complexed with (whether directly or indirectly, or in whole or in part).

1.40         “Detail” means, with respect to a Co-Commercialized Licensed Product, an interactive, live, face-to-face contact of a representative within the Co-Commercialization Territory with a medical professional with prescribing authority or other individuals or entities that have a significant impact or influence on prescribing decisions, in an effort to increase physician prescribing preferences of such Co-Commercialized Licensed Product for its approved uses within the Co-Commercialization Territory.  When used as a verb, “Detailing” means performing Details.  When used as an adjective, “Detailing” means of or related to performing Details.

1.41         “Development” or “Develop” means, with respect to each Primary Development Compound and/or Backup Compound and Licensed Product (including without limitation any Co-Commercialized Licensed Product), all non-clinical and clinical activities performed in order to obtain Regulatory Approval of a Licensed Product (including without limitation any Co-Commercialized Licensed Product) in accordance with this Agreement up to and including the obtaining of Commercialization Regulatory Approval of such Licensed Product.  For purposes of clarity, these activities include, without limitation, in vivo animal efficacy testing, preclinical safety testing, test method development and stability testing, regulatory toxicology studies, formulation, process development, manufacturing, manufacturing scale-up, development-stage manufacturing, quality assurance/quality control development, statistical analysis and report

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writing, clinical trial design and operations, conducting Clinical Trials, preparing and filing Drug Approval Applications, and all regulatory affairs related to the foregoing.  When used as a verb, “Developing” means to engage in Development and “Developed” has a corresponding meaning.

1.42         “Development Program” means the Development activities to be conducted during the Term with respect to each Primary Development Compound and/or Backup Compound and Licensed Product (including without limitation Co-Commercialized Licensed Products), with the objective of developing such Primary Development Compound and/or Backup Compound and Licensed Product.

1.43         “Drug Approval Application” means, with respect to a Licensed Product in a particular country or region, an application for Commercialization Regulatory Approval for such Licensed Product in such country or region, including without limitation: (a) an NDA or sNDA; (b) a counterpart of an NDA or sNDA in any country or region in the Territory (including, without limitation, a CTN); and (c) all supplements and amendments to any of the foregoing.

1.44         “DS Background Technology” means any Technology that is used by DS, or provided by DS for use, in the Research Program and/or Development Program that is (a) Controlled by DS as of the Effective Date or (b) conceived or first reduced to practice by employees of, or consultants to, DS after the Effective Date other than in the conduct of DS Research Activities or DS Development Activities and without the use in any material respect of any Collaboration Compounds, ARQULE Technology, ARQULE Patent Rights, or ARQULE Materials.  For purposes of clarity, DS Background Technology shall not include DS Program Technology or DS’s interest in Joint Technology.

1.45         “DS Decision” means *.

1.46         “DS Development Activities” means all Development activities (including without limitation all Development activities conducted with respect to Co-Commercialized Collaboration Compounds) specified to be conducted by DS.

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1.47         “DS Materials” means any Proprietary Materials that are Controlled by DS and used by DS, or provided by DS for use, in the Research Program and/or the Development Program.

1.48         “DS Option Period” means, with respect to any Primary Development Compound and the related Backup Compounds, the period commencing on the date of designation by DS of a Primary Development Compound, and continuing until * (*) days following the date of receipt by the JRC of the Toxicology Studies Results with respect to such Primary Development Compound, or up to * (*) subsequently evaluated Backup Compounds provided that DS has designated such Backup Compounds prior to the start of the first Toxicology Study; provided that the DS Option Period shall end no later than * (*) months after the end of the Research Collaboration Period.

1.49         “DS Patent Rights” means any Patent Rights Controlled by DS that contain one or more claims that cover DS Technology.

1.50         “DS Program Technology” means any Program Technology that (a) is not ARQULE Program Technology or Joint Technology and (b) is conceived or first reduced to practice by employees of, or consultants to, DS, alone or jointly with any Third Party, without the use in any material respect of any ARQULE Technology, ARQULE Patent Rights, ARQULE Materials or Joint Technology.

1.51         “DS Research Activities” means all activities specified to be conducted by DS in any Annual Research Plan (or amendment thereto) that are approved by the JEC.

1.52         “DS Target” means each Target listed on the DS Target List, as amended from time to time in accordance with Section 3.5.2.

1.53         “DS Target List” means the list of Targets listed on Schedule 2 attached hereto and incorporated herein by reference.

1.54         “DS Technology” means, collectively, DS Background Technology and DS Program Technology.

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1.55         “Effective Date” means the date first set forth above.

1.56         “European Union” or “EU” means the countries of the European Union, as the European Union is constituted as of the Effective Date and as it may be expanded from time to time.

1.57         “FDA” means the United States Food and Drug Administration or any successor agency or authority thereto.

1.58         “FDCA” means the United States Federal Food, Drug, and Cosmetic Act, as amended.

1.59         “Feasibility Assessment Activities” means the activities to be conducted by ARQULE with respect to Available Targets in order to identify those Available Targets that ARQULE reasonably believes would be amenable to the application of the AKIP Platform Technology.

1.60         “Field” means the prevention, treatment, cure and/or delay of the onset or progression of all human oncology Indications.

1.61         “First Commercial Sale” means, with respect to a Licensed Product in a country in the Territory, the first sale, transfer or disposition for value or for an end user of such Licensed Product in such country.  For purposes of clarity, the use of any Licensed Product in clinical trials, pre-clinical studies or other research or development activities, or the disposal or transfer of Licensed Products for a bona fide charitable purpose or a commercially reasonable sampling program, shall not be deemed to be a sale, transfer or disposition for value or for an end user.

1.62         “Force Majeure” means any occurrence beyond the reasonable control of a Party that (a) prevents or substantially interferes with the performance by such Party of any of its obligations hereunder and (b) occurs by reason of any act of God, flood, fire, explosion, earthquake, strike, lockout, labor dispute, casualty or accident, or war, revolution, civil commotion, act of terrorism, blockage or embargo, or any injunction, law, order, proclamation, regulation, ordinance, demand or requirement of any government or of any subdivision, authority or representative of any such government.

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1.63         “FTE” shall mean the efforts of one full-time employee (or equivalent part-time efforts of more than one employee) devoted to or in support of the ARQULE Research Activities.

1.64         “FTE Funding Commitment” means (a) with respect to the ARQULE Research Activities conducted in the first Contract Year during the Research Collaboration Period, the funding of * ARQULE FTEs at the FTE Rate; and (b) with respect to the ARQULE Research Activities conducted by ARQULE in any subsequent Contract Year during the Research Collaboration Period, the funding of that number of FTEs as shall be consistent with the Annual Research Plan for such subsequent Contract Year and agreed to by the Parties not later than * (*) days prior to the commencement of such Contract Year; provided, that, (i) DS shall have the right to reduce the FTE Funding Commitment in any subsequent Contract Year to the funding at the FTE Rate of a number of FTEs no fewer than * of FTE Funding Commitment that is applicable to the previous Contract Year, and (ii) ARQULE’s consent shall be required to increase the number of FTEs above the number in the previous year. In the event the Parties cannot agree on the number of FTE’s in any subsequent year, each Party shall give written notice to the JEC of the number of  FTEs it believes are needed to perform the ARQULE Research Activities in such Contract Year and the number of FTEs shall be decided in accordance with Section 2.1.5.  Until the number of FTEs is decided,  the FTE Funding Commitment for such Contract Year shall be the funding at the FTE Rate of a number of FTEs equal to one half of the number of FTEs funded in the previous year.

1.65         “FTE Rate” means with respect to the conduct by ARQULE of ARQULE Research Activities and Feasibility Assessment Activities, * Dollars (US $*) per year.  The FTE Rate includes all salary, employee benefits, materials and all other expenses including support staff and overhead for or associated with the scientists of a Party performing activities but does not include Third Party Costs.

1.66         “Hatch-Waxman Act” means the Drug Price Competition and Patent Term Restoration Act of 1984, as amended.

1.67         “IND” means: (a) an Investigational New Drug Application as defined in the FDCA and regulations promulgated thereunder or any successor application or procedure

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required to initiate clinical testing of a Licensed Product in humans in the United States; (b) a counterpart of an Investigational New Drug Application that is required in any other country or region in the Territory before beginning clinical testing of a Licensed Product in humans in such country or region; and (c) all supplements and amendments to any of the foregoing.

1.68         “Indication” means any human indication, disease or condition which can be treated, prevented, cured or the onset or progression of which can be delayed.  For purposes of clarity, distinctions between human indications, diseases or conditions with respect to a Licensed Product shall be made by reference to the World Health Organization International Classification of Diseases, version 10 (as revised and updated, “ICD10”).

1.69         “Initiation” or “Initiate” means, with respect to a human clinical trial, the first date that a subject or patient is dosed in such clinical trial.

1.70         “Joint Executive Committee” or “JEC” means the committee composed of ARQULE and DS representatives established pursuant to Section 2.1.1.

1.71         “Joint Patent Rights” means Patent Rights that contain one or more claims that cover Joint Technology.

1.72         “Joint Research Committee” or “JRC” means the committee composed of ARQULE and DS representatives established pursuant to Section 2.2.

1.73         “Joint Technology” means any Program Technology that is (a) jointly conceived or reduced to practice by both (i) employees of, or consultants to, DS and (ii) employees of or consultants to ARQULE or (b) conceived or reduced to practice solely by employees of, or consultants to, a Party with the use in any material respect of any Technology, Patent Rights or Proprietary Materials of the other Party.  Notwithstanding anything in this Agreement to the contrary, any Program Technology that relates to the AKIP Platform Technology shall not be considered Joint Technology irrespective of which Party or Parties conceived or reduced to practice such Program Technology and shall be ARQULE Program Technology.

1.74         “Kinase Inhibition Assays” means the relevant assays used to determine the IC50 of a Collaboration Compound against a Target, which shall consist of enzymatic assays or

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biophysical methods and any other assays agreed by the JRC and set forth in the Annual Research Plan.

1.75         “Licensed Patent Rights” means any ARQULE Patent Rights and ARQULE’s interest in Joint Patent Rights that (a) contain one or more claims that cover any Collaboration Compound or Licensed Product, including its manufacture or its formulation or a method of its delivery or of its use, or (b) are necessary or useful for DS to exercise the licenses granted to it hereunder.

1.76         “Licensed Product” means any pharmaceutical or medicinal item, substance or formulation that contains, incorporates, comprises or is Derived from a Primary Development Compound for which DS has exercised the DS Option under Section 7.1.2 or any Backup Compound with respect to such Primary Development Compound ; provided, that, no Primary Development Compound or Backup Compound shall, after becoming a Waived Compound or Terminated Compound, be deemed to be a Licensed Product.

1.77         “Licensed Product Commercialization Plan” means, with respect to each Licensed Product (including without limitation any Co-Commercialized Licensed Product), the written plan for the Commercialization of such Licensed Product in the Territory, as such plan may be amended or updated.

1.78         “Licensed Product Trademark” means any trademark or trade name, whether or not registered, or any trademark application or renewal, extension or modification thereof, in the Territory, or any trade dress and packaging, in each case that are applied to or used with any Licensed Product by DS, together with all goodwill associated therewith and promotional materials relating thereto.

1.79         “Licensed Technology” means any ARQULE Technology and ARQULE’s interest in Joint Technology that (a) relates to any Collaboration Compound or Licensed Product, including its manufacture or its formulation or a method of its delivery or of its use; and (b) is necessary or useful for DS to exercise the licenses granted to it hereunder.

1.80         “Minimum Requirement” for a Collaboration Compound means (i) an IC50 less than *µM against a DS Target in the Kinase Inhibition Assays, (ii) an IC50 against such DS

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Target that is less than *% of the IC50 against any other Target in the Target Specificity Panel in the Kinase Inhibition Assays, and (iii) satisfaction of the Advancement Criteria to Advance from Hit to Lead to Lead Optimization.

1.81         “NDA” means a New Drug Application, as defined in the FDCA and regulations promulgated thereunder or any successor application or procedure required to sell a Licensed Product in the United States.

1.82         “Net Sales” means such meaning to be defined in the amendment to this Agreement or separate agreement as set forth in Section 5.4.

1.83         “Patent Rights” means the rights and interests in and to issued patents and pending patent applications (which, for purposes of this Agreement, include certificates of invention, applications for certificates of invention and priority rights) in any country or region, including all provisional applications, substitutions, continuations, continuations-in-part, divisions, renewals, all letters patent granted thereon, and all reissues, re-examinations and extensions thereof, and all foreign counterparts of any of the foregoing.

1.84         “Person” means an individual, sole proprietorship, partnership, limited partnership, limited liability partnership, corporation, limited liability company, business trust, joint stock company, trust, incorporated association, joint venture or similar entity or organization, including a government or political subdivision, department or agency of a government.

1.85         “Phase I Clinical Trial” means a clinical trial conducted in healthy humans or patients, which clinical trial is designed to establish the safety, drug-drug interactions and/or pharmacokinetics of an investigational drug given its intended use, and to support continued testing of such drug in Phase II Clinical Trials.  Any clinical trial in any country that would satisfy the requirements of 21 CFR 312.21(a) shall be a Phase I Clinical Trial.

1.86         “Phase II Clinical Trial” means a clinical trial conducted in patients with a particular disease or condition, which clinical trial is designed to establish the safety, appropriate dosage and pharmacological activity of an investigational drug given its intended use, and to

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initially explore its efficacy for such disease or condition and to support continued testing of such drug in Phase III Clinical Trials.  Any clinical trial in any country that would satisfy the requirements of 21 CFR 312.21(b) shall be a Phase II Clinical Trial.

1.87         “Phase III Clinical Trial” means a pivotal clinical trial conducted in patients with a particular disease or condition, which clinical trial is designed to ascertain efficacy and safety of an investigational drug for its intended use and to define warnings, precautions and Adverse Events that are associated with the Licensed Product in the dosage range intended to be prescribed, with the purpose of preparing and submitting applications for Regulatory Approval or label expansion to the pertinent Regulatory Authority in any country.  Any clinical trial in any country that would satisfy the requirements of 21 CFR 312.21(c) shall be a Phase III Clinical Trial.

1.88         “Primary Detail Equivalent” means (i) if only a Licensed Product is Detailed, one Detail of such Licensed Product or (ii) if a Licensed Product is Detailed with another product, * percent (*%) of a Detail if the Licensed Product is Detailed in the first position and * percent (*%) of a Detail if the Licensed Product is Detailed in the second position or (iii) if a Licensed Product is Detailed other than in the first or second position, such percentage of a Detail as the Parties shall agree upon in the Co-Commercialization Agreement.

1.89         “Primary Development Compound” means any Collaboration Compound that the JRC determines has satisfied all applicable Advancement Criteria to Advance from Lead Optimization to Preclinical Studies and that DS has designated as a Primary Development Compound; provided, that, no Collaboration Compound shall, after becoming a Waived Compound or Terminated Compound, be designated by DS as a Primary Development Compound.

1.90         “Program Patent Rights” means any Patent Rights that contain one or more claims that cover Program Technology.

1.91         “Program Technology” means any Technology (including, without limitation, any new and useful process, method of manufacture or composition of matter) or Proprietary Materials that are conceived or first reduced to practice (actively or constructively) by either

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Party in the conduct of the Research Program and/or the Development Program, including but not limited to a process for modifying, optimizing, using, formulating, delivering and/or stabilizing any Collaboration Compound or Licensed Product.

1.92“Proprietary Materials” means tangible chemical, biological or physical materials (a) that are furnished by or on behalf of one Party to the other Party in connection with this Agreement, whether or not specifically designated as proprietary by the Transferring Party or (b) that are otherwise conceived or reduced to practice in the conduct of the Research Program or the Development Program.

1.93“Quarterly FTE Payment” means the amount payable by DS to ARQULE for FTEs for all ARQULE Research Activities to be conducted during each Calendar Quarter of the Research Collaboration Period, which shall equal * percent (*%) of the FTE Funding Commitment set forth in the Annual Research Plan for the applicable Calendar Year, provided, that such amount shall be prorated for the first and last Calendar Quarter based on the number of days in such first or last Calendar Quarter divided by 365.

1.94“Regulatory Approval” means, with respect to any country or region in the Territory, any approval, product and establishment license, registration or authorization of any Regulatory Authority required for the manufacture, use, storage, importation, exportation, distribution, transport or sale of a Licensed Product for use in the Field in such country or region.

1.95“Regulatory Authority” means the FDA in the United States, the EMEA in the EU, the Ministry of Health, Labor and Welfare in Japan, or any counterpart of any of the foregoing in any other jurisdiction, or any other national, supra-national, regional, state or local regulatory agency, department, bureau, commission, council or other governmental entity with authority over the distribution, importation, exportation, manufacture, production, use, storage, transport, clinical testing or sale of a Licensed Product.

1.96“Regulatory Filings” means, collectively: (a) all INDs, establishment license applications, drug master files, applications for designation as an “Orphan Product(s)” under the Orphan Drug Act, for “Fast Track” status under Section 506 of the FDCA (21 U.S.C. § 356) or for a Special Protocol Assessment under Section 505(b)(4)(B) and (C) of the FDCA (21 U.S.C.

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§ 355(b)(4)(B)), NDAs and BLAs and all other similar filings (including, without limitation, counterparts of any of the foregoing) in any country or region in the Territory; (b) all supplements and amendments to any of the foregoing; and (c) all data and other information contained in, and correspondence relating to, any of the foregoing.

1.97“Research Collaboration Period” means the period beginning on the Effective Date and ending on the * anniversary thereof, as such period may be extended by the mutual written agreement of the Parties; provided, that, (a) DS shall have the right to extend the Research Collaboration Period by * (*) * (*) * by providing written notice to ARQULE not less than * (*) * prior to the expiration of the then-applicable Research Collaboration Period and (b) if this Agreement is terminated prior to the end of the Research Collaboration Period, the effective date of such early termination shall become the last day of the Research Collaboration Period.

1.98“Research Program” means the research program to be conducted by the Parties during the Research Collaboration Period pursuant to the Annual Research Plans which shall involve the identification and preclinical development of Collaboration Compounds through all Research Stages.  For purposes of clarity, the Research Program does not include any Development activities performed in the course of the Development Program.

1.99“Research Stage” means each stage of the Research Program described more fully on Schedule 1 attached hereto and incorporated herein by reference.  For purposes of clarity, the Research Stages shall consist of (a) Assay Development and Hit Generation ; (b) Hit to Lead; (c) Lead Optimization and (d) Preclinical Studies.

1.100“Royalty Term” means, on a Licensed Product-by-Licensed Product and country-by-country basis, the period beginning on the date of First Commercial Sale of a Licensed Product in a country and ending on the later to occur of (a) expiration of the last to expire Valid Claim of the Licensed Patent Rights or Joint Patent Rights in such country that covers such Licensed Product or its identification, manufacture, use, import, offer for sale or sale or (b) * (*) years from the date of the First Commercial Sale of such  Licensed Product in such country.

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1.101“sNDA” means a Supplemental New Drug Application, as defined in the FDCA and applicable regulations promulgated thereunder.

1.102“Sublicensee” means any Third Party to which DS grants a sublicense under the licenses granted to it under Section 7.5.

1.103“Target” means a kinase.

1.104“Target Specificity Panel” means the list of Targets set forth in the most recent Annual Research Plan for the purpose of testing the specificity of Collaboration Compounds.

1.105“Technology” means, collectively, inventions, discoveries, improvements, trade secrets and proprietary methods, whether or not patentable, including without limitation: (a) methods of production or use of, and structural and functional information pertaining to, chemical compounds; and (b) compositions of matter, data, formulations, processes, techniques, know-how and results (including, without limitation, any negative results).

1.106“Terminated Compounds” means (a) all Collaboration Compounds upon any termination of this Agreement by ARQULE pursuant to Section 10.2.2, 10.2.3 or 10.2.4 or by DS pursuant to Section 10.2.1; (b) the relevant Collaboration Compounds binding to the DS Target for which DS’s license is terminated by ARQULE pursuant to Section 10.2.2 due to failure of DS to meet its diligence obligations, as provided in Section 4.7(b); and (c) the relevant Collaboration Compounds binding to any Abandoned DS Target.

1.107“Territory” means all countries and territories of the world.

1.108“Third Party” means a Person other than DS and ARQULE and their respective Affiliates.

1.109“Third Party Data Provider” means IMS Health and/or any other Third Party approved by the JEC that performs market analyses and provides sales data for the biotechnology or pharmaceutical industry.

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1.110“Toxicology Study” means the GLP toxicology studies to be conducted as part of the Preclinical Studies with respect to a Primary Development Compound or a Backup Compound, as described in the Annual Research Plan.

1.111“Unanimous Decision” means any decision of the JEC that is not designated herein as an ARQULE Decision or a DS Decision.

1.112“United States” means the United States of America and its territories and possessions (including the District of Columbia, Puerto Rico and the U.S. Virgin Islands).

1.113“US Co-Commercialization Committee” or “USCC” means the committee composed of ARQULE and DS representatives established pursuant to Section 2.3.1.

1.114“Valid Claim” means any claim of a pending patent application or an issued unexpired patent that (a) has not been finally cancelled, withdrawn, abandoned or rejected by any administrative agency or other body of competent jurisdiction, (b) has not been permanently revoked, held invalid, or declared unpatentable or unenforceable in a decision of a court or other body of competent jurisdiction that is unappealable or unappealed within the time allowed for appeal, (c) has not been rendered unenforceable through disclaimer or otherwise, and (d) is not lost through an interference proceeding.

1.115“Waived Compound” means on a Target-by-Target basis, (a) any Collaboration Compound that does not satisfy Minimum Requirement, (b) any Collaboration Compound for which DS does not exercise the DS Option prior to the end of the DS Option Period for the DS Target of such Collaboration Compound, and (c) any Primary Development Compound, Backup Compound or Licensed Product the Development or Commercialization of which is abandoned or discontinued by DS.

Additional Definitions.  In addition, each of the following definitions shall have the respective meanings set forth in the section of this Agreement indicated below:

Definition	Section
Abandoning Party	9.1.5(b)
Additional Indication	4.11
Additional Indication Notice	4.11

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Agreement	Recitals
Alliance Manager	2.4
ARQULE	Recitals
ARQULE Indemnitees	12.2
ARQULE Program Patent Right	9.2.1(c)(ii)
Available Target	3.5.2(c)
Available Target Response	3.5.2(c)
Blocked Target List	3.5.2(b)
Claims	12.1
Collaboration Compound Notice	3.6
Co-Commercialization Agreement	4.10.2(a)(iii) (A)
Co-Commercialization Option	4.10.2(a)(ii)
Co-Commercialization Option Notice	4.10.2(a)(ii)
Co-Commercialization Plan	4.10.2(b)
Co-Commercialized Licensed Product	4.10.2(a)(ii)
Designated Senior Officers	2.1.5
Desired Target	3.5.2(c)
Desired Target Notice	3.5.2(c)
Dispute	13.1.1
Disputed Matter	2.1.5
DS	Recitals
DS Backup Compound Notice	7.1.2(b)
DS Indemnitees	12.1
DS Option	7.1.1
DS Option Exercise Notice	7.1.2(a)
Expert	13.1.2(a)
Filing Party	9.1.4
Gatekeeper	3.5.2(b)
Generic Licensed Product	Schedule 3
Hit	3.6
Indemnified Party	12.3
Indemnifying Party	12.3
Infringement	9.2.1(a)
Infringement Notice	9.2.1(a)
Initial DS Targets	3.5.1
License Agreement	7.1.2(a)
License Fee	5.2
Losses	12.1
Maintaining Party	9.1.5(b)
non-Appointing Party	2.6
Non-Filing Party	9.1.4
Party/Parties	Recitals
Patent Coordinator	8.4
Recipient Party	3.8
Term	10.1
Third Party Costs	5.3.2

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Toxicology Studies Results	3.4.2
Transferring Party	3.8
Upfront Fee	5.1
Validated Target	3.5.2(d)
Validated Target Notice	3.5.2(d)

2.ADMINISTRATION OF THE COLLABORATION

2.1Joint Executive Committee.

2.1.1Establishment.  Within fifteen (15) days of the Effective Date, ARQULE and DS shall establish the Joint Executive Committee.  Unless otherwise agreed by the Parties, the term of the JEC shall continue until the later of (a) termination of this Agreement or (b) termination of the last License Agreement to terminate.

2.1.2Membership.  Upon establishment of the JEC, each Party shall designate in writing, in its sole discretion, one (1) person to be its initial member of the JEC, and upon the first exercise of a DS Option, two (2) additional persons or such other equal number of persons to be members of the JEC as the Parties agree to (who shall be members of its management).  Unless otherwise agreed by the Parties, each Party’s initial member shall be designated as co-chairs of the JEC  and upon appointment of the additional members, one of DS’s designees and one of ARQULE’s designees shall be designated as co-chairs of the JEC.  Each Party shall have the right at any time to substitute individuals, on a permanent or temporary basis, for any of its previously designated representatives to the JEC, by giving written notice to the other Party.  Initial designees of the Parties to the JEC shall be designated by each Party by written notice to the other Party as soon as is reasonably practicable following the Effective Date.

2.1.3Meetings.

(a)Schedule of Meetings; Agenda.  The JEC shall establish a schedule of times for regular meetings, taking into account the planning needs of the Collaboration and its responsibilities.  In urgent cases, special meetings of the JEC may be convened by any member upon thirty (30) days (or, if such meeting is proposed to be conducted by teleconference, upon ten (10) days) written notice to the other members; provided, that, (i) notice of any such special meeting may be waived at any time, either before or after such meeting, and such waiver shall be

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the equivalent to the giving of a valid notice hereunder, and (ii) attendance of any member at a special meeting shall constitute a valid waiver of notice from such member.  In no event shall the JEC meet less frequently than two (2) times in each Calendar Year.  Regular and special meetings of the JEC may be held in person or by teleconference or videoconference; provided, that, meetings held in person shall alternate between the respective offices of the Parties.  The co-chairs shall prepare and circulate to each JEC member an agenda for each JEC meeting not later than one (1) week prior to such meeting.

(b)Quorum; Voting; Decisions.  At each JEC meeting after the appointment of the additional members, (i) the presence in person of at least two (2) members designated by each Party shall constitute a quorum and (ii) all members designated by each Party who are present shall have one collective vote on all matters before the JEC at such meeting.  All decisions of the JEC shall be made by unanimous vote.  Alternatively, the JEC may act by written consent signed by the co-chairs.  Whenever any action by the JEC is called for hereunder during a time period in which the JEC is not scheduled to meet, either co-chair shall cause the JEC to meet to take the action in the requested time period by calling a special meeting or the co-chairs shall act by written consent.  Representatives of each Party or of its Affiliates who are not members of the JEC may attend JEC meetings as non-voting observers with the consent of the other Party, which shall not be unreasonably withheld, conditioned or delayed.

(c)Minutes.  The JEC shall keep minutes of its meetings that record all decisions and all actions recommended or taken in reasonable detail.  Drafts of the minutes shall be prepared and circulated to the members of the JEC within a reasonable time after the meeting, not to exceed ten (10) business days.  The co-chairs shall have responsibility for the preparation and circulation of draft minutes.  Each member of the JEC shall have the opportunity to provide comments on the draft minutes.  The minutes shall be approved, disapproved and revised as necessary at the next JEC meeting or within thirty (30) days of the meeting whichever occurs first.  Upon approval, final minutes of each meeting shall be circulated to the members of the JEC by the co-chairs.

2.1.4Responsibilities.  The JEC shall be responsible for overseeing the conduct and progress of the Research Program, the Development of Primary Development

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Compounds and related Backup Compounds and the Commercialization of Licensed Products.  Without limiting the generality of the foregoing, the JEC shall have the following responsibilities:

(a)approving each Annual Research Plan, including amendments thereto;

(b)overseeing the JRC’s and USCC’s performance of its respective responsibilities;

(c)reviewing and overseeing Development activities and serving as a forum for discussing Development of Primary Development Compounds, Backup Compounds and Licensed Products ;

(d)reviewing and overseeing Commercialization of Licensed Products and serving as a forum for discussing the worldwide plan and strategy for Commercialization of Licensed Products;

(e)resolving all JRC matters that are in dispute other than those relate to a DS Decision or ARQULE Decision; and

(f)making such other decisions as may be delegated to the JEC pursuant to this Agreement or by mutual written agreement of the Parties after the Effective Date.

2.1.5Dispute Resolution.  The JEC members shall use reasonable efforts to reach agreement on any and all matters.  In the event that, despite such reasonable efforts, agreement on a particular matter cannot be reached by the JEC within * (*) days after the JEC first meets to consider such matter (each such matter, a “Disputed Matter”), then, (a) if the Disputed Matter involves a DS Decision, DS shall have the right to make the final decision on such Disputed Matter but shall only exercise such right in good faith after full consideration of the positions of both Parties; (b) if the Disputed Matter involves an ARQULE Decision, ARQULE shall have the right to make the final decision on such Disputed Matter but shall only exercise such right in good faith after full consideration of the positions of both Parties and (c) if the Disputed Matter involves a Unanimous Decision, (i) the co-chairs of the JEC shall refer such Disputed Matter to the CEO of ARQULE and the Head of R&D Division of DS (the “Designated Senior Officers”), who shall promptly initiate discussions in good faith to resolve such Disputed Matter and (ii) if such Disputed Matter is not resolved by the Designated Senior Officers within * (*) days after the date the Designated Senior Officers first met to consider such

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Disputed Matter or * (*) days after the date the JEC first met to consider such Disputed Matter, whichever is later, the Disputed Matter shall be resolved in accordance with Section 13.1.

2.2Joint Research Committee.

2.2.1Establishment.  Within fifteen (15) days of the Effective Date, ARQULE and DS shall establish the Joint Research Committee.  Unless otherwise agreed by the Parties, the term for the JRC shall commence as of the Effective Date and continue until the later of (i) the last day of the Research Collaboration Period, or (ii) the expiration of the last DS Option Period.  The JRC shall have and perform the responsibilities set forth in Section 2.2.4.

2.2.2Membership.  Upon establishment of the JRC, each Party shall designate in writing, in its sole discretion, three (3) or such other equal number of members as the Parties agree, to the JRC (which members shall be employees of such Party or its Affiliates).  Unless otherwise agreed by the Parties, one of DS’s designees and one of ARQULE’s designees shall be designated as the co-chairs of the JRC.  Each Party shall have the right at any time to substitute individuals, on a permanent or temporary basis, for any of its previously designated representatives to the JRC, by giving written notice to the other Party.  Initial designees of the Parties to the JRC shall be designated by each Party by written notice to the other Party within fifteen (15) days following the Effective Date.

2.2.3Meetings.

(a)Schedule of Meetings; Agenda.  The JRC shall establish a schedule of times for regular meetings, in no event less frequently than once per Calendar Quarter and at such other times as the Parties agree during the Research Collaboration Period taking into account, without limitation, the planning needs of the Research Program and its responsibilities.  In urgent cases special meetings may be convened by any member upon thirty (30) days (or, if such meeting is proposed to be conducted by teleconference, upon ten (10) days) written notice to the other members; provided, that, (i) notice of any such special meeting may be waived at any time, either before or after such meeting, and such waiver shall be the equivalent to the giving of a valid notice hereunder, and (ii) attendance of any member at a special meeting shall constitute a valid waiver of notice from such member.  Regular and special meetings of the JRC

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may be held in person or by teleconference or videoconference; provided, that, meetings held in person shall alternate between the respective offices of the Parties.  The co-chairs of the JRC shall prepare and circulate to each JRC member an agenda for each JRC meeting no later than one (1) week prior to such meeting.  Notwithstanding the foregoing, the JRC shall meet face-to-face at least twice per Calendar Year, one of which shall be held in the United States and one of which shall be held in Japan.

(b)Quorum; Voting; Decisions.  At each JRC meeting, (i) the presence in person of at least two (2) members designated by each Party shall constitute a quorum and (ii) all members designated by each Party who are present shall have one collective vote on all matters before the JRC at such meeting.  All decisions of the JRC shall be made by unanimous vote.  Alternatively, the JRC may act by written consent signed by the co-chairs.  Whenever any action by the JRC is called for hereunder during a time period in which the JRC is not scheduled to meet, either co-chair shall cause the JRC to meet to take the action in the requested time period by calling a special meeting or the co-chairs shall act by written consent.  Representatives of each Party or of its Affiliates who are not members of the JRC (including, without limitation, the Patent Coordinators) may attend JRC meetings as non-voting observers without the consent of the other Party.

(c)Minutes.  The JRC shall keep minutes of its meetings that record all decisions and all actions recommended or taken in reasonable detail.  Drafts of the minutes shall be prepared and circulated to the members of the JRC within a reasonable time after the meeting, not to exceed ten (10) business days.  The co-chairs of the JRC shall have responsibility for the preparation and circulation of draft minutes.  Each member of the JRC shall have the opportunity to provide comments on the draft minutes.  The minutes shall be approved, disapproved and revised as necessary at the next JRC meeting.  Upon approval, final minutes of each meeting shall be circulated to the members of the JRC by the co-chairs of the JRC.

2.2.4Responsibilities.  The JRC shall be responsible for overseeing the conduct and progress of the Research Program.  Without limiting the generality of the foregoing, the JRC shall have the following responsibilities:

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(a)establishing the objectives of and the appropriate allocation of resources (including personnel) to the Research Program;

(b)preparing or directing the preparation of and submitting all Annual Research Plans to the JEC for approval;

(c)preparing or directing the preparation of and submitting amendments to Annual Research Plans to the JEC for approval;

(d)monitoring the progress of each Annual Research Plan and of each Party’s activities under each Annual Research Plan;

(e)providing a forum for consensual decision making with respect to the Research Program;

(f)reviewing data, reports or other information submitted by either Party with respect to work conducted in the Research Program;

(g)preparing for the JEC on at least a semi-annual basis a progress report for the Research Program in reasonable detail and providing to the JEC such additional information as it may request;

(h)recommending amendments to the Advancement Criteria applicable to any Research Stage as it deems appropriate in furtherance of the objectives of the Research Program, as set forth in the applicable Annual Research Plan;

(i)determining at the completion of each Research Stage whether or not to Advance any Collaboration Compounds based on the applicable Advancement Criteria;

(j)determining whether each Collaboration Compound satisfies the Minimum Requirement;

(k)providing a forum for the Parties to exchange and review scientific information and data relating to the Collaboration; and

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(l)making any other decisions as may be delegated to the JRC pursuant to this Agreement or by mutual written agreement of the Parties after the Effective Date and performing such activities as may be delegated to the JRC pursuant to this Agreement, or by mutual written agreement of the Parties after the Effective Date.

2.2.5Dispute Resolution.  The JRC members shall use reasonable efforts to reach agreement on any and all matters.  In the event that, despite such reasonable efforts, agreement on a particular matter cannot be reached by the JRC within * (*) days after the JRC first meets to consider such matter, the matter shall be referred to the JEC for resolution pursuant to Section 2.1.5.

2.3US Co-Commercialization Committee.

2.3.1Establishment.  As soon as practicable following the exercise by ARQULE of a Co-Commercialization Option with respect to a Co-Commercialized Licensed Product in accordance with Section 4.10.2(a)(ii), ARQULE and DS shall establish the US Co-Commercialization Committee which shall have and perform the responsibilities set forth in Section 2.3.4.

2.3.2Membership.  ARQULE shall be entitled to designate one (1) representative to the USCC (who shall be an employee of ARQULE or its Affiliates).  Unless otherwise agreed by the Parties, one of DS’s designees shall be designated by DS as the chair.  Each Party shall have the right at any time to substitute individuals, on a permanent or temporary basis, for any of its previously designated representatives to the USCC by giving written notice to the other Party.  Initial designees of the Parties to the USCC shall be designated by each Party by written notice to the other Party as soon as reasonably practicable following the establishment of the USCC.

2.3.3Meetings.

(a)Schedule of Meetings; Agenda.  The USCC shall establish a schedule of times for meetings.  If formed, in no event shall the USCC meet less frequently than twice per Calendar Year.  Meetings of the USCC may be held in person or by teleconference or

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videoconference.  The chair of the USCC shall prepare and circulate to each USCC member an agenda for each USCC meeting not later than one (1) week prior to such meeting.

2.3.4Responsibilities.  The primary role of the USCC shall be to provide a forum to review and monitor the progress of all Co-Commercialization Activities with respect to the Co-Commercialized Licensed Products in the Co-Commercialization Territory.

2.4Alliance Management.  Within fifteen (15) days of the Effective Date, each Party shall appoint a person who shall oversee contact between the Parties for all matters related to the Collaboration between meetings of the Committees and shall have such other responsibilities as the Parties may mutually agree in writing after the Effective Date (each, an “Alliance Manager”).  Each Party may replace its Alliance Manager at any time by notice in writing to the other Party.

2.5Interests of the Parties.  All decisions made and all actions taken by any Committee or the officers of the Parties pursuant to Section 2.1.5 shall be made or taken with due interest of both Parties considered in good faith.  This provision shall not be subject to arbitration or other dispute resolution under this Agreement.

2.6Appointment Not an Obligation; No Breach.  The appointment of any members of a Committee and Alliance Managers is a right of each Party and not an obligation and shall not be a “deliverable” as defined in EITF Issue No. 00-21.  Each Party shall be free to determine not to appoint members to any Committee and not to appoint an Alliance Manager.  If a Party (the “non-Appointing Party”) does not appoint members of any Committee or an Alliance Manager, it shall not be a breach of this Agreement, nor shall any consideration be required to be returned, and the other Party shall have the votes and the decision-making power of the non-Appointing Party unless and until such members are appointed by the non-Appointing Party.

3.RESEARCH PROGRAM

3.1Objectives of the Research Program.  The objectives of the Research Program shall be the identification and preclinical development of Collaboration Compounds that exhibit activity against DS Targets.

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3.2Annual Research Plans.  The Annual Research Plan for the first Contract Year has been agreed upon in writing by the Parties.  An Annual Research Plan for each subsequent Contract Year for each DS Target shall be prepared by or at the direction of the JRC, approved by the JEC no later than the end of the third quarter of the preceding Contract Year and attached as an exhibit to the minutes of the JEC meeting at which such JEC approval is obtained.  As soon as practicable after the designation of any additional DS Target the JRC shall prepare an update to the Annual Research Plan as provided in Section 3.5.2(d).  Each Annual Research Plan shall: (a) set forth (i) the research objectives and activities to be performed for each Research Stage of the Research Program for the Contract Year covered by the Annual Research Plan with reasonable specificity; (ii) the research plans and protocols to be employed to complete each such Research Stage, including without limitation a description of the types of assays (in silico, in vitro or in vivo) to be developed and used by the Parties; (iii) the Advancement Criteria that the JRC will utilize to evaluate the results of each Research Stage and to determine whether to Advance Collaboration Compounds to the next Research Stage; (iv) the Party that shall be responsible for performing the activities described for each Research Stage; (v) a timeline for such activities (including any Third Party Costs to be incurred for outsourced Research activities managed by ARQULE or DS); and (vi) with respect to ARQULE Research Activities, the applicable FTE Funding Commitment; and (b) shall be consistent with the other terms of this Agreement.  Subject to the FTE Funding Commitment, any Annual Research Plan may be amended from time to time by the JRC and approved by the JEC pursuant to Section 2.1.4.  Each amendment, modification and update to the Annual Research Plan shall be set forth in a written document prepared by, or at the direction of, the JEC, shall specifically state that it is an amendment, modification or update to the Annual Research Plan and shall be attached to the minutes of the meeting of the JEC at which such amendment, modification or update was approved.

3.3Conduct of Research Program.

3.3.1ARQULE Responsibilities.

(a)ARQULE Research Activities.  During the Research Collaboration Period, ARQULE shall use Commercially Reasonable Efforts to conduct the ARQULE Research

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Activities using the number of FTEs set forth in the Annual Research Plans.  For purposes of clarity, unless otherwise set forth in any Annual Research Plan, (i) ARQULE shall be solely responsible for the conduct of (x) all Feasibility Assessment Activities (y) all Assay Development and Hit Generation activities and (z) all Hit to Lead activities to be conducted as part of the Research Program; and (ii) subject to Section 3.3.1(b), ARQULE shall be jointly responsible, together with DS, for the conduct of all Lead Optimization activities and Preclinical Studies to be conducted as part of the Research Program.

(b)Toxicology Studies.  Without limiting the generality of Section 3.3.1(a), within * (*) days following the designation by DS of a Primary Development Compound, DS shall conduct the Toxicology Studies as set forth in the Annual Research Plan applicable to such Primary Development Compound.  Toxicology Studies may only be conducted on a Primary Development Compound or a Backup Compound.

3.3.2DS Responsibilities.  During the Research Collaboration Period, DS shall: (a) pay ARQULE the applicable Quarterly FTE Payment for all ARQULE Research Activities in accordance with Section 5.3.1; (b) commit such resources as are reasonably necessary to conduct the DS Research Activities set forth in the Annual Research Plan; (c) use Commercially Reasonable Efforts to conduct the DS Research Activities set forth in the Annual Research Plan; and (d) bear the cost of all Toxicology Studies.  For purposes of clarity, unless otherwise set forth in any Annual Research Plan, DS shall be jointly responsible, together with ARQULE, for the conduct of Lead Optimization activities and Preclinical Studies to be conducted as part of the Research Program as set forth in the Annual Research Plan.  DS may participate in biological assays for the purpose of verification of Collaboration Compound activity in the Hit to Lead Research Stage.

3.3.3Compliance and Funding.  Each Party shall perform its obligations under each Annual Research Plan in compliance in all material respects with all Applicable Laws.  For purposes of clarity, with respect to each activity performed under an Annual Research Plan that will or would reasonably be expected to generate data to be submitted to a Regulatory Authority in support of a Regulatory Filing or Drug Approval Application, the Party performing such activity shall comply in all material respects with the regulations and guidance of the FDA

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that constitute Good Laboratory Practice or Good Manufacturing Practice (or, if and as appropriate under the circumstances, International Conference on Harmonization (ICH) guidance or other comparable regulation and guidance of any Regulatory Authority in any country or region in the Territory).  Each Party shall be solely responsible for paying the salaries and benefits of its employees.

3.3.4Cooperation.  Scientists at ARQULE and DS shall cooperate in the performance of the Research Program and, subject to the terms of this Agreement and any confidentiality obligations to Third Parties, shall exchange such information and materials as are reasonably necessary for the other Party to perform its obligations under any Annual Research Plan and all data resulting from performance of the Research Program.

3.4Records.

3.4.1Record Keeping.

(a)Research Program Records.  Each Party shall maintain complete and accurate records of its activities in the Research Program in sufficient detail, in good scientific manner and otherwise in a manner that reflects all work done and results achieved.  Subject to Article 6, each Party shall provide the other Party with access during normal business hours and upon reasonable advance notice to review such records to the extent reasonably required for such other Party’s performance of its obligations under this Agreement; provided, that, the non-reviewing Party may redact information not relevant to the Research Program prior to such review.

(b)Record Keeping Policies.  Without limiting the generality of Section 3.4.1(a), each Party agrees to maintain a policy that requires its employees and consultants to record and maintain all data and information developed during the Research Program.

3.4.2Reports.  Each Party shall keep the JRC regularly informed of the progress of the Research Program.  Without limiting the generality of the foregoing, each Party shall, at least once each Calendar Quarter during the Research Collaboration Period, (a) provide reports to the JRC in reasonable detail regarding the status of its activities under the Research

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Program, (b) advise the JRC of its identification of Collaboration Compounds pursuant to Section 3.6 and provide the JRC with any supporting data applicable to such Collaboration Compounds, (c) provide the JRC with the results of activities conducted in the Research Program with respect to each Collaboration Compound so as to enable the JRC to determine whether such Collaboration Compound meets the Advancement Criteria and should be Advanced by the JRC to the next Research Stage, (d) provide the JRC with the results of the Toxicology Studies with respect to each Primary Development Compound or Backup Compound so as to enable DS to determine whether to exercise the DS Option applicable thereto (such notice, the “Toxicology Studies Results”), (e) provide the JRC with such additional information that it has in its possession as may be reasonably requested from time to time by the JRC, and (f) provide the JRC, on or before * (*) days from the termination or expiration of the Research Collaboration Period, with a final report regarding all ARQULE Research Activities and DS Research Activities conducted by ARQULE and DS, respectively, during the Research Collaboration Period to the extent not previously included in the reports described above.

3.5Selection of DS Targets.

3.5.1Initial DS Targets.  The Parties hereby acknowledge and agree that * (*) Targets have been designated by the Parties as DS Targets as of the Effective Date and are included on the DS Target List (the “Initial DS Targets”).

3.5.2Substitution of DS Targets.

(a)Discontinuation and Replacement of DS Targets.  If, at any time during the Research Collaboration Period, DS determines that it wishes to discontinue further research with respect to a DS Target (i) DS shall provide written notice of such determination to ARQULE and the JRC, which notice shall identify the DS Target and state the reason for such determination; (ii) all activities (including all ARQULE Research Activities) being conducted with respect to such DS Target under the Research Program shall promptly cease; and (iii) such DS Target shall be deemed to be an Abandoned DS Target as of the date of such written notice.

(b)Designation of Blocked Targets.  As soon as practicable and in any event within * after receipt of notice pursuant to Section 3.5.2(a), ARQULE shall

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provide to DS a written notice indicating whether or not there are any Blocked Targets; and if there are any Blocked Targets, ARQULE shall (i) provide to an independent third party attorney identified by ARQULE and reasonably acceptable to DS (the “Gatekeeper”) a written notice identifying all Targets that are Blocked Targets for purposes of this Agreement (such notice, the “Blocked Target List”) and (ii) provide DS with written confirmation that it has provided the Blocked Target List to the Gatekeeper.

(c)Designation of Available Targets.  DS may, at any time after its receipt from ARQULE of the written confirmation that the Blocked Target List has been provided to the Gatekeeper, propose up to * (*) Targets that DS desires to include as DS Targets as part of the Research Program (each, a “Desired Target”) by providing written notice to the Gatekeeper which notice shall identify such Desired Targets (each, a “Desired Target Notice”).  As soon as practicable and in any event within * (*) days of the Gatekeeper’s receipt of a Desired Target Notice, the Gatekeeper shall provide DS with a written response (each, an “Available Target Response”) which shall identify those Desired Targets listed on the Desired Target Notice that are not Blocked Targets (each such Target, an “Available Target”) and those Desired Targets listed on the Desired Target Notice that are Blocked Targets.  In the event that the Gatekeeper identifies one or more Desired Targets as Blocked Targets in the Available Target Response, DS shall have the right to propose one (1) additional Desired Target in a Desired Target Notice pursuant to this Section 3.5.2(c) for each such Desired Target that is identified as a Blocked Target until such time as an aggregate of * (*) Available Targets have been identified in the Available Target Responses.  Notwithstanding the foregoing in the event that ARQULE determines that there are no Blocked Targets, it shall provide DS with written notice and DS shall thereafter have the right to provide the Desired Target Notice contemplated by this Section 3.5.2(c) directly to ARQULE and all Desired Targets listed on the Desired Target Notice shall be deemed to be Available Targets for purposes of this Agreement.

(d)Feasibility Assessment Activities and Target Replacement.  As soon as practicable and in any event within * of the identification by the Gatekeeper (or by DS if ARQULE’s notice indicates that there are no Blocked Targets) of * (*) Available Targets pursuant to Section 3.5.2(c), ARQULE shall commence the Feasibility

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Assessment Activities with respect to such Available Targets.  As soon as practicable following the completion of such Feasibility Assessment Activities, ARQULE shall provide DS with written notice which shall identify those Available Targets that ARQULE reasonably believes would be amenable to the application of the AKIP Platform Technology (each, a “Validated Target”).  DS shall have the right within * of ARQULE’s identification of the Validated Targets to replace the Abandoned DS Target with one of the Validated Targets by providing written notice to ARQULE, which notice shall identify such Validated Target (each, a “Validated Target Notice”).  As soon as practicable after the receipt of such Validated Target Notice, (i) such Validated Target shall be added to the DS Target List and shall be deemed to be a DS Target for purposes of this Agreement and (ii) the JRC shall prepare an update to the Annual Research Plan to identify the Advancement Criteria applicable to such DS Target and describe the ARQULE Research Activities to be conducted with respect to such DS Target.

(e)Limitation on DS Targets.  Notwithstanding anything to the contrary set forth in this Agreement, DS shall have the right to designate an aggregate of up to * (*) DS Targets pursuant to this Agreement, consisting of (i) the * (*) Initial Targets designated by the Parties on the Effective Date and (ii) up to * (*) Validated Targets designated by DS to replace Abandoned DS Targets pursuant to Section 3.5.2(d); provided, that, in the event that DS designates * (*) DS Targets (i.e., the * (*) Initial DS Targets and * (*) Validated Targets selected as replacements) as Abandoned DS Targets pursuant to Section 3.5.2(d) on or before the first anniversary of the Effective Date, DS shall have the right to designate an additional * (*) DS Targets, or an aggregate of up to * (*) DS Targets, pursuant to the procedures set forth in this Section 3.5.2.  For clarity, in no event shall ARQULE be obligated to conduct ARQULE Research Activities on more than * (*) DS Targets at any give time.

3.5.3Termination of Replacement Right.  Notwithstanding anything to the contrary in this Agreement, DS’s right to replace DS Targets pursuant to Section 3.5.2 shall terminate on the date of termination or expiration of the Research Collaboration Period, unless extended by mutual agreement of the Parties.

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3.6Designation and Advancement of Collaboration Compounds. During the Research Collaboration Period, each Party shall provide the other Party and the JRC with written notice of its identification in the conduct of the Research Program of (a) any Collaboration Compound that such Party reasonably believes has an IC50 less than *µM against a DS Target and satisfies the Advancement Criteria to Advance to Hit to Lead (a “Hit”), (b) any Collaboration Compound that such Party reasonably believes should be Advanced, and any Collaboration Compound that such Party reasonably believes to satisfy the criteria for a Primary Development Compound which notice shall (i) identify the Collaboration Compound with its chemical and biological data, and (ii) summarize briefly the results of the non-clinical studies and assessments on such Collaboration Compound completed by or on behalf of such Party under the Research Program (each, a “Collaboration Compound Notice”). Within * (*) days after its receipt of each such Collaboration Compound Notice from a Party pursuant to this Section 3.6, the JRC shall review the data and information and determine whether such Collaboration Compound satisfies the Minimum Requirement and/or to Advance such Collaboration Compound to the next Research Stage and/or to designate such Collaboration Compound as satisfying the criteria for designation as a Primary Development Compound. Once the JRC has designated such Collaboration Compound as satisfying the criteria for designation as a Primary Development Compound, DS may designate such Collaboration Compound as a Primary Development Compound by written notice to ARQULE.

3.7Supply of Collaboration Compounds. Unless otherwise agreed by the Parties, (a) ARQULE shall be responsible for manufacturing and providing Collaboration Compounds for use in the Research Program through the Hit to Lead Research Stage, (b) if (i) the Lead Optimization activities are DS Research Activities, DS shall be responsible for manufacturing and providing any Collaboration Compounds discovered or identified in such Lead Optimization activities for use in the Research Program in the Lead Optimization Research Stage, and (ii) if the Lead Optimization activities are ARQULE Research Activities, ARQULE shall be responsible for manufacturing and providing any Collaboration Compounds discovered or identified in such Lead Optimization activities for use in the Research Program in the Lead Optimization Research Stage, and (c) DS shall be responsible for manufacturing and providing

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Collaboration Compounds for use in the Research Program in the Preclinical Studies Research Stage and for any other research, Development or Commercialization activities.

3.8Supply of Proprietary Materials. From time to time during the Research Collaboration Period, either Party (the “Transferring Party”) may supply the other Party (the “Recipient Party”) with Proprietary Materials of the Transferring Party for use in the Research Program. In connection therewith, each Recipient Party hereby agrees that (a) it shall not use such Proprietary Materials for any purpose other than exercising its rights or performing its obligations under this Agreement; (b) it shall use such Proprietary Materials only in compliance with all Applicable Laws; (c) it shall not transfer any such Proprietary Materials to any Third Party without the prior written consent of the Transferring Party, except as expressly permitted by this Agreement; (d) the Recipient Party shall not acquire any right, title or interest in or to such Proprietary Materials as a result of such supply by the Transferring Party; and (e) upon the expiration or termination of the Research Collaboration Period, the Recipient Party shall, if and as instructed by the Transferring Party, either destroy or return any such Proprietary Materials that are not the subject of the grant of a continuing license hereunder.

3.9Determination of IC50. Whenever this Agreement refers to the IC50 of a Compound, such IC50 shall be determined through the application of the Kinase Inhibition Assays.

3.10Research Collaboration Period. The Research Program shall commence on the Effective Date and continue until the expiration of the Research Collaboration Period. Notwithstanding the foregoing, the Research Program may be terminated prior to the expiration of the Research Collaboration Period (a) by either Party (i) on * (*) days’ prior written notice to the other Party at any time following the exercise by DS of * (*) DS Options or (ii) at any time on or after the first anniversary of the Effective Date, on one-hundred * (*) days’ prior written notice to the other Party if all DS Targets that are included in the Research Program have been discontinued by DS; and (b) by DS at any time on or after the first anniversary of the Effective Date upon not less than one hundred * (*) days’ prior written notice to ARQULE.

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4.DEVELOPMENT PROGRAM; COMMERCIALIZATION

OF LICENSED PRODUCTS

4.1Objectives of the Development Program. The objectives of the Development Program shall be the Development and Commercialization of Licensed Products in the Field and in the Territory.

4.2Responsibility for Development and Commercialization of Licensed Products. Except for any Development activities that DS and ARQULE mutually agree should be undertaken by ARQULE (which shall be paid for by DS at the FTE Rate), DS shall have the sole right and responsibility, including the right to make any decision at its sole discretion, at its sole expense, for all aspects of the Development of Licensed Products, and, subject to the ARQULE Co-Commercialization Option, all aspects of the Commercialization of Licensed Products, in the Field in the Territory, including, without limitation, the conduct of: (a) all IND-enabling non-clinical studies that are outside of the Research Program; (b) all activities related to human clinical trials (including, without limitation, Phase I Clinical Trials, Phase II Clinical Trials and Phase III Clinical Trials); (c) all activities relating to the manufacture and supply of Licensed Products (including all required process development and scale up work with respect thereto); and (d) all pre-marketing, marketing, promotion, sales, distribution, import and export activities (including securing reimbursement, conducting sales and marketing activities and any post-marketing trials or post-marketing safety surveillance and maintaining databases). Without limiting the generality of the foregoing, DS shall have the sole right and responsibility, at its sole expense, (i) to make all Regulatory Filings for Licensed Products and file all Drug Approval Applications and otherwise seek all Regulatory Approvals for Licensed Products, as well as to conduct all correspondence and communications with Regulatory Authorities regarding such matters, subject in each case to Section 4.10.2, (ii) to report all Adverse Events to Regulatory Authorities if and to the extent required by Applicable Laws, and (iii) to cease further Development and/or Commercialization of Licensed Products and to Develop and Commercialize Backup Compounds as Licensed Products. All Regulatory Approvals for Licensed Products shall be owned by DS, subject to Section 10.3.

4.3Development Plans. An initial development plan for each Licensed Product shall be prepared by DS and submitted to the JEC for its review within * (*) days of the date of

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exercise by DS of each DS Option, and in any event on or prior to the initiation of Development activities with respect thereto, which shall describe the Development activities to be conducted. ARQULE may provide input on the development plan and DS will give good faith consideration to such input. Each amendment or modification of each development plan for each Licensed Product that is prepared by DS shall be submitted to the JEC members for its review within * (*) days after it is prepared. ARQULE may provide input on amendments and modifications to the development plan and DS will give good faith consideration to such input.

4.4Commercial Assessment. Prior to commencing any Phase II Clinical Trial or Phase III Clinical Trial of any Licensed Product, DS will perform a commercial assessment of the market opportunities in various indications for such Licensed Product throughout the Territory (which may be performed by internal personnel or external consultants) and will provide a copy thereof to ARQULE within * (*) days after the completion thereof.

4.5Licensed Product Commercialization Plans. Within one hundred and eighty (180) days after the Initiation of a Phase III Clinical Trial with respect to each Licensed Product, DS shall prepare and provide to the JEC for its review a Licensed Product Commercialization Plan for each such Licensed Product, and shall inform the JEC with respect to all significant Commercialization decisions to be made with respect to such Licensed Product. ARQULE may provide input on the Licensed Product Commercialization Plan and DS will give good faith consideration to such input.

4.6Manufacture and Supply of Licensed Products. Unless otherwise agreed to by the Parties, DS shall be responsible, at its sole expense, for manufacturing, either by itself, its Affiliates or by a Third Party contract manufacturing organization, each Licensed Product that is Developed and Commercialized under this Agreement. DS shall report regularly to the JEC on CMC plans and activities, development of manufacturing processes and any plans for outsourcing (including the identity of any Third Party to which any part of manufacture of Licensed Products is outsourced.)

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4.7Development and Commercialization Diligence.

(a)Diligence Obligations. DS shall exercise Commercially Reasonable Efforts during the Term to conduct the DS Development Activities, and to Develop and Commercialize Licensed Products targeted at each DS Target in the Field and in the Territory.

(b)Effect of Breach of Diligence Obligations. If ARQULE at any time reasonably believes that DS, on a Licensed Product-by-Licensed Product basis, is not meeting its diligence obligations pursuant to Section 4.7(a), ARQULE may give written notice to DS in the form of detailed reasons that would support the proposition that DS is not meeting such diligence obligation and proposed activities that would satisfy the diligence requirement. In such event, DS shall provide such written justification and/or proposed plans for curing the alleged breach to ARQULE responding to the issues raised by ARQULE within * after such notice is given. If ARQULE agrees that the plan proposed by DS will completely cure the alleged breach, DS shall have * to begin implementing such plan. In the event that ARQULE does not receive such justification within such *, does not agree with such justification, or DS has not begun implementing its plan to cure the alleged breach within * of receiving agreement from ARQULE, then ARQULE may submit any unresolved matters for full arbitration under Section 13.1.1. If the arbitrator resolves any unresolved matters in favor of ARQULE, ARQULE shall have the right to treat such finding as a breach of Section 4.7(a) and take action to terminate the license with respect to such DS Target and/or Licensed Product in accordance with Section 10.2.2 without further arbitration.

4.8Compliance. DS shall perform DS Development Activities (and if DS and ARQULE agree that ARQULE shall perform any Development activities, ARQULE shall perform such activities) in good scientific manner and in compliance in all material respects with all Applicable Laws. For purposes of clarity, with respect to such Development activities that will or would reasonably be expected to generate data to be submitted to a Regulatory Authority in support of a Regulatory Filing or Drug Approval Application, the Party performing such activity shall comply in all material respects with, if and as applicable, the regulations and

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guidance of the FDA that constitute Good Laboratory Practice, Good Manufacturing Practice or Good Clinical Practices (or, if and as appropriate under the circumstances, International Conference on Harmonization (ICH) guidance or other comparable regulation and guidance of any Regulatory Authority in any country or region in the Territory). Each Party shall be solely responsible for paying the salaries and benefits of its employees conducting its Development activities.

4.9Exchange of Reports; Information; Updates.

4.9.1Development Program Reports. DS shall keep the JEC regularly informed of the progress of its efforts to Develop Licensed Products in the Field and in the Territory. Without limiting the generality of the foregoing, DS shall, at least once each six (6) months of each Calendar Year, provide the JEC with reports in reasonable detail regarding the status of all preclinical IND-enabling studies and activities (including toxicology and pharmacokinetic studies), clinical trials and other activities conducted under the Development Program. In addition, DS shall designate a senior member of its Development organization (who may be the DS Alliance Manager if the DS Alliance Manager is a senior member of the DS Development organization) with responsibility for the Development of Licensed Products to act as a liaison with ARQULE and who shall respond to inquiries from ARQULE on Development activities and progress.

4.9.2Commercialization Reports. DS shall keep the JEC regularly informed of the progress of DS’s efforts to Commercialize Licensed Products in the Field in the Territory through periodic updates. Without limiting the generality of the foregoing, DS shall provide the JEC with annual written updates to each Licensed Product Commercialization Plan, which shall (a) summarize DS’s efforts to Commercialize Licensed Products, (b) identify the Regulatory Filings and Drug Approval Applications with respect to such Licensed Product that DS or any of its Affiliates or Sublicensees have filed, sought or obtained in the prior twelve (12) month period or reasonably expect to make, seek or attempt to obtain in the following twelve (12) month period and (c) summarize all clinical and other data generated by DS with respect to Licensed Products. In addition, DS shall provide such additional information that it has in its possession

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as may be reasonably requested by ARQULE regarding the Commercialization of any Licensed Product, which request shall not be made more than once each Calendar Year.

4.9.3Review of Regulatory Filings and Correspondence. Notwithstanding anything to the contrary in this Agreement, ARQULE shall have the right, upon written notice, to review all Regulatory Filings made by DS and all correspondence between DS and Regulatory Authorities at ARQULE’s sole expense.

4.10Development and Commercialization Rights and Restrictions.

4.10.1Development and Commercialization Rights in the Field. Except as provided in Section 4.10.2, DS shall have the exclusive right and responsibility, at its sole cost and expense, during the Term to Develop Licensed Products and Commercialize Licensed Products in the Territory for use in the Field.

4.10.2Co-Commercialization Right.

(a)Co-Commercialization Option.

(i)Notice of Phase III Trial. DS shall give ARQULE written notice of its intent to Initiate the first Phase III Clinical Trial of each Licensed Product at least * (*) days prior to the anticipated date of such Initiation.

(ii)Exercise of Co-Commercialization Option. ARQULE shall have the option (the “Co-Commercialization Option”), in its sole discretion, to Co-Commercialize any Licensed Product in the Co-Commercialization Territory by providing written notice to DS (the “Co-Commercialization Option Notice”) at any time during the Co-Commercialization Option Period, which notice shall identify the Licensed Product (each, such Licensed Product, a “Co-Commercialized Licensed Product”). If ARQULE exercises its Co-Commercialization Option with respect to any Licensed Product, (A) such Licensed Product will be deemed to be a Co-Commercialized Licensed Product for purposes of this Agreement, and (B) the Parties shall (1) negotiate a Co-Commercialization Agreement for such Co-Commercialized Licensed Product in accordance with Section 4.10.2(a)(iii) and (2) form, as

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soon as practicable thereafter but in any event within * (*) days, the US Co-Commercialization Committee in accordance with Section 2.3.

(iii)Negotiation of Co-Commercialization Agreement.

(A)Preparation, Negotiation, Execution and Delivery. Within * (*) days after ARQULE provides a Co-Commercialization Option Notice, the Parties shall commence the preparation of a co-commercialization agreement (the “Co-Commercialization Agreement”) which shall provide for the terms applicable to such Co-Commercialization and shall contain the provisions set forth below and such additional provisions as are usual and customary for inclusion in a co-commercialization agreement between companies in the pharmaceutical industry of comparable sizes to the respective Parties. The Parties hereby acknowledge and agree that the Co-Commercialization Agreement shall provide that (1) the Parties shall share Co-Commercialization Activities with respect to such Co-Commercialized Licensed Product in the Co-Commercialization Territory with ARQULE providing, at its option, up to * percent (*%) of all required Primary Detail Equivalents, but in no event will the total number of sales representatives of ARQULE exceed * (*), unless otherwise set forth in the Co-Commercialization Agreement, pursuant to the Co-Commercialization Plan; (2) DS shall be responsible for all account management of community, academic and Veterans hospitals and associated activities, including, but not limited to, communication with hospital pharmacy and the pharmacy and therapeutics committee, formulary management and contracting; (3) DS shall reimburse ARQULE for the fully-burdened cost incurred by ARQULE’s sales representatives who engaged in conducting such Co-Commercialization Activities at a negotiated rate comparable to the then prevailing rate, but in no event shall such rate be in excess of the fully burdened cost to DS of employing or otherwise engaging its own representatives who detail its oncology products in the Co-Commercialization Territory (including incentive compensation for the ARQULE sales personnel on the same basis as the incentive compensation of DS personnel in the Co-Commercialization Territory); (4) such ARQULE sales personnel shall engage in Detailing the Co-Commercialized Licensed Product and any other product being co-promoted by ARQULE and DS in the first position, but shall not expend more than * percent (*%) of the detailing effort on any other products unless the Parties

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agree, and shall not promote any other product that is directly competitive with the Co-Commercialized Licensed Product or any other product of DS; provided, that in the event ARQULE’s sales personnel promote any product that is not being co-promoted by ARQULE and DS, there shall be a reduction in DS’s reimbursement of ARQULE’s cost that is proportional to the percentage of detailing effort expended on products that are not being co-promoted by ARQULE and DS; (5) the Parties shall create a US Co-Commercialization Committee in accordance with Section 2.3; and (6) the Parties shall cooperate to allocate Details between them in good faith, taking into account geography, settings, provider category and Detailing position, as well as ARQULE’s sales force composition. Disputes shall be decided by the chair of the USCC. The Parties shall negotiate the Co-Commercialization Agreement in good faith and with sufficient diligence as is required to execute and deliver the Co-Commercialization Agreement within * (*) days after ARQULE provides the Co-Commercialization Option Notice.

(B)Dispute Resolution. In the event the Parties fail to execute and deliver the Co-Commercialization Agreement within the * (*) day period described in Section 4.10.2(a)(iii), the Parties shall (1) use reasonable efforts to complete such negotiations and to execute and deliver the Co-Commercialization Agreement as soon as possible after such * (*) day period and (2) without limiting the generality of the foregoing, after the expiration of such * (*) day period, each produce a list of issues on which they have failed to reach agreement and submit its list to the JEC to be resolved in accordance with Section 2.1.5.

(b)Co-Commercialization Plan. As soon as practicable following the exercise by ARQULE of a Co-Commercialization Option Notice, DS shall prepare and provide to the USCC for its review a co-commercialization plan (the “Co-Commercialization Plan”) for each Co-Commercialized Licensed Product for the Co-Commercialization Territory  DS shall update the Co-Commercialization Plan to the USCC not less than annually. Each amendment or modification of each Co-Commercialization Plan for each Licensed Product that is  prepared by DS shall be submitted to the USCC for its review within * (*) days after it is prepared. ARQULE may provide input on the Co-Commercialization Plan and any amendment or modification  and DS will give good faith consideration to such input.

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(c)Labeling.  All product labels for Co-Commercialized Licensed Products shall include, in equal prominence, the names of both DS and ARQULE.  The USCC shall have the responsibility of meeting not less frequently than annually and deciding whether changes in the particular appearance in labeling of packaging and containers of Co-Commercialized Licensed Products or in the product information are required.

(d)Cooperation; Additional Information.  In connection with ARQULE’s consideration of the exercise of a Co-Commercialization Option with respect to each Licensed Product, DS shall provide ARQULE with any information Controlled by DS and reasonably requested by ARQULE that is necessary or useful to ARQULE in determining whether to exercise such Co-Commercialization Option.

4.11Expansion of the Field.  If at any time during the Term of this Agreement, DS desires to add an additional Indication to the Field with respect to a Licensed Product for purposes of this Agreement (each, an “Additional Indication”), DS shall give written notice to ARQULE specifying such Licensed Product and such Additional Indication or Additional Indications (the “Additional Indication Notice”).  ARQULE shall, on or before * (*) days from the date of the Additional Indication Notice, provide DS with a written response as to whether or not it Controls the Technology and Patent Rights applicable to such Licensed Product for such Additional Indication.  If ARQULE Controls the Technology and Patent Rights to such Licensed Product for such Additional Indication, the Parties shall for a period of * (*) days from the date DS receives the written notice from ARQULE negotiate in good faith to complete and execute any amendment to this Agreement that may be required to add the Additional Indication or Additional Indications to the definition of Field for purposes of this Agreement, including, without limitation, the inclusion of any amendments to the applicable Annual Research Plans, as well as any amendments to the compensation payable by DS pursuant to Article 5, that may be required to include such Additional Indication in the Field, provided, if any Additional Indication is added to the Field, the royalties for such Additional Indication will be the same as for other indications and such Additional Indication will be included in the determination of achievement of milestones subject to milestone payments; provided, that, only one (1) full set of the milestones to be negotiated pursuant to Section 5.4 will be paid for each Licensed Product.  If the Parties are unable to agree upon terms and conditions of such amendment on or before expiration

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of such * (*) day period despite their respective good faith efforts, then the Parties shall refer such matter to JEC for resolution; provided that if the JEC is unable to resolve the matter it will be referred to the Designated Senior Officers.

5.COMPENSATION

5.1Upfront Fee.  DS shall pay ARQULE a non-refundable, non-creditable up-front fee (the “Upfront Fee”) in the aggregate amount of Fifteen Million Dollars (U.S. $15,000,000), payable by wire transfer of immediately available funds within five (5) Business Days of the Effective Date in accordance with wire transfer instructions provided in writing by ARQULE prior to the Effective Date.

5.2License Fee.  For each DS Option exercised by DS pursuant to Section 7.1, DS shall pay ARQULE a license fee (the “License Fee”) in the amount of * Dollars (US $*), of which * Dollars (US $*) shall be paid within * (*) days of the execution of the License Agreement for the Primary Development Compound and related Backup Compounds that were the subject of such DS Option, and * Dollars (US $*) shall be paid within * (*) days of the Initiation of the first Phase II Clinical Trial of any Licensed Product under such License Agreement.

5.3Research Funding.

5.3.1Payment of Research Funding.  In consideration of the performance by ARQULE of the ARQULE Research Activities under the Research Program as described in Section 3.3, during the Research Program Period, DS will pay ARQULE the applicable Quarterly FTE Payment at least * (*) days prior to the first day of each Calendar Quarter, provided that DS will pay ARQULE the Quarterly FTE Payment covering the period from the Effective Date through the end of the first full Calendar Quarter of the Research Collaboration Period within * (*) days after the Effective Date.

5.3.2External Costs.  Each of ARQULE and DS shall be solely responsible for the payment of all Third Party research activity costs (“Third Party Costs”), including, without limitation, contract research organizations, contract personnel and consultant costs it

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incurs to meet its obligations under an Annual Research Plan; provided that if the external costs incurred by ARQULE for selectivity screening for any DS Target exceed * Dollars ($*) or the total amount required to be expended for selectivity screening by ARQULE exceeds * Dollars ($*), then ARQULE will notify DS and the Parties shall discuss the plan for any additional selectivity screening; provided that ARQULE shall not be required to perform any further selectivity screening.

5.4Milestone and Royalty Payments.  The Parties hereby agree, as promptly as possible on and after the Effective Date, to negotiate in good faith and reach agreement on an amendment to this Agreement or a separate agreement to be executed by the Parties which shall include (a) the development milestone payments, tiered sales milestones and tiered royalties on Net Sales customary for such agreements and to be paid by DS under the License Agreement(s) for each Licensed Product that is Developed and Commercialized under this Agreement and/or a License Agreement, which milestone payments and royalties shall include the milestone and royalty payments described in Schedule 3 and shall conform in all material respects with the terms and conditions set forth in Schedule 3, and (b) such additional provisions relating to royalty reports, payment mechanisms and dates, audit rights, overdue payments, taxes, currency conversion rates and other provisions as are usual and customary for inclusion in provisions relating to milestones and royalties in collaboration and license agreements between companies in the pharmaceutical industry of comparable sizes to the respective Parties.  For purposes of clarity, such additional provisions shall supplement and shall not materially expand, limit or change the provisions set forth on Schedule 3.  The Parties shall negotiate such amendment to this Agreement or separate agreement in good faith and with sufficient diligence as is required to execute and deliver such amendment or separate agreement within * (*) days of the Effective Date.  In the event the Parties fail to execute and deliver the amendment to this Agreement or separate agreement within such * (*) day period, the Parties shall (a) use reasonable efforts to complete such negotiations and to execute and deliver the amendment to this Agreement or separate agreement as soon as possible after such * (*) day period and (b) without limiting the generality of the foregoing, after the expiration of such * (*) day period, each produce a list of

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issues on which they have failed to reach agreement and submit its list to the JEC to be resolved as a Unanimous Decision in accordance with Section 2.1.5.

6.TREATMENT OF CONFIDENTIAL INFORMATION;

PUBLICITY; NON-SOLICITATION.

6.1Confidentiality.

6.1.1Confidentiality Obligations.  ARQULE and DS each recognize that the other Party’s Confidential Information and Proprietary Materials constitute highly valuable assets of such other Party.  ARQULE and DS each agrees that, subject to Section 6.1.2, it will not disclose, and will cause its Affiliates and sublicensees (or Sublicensees, as the case may be) not to disclose, any Confidential Information or Proprietary Materials of the other Party and it will not use, and will cause its Affiliates and sublicensees (or Sublicensees, as the case may be) not to use, any Confidential Information or Proprietary Materials of the other Party except as expressly permitted hereunder.  Notwithstanding anything to the contrary in this Agreement, the obligations of each Party under this Section 6.1.1 shall remain in effect during the Term and for an additional ten (10) years following the termination or expiration of this Agreement.

6.1.2Limited Disclosure.  ARQULE and DS each agrees that disclosure of its Confidential Information or any transfer of its Proprietary Materials may be made by the other Party to any employee, consultant or Affiliate of such other Party to enable such other Party to exercise its rights or to carry out its responsibilities under this Agreement; provided, that, any such disclosure or transfer shall only be made to Persons who are bound by the written obligations described in Section 6.1.3.  In addition, ARQULE and DS each agrees that the other Party may disclose its Confidential Information (a) on a need-to-know basis to such other Party’s legal and financial advisors, (b) to any Third Party as reasonably necessary in connection with an actual or potential permitted sublicense of such other Party’s rights hereunder or in connection with an actual or potential collaboration between such party and a Third Party or any debt or equity financing of such other Party, subject in each case, to the execution of written obligations of confidentiality substantially similar to those of such Party hereunder, and provided that any Confidential Information so provided by ARQULE in connection with a collaboration will in no event include information identifying any DS Targets unless such disclosure is subject to a

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mechanism similar to the Gatekeeper mechanism contained in Section 3.5.2, (c) if such other Party is ARQULE, to any Third Party that is or may be engaged by ARQULE to perform services in connection with the Research Program, and (d) for any other purpose with the other Party’s written consent, which consent shall not be unreasonably withheld, conditioned or delayed.  In addition, each Party agrees that the other Party may disclose such Party’s Confidential Information or Proprietary Materials (A) as reasonably necessary to file, prosecute or maintain Patent Rights, or to file, prosecute or defend litigation related to Patent Rights, in accordance with this Agreement; or (B) as required by Applicable Laws; provided, that, in the case of any disclosure under this clause (B), the disclosing Party shall (1) if practicable, provide the other Party with reasonable advance notice of and an opportunity to comment on any such required disclosure and (2) if requested by the other Party, cooperate in all reasonable respects with the other Party’s efforts to obtain confidential treatment or a protective order with respect to any such disclosure, at the other Party’s expense.

6.1.3Employees and Consultants.  ARQULE and DS each hereby represents that all of its employees and consultants, and all of the employees and consultants of its Affiliates, who participate in the activities of the Collaboration or have access to Confidential Information or Proprietary Materials of the other Party are or will, prior to their participation or access, be bound by written obligations to maintain such Confidential Information or Proprietary Materials in confidence and not to use such information except as expressly permitted hereunder.  Each Party agrees to use, and to cause its Affiliates to use, reasonable efforts to enforce such obligations.

6.2Publicity.  The Parties acknowledge that the terms of this Agreement constitute Confidential Information of each Party and may not be disclosed except as permitted by Section 6.1.2 and this Section 6.2.  Notwithstanding the foregoing, the terms of this Agreement may be disclosed by a Party to investment bankers, analysts, investors and potential investors, lenders and potential lenders and other sources and other potential sources of financing, or any acquirer or merger partner and potential acquirer or merger partner but only to the extent reasonably necessary.  In addition, a copy of this Agreement may be filed by either Party with the U.S. Securities and Exchange Commission, or comparable administrative/regulatory body in other jurisdictions, if such filing is required by law or regulation.  In connection with any such filing,

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such Party shall endeavor to obtain confidential treatment of economic and trade secret information, and shall provide the other Party with the proposed confidential treatment request with reasonable time for such other Party to provide comments, which comments shall be reasonably considered by the filing Party.  Notwithstanding anything to the contrary in Section 6.1, the Parties, upon the execution of this Agreement, shall agree to a press release with respect to this Agreement, and either Party may make subsequent public disclosure of the contents of such press release without further approval of the other Party.  After issuance of such press release, except as required by Applicable Laws, neither Party shall issue a press or news release or make any similar public announcement (it being understood that publication in scientific journals, presentation at scientific conferences and meetings and the like are intended to be covered by Section 6.3 and not subject to this Section 6.2) related to the Research Program or to any Development Program without the prior written consent of the other Party; provided, that, notwithstanding the foregoing, ARQULE shall be expressly permitted to publicly announce the occurrence of any milestone event and any other event that ARQULE reasonably believes is material to ARQULE.

6.3Publications and Presentations.  The Parties acknowledge that scientific publications and presentations must be strictly monitored to prevent any adverse effect from premature publication or dissemination of results of the activities hereunder.  Each Party agrees that, except as required by Applicable Laws, it shall not publish or present, or permit to be published or presented, the results of the Research Program or the Development Program without the prior review by and written approval of the other Party.  Each Party shall provide to the other Party the opportunity to review each of the submitting Party’s proposed abstracts, manuscripts or presentations (including, without limitation, information to be presented verbally) that relate to the Research Program or the Development Program at least * (*) days prior to its intended presentation or submission for publication, and such submitting Party agrees, upon written request from the other Party given within such * (*) day period, not to submit such abstract or manuscript for publication or to make such presentation until the other Party is given up to * (*) days from the date of such written request to seek appropriate patent protection for any material in such publication or presentation that it reasonably believes may be patentable.  Once such abstracts, manuscripts or presentations have been reviewed and approved by each Party, the

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same abstracts, manuscripts or presentations do not have to be provided again to the other Party for review for a later submission for publication.  Each Party also shall have the right to require that any of its Confidential Information that is disclosed in any such proposed publication or presentation be deleted prior to such publication or presentation.  In any permitted publication or presentation by a Party, the other Party’s contribution shall be duly recognized, and co-authorship shall be determined in accordance with customary standards.  Each Party (a) expressly acknowledges that the other Party’s business may be substantially dependent on its ability to publish results in scientific journals, presentation at scientific conferences and meetings and (b) agrees that it shall not unreasonably withhold, condition or delay its consent to any request by the other Party to publish results of the Research Program or any Development Program in accordance with its internal publication guidelines.

6.4AKIP Platform Technology.  Notwithstanding anything to the contrary set forth herein, including without limitation, the right to disclose Confidential Information of ARQULE set forth in Section 6.2 and the rights to publish set forth in Section 6.3, DS shall in no event disclose any Confidential Information of ARQULE relating to AKIP Platform Technology.

6.5Prohibition on Solicitation.  Without the written consent of the other Party, neither Party nor its Affiliates shall, during the Research Collaboration Period or for one (1) year thereafter, solicit (directly or indirectly) any employee of the other Party or its Affiliates who participated in the Research Program at any time during the Research Collaboration Period.  This provision shall not restrict either Party or its Affiliates from advertising employment opportunities in any manner that does not directly target the other Party or its Affiliates.

7.LICENSE GRANTS; EXCLUSIVITY

7.1DS Option.

7.1.1Option Grant.  ARQULE hereby grants DS an option (each, a “DS Option”) to obtain an exclusive, royalty-bearing license under the Licensed Technology and Licensed Patent Rights for the purpose of Developing and Commercializing Primary Development Compounds and related Backup Compounds in the Field and in the Territory.  For purposes of clarity, (a) DS Options shall be available to DS on a DS Target by DS Target basis and (b) a DS Option shall only be available with respect to Collaboration Compounds that are

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designated as Primary Development Compounds and Backup Compounds for purposes of this Agreement.

7.1.2Option Exercise.

(a)Primary Development Compounds.  DS may exercise any DS Option at any time during the applicable DS Option Period by giving written notice of exercise to ARQULE, which notice shall designate the Primary Development Compound (and related Backup Compounds) (the “DS Option Exercise Notice”); provided, that, (i) DS hereby agrees if it determines not to exercise a DS Option prior to expiration of the applicable DS Option Period, it shall in good faith provide written notice to ARQULE promptly upon such determination and (ii) the date on which any such notice is given shall constitute the last day of the applicable DS Option Period for all Collaboration Compounds against the DS Target against which such Primary Development Compound is directed.  Upon the exercise by DS of each DS Option, (a) the Primary Development Compound that is the subject of the DS Option (and related Backup Compounds) shall be deemed to be Licensed Products for purposes of this Agreement and (b) DS and ARQULE shall negotiate a license agreement (a “License Agreement”) which shall contain the exclusive licenses with respect to such Licensed Products set forth in Sections 7.3.1 and 7.4 and the substantially similar provisions as set forth in Sections 7.5, 7.6, 7.7, Article 8, Article 9, Article 10, Article 12 and Article 13 herein; provided, that, such provisions will be limited to the Primary Development Compound (and related Backup Compounds) and Licensed Products which are the subject of the License Agreement.

(b)Backup Compounds.  At any time before the expiration of the DS Option Period for the DS Target of any Primary Development Compound, DS may designate up to * (*) Backup Compounds to such Primary Development Compound by giving written notice of designation to ARQULE, which notice shall identify such Backup Compounds (the “DS Backup Compound Notice”).  No Backup Compound may be designated after the expiration of the DS Option Period for the DS Target of the relevant Primary Development Compound.

7.1.3Expiration of DS Option.  If DS fails to exercise the DS Option applicable to a Primary Development Compound (and related Backup Compounds) on or before the expiration of the applicable DS Option Period, then such Primary Development Compound

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(and related Backup Compounds) shall be deemed to be a Waived Compound for purposes of this Agreement.

7.2Research Licenses.

7.2.1ARQULE Grant.  Subject to the terms and conditions of this Agreement, ARQULE hereby grants to DS and its Affiliates a non-exclusive, royalty-free, worldwide license until the expiration of the last to expire DS Option Period under Licensed Technology and Licensed Patent Rights, for the sole purpose of conducting DS Research Activities in the Research Program.

7.2.2DS Grants.  Subject to the terms and conditions of this Agreement, DS hereby grants to ARQULE and its Affiliates a non-exclusive, royalty-free, worldwide license until the expiration of the last to expire DS Option Period under DS Technology and DS Patent Rights that is necessary or useful for ARQULE to carry out its obligations under the Annual Research Plan, and for the sole purpose of conducting ARQULE Research Activities in the Research Program.

7.3Development Licenses.

7.3.1ARQULE Grant.  In the event of exercise by DS of the DS Option for a Primary Development Compound and related Backup Compounds, subject to the terms and conditions of this Agreement, in the License Agreement negotiated upon the exercise of the DS Option for such Primary Development Compound (and related Backup Compounds), ARQULE will grant to DS and its Affiliates, an exclusive, royalty bearing, worldwide license during the Term, including the right to grant sublicenses to Sublicensees as provided in Sections 7.5, under Licensed Technology and Licensed Patent Rights, for the sole purpose of Developing such Primary Development Compound and related Backup Compounds and Licensed Products with respect thereto in the Field and in the Territory.  Notwithstanding the foregoing, during the period commencing on the date of expiration or termination of the Research Collaboration Period and continuing for the remainder of the Term, ARQULE hereby retains the right to Develop and Commercialize all Waived Compounds and Terminated Compounds.

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7.3.2DS Grant.  Effective upon exercise by DS of the DS Option for a Primary Development Compound and related Backup Compounds, subject to the terms and conditions of this Agreement, DS hereby grants to ARQULE and its Affiliates a non-exclusive, royalty-free, worldwide license during the Term, without the right to grant sublicenses, under DS Technology and DS Patent Rights that is necessary or useful for ARQULE to carry out any development activities which the Parties agree that ARQULE shall perform, and DS’s interest in Joint Technology and Joint Patent Rights and under Licensed Technology and Licensed Patent Rights exclusively licensed to DS under Section 7.3.1, for the sole purpose of conducting the such development activities in any Development Program.

7.3.3Waived Compound; Terminated Compounds.  Subject to the terms and conditions of this Agreement, DS hereby grants to ARQULE and its Affiliates an exclusive, worldwide, royalty-free license, with the right to grant sublicenses, under DS Program Technology, Patent Rights claiming DS Program Technology and DS’s interest in Joint Technology and Joint Patent Rights to research, develop, have developed, make, have made, use, distribute for sale, sell, offer for sale, import and have imported Waived Compounds and Terminated Compounds for any and all uses, both within and outside of the Field.  Subject to Section 9.1.5, DS shall retain all rights to such DS Program Technology, Patent Rights claiming DS Program Technology and DS’s interest in Joint Technology and Joint Patent Rights for all other purposes.

7.4Commercialization License.  In the event of exercise by DS of the DS Option for a Primary Development Compound and related Backup Compounds, subject to the terms and conditions of this Agreement, the License Agreement negotiated upon the exercise of the DS Option with respect to such Primary Development Compound (and related backup Compounds), will grant to DS and its Affiliates an exclusive, royalty-bearing license during the Term, including the right to grant sublicenses to Sublicensees as provided in Section 7.5, under Licensed Technology and Licensed Patent Rights for the sole purpose of Commercializing Licensed Products with respect to such Primary Development Compound and related Backup Compounds in the Field in the Territory.

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7.5Right to Sublicense.  DS shall have the right to grant sublicenses to Sublicensees under the licenses granted to it under the License Agreement with respect to any Primary Development Compounds (and related Backup Compounds) and Licensed Products; provided, that, (a) it shall be a condition of any such sublicense that such Sublicensee agrees to be bound by all terms of this Agreement and the License Agreement applicable to the Development or Commercialization, as the case may be, of Licensed Products in the Field in the Territory (including, without limitation, Article 6); (b) DS shall provide written notice to ARQULE of any such proposed sublicense at least thirty (30) days prior to such execution and provide copies to ARQULE of each such sublicense in the form to be executed at least ten (10) business days prior to such execution; (c) if DS grants a sublicense to a Sublicensee, DS shall be deemed to have guaranteed that such Sublicensee will fulfill all of DS’s obligations under this Agreement applicable to the subject matter of such sublicense; and (d) DS shall not be relieved of its obligations pursuant to this Agreement or the License Agreement as a result of such sublicense.  Any sublicenses granted by DS to Sublicensee under Section 7.3.1 and/or Section 7.4 with respect to Licensed Products and Co-Commercialized Licensed Products shall require ARQULE’s consent, which consent shall not be unreasonably withheld, delayed or conditioned.  Sublicenses to Affiliates of DS shall not require ARQULE’s consent.

7.6No Other Rights.  DS shall have no rights to use or otherwise exploit ARQULE Technology, ARQULE Patent Rights, or ARQULE Proprietary Materials, and ARQULE shall have no rights to use or otherwise exploit DS Technology, DS Patent Rights or DS Proprietary Materials, in each case, except as expressly set forth in this Article 7 or a License Agreement.  No right is granted to DS to practice or use AKIP Platform Technology for any purpose.

7.7Exclusivity.

7.7.1ARQULE.  ARQULE shall not, and shall cause each of its Affiliates to not, conduct or fund any research, development or commercialization activity, either on its own, or with, for the benefit of, or sponsored by, any Third Party, that involves the research, development or commercialization of, or grant any license or other rights to any Third Party to utilize any Technology or Patent Rights Controlled by ARQULE or any of its Affiliates for the express purpose of researching, developing or commercializing (a) any Compound that meets

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clauses (i), (ii) and (iii) of the Minimum Requirements for a DS Target for which DS has exercised the DS Option or for which the DS Option Period has not expired, or (b) any Licensed Product that DS is actively Developing or Commercializing for any use, whether within or outside of the Field, except hereunder in the Research Program, or the Development or the Commercialization of Licensed Products under a License Agreement.  Notwithstanding the foregoing, during the period commencing on the date of termination or expiration of the Research Collaboration Period and continuing for the remainder of the Term, ARQULE shall have the right to research, develop and/or commercialize, and grant licenses or other rights to any Third Party to utilize any Proprietary Materials, Technology or Patent Rights Controlled in whole or in part by ARQULE or any of its Affiliates for the purpose of researching, developing or commercializing, any and all Waived Compounds and Terminated Compounds.

7.7.2DS.  DS shall not, and shall cause each of its Affiliates to not, conduct any research, development or commercialization activity, either on its own, or with, for the benefit of, or sponsored by, any Third Party, that involves the research, development or commercialization, or grant any license or other rights to any Third Party to utilize any Technology or Patent Rights Controlled by DS or any of its Affiliates for the express purpose of researching, developing or commercializing (a) any Compound that meets clauses (i) and (ii) of the Minimum Requirements for a DS Target for which DS has exercised the DS Option or for which the DS Option Period has not expired or (b) any Collaboration Compound or Licensed Product for any use, whether within or outside of the Field, except hereunder in the Research Program, the Development of Collaboration Compound, the Commercialization of Licensed Products under a License Agreement and/or as provided in Section 4.11.

8.INTELLECTUAL PROPERTY RIGHTS

8.1ARQULE Intellectual Property Rights.  ARQULE shall have sole and exclusive ownership of all right, title and interest on a worldwide basis in and to any and all ARQULE Technology and ARQULE Patent Rights.

8.2DS Intellectual Property Rights.  DS shall have sole and exclusive ownership of all right, title and interest on a worldwide basis in and to any and all DS Technology, Licensed Product Trademarks and DS Patent Rights.

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8.3Joint Technology and Joint Patent Rights.  DS and ARQULE shall jointly own all Joint Technology and Joint Patent Rights.  Notwithstanding anything to the contrary contained in this Agreement or under Applicable Law, except to the extent exclusively licensed to one Party under this Agreement, the Parties hereby agree that either Party may use or license or sublicense to Affiliates or Third Parties all or any portion of its interest in Joint Technology and/or Joint Patent Rights or jointly owned Confidential Information or Proprietary Materials for use outside the Field without the prior written consent of the other Party, without restriction and without the obligation to provide compensation to the other Party; provided, that, during the Term of this Agreement, neither Party may use or license or sublicense to Third Parties all or any portion of its interest in Joint Technology and/or Joint Patent Rights or jointly owned Confidential Information or Proprietary Materials for use in the Field against DS Targets for which DS has exercised the DS Option or for which the DS Option Period has not expired.

8.4Patent Coordinators.  ARQULE and DS shall each appoint a patent coordinator reasonably acceptable to the other Party (each, a “Patent Coordinator”) to serve as such Party’s primary liaison with the other Party on matters relating to patent filing, prosecution, maintenance and enforcement.  Each Party may replace its Patent Coordinator at any time by notice in writing to the other Party.  The initial Patent Coordinators shall be:

For ARQULE:Mark Ashwell, Ph. D.

For DS: Dr. Kazuo Sato, General Manager, Intellectual Property, DAIICHI SANKYO, CO., LTD.

8.5Inventorship.  In case of a dispute between ARQULE and DS over inventorship and, as a result, whether any particular Program Technology is ARQULE Technology, DS Technology or Joint Technology, it shall be determined by applicable United States patent law.

8.6Cooperation.  Each Party shall cooperate with the other Party to effect the intent of this Article 8, including without limitation by executing documents and making its employees and independent contractors available to execute documents as necessary to achieve the foregoing allocation of ownership rights.

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9.FILING, PROSECUTION AND MAINTENANCE OF PATENT RIGHTS

9.1Patent Filing, Prosecution and Maintenance.

9.1.1DS’s Prosecution Rights.

(a)DS Program Technology.  Subject to Sections 9.1.4 and 9.1.5, DS, acting through patent counsel or agents of its choice, shall be responsible for the preparation, filing, prosecution and maintenance, at its sole cost and expense, of Patent Rights covering DS Program Technology.  At DS’s request, ARQULE shall cooperate with DS in all reasonable respects in connection with such preparation, filing, prosecution and maintenance of such Patent Rights, including but not limited to obtaining assignments to reflect chain of title consistent with the terms of this Agreement, gaining United States patent term extensions, supplementary protection certificates and any other extensions that are now or become available in the future wherever applicable.  For purposes of clarity, notwithstanding anything to the contrary herein, DS shall have no rights to prepare, file, prosecute and/or maintain any Patent Rights related to the AKIP Platform Technology.

(b)DS Background Technology.  DS, at its sole expense and acting through patent counsel or agents of its choice, shall be responsible for the preparation, filing, prosecution and maintenance of all Patent Rights covering DS Background Technology.

9.1.2ARQULE Prosecution Rights.

(a)ARQULE Program Technology.  Subject to Sections 9.1.4 and 9.1.5, ARQULE, acting through patent counsel or agents of its choice, shall be responsible for the preparation, filing, prosecution and maintenance, at its sole cost and expense, of Patent Rights covering ARQULE Program Technology.  At ARQULE’s request, DS shall cooperate with and assist ARQULE in all reasonable respects in connection with such preparation, filing, prosecution and maintenance of such Patent Rights, including but not limited to obtaining assignments to reflect chain of title consistent with the terms of this Agreement, gaining United States patent term extensions, supplementary protection certificates and any other extensions that are now or become available in the future wherever applicable.

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(b)ARQULE Background Technology.  ARQULE, at its sole expense and acting through patent counsel or agents of its choice, shall be responsible for the preparation, filing, prosecution and maintenance of all Patent Rights covering ARQULE Background Technology.

9.1.3Joint Prosecution.  In the case of Joint Patent Rights, the Parties shall meet through the Patent Coordinators, or hold a teleconference or videoconference, to discuss in good faith and agree upon the content and form of any application for a Joint Patent Right and hereby agree that only the application in the form as agreed between the Parties may be filed in respect of the Joint Patent Rights.  Any dispute between the Patent Coordinators shall be referred to the JEC for resolution pursuant to Section 2.1.5.  The Parties shall share the costs equally in respect of the preparation of the application, filing, prosecution, grant and maintenance of any Joint Patent Right jointly filed; and jointly instruct an appropriately qualified patent attorney to draft, file and prosecute the application and each Party will have equal control over the prosecution of the filing such that the patent attorney will only be able to act on unanimous instructions.  In the event that one Party (i) is not interested, or (ii) not willing to equally share the related cost and expense, with respect to any Joint Patent Rights in a given country, then the other Party shall have the right, at its own cost and expense, to file for and prosecute such Joint Patent Rights in such country in both Parties’ names.

9.1.4Information and Cooperation.  Each Party that has responsibility for filing and prosecuting any Patent Rights under this Section 9.1 (a “Filing Party”) shall (a) regularly provide the other Party (the “Non-Filing Party”) with copies of all patent applications filed hereunder for Program Technology and other material submissions and correspondence with the patent offices, in sufficient time to allow for review and comment by the Non-Filing Party; and (b) provide the Non-Filing Party and its patent counsel with an opportunity to consult with the Filing Party and its patent counsel regarding the filing and contents of any such application, amendment, submission or response.  The advice and suggestions of the Non-Filing Party and its patent counsel shall be taken into consideration in good faith by such Filing Party and its patent counsel in connection with such filing.  Each Filing Party shall pursue in good faith all reasonable claims and take such other reasonable actions, as may be requested by the Non-Filing Party in the prosecution of any Patent Rights covering any Program Technology under this

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Section 9.1; provided, however, if the Filing Party incurs any additional expense as a result of any such request, the Non-Filing Party shall be responsible for the cost and expenses of pursuing any such additional claim or taking such other activities.  In addition, DS agrees that if ARQULE claims any action taken under Section 9.1.1(a) would be detrimental to Patent Rights covering ARQULE Background Technology (including without limitation the AKIP Platform Technology), ARQULE shall provide written notice to DS and the Patent Coordinators shall, as promptly as possible thereafter, meet to discuss and resolve such matter and, if they are unable to resolve such matter, the Parties shall refer such matter to a mutually agreeable outside patent counsel for resolution.

9.1.5Abandonment.

(a)Patent Rights owned solely by ARQULE or DS.  If a Filing Party decides to abandon or to allow to lapse any of the Patent Rights covering any Program Technology for which it has responsibility, it shall inform the Non-Filing Party of such decision promptly and, in any event, so as to provide the Non-Filing Party a reasonable amount of time to meet any applicable deadline to establish or preserve such Patent Rights in such country or region.  The Non-Filing Party shall have the right to assume responsibility for continuing the prosecution of such Patent Rights in such country or region and paying any required fees to maintain such Patent Rights in such country or region or defending such Patent Rights, through patent counsel or agents of its choice, which shall be at the Non-Filing Party’s sole expense.  The Non-Filing Party shall not become an assignee of any such Patent Rights as a result of its assumption of any such responsibility.  Upon transfer of such responsibility under this Section 9.1.5(a), the Filing Party shall promptly deliver to the Non-Filing Party copies of all necessary files related to the Patent Rights with respect to which responsibility has been transferred and shall take all actions and execute all documents reasonably necessary for the Non-Filing Party to assume such responsibility.

(b)Joint Patent Rights.  If one Party decides to abandon its share of the Joint Patent Rights in any country or region (an “Abandoning Party”), it shall inform the other Party (the “Maintaining Party”) of such decision promptly.  The Maintaining Party shall have the right to assume all responsibility for continuing the prosecution of such Patent Rights in

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such country or region and paying any required fees to maintain such Patent Rights in such country or region or defending such Patent Rights, through patent counsel of its choice, which shall be at the Maintaining Party’s sole expense.  Upon abandonment of the Abandoning  Party’s share of any Joint Patent Rights under this Section 9.1.5(b), the Abandoning Party shall take all actions and execute all documents reasonably necessary for the Maintaining Party to assume such responsibility.

9.2Legal Actions.

9.2.1Third Party Infringement.

(a)Notice.  In the event either Party becomes aware of (i) any possible infringement of any Licensed Patent Rights, DS Patent Rights or Joint Patent Rights through the Development or Commercialization of a Primary Development Compound, Backup Compound or Licensed Product, or (ii) the submission by any Third Party of an abbreviated new drug application under the Hatch-Waxman Act for a product that includes a Licensed Product or Primary Development Compound or Backup Compound (each, an “Infringement”), that Party shall promptly notify the other Party and provide it with all details of such Infringement of which it is aware (each, an “Infringement Notice”).

(b)DS Right to Enforce.

(i)Enforcement of DS Patent Rights.  In the event that any Infringement relates to any DS Patent Rights, then, subject to Section 9.2.1(b)(ii), DS shall have the sole right but not the obligation to enforce such claim.

(ii)Enforcement of Program Patent Rights.  In the event that any Infringement relates to any Third Party product that meets clauses (i) and (ii) of the Minimum Requirements for a DS Target, then, subject to Section 9.2.1(c) and 9.2.1(d), DS shall have the first right (but not the obligation) to enforce such claim, which may include the institution of legal proceedings or other action; provided, that, notwithstanding the foregoing, DS shall not admit the invalidity or unenforceability of any Licensed Patent Rights or Valid Claims therein without ARQULE’s prior written consent.  DS shall keep ARQULE reasonably informed on a quarterly basis, in person or by telephone, prior to and during any such enforcement. 

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ARQULE shall assist DS, upon request, in taking any action to enforce any such Patent Rights and shall join in any such action if deemed to be a necessary party.  All costs, including without limitation attorneys’ fees, relating to such legal proceedings or other action shall be borne by DS.  If DS does not take commercially reasonable steps to abate the Infringement of such Patent Rights within * (*) days from any Infringement Notice (or * (*) days in the case of an Infringement resulting from the submission by any Third Party of an abbreviated new drug application under the Hatch-Waxman Act), then ARQULE shall have the right and option to do so at its expense.

(c)ARQULE Right to Enforce.

(i)Enforcement of ARQULE Background Patent Rights.  In the event that any Infringement relates to any Patent Rights covering ARQULE Background Technology, ARQULE shall have the sole right but not the obligation to enforce such claim.

(ii)Enforcement of ARQULE Program Patent Rights.  In the event that any Infringement relates to any Patent Rights covering ARQULE Program Technology (“ARQULE Program Patent Right”), then, subject to Section 9.2.1(b)(ii), ARQULE shall have the first right (but not the obligation) to enforce such claim, which may include the institution of legal proceedings or other action.  ARQULE shall keep DS reasonably informed on a quarterly basis, in person or by telephone, prior to and during any such enforcement.  DS shall assist ARQULE, upon request, in taking any action to enforce any such Patent Rights and shall join in any such action if deemed to be a necessary party.  ARQULE shall incur no liability to DS as a consequence of such litigation or any unfavorable decision resulting therefrom, including any decision holding any such claim invalid, not infringed or unenforceable.  All costs, including without limitation attorneys’ fees, relating to such legal proceedings or other action shall be borne by ARQULE.  If ARQULE does not take commercially reasonable steps to abate the Infringement of such Patent Rights within * (*) days from any Infringement Notice (or * (*) days in the case of an Infringement resulting from the submission by any Third Party of an abbreviated new drug application under the Hatch-Waxman Act), then DS shall have the right and option to do so at its expense.  For purposes of clarity,

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notwithstanding anything to the contrary herein, DS shall have no right to enforce any ARQULE Patents Rights covering the AKIP Platform Technology.

(d)Joint Patent Rights.  In the event of an Infringement of a Joint Patent Right, then, subject to Section 9.2.1(b)(ii), the Parties shall enter into good faith discussions as to whether and how to eliminate the Infringement.  Subject to the foregoing, (i) DS shall have the first right and option to eliminate such Infringement in the Field and ARQULE shall have the first right and option to eliminate such Infringement outside the Field, in each case by reasonable steps, which may include the institution of legal proceedings or other action and (ii) all costs, including without limitation attorneys’ fees, relating to such legal proceedings or other action shall be borne by such Party.  Neither DS nor ARQULE shall admit the invalidity or unenforceability of any Joint Patent Rights or Valid Claims therein without the other Party’s prior written consent.  If DS or ARQULE does not take or initiate commercially reasonable steps to eliminate the Infringement within * (*) days from any Infringement Notice (or * (*) days in the case of an Infringement resulting from the submission by any Third Party of an abbreviated new drug application under the Hatch-Waxman Act), then the other Party shall have the right and option to do so at its expense.

(e)Representation of Either Party.  Each Party shall have the right to be represented by counsel that it selects in any legal proceedings or other action instituted under this Section 9.2.1 by the other Party.

(f)Cooperation by the Parties.  In any action, suit or proceeding instituted under this Section 9.2.1, the Parties shall cooperate with and assist each other in all reasonable respects.  Upon the reasonable request of the Party instituting such action, suit or proceeding, the other Party shall join such action, suit or proceeding and shall be represented using counsel of its own choice, at the requesting Party’s expense.  If a Party with the right to initiate legal proceedings under this Section 9.2.1 lacks standing to do so and the other Party has standing to initiate such legal proceedings, then the Party with standing shall initiate such legal proceedings at the request and expense of the other Party.

(g)Allocation of Recoveries.  Any amounts recovered by DS pursuant to actions under Sections 9.2.1(b)(ii) or 9.2.1(d), whether by settlement or judgment, shall be

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allocated in the following order: (i) first, to reimburse DS and ARQULE for their reasonable out-of-pocket expenses in making such recovery (which amounts shall be allocated pro rata if insufficient to cover the totality of such expenses); and (ii) second (A) with respect to actual damages, to DS and ARQULE in the *, and (B) with respect to punitive, special or consequential damages, * percent (*%) to DS and * percent (*%) to ARQULE.  Any amounts recovered by ARQULE pursuant to actions under Section 9.2.1(c)(ii) or 9.2.1(d) shall be allocated in the following order: (X) first, to reimburse ARQULE and DS for their reasonable out of pocket expenses in making such recovery (which amounts shall be allocated pro rata if insufficient to cover the totality of such expenses); and (Y) then, *% to ARQULE.

9.2.2Defense of Claims.

(a)Notice.  In the event that a Third Party alleges that the conduct of the Research Program or the Development or Commercialization of a Primary Development Compound, Backup Compound or Licensed Product infringes the Patent Rights of a Third Party, the Party becoming aware of such allegation shall promptly notify the other Party hereof, in writing, reasonably detailing the claim.

(b)Third Party Suit Relating Primarily to DS Targets or Licensed Products.  In the event that any action, suit or proceeding is brought against either Party or any Affiliate or sublicensee of either Party alleging the infringement of the Patent Rights of a Third Party relating specifically to the DS Targets or Licensed Products by reason of activities conducted pursuant to this Agreement, (i) DS shall have the right and obligation to defend or otherwise resolve such action, suit or proceeding (e.g., by way of entering into a settlement agreement or consent) at its sole expense; (ii) ARQULE or any of its Affiliates or sublicensees shall have the right to separate counsel at its own expense in any such action, suit or proceeding and, if such action, suit or proceeding has been brought against ARQULE or any of its Affiliates or sublicensees, ARQULE may elect to defend itself at its sole expense; and (iii) the Parties shall cooperate with each other in all reasonable respects in any such action, suit or proceeding.  Settlement costs, royalties paid in settlement of any such suit, and the payment of any damages

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to the Third Party shall be borne solely by DS, provided that DS shall be entitled to credit * percent (*%) of such payments against milestone payments or royalty payments to be paid by DS under the License Agreement relating to such Licensed Product.

(c)Third Party Suit Relating Primarily to the use of the AKIP Platform Technology.  In the event that any action, suit or proceeding is brought against either Party or any Affiliate or sublicensee of either Party alleging the infringement of the Patent Rights of a Third Party by reason of the use of the AKIP Platform Technology in the conduct of the Research Program (i) ARQULE shall have the right and obligation to defend or otherwise resolve such action, suit or proceeding (e.g., by way of entering into a settlement agreement or consent) at its sole expense; and (ii) DS or any of its Affiliates or Sublicensees shall have the right to separate counsel at its own expense in any such action, suit or proceeding and, if such action, suit or proceeding has been brought against DS or any of its Affiliates or Sublicensees, DS or its Affiliate or Sublicensee may elect to defend itself at its sole expense.  Settlement costs, royalties paid in settlement of any such suit, and the payment of any damages to the Third Party shall be borne solely by ARQULE.

(d)Cooperation in Defense.  The Parties shall cooperate with each other in all reasonable respects in any action, suit or proceeding under this Section 9.2.2.  Each Party shall provide the other Party with prompt written notice of the commencement of any such suit, action or proceeding, or of any evidence or allegation of infringement of which such Party becomes aware, and shall promptly furnish the other Party with a copy of each communication relating to the alleged infringement that is received by such Party.  The Party that is a party to the action, suit or proceeding shall not admit the invalidity of any patent within the Licensed Patent Rights, Joint Patent Rights or DS Patent Rights, nor settle such action, suit or proceeding in a manner that adversely affects the other Party’s rights under this Agreement, without the written consent of the other Party, which consent shall not be unreasonably withheld, delayed or conditioned.

9.3Trademark and Copyright Prosecution, Defense and Enforcement.  DS shall be responsible for the filing, prosecution, maintenance, defense and enforcement of all Licensed

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Product Trademarks and copyrights created during the Research Program, Development and/or Commercialization at DS’s expense.

10.TERM AND TERMINATION

10.1Term.  The term (“Term”) of this Agreement shall commence on the Effective Date and shall continue in full force and effect until the later of (i) the end of the Research Collaboration Period, or (ii) the expiration of the last to expire DS Option Period and, if DS is Developing a Licensed Product or Commercializing a Licensed Product (including any Co-Commercialized Licensed Product), thereafter until (a) such time as DS is no longer Developing at least one (1) Licensed Product or (b) if, as of the time DS is no longer Developing at least one (1) Licensed Product, DS is Commercializing a Licensed Product, such time as all Royalty Terms for all Licensed Products have ended, whichever is later, unless earlier terminated in accordance with the provisions of this Article 10.

10.2Termination.  This Agreement may be terminated at any time by either Party as follows:

10.2.1Unilateral Right to Terminate.  DS may terminate this Agreement, effective upon not less than ninety (90) days written notice to ARQULE, at any time on or after expiration of the Research Collaboration Period.

10.2.2Termination for Breach.  Subject to Section 13.1.1(d), either Party may terminate this Agreement, effective immediately upon written notice to the other Party, for a material breach by the other Party of any term of this Agreement that remains uncured for * (*) days * (*) days in the event that the breach is a failure of either Party to make any payment required hereunder) after the non-breaching Party first gives written notice to the other Party of such breach and its intent to terminate this Agreement if such breach is not cured; provided, that, in the event DS is in breach of its diligence obligations with respect to a given DS Target and/or any Licensed Product against such DS Target, ARQULE shall only have the right to terminate the license with respect to such DS Target and/or Licensed Product (but leaving unaffected DS’s rights under this Agreement to any other DS Target and Licensed Product directed against such other DS Target).

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10.2.3Termination for Insolvency.  In the event that either Party files for protection under bankruptcy laws, makes a general assignment for the benefit of creditors, appoints or suffers appointment of a receiver or trustee over its business, files a petition under any bankruptcy or insolvency act or has any such petition filed against it which is not dismissed or stayed within * (*) days of the filing thereof, the other Party may terminate this Agreement effective immediately upon written notice to such Party.  In connection therewith, all rights and licenses granted under this Agreement are, and shall be deemed to be, for purposes of Section 365(n) of the United States Bankruptcy Code, licenses of rights to “intellectual property” as defined under Section 101(35A) of the United States Bankruptcy Code.

10.2.4Termination for Challenge.  Except to the extent the following is unenforceable under the law of a particular jurisdiction where a patent application within the Licensed Patent Rights is pending or a patent within the Licensed Patent Rights issued, in the event DS, its Affiliates and/or Sublicensees initiates a Challenge or assists a Third Party in initiating a Challenge, ARQULE shall have the right to terminate this Agreement, effective immediately upon written notice to DS.

10.3Consequences of Termination of Agreement.  In the event of the termination of this Agreement pursuant to Section 10.2, the following provisions shall apply, as applicable to this Agreement and shall be included in any License Agreement executed upon exercise of a DS Option.

10.3.1Termination Pursuant to Section 10.2.1.  If this Agreement is terminated by DS pursuant to Section 10.2.1:

(a)All licenses granted to DS under Article 7 to any Licensed Products as of the effective date of termination, if any, shall immediately terminate and all such Licensed Products and the Collaboration Compounds therein shall be deemed to be Terminated Compounds, and ARQULE shall have no further obligations under Section 7.7.1.

(b)Each Party shall promptly return all Confidential Information and Proprietary Materials of the other Party that are not subject to a continuing license hereunder; provided, that, each Party may retain one copy of the Confidential Information of the other Party

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in its archives solely for the purpose of establishing the contents thereof and ensuring compliance with its obligations hereunder.

(c)Upon request of ARQULE, DS will transfer to ARQULE all of its right, title and interest in Terminated Compounds to ARQULE.  Without limiting the foregoing, DS shall:

(i)assign , free of charge, to ARQULE the ownership of all Licensed Product Trademarks applicable to the Terminated Compounds; provided that after such assignment, ARQULE shall assume all responsibility for maintaining such Licensed Product Trademarks, and if ARQULE does not request such assignment, DS may terminate or withdraw from registration all such Licensed Product Trademarks;

(ii)assign to ARQULE, free of charge, or at DS’s choice, grant to ARQULE an exclusive, worldwide, royalty-free license, with the unrestricted right to sublicense, under all DS Patent Rights and DS Technology specific to the  Primary Development Compounds and related Backup Compounds and grant to ARQULE a non-exclusive worldwide, royalty-free license, with the unrestricted right to sublicense, under all other DS Patent Rights and DS Technology necessary or useful for ARQULE to Develop and Commercialize the Licensed Products and the Primary Development Compounds and related Backup Compounds;

(iii)transfer to ARQULE all of its right, title and interest in all Regulatory Filings, Drug Approval Applications and Regulatory Approvals then in its name applicable to the Terminated Compounds, if any;

(iv)notify the applicable Regulatory Authorities and take any other action reasonably necessary to effect such transfer;

(v)provide ARQULE with copies of all correspondence between DS and such Regulatory Authorities relating to such Regulatory Filings, Drug Approval Applications and Regulatory Approvals;

(vi)unless expressly prohibited by any Regulatory Authority, transfer control to ARQULE of all clinical trials of the Terminated Compounds being conducted

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as of the effective date of termination and continue to conduct such trials at its expense for up to four (4) months to enable such transfer to be completed without interruption of any such trial, unless ARQULE demonstrates to DS to DS’s satisfaction that ARQULE shall not be able to assume such clinical trials within four months, in which case DS shall continue to conduct such trials for up to two (2) additional months;

(vii)assign (or cause its Affiliates to assign) to ARQULE all agreements with any Third Party with respect to the conduct of clinical trials for the Terminated Compounds including, without limitation, agreements with contract research organizations, clinical sites and investigators, unless expressly prohibited by any such agreement (in which case DS shall cooperate with ARQULE in all reasonable respects to secure the consent of such Third Party to such assignment);

(viii)provide ARQULE with all supplies of the Terminated Compounds in the possession of DS or any Affiliate or contractor of DS;

(ix)provide ARQULE with copies of all reports and data generated or obtained by DS or its Affiliates pursuant to this Agreement that relate to any Terminated Compounds that have not previously been provided to ARQULE;

(x)reimburse ARQULE for all internal and out-of-pocket costs incurred by ARQULE in continuing the research and Development of all the Terminated Compounds for a period of * (*) days from the date of the termination notice; and

(xi)if DS has manufactured, is manufacturing or having manufactured any Terminated Compounds or any intermediate thereof: (i) DS shall, if requested by ARQULE, supply ARQULE with its requirements for all Terminated Compounds and intermediates for up to * (*) months following such termination at a transfer price equal to DS’s fully-burdened manufacturing cost for the supply of such Terminated Compounds or intermediates, plus * percent (*%), (ii) within * (*) days after ARQULE’s request, DS shall provide to ARQULE or its designee all information in its possession with respect to the manufacture of each such Terminated Compound or intermediate.

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(d)ARQULE shall reimburse DS for its actual out-of-pocket costs of complying with Section 10.3.1(c)(i), (ii), (iii), (iv), (v), (vi), (vii), (viii) and (ix), up to a total of * Dollars (US $*).

10.3.2Termination by DS Pursuant to Section 10.2.2.  If this Agreement is terminated by DS pursuant to Section 10.2.2, the license granted by ARQULE to DS pursuant to Section 7.2.1 shall survive solely as applied to Collaboration Compounds subject to a DS Option as of the effective date of termination, if any, in each case subject to DS’s continued payment of all milestone, royalty, and other payments under and in accordance with this Agreement and any License Agreement with respect thereto.

10.3.3Termination by DS Pursuant to Section 10.2.3.  If this Agreement is terminated by DS pursuant to Section 10.2.3, unless prohibited by Applicable Laws, each Party shall promptly return all Confidential Information and Proprietary Materials of the other Party that are not subject to a continuing license hereunder, or under the United States Bankruptcy Code; provided, that, each Party may retain one copy of the Confidential Information of the other Party in its archives solely for the purpose of establishing the contents thereof and ensuring compliance with its obligations hereunder.

10.3.4Termination by ARQULE Pursuant to Section 10.2.2.

(a)Diligence Obligations.  If DS’s rights to a DS Target and all Licensed Products directed against such DS Target are terminated by ARQULE pursuant to Section 10.2.2 for breach by DS of its diligence obligations under Section 4.7, the provisions of Section 10.3.1 shall apply but only to the DS Target and Collaboration Compounds for which DS’s rights were terminated.

(b)Other Obligations.  If this Agreement is terminated by ARQULE pursuant to Section 10.2.2 for breach by DS of its obligations under this Agreement other than its diligence obligations under Section 4.7:

(i)the provisions of Section 10.3.1 shall apply; and

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(ii)if such termination is effective prior to the end of the Research Collaboration Period, (A) DS shall, for a period of * from the effective date of termination, pay ARQULE the FTE Funding Commitment and (B) the Research Program shall terminate without any further obligation of ARQULE.

10.3.5Termination by ARQULE Pursuant to Section 10.2.3.  If this Agreement is terminated by ARQULE pursuant to Section 10.2.3, unless prohibited by Applicable Laws, the provisions of Section 10.3.1 shall apply, except that DS shall have no obligation to continue to conduct any clinical trial.

10.3.6Termination by ARQULE Pursuant to Section 10.2.4.  If this Agreement is terminated by ARQULE pursuant to Section 10.2.4:

(a)the provisions of Section 10.3.1 shall apply; and

(b)if such termination is effective prior to the end of the Research Collaboration Period, (i) DS shall, for a period of one hundred twenty (120) days from the effective date of termination, pay ARQULE the FTE Funding Commitment and (ii) the Research Program shall terminate without any further obligation of ARQULE.

10.4Surviving Provisions.  Termination or expiration of this Agreement for any reason shall be without prejudice to:

(a)the rights and obligations of the Parties provided in Articles 1, 6, 8, 9 (with respect to Joint Patent Rights and DS Patent Rights licensed to ARQULE pursuant to Section 10.3.1(c)(ii)), 11, 12 and 13 (except Section 13.1.2) and Sections 7.6, 10.3 and 10.4.

(b)unless otherwise provided for in this Agreement, ARQULE’s rights to receive royalties and milestone payments for the duration of all applicable Royalty Terms, if any; and

(c)any other rights or remedies provided at law or equity which either Party may otherwise have.

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11.REPRESENTATIONS AND WARRANTIES

11.1Mutual Representations and Warranties.  ARQULE and DS each represents and warrants to the other, as of the Effective Date, as follows:

11.1.1Organization.  It is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization, and has all requisite power and authority, corporate or otherwise, to execute, deliver and perform this Agreement.

11.1.2Authorization.  The execution and delivery of this Agreement and the performance by it of the transactions contemplated hereby have been duly authorized by all necessary corporate action and will not violate (a) such Party’s certificate of incorporation or bylaws, (b) any agreement, instrument or contractual obligation to which such Party is bound in any material respect, (c) any requirement of any Applicable Laws, or (d) any order, writ, judgment, injunction, decree, determination or award of any court or governmental agency presently in effect applicable to such Party.

11.1.3Binding Agreement.  This Agreement is a legal, valid and binding obligation of such Party enforceable against it in accordance with its terms and conditions.

11.1.4No Inconsistent Obligation.  It is not under any obligation, contractual or otherwise, to any Person that conflicts with or is inconsistent in any respect with the terms of this Agreement or that would impede the diligent and complete fulfillment of its obligations hereunder.

11.2ARQULE’s Representations and Warranties.  ARQULE represents and warrants to DS as follows:

11.2.1All Licensed Technology existing as of the Effective Date is Controlled by ARQULE.

11.2.2To the actual knowledge of the Chief Executive Officer, the President, any Vice President or ARQULE’s internal patent counsel, ARQULE, as of the Effective Date, except as previously disclosed to DS, no Third Party has initiated, or threatened in writing to initiate, any litigation against ARQULE or its Affiliates, including, without limitation, by

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initiating any declaratory judgment lawsuit, or by sending a cease-and-desist letter, alleging that the Licensed Patent Rights are invalid or unenforceable or that the use of the Licensed Patent Rights or Licensed Technology as contemplated by this Agreement infringes the Patent Rights of such Third Party.

12.INDEMNIFICATION

12.1Indemnification of DS by ARQULE.  ARQULE shall indemnify, defend and hold harmless DS, its Affiliates, their respective directors, officers, employees and agents, and their respective successors, heirs and assigns (collectively, the “DS Indemnitees”), against all liabilities, damages, losses and expenses (including, without limitation, reasonable attorneys’ fees and expenses of litigation) (collectively, “Losses”) incurred by or imposed upon the DS Indemnitees, or any one of them, as a direct result of claims, suits, actions, demands or judgments of Third Parties, including without limitation personal injury and product liability claims (collectively, “Claims”), arising out of (a) ARQULE’s research and development activities under this Agreement, (b) the Co-Commercialization of any Co-Commercialized Licensed Product by ARQULE and (c) the development, manufacture, use or sale of any Waived Compound or Terminated Compound by ARQULE or any of its Affiliates, sublicensees, distributors or agents, except with respect to any Claim or Losses that result from a breach of this Agreement by, or the gross negligence or willful misconduct of, DS; provided, that, with respect to any Claim for which ARQULE has an obligation to any DS Indemnitee pursuant to this Section 12.1 and DS has an obligation to any ARQULE Indemnitee pursuant to Section 12.2, each Party shall indemnify each of the other Party’s Indemnitees for its Losses to the extent of its responsibility, relative to the other Party, for the facts underlying the Claim.

12.2Indemnification of ARQULE by DS.  DS shall indemnify, defend and hold harmless ARQULE, its Affiliates, their respective directors, officers, employees and agents, and their respective successors, heirs and assigns (the “ARQULE Indemnitees”), against any Losses incurred by or imposed upon the ARQULE Indemnitees, or any one of them, as a direct result of Claims arising out of (a) DS’s research activities under this Agreement, (b) the Development of any Licensed Product or the Commercialization (including, without limitation, the production, manufacture, promotion, import, sale or use by any Person) of any Licensed Product by DS or any of its Affiliates, Sublicensees, distributors or agents, and (c) the Co-Commercialization of

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any Co-Commercialized Licensed Product by DS or any of its Affiliates, Sublicensees, distributors or agents, except with respect to any Claim that results from a breach of this Agreement by, or the gross negligence or willful misconduct of, ARQULE; provided, that, with respect to any Claim for which ARQULE has an obligation to any DS Indemnitee pursuant to Section 12.1 and DS has an obligation to any ARQULE Indemnitee pursuant to this Section 12.2, each Party shall indemnify each of the other Party’s Indemnitees for its Losses to the extent of its responsibility, relative to the other Party, for the facts underlying the Claim.

12.3Conditions to Indemnification.  A Person seeking recovery under this Article 12 (the “Indemnified Party”) in respect of a Claim shall give prompt notice of such Claim to the Party from which recovery is sought (the “Indemnifying Party”) and, provided that the Indemnifying Party is not contesting its obligation under this Article 12, shall permit the Indemnifying Party to control any litigation relating to such Claim and the disposition of such Claim; provided, that, the Indemnifying Party shall (a) act reasonably and in good faith with respect to all matters relating to the settlement or disposition of such Claim as the settlement or disposition relates to such Indemnified Party and (b) not settle or otherwise resolve such claim without the prior written consent of such Indemnified Party (which consent shall not be unreasonably withheld, conditioned or delayed).  Each Indemnified Party shall cooperate with the Indemnifying Party in its defense of any such Claim in all reasonable respects and shall have the right to be present in person or through counsel at all legal proceedings with respect to such Claim.

12.4Warranty Disclaimer.  EXCEPT AS OTHERWISE EXPRESSLY PROVIDED IN THIS AGREEMENT, NEITHER PARTY MAKES ANY WARRANTY WITH RESPECT TO ANY TECHNOLOGY, GOODS, SERVICES, RIGHTS OR OTHER SUBJECT MATTER OF THIS AGREEMENT AND EACH PARTY HEREBY DISCLAIMS ALL WARRANTIES, EXPRESS OR IMPLIED, INCLUDING WITHOUT LIMITATION WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, VALIDITY AND NONINFRINGEMENT.

12.5No Warranty of Success.  Nothing contained in this Agreement shall be construed as a warranty on the part of either Party that (a) the Research Program will yield any

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Collaboration Compound, Hit, Primary Development Compound, Backup Compound or Licensed Product or otherwise be successful, (b) any Development Program will yield a Licensed Product or otherwise be successful or (c) the outcome of the Research Program or any Development Program will be commercially exploitable in any respect.

12.6Limited Liability.  NOTWITHSTANDING ANYTHING TO THE CONTRARY IN THIS AGREEMENT, NEITHER PARTY SHALL BE LIABLE TO THE OTHER PARTY OR ANY OF ITS AFFILIATES FOR (I) ANY SPECIAL, PUNITIVE, INDIRECT, INCIDENTAL OR CONSEQUENTIAL DAMAGES, INCLUDING WITHOUT LIMITATION LOST PROFITS OR LOST REVENUES, OR (II) COST OF PROCUREMENT OF SUBSTITUTE GOODS, TECHNOLOGY OR SERVICES, WHETHER UNDER ANY CONTRACT, WARRANTY, NEGLIGENCE, STRICT LIABILITY OR OTHER LEGAL OR EQUITABLE THEORY.

13.MISCELLANEOUS

13.1Arbitration.

13.1.1Full Arbitration.  Any dispute, controversy or claim arising between the Parties with respect to this Agreement, including any dispute, controversy or claim relating to any Unanimous Decision (each, a “Dispute”), shall be resolved by binding arbitration before a panel of three (3) arbitrators in accordance with the rules of the AAA in effect at the time the proceeding is initiated; provided, that, any Dispute as to a Unanimous Decision shall be resolved pursuant to Section 13.1.2.  In any such arbitration, the following procedures shall apply:

(a)The panel will be comprised of one arbitrator chosen by DS, one by ARQULE and the third by the two so chosen.  If either, or both, of DS or ARQULE fails to choose an arbitrator or arbitrators within thirty (30) days after receiving notice of commencement of arbitration or if the two arbitrators fail to choose a third arbitrator within thirty (30) days after their appointment, then either or both Parties shall immediately request that the ICC select the remaining number of arbitrators to be selected, which arbitrator(s) shall have the requisite scientific background, experience and expertise.  The place of arbitration shall be Boston, Massachusetts.

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(b)Either Party may apply to the arbitrators for interim injunctive relief until the arbitration decision is rendered or the Dispute is otherwise resolved.  Either Party also may, without waiving any right or remedy under this Agreement, seek from any court having jurisdiction any injunctive or provisional relief necessary to protect the rights or property of that Party pending resolution of the Dispute pursuant to this Section 13.1.1.  The arbitrators shall have no authority to award punitive or any other type of damages not measured by a Party’s compensatory damages.  Each Party shall bear its own costs and expenses and attorneys’ fees in connection with any such arbitration; provided, that, the non-prevailing Party shall pay the costs and expenses incurred by the prevailing Party in connection with any such arbitration, including reasonable attorneys’ fees and costs.  The Parties acknowledge that while Section 13.4 shall apply to any such Dispute, it is the intention of the Parties not to use the discovery rules of the Commonwealth of Massachusetts in connection with any such Dispute.

(c)Except to the extent necessary to confirm an award or decision or as may be required by Applicable Laws, neither Party nor any arbitrator may disclose the existence or results of any arbitration without the prior written consent of both Parties.  In no event shall any arbitration be initiated after the date when commencement of a legal or equitable proceeding based on the Dispute would be barred by the applicable Massachusetts statute of limitations.

(d)In the event of a Dispute involving the alleged breach of this Agreement (including, without limitation, whether a Party has satisfied its diligence obligations hereunder), (i) neither Party may terminate this Agreement under Section 10.2.2 until resolution of the Dispute pursuant to this Section 13.1.1 and (ii) if the arbitrators render a decision that a breach of this Agreement has occurred, the arbitrators shall have no authority to modify the right of the non-breaching Party to terminate this Agreement in accordance with Section 10.2.2.

(e)Any disputed performance or suspended performance pending the resolution of a Dispute that the arbitrators determine to be required to be performed by a Party shall be completed within a reasonable time period following the final decision of the arbitrators.

(f)The decision of the arbitrators shall be the sole, exclusive and binding remedy between the Parties regarding the determination of all Disputes presented.  Any

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monetary payment to be made by a Party pursuant to a decision of the arbitrators shall be made in United States dollars, free of any tax or other deduction.

13.1.2Accelerated Arbitration.  To the extent a Dispute submitted to arbitration by a Party under Section 13.1.1 is claimed, by either Party, to involve a Unanimous Decision, the following procedures shall apply:

(a)The Parties shall mutually select a single independent, conflict-free arbitrator (the “Expert”), who shall have sufficient scientific background and experience to resolve the Dispute.  If the Parties are unable to reach agreement on the selection of an Expert within fifteen (15) business days after submission to arbitration, then either or both Parties shall immediately request that the AAA select an arbitrator with the requisite scientific background, experience and expertise.  The place of arbitration shall be Boston, Massachusetts.

(b)Each Party shall prepare and submit a written summary of such Party’s position and any relevant evidence in support thereof to the Expert within thirty (30) days of the selection of the Expert.  Upon receipt of such summaries from each Party, the Expert shall provide copies of the same to the other Party.  Within thirty (30) days of the delivery of such summaries by the Expert, each Party shall submit a written rebuttal of the other Party’s summary and may also amend and re-submit its original summary.  Oral presentations shall not be permitted unless otherwise requested by the Expert.  The Expert shall make a final decision with respect to the Dispute within thirty (30) days following receipt of the last of such rebuttal statements submitted by the Parties.  Each Party shall bear its own costs and expenses and attorneys’ fees, and the Party that does not prevail in the arbitration proceeding shall pay the Expert’s fees and any administrative fees of arbitration.

13.2Notices.  All notices and communications shall be in writing and delivered personally or by courier or mailed via certified mail, return receipt requested, addressed as follows, or to such other address as may be designated from time to time:

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If to DS:	If to ARQULE:
Daiichi Sankyo Co., Ltd.	ArQule, Inc.
1-2-58, Hiromachi, Shinagawa -ku	19 Presidential Way
Tokyo 140-8710, Japan	Woburn, MA 01801
Tel: +81-3-3492-3131	Tel: (781) 994-0300
Fax: +81-3-5436-8561	Fax: (781) 376-6019
Attention:   Vice President,	Attention: General Counsel
R&D Planning
	Attention   Vice President,
	Business Development
	With a copy to:
	Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.
	One Financial Center
	Boston, Massachusetts 02111
	Attention: Jeffrey Wiesen, Esq.
	Tel: (617) 542-6000
	Fax: (617) 542-2241

In addition, all notices to the JEC, JRC, or USCC shall be sent to each Party’s designees at such Party’s address stated above or to such other address as such Party may designate by written notice given in accordance with this Section 13.2.

Except as otherwise expressly provided in this Agreement or mutually agreed in writing, any notice, communication or document (excluding payment) required to be given or made shall be deemed given or made and effective upon actual receipt or, if earlier, (a) three (3) business days after deposit with an internationally-recognized overnight express courier with charges prepaid, or (b) five (5) business days after mailed by certified, registered or regular mail, postage prepaid, in each case addressed to a Parties at its address stated above or to such other address as such Party may designate by written notice given in accordance with this Section 13.2.

13.3Governing Law.  This Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Massachusetts, without regard to the application of principles of conflicts of law.

13.4Binding Effect.  This Agreement shall be binding upon and inure to the benefit of the Parties and their respective legal representatives, successors and permitted assigns.

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13.5Headings.  Section and subsection headings are inserted for convenience of reference only and do not form a part of this Agreement.

13.6Counterparts.  This Agreement may be executed simultaneously in two or more counterparts, each of which shall be deemed an original and both of which, together, shall constitute a single agreement.

13.7Amendment; Waiver.  This Agreement may be amended, modified, superseded or canceled, and any of the terms of this Agreement may be waived, only by a written instrument executed by each Party or, in the case of waiver, by the Party or Parties waiving compliance.  The delay or failure of either Party at any time or times to require performance of any provisions shall in no manner affect the rights at a later time to enforce the same.  No waiver by either Party of any condition or of the breach of any term contained in this Agreement, whether by conduct, or otherwise, in any one or more instances, shall be deemed to be, or considered as, a further or continuing waiver of any such condition or of the breach of such term or any other term of this Agreement.

13.8No Third Party Beneficiaries.  Except as set forth in Sections 12.1, 12.2 and 12.3, no Third Party (including, without limitation, employees of either Party) shall have or acquire any rights by reason of this Agreement.

13.9Purposes and Scope.  The Parties hereto understand and agree that this Collaboration is limited to the activities, rights and obligations as set forth in this Agreement.  Nothing in this Agreement shall be construed (a) to create or imply a general partnership between the Parties, (b) to make either Party the agent of the other for any purpose, (c) to alter, amend, supersede or vitiate any other arrangements between the Parties with respect to any subject matters not covered hereunder, (d) to give either Party the right to bind the other, (e) to create any duties or obligations between the Parties except as expressly set forth herein, or (f) to grant any direct or implied licenses or any other right other than as expressly set forth herein.

13.10Assignment and Successors.  Neither this Agreement nor any obligation of a Party hereunder may be assigned by either Party without the consent of the other which shall not be unreasonably withheld, except that each Party may assign this Agreement and the rights,

80

obligations and interests of such Party, in whole or in part, to any of its Affiliates, to any purchaser of all or substantially all of its assets or all or substantially all of its assets to which this Agreement relates or to any successor corporation resulting from any merger, consolidation, share exchange or other similar transaction.

13.11Force Majeure.  Neither DS nor ARQULE shall be liable for failure of or delay in performing obligations set forth in this Agreement, and neither shall be deemed in breach of its obligations, if such failure or delay is due to a Force Majeure.  In event of such Force Majeure, the Party affected shall use reasonable efforts to cure or overcome the same and resume performance of its obligations hereunder.

13.12Interpretation.  The Parties hereto acknowledge and agree that: (a) each Party and its counsel reviewed and negotiated the terms and provisions of this Agreement and have contributed to its revision; (b) the rule of construction to the effect that any ambiguities are resolved against the drafting Party shall not be employed in the interpretation of this Agreement; and (c) the terms and provisions of this Agreement shall be construed fairly as to each Party and not in a favor of or against either Party, regardless of which Party was generally responsible for the preparation of this Agreement.

13.13Integration; Severability.  This Agreement is the entire agreement with respect to the subject matter hereof and supersedes all other agreements and understandings between the Parties with respect to such subject matter.  Notwithstanding the foregoing, this Agreement shall not supersede the Confidentiality Disclosure Agreement dated February 24, 2008 (the “Prior CDA”) between ARQULE and DS, which shall continue to be in full force and effect in accordance with its terms and conditions.  All disclosures and information from ARQULE to DS prior to the Effective Date shall be governed by the prior CDA, and all disclosures and information from ARQULE to DS after the Effective Date shall be governed by this Agreement.  If any provision of this Agreement is or becomes invalid or is ruled invalid by any court of competent jurisdiction or is deemed unenforceable, it is the intention of the Parties that the remainder of the Agreement shall not be affected.

13.14Further Assurances.  Each of ARQULE and DS agrees to duly execute and deliver, or cause to be duly executed and delivered, such further instruments and do and cause to

81

be done such further acts and things, including, without limitation, the filing of such additional assignments, agreements, documents and instruments, as the other Party may at any time and from time to time reasonably request in connection with this Agreement or to carry out more effectively the provisions and purposes of, or to better assure and confer unto such other Party its rights and remedies under, this Agreement.

[Remainder of page intentionally left blank.]

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IN WITNESS WHEREOF, the Parties have caused this Agreement to be executed by their duly authorized representatives.

ARQULE, INC.
By:	/s/ Paolo Pucci
Name: Paolo Pucci
Title: Chief Executive Officer
DAIICHI SANKYO CO., LTD.
By:	/s/ Kazuhiro Hirokawa
Name: Kazuhiro Hirokawa
Title: Executive Officer,
Head of R&D Division

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SCHEDULE 1

RESEARCH STAGES/ADVANCEMENT CRITERIA

Research Stage:  *

Activities:

·*

·*

·*

·*

Advancement Criteria:

·*

Research Stage:  Hit to Lead Activities

Activities:

·*

·*

·*

·*

Advancement Criteria:

·*

·*

·*

1-1

Research Stage:  Lead Optimization

Activities:

·*

·*

·*

Advancement Criteria:

·*

·*

·*

·*

·*

Research Stage:  *

Activities:

·*

·*

Advancement Criteria:

·*

1-2

SCHEDULE 2

DS TARGET LIST

*

*

2-1

SCHEDULE 3

MILESTONE AND ROYALTY PROVISIONS TO BE NEGOTIATED PURSUANT TO SECTION 5.4 AND

INCLUDED IN LICENSE AGREEMENTS

1.Milestones.

(a)Clinical Development & Sales Milestones.  Within * (*) days after the occurrence of the following milestone events, DS shall make non-refundable, non-creditable (except as provided below) milestone payments for events and in amounts to be agreed pursuant to Section 5.4 of the Agreement to ARQULE for each Licensed Product that is Developed and Commercialized under a License Agreement:

Milestone Event	Milestone Payment
*	Number of indications and corresponding payments to be determined
*	Number of indications and corresponding payments to be determined
*	Number of indications and corresponding payments to be determined
*	Tiered sales brackets and corresponding milestone payments to be determined.

2.Determination that Milestone Events have Occurred.  DS shall provide ARQULE with written notice within ten (10) days of each occurrence of a milestone event set forth above.  In the event that, notwithstanding the fact that DS has not given such a notice, ARQULE believes any such milestone event has occurred, it shall so notify DS in writing and shall provide to DS data, documentation or other information that supports its belief.  Any dispute under this

3-1

Section that relates to whether or not a milestone event has occurred shall be referred to the JEC to be resolved in accordance with Section 2.1.5 of the Agreement.

3.Crediting of Milestone Payments for Backup Compounds.  In the event that any milestone payment is made for a Licensed Product, the Development and/or Commercialization of such Licensed Product is subsequently terminated and a Backup Compound with respect to such Licensed Product is Developed and/or Commercialized in lieu of such Licensed Product, then all such previously paid milestone payments paid with respect to such terminated Licensed Product shall be creditable against the same milestone payments due and payable for such Backup Compound.

4.Payment of Royalties.

(a)Royalty Rates.  DS shall pay ARQULE a royalty based on Annual Net Sales of each Licensed Product in each Calendar Year (or partial Calendar Year) commencing with the First Commercial Sale of such Licensed Product in any country in the Territory and ending upon the last day of the last Royalty Term for such Licensed Product at royalty rates and for tiers of Net Sales to be agreed pursuant to Section 5.4 of the Agreement.

(b)Royalty Rate Adjustments.  Notwithstanding anything to the contrary in Section 4(a) of this Schedule 3, if any Licensed Product is sold in a country and is only covered by a Valid Claim that is included in the Joint Patent Rights, then, during the period commencing on the * (*) anniversary of the First Commercial Sale of such Licensed Product in such country and continuing until the last day of the applicable Royalty Term with respect to such Licensed Product in such country, the royalty rates in such country shall be reduced by * percent (*%) of the rates set forth above.  If the royalty rate on a Licensed Product is reduced in a country under this Section 4(b) and is subsequently covered by a Valid Claim under the Licensed Patent Rights in such country, the full royalty rates otherwise applicable shall be reinstated for so long as such Valid Claim covers the Licensed Product during the remainder of the applicable Royalty Term.

(c)Generic Licensed Products.  In the event that one or more Third Parties sell a Generic Licensed Product (as defined below) in any country in which a Licensed Product is then being sold by DS, then, (i) during any Calendar Quarter in which sales of the Generic Licensed Product

3-2

by such Third Parties are equal to or greater than * percent (*%) but less than * percent (*%) of aggregate unit sales of Licensed Products and Generic Licensed Products in such country (as measured by prescriptions or other similar information available from a Third Party Data Provider and applicable to such country) the applicable royalties in effect with respect to such Licensed Product in such country as specified in Section 4(a) of this Schedule 3 shall be reduced by * percent (*%) and (ii) during any Calendar Quarter in which sales of the Generic Licensed Products by such Third Parties are equal to or greater than * percent (*%) of aggregate unit sales of Licensed Products and Generic Licensed Products in such country (as measured by prescriptions or other similar information available from a Third Party Data Provider and applicable to such country) the applicable royalties in effect with respect to such Licensed Product in such country as specified in Section 4(a) of this Schedule 3 shall be reduced by * percent (*%).  Notwithstanding the foregoing, (i) DS’s obligation to pay royalties at * percent (*%) of the applicable royalty rates shall be reinstated on the first day of the Calendar Quarter immediately following the Calendar Quarter in which sales of such Generic Licensed Products account for less than * percent (*%) but more than * percent (*%) of aggregate unit sales of Licensed Products and Generic Licensed Products in such country and (ii) DS’s obligation to pay royalties at the full royalty rates shall be reinstated on the first day of the Calendar Quarter immediately following the Calendar Quarter in which sales of such Generic Licensed Products account for * percent (*%) or less of aggregate unit sales of Licensed Products and Generic Licensed Products in such country.  Notwithstanding the foregoing, the provisions of this Section 4(c) shall not apply for any country in which DS has not filed for patent protection for the applicable Licensed Product or has not otherwise used commercially reasonable efforts to secure patent protection for such Licensed Product.  For purposes of this Section 4(c), a “Generic Licensed Product” means a pharmaceutical product that contains the same active ingredient as a Licensed Product and is bioequivalent to such Licensed Product; provided, that, any product sold by DS or any Affiliate or licensee of DS shall not be a Generic Licensed Product for purposes of this Agreement.

3-3

EX-10.23

Exhibit 10.23

Execution Copy

LICENSE, CO-DEVELOPMENT

AND CO-COMMERCIALIZATION AGREEMENT

BY AND BETWEEN

ARQULE, INC.

and

DAIICHI SANKYO CO., LTD

December 18, 2008

[*] = CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.  CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.  OMITTED TEXT IS INDICATED BY AN “*”.

TABLE OF CONTENTS

			Page
1.	DEFINITIONS		1
2.	ADMINISTRATION OF THE COLLABORATION		27
	2.1	Joint Steering Committee	27
	2.2	Joint Development Committee	30
	2.3	Joint Life Cycle Management Committee	33
	2.4	Joint Finance Committee	34
	2.5	US Joint Marketing Committee	34
	2.6	Alliance Managers	38
	2.7	Decision Making	39
	2.8	Appointment Not an Obligation; No Breach	39
3.	DEVELOPMENT AND COMMERCIALIZATION OF PRODUCTS		40
	3.1	Implementation of Development Program	40
	3.2	Identification of Back-Up Compounds	43
	3.3	Supply of Licensed Products for Development and Commercialization	43
	3.4	Supply of Proprietary Materials	44
	3.5	Licensed Product Commercialization	45
	3.6	Development and Commercialization Diligence	46
	3.7	Compliance	46
	3.8	Cooperation	47
	3.9	Global Commercialization Coordination	47
	3.10	Reports; Information; Updates	47
	3.11	Development Cost Sharing; Reconciliation	51
	3.12	Co-Commercialization Option	53
	3.13	Expansion of the Field	57
	3.14	Additional Cancer Indications	58
	3.15	Additional Phase 5 Clinical Trials	60
4.	PAYMENTS		60
	4.1	Up-front Fee	60
	4.2	Milestone Payments	61
	4.3	Payment of Royalties; Royalty Rates; Accounting and Records	64
5.	CONFIDENTIALITY		69
	5.1	Confidentiality	69
	5.2	Publicity	70
	5.3	Publications and Presentations	71
	5.4	Prior Approved Publication	72
	5.5	Mechanism of Inhibition Information	72
6.	LICENSE GRANTS; EXCLUSIVITY		72
	6.1	Licenses	72

i

	6.2	Right to Sublicense	74
	6.3	No Other Rights	75
	6.4	Exclusivity	75
	6.5	Use of Third Party Technology	76
7.	INTELLECTUAL PROPERTY RIGHTS		77
	7.1	ARQULE Intellectual Property Rights	77
	7.2	DS Intellectual Property Rights	77
	7.3	Joint Intellectual Property Rights	77
	7.4	Patent Coordinators	78
	7.5	Inventorship	78
8.	FILING, PROSECUTION AND MAINTENANCE OF PATENT RIGHTS		79
	8.1	Patent Filing, Prosecution and Maintenance	79
	8.2	Legal Actions	82
9.	TERM AND TERMINATION		86
	9.1	Term	86
	9.2	Termination	86
	9.3	Consequences of Termination of Agreement	88
	9.4	Surviving Provisions	92
10.	REPRESENTATIONS AND WARRANTIES		92
	10.1	Mutual Representations and Warranties	92
	10.2	Additional Representations of ARQULE	93
	10.3	Covenants of DS Relating to Existing License Agreement	94
11.	INDEMNIFICATION		95
	11.1	Indemnification of ARQULE by DS	95
	11.2	Indemnification of DS by ARQULE	95
	11.3	Conditions to Indemnification	96
	11.4	Warranty Disclaimer	96
	11.5	No Warranty of Success	96
	11.6	Limited Liability	97
12.	MISCELLANEOUS		97
	12.1	Arbitration	97
	12.2	Notices	98
	12.3	Governing Law	99
	12.4	Binding Effect	100
	12.5	Headings	100
	12.6	Counterparts	100
	12.7	Amendment; Waiver	100
	12.8	No Third Party Beneficiaries	100
	12.9	Purposes and Scope	100
	12.10	Assignment and Successors	101
	12.11	Force Majeure	101

ii

12.12	Interpretation	101
12.13	Integration; Severability	101
12.14	Further Assurances	102
12.15	Effective Date	102

List of Schedules

Schedule 1	Description of ARQ 197
Schedule 2	ARQULE Patent Rights
Schedule 3	Material Terms to be Included in Co-Commercialization Agreement

iii

LICENSE, CO-DEVELOPMENT AND CO-COMMERCIALIZATION AGREEMENT

This LICENSE, CO-DEVELOPMENT AND CO-COMMERCIALIZATION AGREEMENT (this “Agreement”) is entered into as of December 18, 2008 (the “Execution Date”) and effective as of the Effective Date (as defined below), by and between ArQule, Inc., a Delaware corporation with offices at 19 Presidential Way, Woburn, Massachusetts 01801 (“ARQULE”), and Daiichi Sankyo Co., Ltd, a Japanese company organized under the laws of Japan with offices at 3-5-1 Nihonbashi Honcho, Chuo-ku, Tokyo 103-8426, Japan (“DS”).  Each of DS and ARQULE is sometimes referred to individually herein as a “Party” and collectively as the “Parties.”

WHEREAS, ARQULE has developed and controls certain technology and proprietary materials related to its proprietary compound ARQ 197 and is engaged in the research, development and commercialization of human therapeutics; and

WHEREAS, DS is engaged in the research, development and commercialization of human therapeutics; and

WHEREAS, the Parties desire to enter into a collaboration for the purpose of developing and commercializing products containing ARQ 197 for the prevention, diagnosis, delay and treatment of cancer.

NOW, THEREFORE, in consideration of the mutual covenants contained herein, and for other good and valuable consideration, the Parties hereto, intending to be legally bound, hereby agree as follows:

1.DEFINITIONS

Whenever used in this Agreement with an initial capital letter, the terms defined in this Article 1 and in Schedule 3 attached hereto shall have the meanings specified.

1.1“AAA” means the American Arbitration Association.

1.2“Acceptance” means, with respect to a Drug Approval Application filed for a Product (a) in the United States, the receipt of written notice from the FDA in accordance with

1

21 CFR 314.101(a)(2) that such Drug Approval Application is officially “filed”, and (b) in the European Union, receipt of written notice of acceptance by the EMEA of such Drug Approval Application for filing under the centralized European procedure; provided, that, if the centralized filing procedure is not used, then Acceptance shall be determined upon the acceptance of such Drug Approval Application by the applicable Regulatory Authority in any Major European Country.

1.3“Adverse Event” means any unfavorable and unintended change in the structure (signs), function (symptoms), or chemistry (laboratory data), of the body temporally associated with the use of a Licensed Product, whether or not considered related to the use of such Licensed Product.  Changes resulting from normal growth and development which do not vary significantly in frequency or severity from expected levels are not Adverse Events.

1.4“Affiliate” means, with respect to any Person, any other Person that, directly or indirectly through one or more affiliates, controls, or is controlled by, or is under common control with, such Person.  For purposes of this definition, “control” means (a) ownership of fifty percent (50%) or more of the shares of stock entitled to vote for the election of directors in the case of a corporation, or fifty percent (50%) or more of the equity interests in the case of any other type of legal entity, (b) status as a general partner in any partnership, or (c) any other arrangement whereby a Person controls or has the right to control the board of directors of a corporation or equivalent governing body of an entity other than a corporation.

1.5“Annual Net Sales” means, with respect to any Calendar Year, the aggregate amount of the Net Sales for such Calendar Year.

1.6“API” means the active pharmaceutical ingredient known as ARQ 197 and/or any other Collaboration Compound Developed and Commercialized under this Agreement.

1.7“Applicable Laws” means any Federal, state, local, national and supra-national laws, statutes, rules and regulations, including any rules, regulations, guidance, guidelines or requirements of Regulatory Authorities, national securities exchanges or securities listing organizations, that are in effect from time to time during the Term and applicable to a particular activity hereunder.

2

1.8“Approved Non-Cancer Indication” means any Non-Cancer Indication which the Parties agree to add to the Field pursuant to Section 3.13.

1.9“ARQ 197” means the c-Met Inhibitor Controlled by ARQULE and described more fully on Schedule 1 attached hereto.

1.10“ARQULE Background Technology” means any Technology that is used by ARQULE, or provided by ARQULE for use, in the Development Program or that is disclosed by ARQULE to DS or of which DS otherwise becomes aware solely as a result of this Agreement and that is (a) Controlled by ARQULE as of the Effective Date, or (b) conceived or first reduced to practice by employees of, or consultants to, ARQULE after the Effective Date other than in the conduct of ARQULE Development Activities and without the use in any material respect of any DS Technology, DS Patent Rights or DS Materials.  For purposes of clarity, ARQULE Background Technology shall not include ARQULE Program Technology or ARQULE’s interest in Joint Technology, but shall include all Technology relating to the mechanism of inhibition of ARQ 197.

1.11“ARQULE Co-Commercialization Activities” means, with respect to each Co-Commercialized Licensed Product, the Commercialization activities specified to be conducted by ARQULE in the Co-Commercialization Territory in any Product Commercialization Plan applicable thereto (or amendment thereto) and/or in the Co-Commercialization Agreement.

1.12“ARQULE Cost-Sharing Percentage” means fifty percent (50%).

1.13“ARQULE Decision” means all decisions concerning *.

1.14“ARQULE Development Activities” means all Development activities (including without limitation all Development activities conducted with respect to Co-Commercialized Licensed Products) specified to be conducted by ARQULE in any Global Development Plan (or any amendment thereto), as well as all Development activities conducted by ARQULE not specified in a Global Development Plan but approved by the JSC as a Unanimous Decision.

3

1.15“ARQULE Materials” means any Proprietary Materials that are Controlled by ARQULE and used by ARQULE, or provided by ARQULE for use, in the Development Program.  For purposes of clarity, ARQULE Materials shall include the Collaboration Compounds.

1.16“ARQULE Patent Rights” means any Patent Rights that contain one or more claims that cover ARQULE Technology, including, but not limited to, the Patent Rights listed in Schedule 2 attached hereto.  For purposes of clarity, ARQULE Patent Rights includes all ARQULE Program Patent Rights.

1.17“ARQULE Program Patent Rights” means any Patent Rights Controlled by ARQULE that contain one or more claims that cover ARQULE Program Technology.

1.18“ARQULE Program Technology” means (a) any Product Technology; (b) any Program Technology that is conceived or first reduced to practice by employees of, or consultants to, ARQULE, alone or jointly with any Third Party, without the use in any material respect of any DS Technology, DS Patent Rights, DS Materials or Joint Technology; and (c) all Collaboration Compounds.

1.19“ARQULE Technology” means, collectively, ARQULE Background Technology and ARQULE Program Technology.

1.20“Asian Territory” means Japan, China (including Hong Kong), South Korea and Taiwan.

1.21“Back-Up Compound” means any c-MET Inhibitor * or any other c-MET Inhibitor that has been discovered or, is discovered during the Term, by ARQULE, DS or jointly by ARQULE and DS, (as designated by the JSC, pursuant to Section 3.2, to use Commercially Reasonable Efforts to deliver a Back-Up Compound) and that is designated by the JSC for further Development as a Back-Up Compound pursuant to Section 3.2.

1.22“Business Day” means any day on which banking institutions in New York, New York and Tokyo are open for business.

4

1.23“Calendar Quarter” means the period beginning on the Effective Date and ending on the last day of the calendar quarter in which the Effective Date falls, and thereafter each successive period of three (3) consecutive calendar months ending on March 31, June 30, September 30 or December 31.

1.24“Calendar Year” means each successive period of twelve (12) months commencing on January 1 and ending on December 31.

1.25“Cancer Indication” means any and all Indications for cancer or metastasis.

1.26“Challenge” means any challenge to the validity or enforceability of any of the ARQULE Patent Rights, including without limitation by (a) filing a declaratory judgment action in which any of the ARQULE Patent Rights is alleged to be invalid or unenforceable; (b) citing prior art pursuant to 35 U.S.C. §301, filing a request for re-examination of any of the ARQULE Patent Rights pursuant to 35 U.S.C. §302 and/or §311, or provoking an interference with an application for any of the ARQULE Patent Rights pursuant to 35 U.S.C. §135; or (c) filing or commencing any re-examination, opposition, cancellation, nullity or similar proceedings against any of the ARQULE Patent Rights in any country.

1.27“Clinical Trial” means a clinical study of a Licensed Product involving the administration of such Licensed Product to patients for any Targeted Indication, and includes any Phase 1 Clinical Trial, Phase 2 Clinical Trial, Phase 3 Clinical Trial, Phase 4 Clinical Trial and Phase 5 Clinical Trial, as applicable.

1.28“c-MET Inhibitor” means ARQ 197 and any therapeutic agent that binds the c-MET RTK and inhibits *.

1.29“Co-Commercialize” or “Co-Commercialization Activities” means with respect to any Co-Commercialized Licensed Product, the joint Detailing of such Co-Commercialized Licensed Product in the Co-Commercialization Territory using a coordinated sales force consisting of representatives of both Parties.

1.30“Co-Commercialization Territory” means the U.S. Territory.

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1.31“Collaboration” means the alliance of ARQULE and DS established pursuant to this Agreement for the purposes of Developing Collaboration Compounds and Licensed Products and Commercializing Licensed Products in the Field in the Territory.

1.32“Collaboration Compound” means, collectively, ARQ 197 and any Back-Up Compound, as well as any * or other compositions consisting of ARQ 197 or any Back-Up Compound *.

1.33“Commercially Reasonable Efforts” means (a) with respect to activities of ARQULE in the Development Program and/or in the Commercialization of any Co-Commercialized Licensed Product, the efforts and resources comparable to those undertaken by ARQULE in pursuing intellectual property protection and the research, discovery or commercialization of proprietary materials and the development of product candidates, as applicable, that are not subject to the Collaboration and that are at an equivalent stage of development or commercialization and have similar market potential and are at a similar stage in their lifecycle; and (b) with respect to activities of DS in the Development Program, the Development of a particular Licensed Product or the Commercialization of a particular Licensed Product (including any Co-Commercialized Licensed Product), the efforts and resources comparable to those undertaken by DS in pursuing intellectual property protection and development of product candidates and commercialization of products, as applicable, that are not subject to the Collaboration and that are at an equivalent stage of development or commercialization and have similar market potential and are at a similar stage in their lifecycle.  For purposes of both (a) and (b) above, all relevant factors as measured by the facts and circumstances at the time such efforts are due shall be taken into account, including, as applicable and without limitation, mechanism of action; efficacy and safety; product profile; actual or anticipated Regulatory Authority approved labeling; and the nature and extent of market exclusivity (including patent coverage, proprietary position and regulatory exclusivity; cost, time required for and likelihood of obtaining Commercialization Regulatory Approval; competitiveness of alternative products and market conditions; actual or projected profitability and availability of capacity to manufacture and supply for commercial sale).

6

1.34“Commercialization” or “Commercialize” means any and all activities directed to the commercialization of a Licensed Product after Commercialization Regulatory Approval has been obtained, including marketing, development and scale-up of processes for Manufacture of API and Licensed Product for commercial sale, Manufacturing for commercial sale, promoting, detailing, distributing, offering to sell and selling a Licensed Product, importing a Licensed Product for sale under the Product Trademarks selected by DS, conducting post-marketing human clinical studies and interacting with Regulatory Authorities regarding the foregoing.  When used as a verb, “to Commercialize” and “Commercializing” means to engage in Commercialization and “Commercialized” has a corresponding meaning.

1.35“Commercialization Regulatory Approval” means, with respect to any Licensed Product, the Regulatory Approval required by Applicable Laws to sell such Licensed Product for use for a Targeted Indication in the Field in a country or region in the Territory, as well as, to the extent required by Applicable Laws for the sale of the Licensed Product, Pricing Approvals and government reimbursement approvals.  For purposes of clarity, (a) “Commercialization Regulatory Approval” in the United States means final approval of an NDA or sNDA permitting marketing of the applicable Licensed Product in interstate commerce in the United States; (b) “Commercialization Regulatory Approval” in the European Union means marketing authorization for the applicable Licensed Product granted either by a Regulatory Authority in any Major European Country or by the EMEA pursuant to Council Directive 2001/83/EC, as amended, or Council Regulation 2309/93/EEC, as amended, together, if required by Applicable Laws, with the first Price approval and government reimbursement approval for the applicable Licensed Product granted by a Regulatory Authority in any Major European Country; and (c) “Commercialization Regulatory Approval” in any country outside of the United States or the European Union means the equivalent approval in such country.

1.36“Committee” means, collectively, the JSC and the JDC, or any other committee or sub-committee to be established hereunder.

1.37“Completion” means, with respect to any Clinical Trial, the date on which all material data reasonably expected to be derived therefrom has been generated and the final study report with respect thereto has been finalized.

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1.38“Confidential Information” means (a) with respect to ARQULE, all tangible embodiments of ARQULE Technology, (b) with respect to DS, all tangible embodiments of DS Technology and (c) with respect to each Party, (i) all tangible embodiments of Joint Technology and (ii) all information, Technology and Proprietary Materials that are disclosed or provided by or on behalf of such Party (the “disclosing Party”) to the other Party (the “receiving Party”) or to any of the receiving Party’s employees, consultants, Affiliates, sublicensees or Third Party subcontractors hereunder or of which the receiving Party or any of its employees, consultants, Affiliates, sublicensees or Third Party subcontractors has become aware or hereafter becomes aware solely as a result of this Agreement; provided, that, none of the foregoing shall be Confidential Information if: (A) as of the date of disclosure, it is known to the receiving Party or its Affiliates as demonstrated by contemporaneous credible written documentation, other than by virtue of a prior confidential disclosure to such receiving Party; (B) as of the date of disclosure it is in the public domain, or it subsequently enters the public domain through no fault of the receiving Party; (C) it is obtained by the receiving Party from a Third Party having a lawful right to make such disclosure free from any obligation of confidentiality to the disclosing Party; or (D) it is independently developed by or for the receiving Party without reference to or use of any Confidential Information of the disclosing Party as demonstrated by contemporaneous credible written documentation.  For purposes of clarity, unless excluded from Confidential Information pursuant to the proviso at the end of the preceding sentence, any scientific, technical or financial information of a Party that is disclosed at any meeting of any Committee or disclosed through an audit report shall constitute Confidential Information of the disclosing Party.  Subject to the rights of the Parties to make disclosures as set forth in Article 5, the terms of this Agreement shall constitute Confidential Information of each Party.  Notwithstanding the proviso (A), (C) and (D) at the end of the third preceding sentence, all Mechanism of Inhibition Information shall be ARQULE Confidential Information.

1.39“Control” or “Controlled” means (a) with respect to Technology (other than Proprietary Materials) or Patent Rights, the possession by a Party of the right to grant a license or sublicense to such Technology or Patent Rights as provided herein without the payment of additional consideration to, and without violating the terms of, any agreement or arrangement with, any Third Party and without violating any Applicable Laws and (b) with respect to Proprietary Materials, the possession by a Party of the right to supply such Proprietary Materials

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to the other Party as provided herein without the payment of additional consideration to, and without violating the terms of any agreement or arrangement with, any Third Party and without violating any Applicable Laws.

1.40“Detail” means with respect to a Co-Commercialized Licensed Product, an interactive, live, face-to-face contact of a Representative within the Co-Commercialization Territory with a medical professional with prescribing authority or other individuals or entities that have a significant impact or influence on prescribing decisions, in an effort to increase physician prescribing preferences of such Co-Commercialized Licensed Product for its approved uses within the Co-Commercialization Territory.  When used as an adjective, “Detailing” means of or related to performing Details.

1.41“Development” or “Develop” means, with respect to each Collaboration Compound and/or Licensed Product (including without limitation any Co-Commercialized Licensed Product), all non-clinical and clinical activities performed in order to develop formulations or forms of a Licensed Product and/or to obtain Regulatory Approval of a Licensed Product (including without limitation any Co-Commercialized Licensed Product) derived from such Collaboration Compound or Licensed Product in accordance with this Agreement.  For purposes of clarity, these activities include, without limitation, in vivo animal testing, preclinical safety testing, test method development and stability testing, regulatory toxicology studies, formulation, process development for Manufacturing of API and Licensed Product for use in Clinical Trials, scale-up of processes for Manufacturing of API and Licensed Product for use in Clinical Trials, quality assurance/quality control development, statistical analysis and report writing, clinical trial design and operations, the conduct of Clinical Trials (including the Manufacturing API and Licensed Product for use in Clinical Trials), regulatory toxicology studies, drug metabolism and pharmacokinetics studies, preparing and filing Drug Approval Applications, the conduct of Regulatory Activities related to the foregoing, consultation to key opinion leaders or outside experts (e.g. KOL meeting), and certain activities to be performed by the commercial function of the Parties for supporting Development (e.g., market research).  When used as a verb, “Developing” means to engage in Development and “Developed” has a corresponding meaning.

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1.42“Development Costs” means all out-of-pocket costs and internal costs incurred by a Party (or for its account by an Affiliate or a Third Party) on or after the earlier of the Execution Date or January 1, 2009 that are generally consistent with the respective Development activities of such Party in the applicable Global Development Plan and are attributable to the Development of a Licensed Product.  For purposes of clarity, Development Costs includes all External Development Costs and all Other Development Costs.

1.43“Development Program” means the Development activities to be conducted during the Term with respect to each Collaboration Compound and Licensed Product (including without limitation Co-Commercialized Licensed Products) pursuant to the Global Development Plans, with the objective of developing such Collaboration Compound into a Licensed Product.

1.44“DMF” means a Drug Master File maintained with the FDA or its equivalent maintained with a Regulatory Authority in other countries within the Territory.

1.45“Drug Approval Application” means, with respect to each Licensed Product in a particular country or region, an application for Commercialization Regulatory Approval for such Licensed Product in such country or region, including without limitation: (a) an NDA or sNDA; (b) a counterpart of an NDA or sNDA in any country or region in the Territory; and (c) all supplements and amendments to any of the foregoing.

1.46“DS Background Technology” means any Technology that is used by DS, or provided by DS for use, in the Development Program or that is disclosed by DS to ARQULE or of which ARQULE otherwise becomes aware solely as a result of this Agreement and that is (a) Controlled by DS as of the Effective Date, or (b) conceived or first reduced to practice by employees of, or consultants to, DS after the Effective Date other than in the conduct of DS Development Activities and without the use in any material respect of any Collaboration Compounds, ARQULE Technology, ARQULE Patent Rights or ARQULE Materials.  For purposes of clarity, DS Background Technology shall not include DS Program Technology or DS’s interest in Joint Technology.

1.47“DS Cost-Sharing Percentage” means fifty percent (50%).

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1.48“DS Decision” means any decision with respect to the *.

1.49“DS Development Activities” means all Development activities (including without limitation all Development activities conducted with respect to Co-Commercialized Licensed Products) specified to be conducted by DS in any Global Development Plan (or any amendment thereto), as well as all Development activities conducted by DS not specified in a Global Development Plan but approved by the JSC as a Unanimous Decision.

1.50“DS Materials” means any Proprietary Materials that are Controlled by DS and used by DS, or provided by DS for use, in the Development Program.

1.51“DS Patent Rights” means any Patent Rights Controlled by DS that contain one or more claims that cover DS Technology.

1.52“DS Program Patent Rights” means any Patent Rights Controlled by DS that contain one or more claims that cover DS Program Technology.

1.53“DS Program Technology” means any Program Technology that (a) is not ARQULE Program Technology or Joint Technology and (b) is conceived or first reduced to practice by employees of, or consultants to, DS, alone or jointly with any Third Party, without the use in any material respect of any ARQULE Technology, ARQULE Patent Rights, ARQULE Materials or Joint Technology.

1.54“DS Technology” means, collectively, DS Background Technology and DS Program Technology.

1.55“Effective Date” means the date of satisfaction of the HSR Conditions with respect to the transactions contemplated by this Agreement.

1.56“EMEA” means the European Medicines Agency or any successor agency or authority thereto.

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1.57“European Union” or “EU” means the countries of the European Union, as the European Union is constituted as of the Effective Date and as it may be expanded from time to time during the Term.

1.58“Execution Date” means the date set forth in the first recital above.

1.59“Existing License Agreement” means the License Agreement dated as of April 27, 2007 by and between ARQULE and Kyowa with respect to the Asian Territory.

1.60“External Development Costs” means any out-of-pocket external Development Costs incurred by a Party (or for its account by an Affiliate) on or after the earlier of the Execution Date or January 1, 2009 and that are payable to any Third Party.  For purposes of clarity, External Development Costs (a) shall only include the actual amounts paid by a Party to a Third Party for specific Development activities conducted by such Third Party applicable to a Licensed Product, including, without limitation all filing fees required for, and other costs associated with, the conduct of Regulatory Activities and Clinical Trials applicable to any Licensed Product; and (b) shall not include any internal costs incurred by a Party (or for its account by an Affiliate) on or after the earlier of the Execution Date or January 1, 2009 that are attributable to the Development of a Licensed Product.

1.61“FDA” means the United States Food and Drug Administration or any successor agency or authority thereto.

1.62“FDCA” means the United States Federal Food, Drug, and Cosmetic Act, as amended.

1.63“Field” means the treatment and prevention in humans of all Targeted Indications.

1.64“First Co-Commercialization Option Period” means, with respect to each Licensed Product, the period commencing on the Effective Date and continuing until * (*) days following the date that the Last Patient/Last Visit Notice is received by ARQULE.

1.65“First Commercial Sale” means, with respect to a Licensed Product in a country in the Territory, the first sale, transfer or disposition for value or for an end user of such Licensed

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Product in such country.  For purposes of clarity, the use of any Licensed Product in Clinical Trials or the disposal or transfer of Licensed Products for a bona fide charitable purpose or a commercially reasonable sampling program, shall not be deemed to be a sale, transfer or disposition for value or for an end user, with respect to a Licensed Product in a country in the Territory.

1.66“Force Majeure” means any occurrence beyond the reasonable control of a Party that (a) prevents or substantially interferes with the performance by such Party of any of its obligations hereunder and (b) occurs by reason of any act of God, flood, fire, explosion, earthquake, strike, lockout, labor dispute, casualty or accident, or war, revolution, civil commotion, act of terrorism, blockage or embargo, or any injunction, law, order, proclamation, regulation, ordinance, demand or requirement of any government or of any subdivision, authority or representative of any such government.

1.67“Global Development Plan” means, with respect to each Collaboration Compound and Licensed Product, the written plan for, and budget applicable to, the Development activities to be conducted for such Collaboration Compound and Licensed Product for the Territory, as such written plan may be amended, modified or updated in accordance with Section 3.1.2.

1.68“Global Pricing Policy” means the establishment of the range of published prices for Licensed Products throughout the Territory.

1.69“GLP” means the then current Good Laboratory Practice Standards promulgated or endorsed by the FDA or in the case of foreign jurisdictions, comparable regulatory standards promulgated or endorsed by the applicable Regulatory Authority, including those procedures contemplated by any Regulatory Filings.

1.70“GMP” means current Good Manufacturing Practices that apply to the Manufacture of API and Clinical Product, including, without limitation, the United States regulations set forth under Title 21 of the United States Code of Federal Regulations, parts 210, 211 and 600-680, as may be amended from time-to-time, as well as all applicable guidance published from time-to-time by the FDA.

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1.71“Hatch-Waxman Act” means the Drug Price Competition and Patent Term Restoration Act of 1984, as amended.

1.72“HSR Act” means the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended.

1.73“IND” means: (a) an Investigational New Drug Application as defined in the FDCA and regulations promulgated thereunder or any successor application or procedure required to initiate clinical testing of a Licensed Product in humans in the United States; (b) a counterpart of an Investigational New Drug Application that is required in any other country or region in the Territory before beginning clinical testing of a Licensed Product in humans in such country or region; and (c) all supplements and amendments to any of the foregoing.

1.74“Indication” means any human disease or condition which can be treated, prevented, cured or the progression of which can be delayed.  For purposes of clarity, distinctions between human indications, diseases or conditions with respect to a Licensed Product shall be made by reference to the World Health Organization International Classification of Diseases, version 10 (as revised and updated, the “ICD10”).

1.75“Initiation” means, with respect to a Clinical Trial, the first date that a subject or patient is dosed in such Clinical Trial.

1.76“Joint Decision” means (a) any decision as set forth in Section 3.1.4(b); (b) any decision set forth in Section 3.14; (c) any decision set forth in Section 3.15; and (d) any other decision designated as a Joint Decision herein.

1.77“Joint Development Committee” or “JDC” means the committee composed of ARQULE and DS representatives established pursuant to Section 2.2.

1.78“Joint Finance Committee” or “JFC” means the committee composed of ARQULE and DS representatives established pursuant to Section 2.4.

1.79“Joint Life Cycle Management Committee” or “JLCMC” means the committee composed of ARQULE and DS representatives established pursuant to Section 2.3.

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1.80“Joint Patent Rights” means Patent Rights that contain one or more claims that cover Joint Technology.

1.81“Joint Steering Committee” or “JSC” means the committee composed of ARQULE and DS representatives established pursuant to Section 2.1.

1.82“Joint Technology” means any Program Technology, other than Product Technology and Collaboration Compounds, that is (a) jointly conceived or reduced to practice by one or more employees of or consultants to DS and one or more employees of or consultants to ARQULE, (b) conceived or first reduced to practice solely by one or more employees of, or consultants to, a Party resulting from the use in any material respect of any (i) Joint Technology or (ii) Patent Rights, Technology or Proprietary Materials Controlled by the other Party.

1.83“Key Regulatory Filings” means (a) any IND, NDA, sNDA, other Drug Approval Applications, application for designation as an “Orphan Product(s)” under the Orphan Drug Act, for “Fast Track” status under Section 506 of the FDCA (21 U.S.C. § 356) or for a Special Protocol Assessment under Section 505(b)(4)(B) and (C) of the FDCA (21 U.S.C. § 355(b)(4)(B)) and counterparts to the foregoing in the EU or any Major European Country, periodic safety update reports, and briefing documents presented to the FDA, the EMEA or any Regulatory Authority in any Major European Country, (b) all supplements and amendments to any of the foregoing, and (c) any Regulatory Filing relating to the Licensed Product label, Targeted Indications, warnings, side effects and precautions.

1.84“Kyowa” means Kyowa Hakko Kirin Co., Ltd.

1.85“LastPatient/Last Visit” means the date on which the last patient has his or her last visit (either for therapeutic or follow-up purposes) during a Phase 3 Clinical Trial.

1.86“Licensed Patent Rights” means any ARQULE Patent Rights and ARQULE’s interest in Joint Patent Rights that (a) contain one or more claims that cover any Collaboration Compound or Licensed Product, including its manufacture or its formulation or a method of its delivery or of its use, or (b) are necessary or useful for DS to exercise the licenses granted to it hereunder.

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1.87“Licensed Product” means any pharmaceutical or medicinal item, substance or formulation that contains, incorporates, comprises or is derived from a Collaboration Compound.

1.88“Licensed Technology” means any ARQULE Technology and ARQULE’s interest in Joint Technology that (a) relates to any Collaboration Compound or Licensed Product, including its manufacture or its formulation or a method of its delivery or of its use; and (b) is necessary or useful for DS to exercise the licenses granted to it hereunder.

1.89“Major European Country” means each of the United Kingdom, Germany, France, Italy and Spain.

1.90“Manufacture” or “Manufacturing” or “Manufactured” means all operations involved in the manufacture, receipt, incoming inspection, storage and handling of raw materials, and the manufacture, processing, purification, packaging, labeling, warehousing, quality control testing (including in-process release and stability testing), shipping and release of Collaboration Compounds and/or Licensed Products.

1.91“Manufacturing Cost” means with respect to any Licensed Product Manufactured by or on behalf of a Party, such Party’s costs of Manufacturing such Licensed Product, which shall be the sum of the following components: (a) direct costs, including manufacturing labor and materials directly used in Manufacturing such Licensed Product by such Party or its Affiliates and allocated supervisory costs of the manufacturing department; (b) direct labor and allocated supervisory costs of non-manufacturing departments (such as quality and regulatory) attributable to such Licensed Product; (c) an allocation of depreciation of facilities, machinery and equipment used in Manufacture of Licensed Product; (d) toll process and other charges incurred by such Party or its Affiliates for outsourcing the Manufacture of the Licensed Product and the cost of supervising and managing the Third Party manufacturers, and of receipt, incoming inspections, storage, packaging, handling quality control testing and release of the outsourced items; (e) allocated general and administrative costs, including, without limitation, purchasing, human resources, payroll, legal, maintenance, information system and accounting, attributable to such Licensed Product; and (f) any other reasonable and customary out-of-pocket costs borne by such Party or its Affiliates for the testing, transport, customs clearance, duty,

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insurance and/or storage of such Licensed Product.  For purposes of clarity, all allocations under this Section shall be based on space occupied or head-count or other activity-based method.

1.92“Manufacturing Development” means, with respect to a Collaboration Compound and/or Licensed Product, all activities related to the optimization of a commercial-grade Manufacturing process for the Manufacture of such Collaboration Compound and/or Licensed Product including, without limitation, test method development and stability testing, formulation, validation, productivity, trouble shooting and next generation formulation, process development, Manufacturing scale-up, strain improvements, development-stage Manufacturing, and quality assurance/quality control development.

1.93“Mechanism of Inhibition Information” means any information or Technology relating to, or arising out of, the mechanism by which ARQ 197, any Back-Up Compound or any proposed Back-Up Compound inhibits *, including without limitation, any information or Technology relating to the binding of ARQ 197, any Back-Up Compound or any proposed Back-Up Compound to its target.

1.94“MiT Tumor” means a microphthalmia transcription factor tumor, including clear cell sarcoma, alveolar soft part sarcoma and renal call carcinoma.

1.95“NDA” means a New Drug Application, as defined in the FDCA and regulations promulgated thereunder or any successor application or procedure required to sell a Product in the United States.

1.96“Net Sales” means the gross amount billed or invoiced by DS or any of its Affiliates or Sublicensees to Third Parties throughout the Territory for sales or other dispositions or transfers for value of Licensed Products less (a) allowances for normal and customary trade, quantity and cash discounts (including discounts imposed by way of wholesaler fees) actually allowed and taken, (b) transportation, insurance and postage charges, if prepaid by DS or any Affiliate or Sublicensee of DS and included on any such party’s bill or invoice as a separate item, (c) credits, rebates, returns pursuant to agreements (including, without limitation, managed care agreements) or government regulations, to the extent actually allowed, and (d) sales, use and

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other consumption taxes similarly incurred to the extent included on the bill or invoice as a separate item.  In addition, Net Sales are subject to the following:

(i)If DS or any of its Affiliates or Sublicensees effects a sale, disposition or transfer of a Licensed Product to a customer in a particular country other than on customary commercial terms or as part of a package of products and services, the Net Sales of such Licensed Product to such customer shall be deemed to be the “fair market value” of such Licensed Product.  For purposes of this subsection, “fair market value” shall mean the value that would have been derived had such Licensed Product been sold as a separate product to another customer in the country concerned on customary commercial terms.

(ii)In the case of pharmacy incentive programs, hospital performance incentive program chargebacks, disease management programs, similar programs or discounts on “bundles” of products, all discounts and the like shall be allocated among products on the basis on which such discounts and the like were actually granted or, if such basis cannot be determined, in proportion to the respective list prices of such products or such other reasonable allocation method as the Parties shall agree.

(iii)For purposes of clarity, use of any Licensed Product in Clinical Trials, pre-clinical studies or other research or development activities, or disposal or transfer of Licensed Products for a bona fide charitable purpose or a commercially reasonable sampling program, shall not give rise to any Net Sales.

(iv)Net Sales shall not include sales or transfers between DS and its Affiliates or Sublicensees unless the Licensed Product is consumed by the Affiliate or Sublicensee.

1.97“Non-Cancer Indication” means any Indication that is not a Cancer Indication.

1.98“Ongoing Regulatory Filing” means the Regulatory Filing with respect to ARQ-197 filed by or on behalf of ARQULE as of the Effective Date.

1.99“Other Development Costs” means any Development Costs incurred by a Party (or for its account by an Affiliate) on or after the earlier of the Execution Date or January 1, 2009 that are not External Development Costs.

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1.100“Patent Rights” means the rights and interests in and to issued patents and pending patent applications (which, for purposes of this Agreement, include certificates of invention, applications for certificates of invention and priority rights) in any country or region, including all provisional applications, substitutions, continuations, continuations-in-part, divisions, renewals, all letters patent granted thereon, and all reissues, re-examinations and extensions thereof, and all foreign counterparts of any of the foregoing.  Patent Rights shall include pediatric exclusivity attached to issued patents pursuant to 21 U.S.C. 355a (Section 505A of the FDCA) and pediatric exclusivity under analogous laws in countries other than the United States of America.

1.101“Permitted Transactions” means any agreement by and between a Party and (a) any Third Party pursuant to which such Third Party conducts contract services permitted pursuant to Section 6.2.1 of this Agreement or (b) any Third Party non-profit or academic institution, which agreement provides for the grant to the Party entering into the agreement of all rights to Technology and Patent Rights relating to the use of Collaboration Compounds that are conceived or reduced to practice by the Third Party non profit or academic institution under such agreement, with the right to sublicense to the other Party.

1.102“Person” means an individual, sole proprietorship, partnership, limited partnership, limited liability partnership, corporation, limited liability company, business trust, joint stock company, trust, incorporated association, joint venture or similar entity or organization, including a government or political subdivision, department or agency of a government.

1.103“Phase 1 Clinical Trial” means a Clinical Trial in humans conducted in normal volunteers or in patients, to get information on product safety, tolerability, pharmacological activity or pharmacokinetics, as more fully defined in Federal Regulation 21 C.F.R. § 312.21(a).  Any clinical trial in any country that would satisfy the requirements of 21 CFR § 312.21(a) shall be a Phase 1 Clinical Trial.

1.104“Phase 2 Clinical Trial” means, as to a particular Licensed Product for any Targeted Indication, a Clinical Trial in humans of the safety and/or dose ranging and/or efficacy of such Licensed Product, which is prospectively designed to generate sufficient data (if

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successful) to commence Phase 3 Clinical Trials, as further defined in Federal Regulation 21 C.F.R. § 312.21(b).  Any clinical trial in any country that would satisfy the requirements of 21 CFR § 312.21(b) shall be a Phase 2 Clinical Trial.

1.105“Phase 3 Clinical Trial” means, a Clinical Trial in humans of the efficacy and safety of a Licensed Product, which is prospectively designed to demonstrate statistically whether such Product is effective and safe for use in a particular indication in a manner sufficient to file an NDA or other Drug Approval Application to obtain regulatory approval to market the Licensed Product, as further defined in Federal Regulation 21 C.F.R. § 312.21(c); provided that if the results of any Clinical Trial are used as the basis for filing a Drug Approval Application, then such Clinical Trial will be deemed to be a Phase 3 Clinical Trial, whether or not it meets the requirements of 21C.F.R §312.21(c).  Any clinical trial in any country that would satisfy the requirements of 21 CFR § 312.21(c) shall be a Phase 3 Clinical Trial.

1.106“Phase 4 Clinical Trial” means a post-registrational Clinical Trial conducted in any country or countries and required as a condition to, or for the maintenance of, any Regulatory Approval for a Licensed Product in the Territory.

1.107“Phase 5 Clinical Trial” means a post-registrational Clinical Trial conducted in any country or countries and not required as a condition to, or for the maintenance of, any Regulatory Approval for a Licensed Product in the Territory.  For purposes of clarity, Phase 5 Clinical Trials are commonly referred to as “marketing” Clinical Trials.

1.108“Phase 2 Development Activities” means, with respect to each Collaboration Compound, all clinical Development activities conducted by the Parties in accordance with any Global Development Plan up to and including the Completion of Phase 2 Clinical Trials, including without limitation, the conduct of activities related to the Manufacture of Collaboration Compounds for such Phase 2 Clinical Trials.

1.109“Phase 3 Development Activities” means, with respect to each Collaboration Compound, all clinical Development activities conducted by the Parties in accordance with any Global Development Plan with respect to Phase 3 Clinical Trials of such Collaboration Compound and including the Completion of Phase 3 Clinical Trials, including without limitation,

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the conduct of activities related to the Manufacture of Collaboration Compounds for such Phase 3 Clinical Trials.

1.110“Post-Registration Activities” means, with respect to each Collaboration Compound or Licensed Product, all clinical Development activities conducted by the Parties in accordance with any Global Development Plan for a specific Targeted Indication after the filing of an NDA with respect to such Collaboration Compound or Licensed Product for which an NDA has been filed for such Targeted Indication, up to and including the Completion of Phase 4 Clinical Trials and Phase 5 Clinical Trials with respect to such Collaboration Compound or Licensed Product and the conduct of activities related to the Manufacture of Collaboration Compounds or Licensed Products for such Clinical Trials.

1.111“Pricing” means the determination of Licensed Product pricing at all levels, including wholesale, retail, hospital, clinic, health care provider, HMO, non-profit entity or government entities, including average sales price, average wholesale price and best price.

1.112“Pricing Approval” means the approval by the appropriate Regulatory Authority in a country or jurisdiction of the price and reimbursement for a Licensed Product.

1.113“Primary Detail Equivalent” means (i) if only a Licensed Product is Detailed, one Detail of such Licensed Product or (ii) if a Licensed Product is Detailed with another product, * percent (*%) of a Detail if the Licensed Product is Detailed in the first position and * percent (*%) of a Detail if the Licensed Product is Detailed in the second position or (iii) if a Licensed Product is Detailed other than in the first or second position, such percentage of a Detail as the Parties shall agree upon in the Co-Commercialization Agreement.

1.114“Product Commercialization Plan” means, with respect to each Licensed Product (including without limitation any Co-Commercialized Licensed Product), the written plan for the Commercialization of such Licensed Product in the Territory (including, without limitation, expected pre-launch and launch activities (other than for Development), Manufacturing scale-up, Manufacture, formulation and filling requirements for such Licensed Product and a detailed strategy, budget and proposed timelines), as such plan may be amended or updated.  Each Product Commercialization Plan, and each amendment, modification or update to

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each Product Commercialization Plan, shall be prepared by, or at the direction of, DS, and approved by the JSC at such time as the JSC may from time to time direct and in any event, on or prior to the initiation of Commercialization activities with respect to the Licensed Product.

1.115“Product Technology” means any Program Technology that covers the composition of matter, synthesis, formulation, delivery, mechanism of action, mechanism of inhibition and/or use of a Collaboration Compound and/or Licensed Product.

1.116“Product Trademark” means any trademark or trade name, whether or not registered, or any trademark application or renewal, extension or modification thereof, in the Territory, or any trade dress and packaging, in each case that are used with any Licensed Product by DS, together with all goodwill associated therewith and promotional materials relating thereto.

1.117“Program Technology” means any Technology (including, without limitation, any new and useful process, method of manufacture or composition of matter) or Proprietary Material (a) that is conceived and first reduced to practice (actually or constructively) by either Party or jointly by both Parties in the conduct of the Development Program and/or in the Commercialization of Licensed Products, or (b) that is conceived and first reduced to practice by employees of, or consultants to, one Party after the Effective Date other than in the conduct of Development activities with the use in any material respect of any Technology, Patent Rights or Proprietary Materials of the other Party.  For purposes of clarity, Program Technology shall include any such Technology that is a process for modifying, optimizing, using, formulating, delivering and/or stabilizing any Collaboration Compound or Licensed Product.

1.118“Proprietary Materials” means any tangible chemical, biological or physical materials (a) that are furnished by or on behalf of one Party to the other Party in connection with this Agreement, whether or not specifically designated as proprietary by the transferring Party, or (b) that are otherwise conceived or reduced to practice in the conduct of the Development Program and/or in connection with the Commercialization of Licensed Products.

1.119“Regulatory Activities” means all activities relating to the obtaining and maintaining of any Regulatory Approval with respect to a Licensed Product, including without

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limitation, the preparation and filing of Regulatory Filings and interacting with Regulatory Authorities with respect to such Regulatory Filings.

1.120“Regulatory Approval” means, with respect to any country or region in the Territory, any approval, product and establishment license, registration or authorization of any Regulatory Authority required for the Manufacture, use, storage, importation, exportation, transport, distribution or sale of a Licensed Product in such country or region.

1.121“Regulatory Authority” means the FDA, or any counterpart of the FDA outside the United States, or any other national, supra-national, regional, state or local regulatory agency, department, bureau, commission, council or other governmental entity with authority over the distribution, importation, exportation, Manufacture, production, use, storage, transport, clinical testing or sale of a Licensed Product.

1.122“Regulatory Filings” means, collectively: (a) all INDs, NDAs, BLAs, establishment license applications, DMFs, applications for designation as an “Orphan Product(s)” under the Orphan Drug Act, for “Fast Track” status under Section 506 of the FDCA (21 U.S.C. § 356) or for a Special Protocol Assessment under Section 505(b)(4)(B) and (C) of the FDCA (21 U.S.C. § 355(b)(4)(B)) and all other similar filings (including, without limitation, counterparts of any of the foregoing in any country or region in the Territory); (b) all supplements and amendments to any of the foregoing; and (c) all data and other information contained in, and correspondence relating to, any of the foregoing.

1.123“ROW Territory” means all of the countries and territories of the world other than the U.S. Territory and the Asian Territory.

1.124“Royalty Term” means on a Licensed Product-by-Licensed Product and country-by-country basis, the period beginning on the date of First Commercial Sale of a Licensed Product in a country and ending on the later to occur of (a) expiration of the last to expire of the Licensed Patent Rights or Joint Patent Rights having a Valid Claim in such country that Covers such Licensed Product or its manufacture, use, import, offer for sale or sale or (b) * (*) years from the date of the First Commercial Sale of such Licensed Product in such country, and “Cover” as used herein means, with respect to a Licensed Product, composition, technology,

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process or method that, in the absence of ownership of or a license granted under a Valid Claim, the manufacture, use, offer for sale, sale or importation of such Licensed Product or the practice of such technology, process or method would infringe such Valid Claim of the Licensed Patent Rights or Joint Patent Rights (or, in the case of a Valid Claim of the Licensed Patent Rights or Joint Patent Rights that has not yet issued, would infringe such Valid Claim if it were to issue).

1.125“Second Co-Commercialization Option Period” means, with respect to each Licensed Product, the period commencing on the date that the NDA Filing Notice is received by ARQULE and continuing for a period of * (*) days thereafter.

1.126“Shared Development Costs” means, with respect to a Party, * percent (*%) of the aggregate amount of the External Development Costs incurred by such Party in the conduct of Development activities.

1.127“sNDA” means a Supplemental New Drug Application, as defined in the FDCA and applicable regulations promulgated thereunder.

1.128“Sublicensee” means any Third Party to which a Party grants a sublicense in accordance with Section 6.2.2.

1.129“Targeted Indications” means (a) all human Cancer Indications and (b) any Approved Non-Cancer Indications.

1.130“Technology” means, collectively, inventions, discoveries, improvements, trade secrets and proprietary methods, whether or not patentable, including without limitation: (a) methods of Manufacture or use of, and structural and functional information pertaining to, chemical compounds or other therapeutic agents and (b) compositions of matter, data, formulations, processes, techniques, know-how and results (including any negative results).

1.131“Territory” all countries and territories of the world other than the Asian Territory, consisting of the U.S. Territory and the ROW Territory.

1.132“Third Party” means a Person other than DS and ARQULE and their respective Affiliates.

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1.133“Third Party Data Provider” means IMS Health and/or any other Third Party reasonably acceptable to the Parties that performs market analyses and provides sales data for the biotechnology or pharmaceutical industry.

1.134“Unanimous Decision” means (a) any decision with respect to * and any amendment to any such *; (b) any decision that would *; (c) any decision to *; (d) any decision requiring a Party to *; (e) any decision applicable to * and any *; (f) any decision to * and (g) any other decision designated as a Unanimous Decision herein.

1.135“US Joint Marketing Committee” or “USJMC” means the committee composed of ARQULE and DS representatives established pursuant to Section 2.5.

1.136“U.S. Territory” means the United States of America and its territories, including, without limitation, Puerto Rico and the U.S. Virgin Islands.

1.137“Valid Claim” means (a) any claim of an issued unexpired patent that, (i) has not been permanently revoked, held invalid, or declared unpatentable or unenforceable in a decision of a court or other body of competent jurisdiction that is unappealable or unappealed within the time allowed for appeal, (ii) has not been rendered unenforceable through disclaimer or otherwise, and (iii) is not lost through an interference proceeding; or (b) any claim of a pending patent application that has not been finally cancelled, withdrawn, abandoned or rejected by any administrative agency or other body of competent jurisdiction, and which pending patent application has been pending for less than * (*) years since its earliest priority date.  In the event subsequent to such * (*) year period, such pending claim is issued as a claim of an issued and unexpired patent included within (a) above, such claim shall be reinstated thereafter as a “Valid Claim” in accordance with clause (a) above.

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1.138Additional Definitions.  In addition, each of the following definitions shall have the respective meanings set forth in the section of this Agreement indicated below:

Definition	Section
Abandoning Party	8.1.5(b)
Agreement	Preamble
Alliance Manager	2.6.1
Appointing Party	2.8
ARQULE	Preamble
ARQULE Indemnitees	11.1
Back-Up Compound	3.2
Claims	11.1
Combination Product	4.3.1(a)(i)
Co-Commercialization Agreement	3.12.1(c)(i)
Co-Commercialization Option	3.12.1(b)
Co-Commercialization Option Notice	3.12.1(b)
Co-Commercialization Plan	3.12.2
Co-Commercialized Licensed Product	3.12.1(b)
Cost Audited Party	3.11.2(b)
Cost Auditing Party	3.11.2(b)
Deferred Development Costs	3.11.2(a)(ii)
Designated Senior Officers	2.1.5
disclosing Party	1.38
Dispute	12.1
Disputed Matter	2.1.5
DS	Preamble
DS Indemnitees	11.2
DS Manufacturing Know-How	9.3.1(e)(xi)
Execution Date	Preamble
Filing Party	8.1.4
Generic Licensed Product	4.3.1(a)(ii)
HSR Conditions	12.15
ICD10	1.74
Indemnified Party	11.3
Indemnifying Party	11.3
Indication Proposal Notice	3.13
Infringement	8.2.1(a)
Infringement Notice	8.2.1(a)
INN	8.2.5
Last Patient/Last Visit Notice	3.12.1(a)
Losses	11.1
Maintaining Party	8.1.5(b)
Manufacturing Plan	3.3.1
Manufacturing Plan Completion Notice	3.3.1

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MiT Tumor Milestones	4.2.2(d)
NDA Filing Notice	3.12.1(a)
New Cancer Indication	3.14
Non-Filing Party	8.1.4
Other Products	4.3.1(a)(i)
Party/Parties	Preamble
Patent Coordinator	7.4
Permitted Employee	5.1.2
Phase 3 Costs	3.11.2(a)(ii)
Prior CDA	12.13
Product-Related Data	3.10.3
receiving Party	1.38
Recipient Party	3.4
Regulatory Transition Plan	3.1.4(a)
Supply Agreement	3.3.3
Term	9.1
Third Party Development Technology	6.5.2
Total Reimbursable Costs	3.14
Transferring Party	3.4
Upfront Fee	4.1

2.ADMINISTRATION OF THE COLLABORATION

2.1Joint Steering Committee.

2.1.1Establishment.  As soon as practicable after the Execution Date, ARQULE and DS shall establish the Joint Steering Committee.  The JSC shall have and perform the responsibilities set forth in Section 2.1.4.

2.1.2Membership.  Upon establishment of the JSC, each of ARQULE and DS shall designate in writing four (4) representatives, or such other equal number of representatives as the Parties agree, to the JSC, who shall be senior level personnel.  One (1) representative of each Party shall be designated as a co-chair of the JSC.  Each Party shall have the right at any time to substitute individuals, on a permanent or temporary basis, for any of its previously designated representatives to the JSC by giving written notice to the other Party.

2.1.3Meetings.

(a)Schedule of Meetings; Agenda.  The JSC shall establish a schedule of times for regular meetings, taking into account, without limitation, the planning needs of the

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Collaboration and the responsibilities of the JSC.  Special meetings of the JSC may be convened by any member upon not less than thirty (30) days (or, if such meeting is proposed to be conducted by teleconference, upon not less than ten (10) days) written notice to the other members; provided, that, (i) notice of any such special meeting may be waived at any time, either before or after such meeting and (ii) attendance of any member at a special meeting shall constitute a valid waiver of notice from such member.  Unless otherwise agreed by the Parties, the JSC shall meet four (4) times in each Calendar Year.  Regular and special meetings of the JSC may be held in person or by teleconference or videoconference; provided, that, meetings held in person shall alternate between the respective offices of the Parties or at other locations mutually agreeable to the JSC members.  The co-chairs shall prepare and circulate an agenda for each JSC meeting not later than one (1) week prior to such meeting.

(b)Quorum; Voting; Decisions.  At each JSC meeting, the presence in person of the co-chairs shall constitute a quorum provided that minutes of the meeting are prepared as set forth below.  All members designated by a Party shall have one (1) collective vote, to be cast by such Party’s co-chair (or his designee), on all matters before the JSC at such meeting.  All decisions of the JSC shall be made by unanimous vote.  Alternatively, the JSC may act by written consent signed by the co-chairs.  Whenever any action by the JSC is called for hereunder during a time period in which the JSC is not scheduled to meet, either co-chair shall cause the JSC to meet to take the action in the requested time period by calling a special meeting or the co-chairs shall act by written consent.  Representatives of each Party or of its Affiliates who are not members of the JSC may attend JSC meetings as guests with the consent of the other Party, which shall not be unreasonably withheld, conditioned or delayed.

(c)Minutes.  The JSC shall keep minutes of its meetings that record all decisions and all actions recommended or taken in reasonable detail.  Drafts of the minutes shall be prepared and circulated to the members of the JSC within a reasonable time after the meeting, not to exceed ten (10) Business Days, and the co-chairs shall alternate responsibility for the preparation and circulation of draft minutes.  Each member of the JSC shall have the opportunity to provide comments on the draft minutes.  The minutes shall be approved, disapproved and revised as soon as practicable.  Upon approval, final minutes of each meeting

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shall be circulated to the members of the JSC by the co-chair with responsibility for preparing such minutes.

(d)Expenses.  ARQULE and DS shall each bear all expenses of their respective JSC representatives related to their participation on the JSC and attendance at JSC meetings.  If any meeting is held off-site, the expense for using the necessary meeting facility is to be  born by the Party hosting such meeting.

2.1.4Responsibilities.  The JSC shall be responsible for general oversight of the conduct and progress of the Development Program, and the global Development and Commercialization of Licensed Products.  Without limiting the generality of the foregoing, the JSC shall have the following responsibilities:

(a)reviewing and approving the overall goals and strategy of the Development Program;

(b)reviewing budgets, data, reports or other information submitted to it by any other Committee from time to time;

(c)overseeing the activities and performance by each of the other Committees of its respective duties;

(d)reviewing and approving each Global Development Plan (as a Unanimous Decision) and reviewing Product Commercialization Plan (as a DS Decision);

(e)appointing the appropriate Committee or people for review of commercialization issues outside the United States;

(f)appointing the appropriate Committee or people for review and approval of, or variances from, Global Pricing Policy (as a Unanimous Decision);

(g)resolving all Committee matters that are in dispute; and

(h)making such other decisions as may be delegated to the JSC pursuant to this Agreement or by mutual written agreement of the Parties during the Term.

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2.1.5Dispute Resolution.  The JSC members shall use reasonable efforts to reach agreement on any and all matters.  In the event that, despite such reasonable efforts, agreement on a particular matter cannot be reached by the JSC within * (*) days after the JSC first meets to consider such matter (each such matter, a “Disputed Matter”), then, (a) if the Disputed Matter involves a DS Decision, DS shall have the right to make the final decision on such Disputed Matter but shall only exercise such right in good faith after full consideration of the positions of both Parties; (b) if the Disputed Matter involves an ARQULE Decision, ARQULE shall have the right to make the final decision on such Disputed Matter but shall only exercise such right in good faith after full consideration of the positions of both Parties; (c) if the Disputed Matter involves a Joint Decision or a Unanimous Decision, (i) the co-chairs of the JSC shall refer such Disputed Matter to the CEO of ARQULE and the senior officer of DS or its Affiliates to be designated by the CEO of DS (the “Designated Senior Officers”), who shall promptly initiate discussions in good faith to resolve such Disputed Matter and (ii) if such Disputed Matter is not resolved by the Designated Senior Officers within * (*) days after the date the Designated Senior Officers first met to consider such Disputed Matter or * (*) days after the date the JSC first met to consider such Disputed Matter, the Disputed Matter shall be resolved in accordance with Section 12.1; and (d) if the Disputed Matter involves a Unanimous Decision, such matter must be resolved by the JSC or the Designated Senior Officers, and shall not be submitted to the arbitration pursuant to Section 12.1.

2.2Joint Development Committee.

2.2.1Establishment.  As soon as practicable after the Execution Date, ARQULE and DS shall establish the Joint Development Committee.  The JDC shall have and perform the responsibilities set forth in Section 2.2.4.

2.2.2Membership.  Upon establishment of the JDC, each of ARQULE and DS shall designate in writing five (5) representatives (representing each key function such as clinical development, regulatory, commercial, CM&C and project management), or such other number of representatives as the Parties agree, to the JDC.  Unless otherwise agreed by the Parties, one representative of each Party shall be designated as a co-chair of the JDC.  Each Party shall have

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the right at any time to substitute individuals, on a permanent or temporary basis, for any of its previously designated representatives to the JDC by giving written notice to the other Party.

2.2.3Meetings.

(a)Schedule of Meetings; Agenda.  The JDC shall establish a schedule of times for regular meetings, taking into account, without limitation, the planning needs of the Development Program and the responsibilities of the JDC.  Special meetings of the JDC may be convened by any member upon not less than thirty (30) days (or, if such meeting is proposed to be conducted by teleconference, upon not less than ten (10) days) written notice to the other members; provided, that, (i) notice of any such special meeting may be waived at any time, either before or after such meeting and (ii) attendance of any member at a special meeting shall constitute a valid waiver of notice from such member.  In no event shall the JDC meet less frequently than four (4) times each Calendar Year.  Regular and special meetings of the JDC may be held in person or by teleconference or videoconference; provided, that, meetings held in person shall alternate between the respective offices of the Parties or at other locations mutually agreeable to the JDC members.  The co-chairs shall prepare and circulate an agenda for each JDC meeting not later than one (1) week prior to such meeting.

(b)Quorum; Voting; Decisions.  At each JDC meeting, the presence in person of the co-chairs shall constitute a quorum provided that minutes of the meeting are prepared as set forth below.  All members designated by a Party shall have one (1) collective vote, to be cast by such Party’s co-chair (or his designee), on all matters before the JDC at such meeting.  All decisions of the JDC shall be made by unanimous vote.  Alternatively, the JDC may act by written consent signed by the co-chairs.  Whenever any action by the JDC is called for hereunder during a time period in which the JDC is not scheduled to meet, either co-chair shall cause the JDC to meet to take the action in the requested time period by calling a special meeting or the co-chairs shall act by written consent.  Representatives of each Party or of its Affiliates who are not members of the JDC may attend JDC meetings as guests with the consent of the other Party, which shall not be unreasonably withheld, conditioned or delayed.

(c)Minutes.  The JDC shall keep minutes of its meetings that record all decisions and all actions recommended or taken in reasonable detail.  Drafts of the minutes

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shall be prepared and circulated to the members of the JDC within a reasonable time after the meeting, not to exceed ten (10) Business Days, and the Parties shall alternate responsibility for the preparation and circulation of draft minutes.  Each member of the JDC shall have the opportunity to provide comments on the draft minutes.  The minutes shall be approved, disapproved and revised as necessary at the next JDC meeting.  Upon approval, final minutes of each meeting shall be circulated to the members of the JDC by the co-chair with responsibility for preparing such minutes.

(d)Expenses.  ARQULE and DS shall each bear all expenses of their respective JDC representatives related to their participation on the JDC and attendance at JDC meetings.  If any meeting is held off-site, the expense for using the necessary meeting facility is to be  born by the Party hosting such meeting.

2.2.4Responsibilities.  The JDC shall be responsible for overseeing the conduct and progress of the Development Program and the global Development of Licensed Products.  Without limiting the generality of the foregoing, the JDC shall have the following responsibilities:

(a)preparing, or directing the preparation by the Parties of, the Development Program;

(b)preparing, or directing the preparation by the Parties of, each Global Development Plan applicable to the Development of Licensed Products in the Territory, including the budget with respect thereto;

(c)preparing, or directing the preparation by the Parties of, each amendment to any Global Development Plan applicable to the Development of Licensed Products in the Territory or the budget with respect thereto;

(d)approving the Manufacturing Plan to be proposed by DS for the Manufacture of Licensed Products;

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(e)monitoring the progress of the Development Program under each Global Development Plan applicable to the Development of Licensed Products in the Territory and of each Party’s activities thereunder;

(f)reconciling issues between the Parties with respect to the Parties’ respective share of Shared Development Costs with respect to Licensed Products;

(g)reviewing and circulating to the Parties data, reports or other information submitted by either Party with respect to work conducted under the Development Program;

(h)overseeing the conduct of Clinical Trials for Licensed Products in the Territory;

(i)reviewing and approving any agreement entered into by a Party with a Third Party pursuant to Section 6.2.1; and

(j)making such other decisions as may be delegated to the JDC pursuant to this Agreement or by the JSC or by mutual written agreement of the Parties during the Term.

2.2.5Dispute Resolution.  The JDC members shall use reasonable efforts to reach agreement on any and all matters.  In the event that, despite such reasonable efforts, agreement on a particular matter cannot be reached by the JDC within * (*) days after the JDC first meets to consider such matter, then the matter shall be referred to the JSC for resolution pursuant to Section 2.1.5.

2.3Joint Life Cycle Management Committee.  The JSC may establish the Joint Life Cycle Management Committee as a sub-Committee to the JDC, the primary purpose of which shall be to generate concepts and direct, plan, manage handoff to execution teams and joint governing committees, and monitor strategies for product innovations for the Licensed Product(s), including new indications, new combinations, dosing regimens, new formulations, and line extensions.  The JLCMC shall also ensure that critical success factors, timelines and issues are transparent to the JDC.  The JLCMC shall consist of three (3) representatives, or such

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other equal number of representatives as the Parties agree, from each Party.  The JLCMC shall establish a life-cycle management plan for the Licensed Product on an annual basis for approval by the JDC.  In the event of a dispute, the matter shall be referred to the JDC.  If the JLCMC is not established, the functions set forth above and below shall be performed by the JDC.  If established, the JLCMC shall be responsible for (a) directing, planning and managing the transition to the applicable Committees of responsibilities with respect to the Development and Commercialization of Licensed Products and (b) generating and monitoring strategies for innovation of Licensed Products, including any strategies related to the pursuit of Non-Cancer Indications, new combinations, dosing regimens and/or line extensions with respect to Licensed Products.

2.4Joint Finance Committee.  The JSC may establish the Joint Finance Committee as a sub-Committee to the JDC, the primary purpose of which shall be to provide monthly standardized financial information and analysis to project team and joint governing committees to facilitate planning, decision making, and controls in the United States.  The JFC shall consist of three (3) representatives, or such other equal number of representatives as the Parties agree, from each Party.  In the event of a dispute, the matter shall be referred to the JDC.  If the JFC is not established, the functions set forth above and below shall be performed by the JDC, or in the case of Section 3.11.2(a)(i), by the Party designated by the JSC under such section.  If established, the JFC shall be responsible for coordinating the financial information and analyses prepared by the Parties in connection with the Commercialization of Licensed Products in the U.S. Territory.

2.5US Joint Marketing Committee.

2.5.1Establishment.  As soon as practicable following the exercise by ARQULE of a Co-Commercialization Option with respect to a Co-Commercialized Licensed Product in accordance with Section 3.12, ARQULE and DS shall establish the US Joint Marketing Committee which shall have and perform the responsibilities set forth in Section 2.5.4.  Unless otherwise agreed by the Parties, the term for the USJMC shall commence at such time and continue for so long as a Co-Commercialized Product is being Commercialized.

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2.5.2Membership.  Upon establishment of the USJMC, each of ARQULE and DS shall designate in writing three (3) representatives, or such other equal number of representatives as the Parties agree, to the USJMC.  Unless otherwise agreed by the Parties, one representative of each Party shall be designated as a co-chair of the USJMC.  Each Party shall have the right at any time to substitute individuals, on a permanent or temporary basis, for any of its previously designated representatives to the JDC by giving written notice to the other Party.

2.5.3Meetings.

(a)Schedule of Meetings; Agenda.  The USJMC shall establish a schedule of times for regular meetings, taking into account, without limitation, the planning needs for the Commercialization of Co-Commercialized Products and the responsibilities of the USJMC.  Special meetings of the USJMC may be convened by any member upon not less than thirty (30) days (or, if such meeting is proposed to be conducted by teleconference, upon ten (10) days) written notice to the other members; provided, that, (i) notice of any such special meeting may be waived at any time, either before or after such meeting and (ii) attendance of any member at a special meeting shall constitute a valid waiver of notice from such member.  Unless otherwise agreed by the Parties, the USJMC shall meet two (2) times each Calendar Year.  Regular and special meetings of the USJMC may be held in person or by teleconference or videoconference; provided, that, meetings held in person shall alternate between the respective offices of the Parties or at other locations mutually agreeable to the USJMC members.  The co-chairs shall prepare and circulate an agenda for each USJMC meeting not later than one (1) week prior to such meeting.

(b)Quorum; Voting; Decisions.  At each USJMC meeting, (i) the presence in person of at least two (2) members designated by each Party shall constitute a quorum and (ii) all members designated by a Party shall have one (1) collective vote on all matters before the USJMC at such meeting.  All decisions of the USJMC shall be made by unanimous vote.  Alternatively, the USJMC may act by written consent signed by the co-chairs.  Whenever any action by the USJMC is called for hereunder during a time period in which the USJMC is not scheduled to meet, the co-chairs shall cause the USJMC to meet to take the action in the requested time period by calling a special meeting or the co-chairs shall act by written

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consent.  Representatives of each Party or of its Affiliates who are not members of the USJMC may attend USJMC meetings as guests with the consent of the other Party, which shall not be unreasonably withheld, conditioned or delayed.

(c)Minutes.  The USJMC shall keep minutes of its meetings that record all decisions and all actions recommended or taken in reasonable detail.  Drafts of the minutes shall be prepared and circulated to the members of the USJMC within a reasonable time after the meeting, not to exceed ten (10) Business Days, and the Parties shall alternate responsibility for the preparation and circulation of draft minutes.  Each member of the USJMC shall have the opportunity to provide comments on the draft minutes.  The minutes shall be approved, disapproved and revised as necessary at the next USJMC meeting.  Upon approval, final minutes of each meeting shall be circulated to the members of the USJMC by the by the co-chair with responsibility for preparing such minutes.

(d)Expenses.  ARQULE and DS shall each bear all expenses of their respective USJMC representatives related to their participation on the USJMC and attendance at USJMC meetings.  If any meeting is held off-site, the expense for using the necessary meeting facility is to be  born by the Party hosting such meeting.

2.5.4Responsibilities.  The USJMC shall be responsible for overseeing the conduct and progress of the Co-Commercialization of each Co-Commercialized Product in the Co-Commercialization Territory.  Without limiting the generality of the foregoing, the USJMC shall have the following responsibilities:

(a)preparing or directing the preparation by the Parties of, each Co-Commercialization Plan for Co-Commercialized Products in the Co-Commercialization Territory, including the budgets with respect thereto;

(b)preparing or directing the preparation by the Parties of each amendment to any Co-Commercialization Plan for Co-Commercialized Products in the Co-Commercialization Territory or the related budget with respect thereto;

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(c)determining style guidelines and the appearance of Co-Commercialized Products in the Co-Commercialization Territory, including packaging and promotional materials;

(d)determining managed health care strategy and tactics, including Pricing, rebates, discounts and charge-backs for Co-Commercialized Products in the Co-Commercialization Territory;

(e)determining the appropriate use of medical science liaisons in support of the Co-Commercialized Products;

(f)determining the format and quantities of promotional sales, marketing and educational materials for the Co-Commercialized Products;

(g)reviewing and approving any proposals for modifications of existing Co-Commercialized Products, including, without limitation, new formulations after First Commercial Sale and line extensions;

(h)agreeing upon the design and implementation of all Co-Commercialized Product launch activities;

(i)monitoring the progress of Commercialization of Co-Commercialized Products in the Co-Commercialization Territory under each Co-Commercialization Plan and of each Party’s activities thereunder;

(j)reviewing and circulating to the Parties data, reports or other information submitted by either Party with respect to the Commercialization of Co-Commercialized Products in the Co-Commercialization Territory;

(k)determining appropriate targets for sales force staffing and territory mapping purposes, determining the appropriate level of Detailing effort to be provided by each Party in Co-Commercializing such Co-Commercialized Product and coordinating the Detailing efforts of both Parties with respect to Co-Commercialized Products;

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(l)overseeing all recalls, market withdrawals and any other corrective actions related to Co-Commercialized Products;

(m)receiving and providing to the Parties sales reports pertaining to Co-Commercialized Products;

(n)approving all Third Parties to be engaged by either Party to provide representatives to Commercialize Co-Commercialized Products, which approval shall be reflected in the minutes of the USJMC; and

(o)making such other decisions as may be delegated to the USJMC pursuant to this Agreement or by the JSC or by mutual written agreement of the Parties during the Term.

2.5.5Dispute Resolution.  The USJMC members shall use reasonable efforts to reach agreement on any and all matters.  In the event that, despite such reasonable efforts, agreement on a particular matter cannot be reached by the USJMC within * (*) days after the USJMC first meets to consider such matter, then the matter shall be referred to the JSC for resolution pursuant to Section 2.1.5.

2.6Alliance Managers.

2.6.1Appointment.  Each Party shall have the right to appoint a person who shall oversee interactions between the Parties for all matters related to the Development and Commercialization of Licensed Products between Committee meetings (each, an “Alliance Manager”).  The Alliance Managers shall have the right to attend all Committee meetings as non-voting participants and may bring to the attention of the applicable Committee any matters or issues either of them reasonably believes should be discussed and shall have such other responsibilities as the Parties may mutually agree in writing.  Each Party may replace its Alliance Manager at any time or may designate different Alliance Managers with respect to Development and Commercialization, respectively, by notice in writing to the other Party.

2.6.2Responsibilities.  The Alliance Managers, if appointed, shall have the responsibility of creating and maintaining a constructive work environment within the

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Committees and between the Parties for all matters related to the Collaboration.  Without limiting the generality of the foregoing, each Alliance Manager shall:

(a)identify and bring to the attention of the JSC, as applicable, any disputes arising between the Parties related to the Collaboration in a timely manner, including, without limitation, any asserted occurrence of a material breach by a Party, and function as the point of first referral in the resolution of each dispute;

(b)provide a single point of communication for seeking consensus within the Parties’ respective organizations and between the Parties with respect to the Collaboration;

(c)plan and coordinate cooperative efforts, internal communications and external communications between the Parties with respect to the Collaboration; and

(d)take such steps as may be required to ensure that Committee meetings occur as set forth in this Agreement, that procedures are followed with respect to such meetings (including, without limitation, the giving or proper notice and the preparation and approval of minutes) and that relevant action items resulting from such meetings are appropriately carried out or otherwise addressed.

2.7Decision Making.  All decisions made and all actions taken by any Committee or the officers of the Parties pursuant to Section 2.1.5 shall be made or taken in the best interest of the Collaboration.

2.8Appointment Not an Obligation; No Breach.  The appointment of members of any Committee and the Alliance Managers is a right of each Party and not an obligation and shall not be a “deliverable” as defined in EITF Issue No. 00-21.  Each Party shall be free to determine not to appoint members to the JSC, JDC, and USJMC, and not to appoint an Alliance Manager.  If a Party (an “Appointing Party”) does not appoint members of a Committee or an Alliance Manager, it shall not be a breach of this Agreement, nor shall any consideration be required to be returned, and unless and until such persons are appointed, the other Party may discharge the roles of the Committee for which members were not appointed by an Appointing Party.

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3.DEVELOPMENT AND COMMERCIALIZATION OF PRODUCTS

3.1Implementation of Development Program.

3.1.1Objectives of the Development Program.  The objectives of the Development Program shall be the Development of Licensed Products in order to obtain, as expeditiously as possible, Commercialization Regulatory Approval of one or more Licensed Products in the Field in the Territory pursuant to the Global Development Plans.

3.1.2Preparation of Global Development Plan.  A clinical development plan for the Development of the Collaboration Compound for each Targeted Indication has been agreed upon in writing by the Parties.  Within * (*) months of the Execution Date, a Global Development Plan, which includes at least the Phase 2 Clinical Trials described in such clinical development plan, will be prepared by the JDC and approved by the JSC.  Until a Global Development Plan is approved by the JSC, the clinical development plan described above shall be the Global Development Plan.  At least annually, during the Term, a Global Development Plan for each Collaboration Compound and Licensed Product and Targeted Indication shall be prepared or updated by the JDC and submitted to the JSC for approval at least * (*) days before the meeting of the JSC at which it will be considered.  Each Global Development Plan shall: (a) set forth *.

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3.1.3Responsibility for Development of Licensed Products.

(a)Phase 2 Development Activities.  Except as otherwise set forth in the Global Development Plan, the Parties shall collaborate in the conduct of all Phase 2 Development Activities (including, without limitation the conduct of any Phase 2 Clinical Trials), and each Party shall have the responsibility for the conduct of all Phase 2 Development Activities (including, without limitation the conduct of all Phase 2 Clinical Trials) designated as the responsibility of such Party in any Global Development Plan.

(b)Phase 3 Development Activities.  Except as otherwise set forth in the Global Development Plan, the Parties shall collaborate in the conduct of all Phase 3 Development Activities (including, without limitation the conduct of any Phase 3 Clinical Trials), and each Party shall conduct the Phase 3 Development Activities specified as its responsibility in any Global Development Plan.

(c)Post-Registration Activities.  Except as otherwise set forth in the Global Development Plan, the Parties shall collaborate in the conduct of all Post-Registration Activities (including, without limitation the conduct of any Phase 4 Clinical Trials and Phase 5 Clinical Trials), and each Party shall conduct the Post-Registration Activities specified as its responsibility in any Global Development Plan.

(d)Engagement of Third Parties.  Each Party shall have the right to engage Third Party contractors to perform some or all of its Development Activities in connection with the Development of Licensed Products hereunder pursuant to Section 6.2.1.

(e)Conduct of Clinical Trials.  Neither Party shall conduct any Clinical Trial unless such Clinical Trial is specified to be conducted in the Global Development Plan, except as set forth in Sections 3.14 and 3.15.

3.1.4Regulatory Filings; Adverse Event Reporting.

(a)Regulatory Transition Activities.  As soon as practicable, but in any event on or before * (*) days from the Execution Date, ARQULE shall prepare and submit to the JDC for its review and approval a mutually-acceptable regulatory transition plan which shall

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describe with reasonable specificity the steps to be followed, and the timelines applicable to, the transfer by ARQULE of the Ongoing Regulatory Filing (the “Regulatory Transition Plan”).  As soon as practicable following the JDC’s approval of the Regulatory Transition Plan, (i) ARQULE shall use Commercially Reasonable Efforts to conduct the activities described in the Regulatory Transition Plan and (ii) DS shall provide such assistance as may be reasonably necessary to complete such activities.

(b)Responsibility for Regulatory Filings.  Subject to the Regulatory Transition Plan and Section 3.10.6, *.  In addition, DS shall be obligated to prepare and file a Drug Approval Application based on data from Phase 2 Clinical Trials and/or Phase 3 Clinical Trials if the JSC determines, as a Joint Decision, that (i) the primary endpoints for efficacy and safety of such Clinical Trials have been met in all material respects, and (ii) there is a reasonable likelihood of approval with a label substantially equivalent to the label that will be requested in the Drug Approval Application, unless the JSC determines as a Joint Decision to delay the preparation and filing of such Drug Approval Application in order to conduct additional Clinical Trials to obtain data to maximize the likelihood of obtaining Commercialization Regulatory Approval or optimize the label.  ARQULE (i) shall, at DS’s request, provide to DS, and DS shall have the right to provide to its Sublicensees or Affiliates, copies of a drug approval application filed by Kyowa with the Regulatory Authorities in the Field outside the Territory, and grants to DS and its Sublicensees or Affiliates the right to access, reference, use and incorporate such drug approval application in the Territory; and (ii) agrees that ARQULE shall, at DS’s request, provide to DS, and that DS shall have the right to provide to its Sublicensees or Affiliates, copies of any additional information or data with respect to the Licensed Product generated by, or on behalf of, Kyowa and owned or otherwise controlled by Kyowa and necessary or useful for DS and its Sublicensees or Affiliates to obtain any Regulatory Approvals or perform such other Regulatory Activities under this Agreement, and to Develop, Manufacture and Commercialize Licensed Products.  For the avoidance of doubt, DS’s

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obligations under this Section 3.1.4(b) shall apply to Regulatory Filings and Drug Approval Applications for Licensed Products in New Cancer Indications (as defined in Section 3.14 below).

3.2Identification of Back-Up Compounds.  If the JSC determines, as a Unanimous Decision, to seek to identify a Back-up Compound for Development under this Agreement, and upon agreement by the Parties on a research plan, including the allocation of research responsibilities, a budget, and responsibility for all costs of performing such research plan, ARQULE, DS or ARQULE and DS jointly (as designated by the JSC) will use Commercially Reasonable Efforts to deliver * (*) or more c-MET Inhibitors in addition to ARQ 197 which may be Developed as a follow-up compound or simultaneously with ARQ 197 for Targeted Indications (each such compound, a “Back-Up Compound”).  The rights and obligations of the Parties relating to each Back-Up Compound shall be identical to those applicable to ARQ 197, except as otherwise expressly provided herein.  Either Party shall notify the JSC in writing in the event it wishes to replace ARQ 197 with a specified c-MET Inhibitor developed hereunder as a Back-Up Compound or to Develop such c-MET Inhibitor as a Back-Up Compound in addition to ARQ 197.  Within * (*) days after its receipt of such notice, the JSC shall review the data information and determine, as a Unanimous Decision, whether to so designate the proposed c-MET Inhibitor as a Back-Up Compound.  Subsequent to such designation, as applicable, any reference to the Licensed Product shall be deemed to include or to be made to the Back-Up Compound for purposes of this Agreement.

3.3Supply of Licensed Products for Development and Commercialization.

3.3.1Manufacturing Plan.  Within * (*) days of the Execution Date, DS will propose to the JDC a plan for establishing manufacturing capabilities necessary for DS to manufacture the Licensed Product for use in the Territory (the “Manufacturing Plan”).  Following approval of the Manufacturing Plan by the JDC, DS will use Commercially Reasonable Efforts to complete the activities and establish manufacturing capabilities in accordance with such Manufacturing Plan.  ARQULE will assist with such activities by providing DS with technical documentation as may be reasonably requested to inform DS about the Manufacturing process.  Notwithstanding the foregoing, DS will (a) retain sole responsibility

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for the implementation and progress of the Manufacturing Plan and (b) provide ARQULE and the JDC with written notice upon its completion of the activities contemplated by the Manufacturing Plan (the “Manufacturing Plan Completion Notice”).

3.3.2Development Supply.  During the period commencing on the Effective Date and continuing until the date of receipt by ARQULE of the Manufacturing Plan Completion Notice, ARQULE will be solely responsible for supplying DS with API and/or finished Licensed Product necessary for the conduct of the Development Program under the Global Development Plan in such quantities as may be mutually agreed by the Parties.  After receipt of the Manufacturing Plan Completion Notice, DS will be solely responsible for supplying DS and ARQULE with API and/or finished Licensed Product necessary for the conduct of the Development Program under the Global Development Plan in such quantities as may be mutually agreed by the Parties.

3.3.3Commercial Supply.  During the period commencing on the date of receipt by ARQULE of the Manufacturing Plan Completion Notice and continuing for the remainder of the Term, DS will be solely responsible, at its sole cost and expense, for supplying all API and finished Licensed Product necessary for Commercialization of Licensed Products in the Territory.  In the event that ARQULE requests in writing that DS supply ARQULE’s Third Party licensees and collaborators with API and/or unlabeled finished and filled Licensed Product necessary for Commercialization of Licensed Product outside of the Territory, ARQULE and DS shall negotiate in good faith and enter into a manufacture and supply agreement (the “Supply Agreement”) detailing the terms of supply for such API and/or finished and filled Licensed Product, which Supply Agreement shall include, without limitation, the transfer price for such API and/or Licensed Product.

3.4Supply of Proprietary Materials.  From time to time during the Term, either Party (the “Transferring Party”) may supply the other Party (the “Recipient Party”) with Proprietary Materials of the Transferring Party for use in the Development Program.  In connection therewith, each Recipient Party hereby agrees that (a) it shall not use such Proprietary Materials for any purpose other than exercising its rights or performing its obligations hereunder; (b) it shall use such Proprietary Materials only in compliance with all Applicable Laws; (c) it

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shall not transfer any such Proprietary Materials to any Third Party without the prior written consent of the Transferring Party, except for (i) the transfer of Licensed Products for use in Clinical Trials or (ii) in a Permitted Transaction or as otherwise expressly permitted hereby; (d) the Recipient Party shall not acquire any right, title or interest in or to such Proprietary Materials as a result of such supply by the Transferring Party; and (e) upon the expiration or termination of the Development Program, the Recipient Party shall, if and as instructed by the Transferring Party, either destroy or return any such Proprietary Materials that are not the subject of the grant of a continuing license hereunder.

3.5Licensed Product Commercialization.

3.5.1Product Commercialization Plans.  Within * (*) days after the Initiation of a Phase 3 Clinical Trial with respect to each Licensed Product, DS shall, with advance input from ARQULE, prepare and provide to the JSC for its review a Product Commercialization Plan for each such Licensed Product, and shall inform the JSC with respect to all significant Commercialization decisions to be made with respect to such Licensed Product.  The Product Commercialization Plan shall be updated and reviewed at such times as the JSC may determine, not less than annually.

3.5.2Responsibility for Commercialization of Licensed Products.  Subject to ARQULE’s Co-Commercialization Option, DS shall have the sole right and responsibility, at its sole expense, for all aspects with respect to the Commercialization of Licensed Products in accordance with the applicable Product Commercialization Plan, in the Field and in the Territory and shall have the sole right and responsibility, at its sole expense, for order fulfillment and distribution of Licensed Product and for booking all sales of Licensed Product in the Territory, including, without limitation, the conduct of: (a) all activities relating to the development and scale-up of processes for Manufacture of API and Licensed Product for commercial sale and the Manufacture and supply of Licensed Products for Commercialization; and (b) all marketing, promotion, sales, distribution, import and export activities (including securing reimbursement, conducting sales and marketing activities, post-marketing safety surveillance (other than Phase 4 Clinical Trials or Phase 5 Clinical Trials) and maintaining databases).

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3.6Development and Commercialization Diligence.

3.6.1DS Diligence.  DS shall use Commercially Reasonable Efforts during the Term to Develop and Commercialize Licensed Products for all Targeted Indications in the Field and in the Territory (including the conduct of those Development activities in the Territory set forth in any Global Development Plan, the conduct of those Commercialization activities in the Territory set forth in any Product Commercialization Plan and/or those Co-Commercialization Activities for which it is responsible in the Co-Commercialization Territory as set forth in the Co-Commercialization Agreement) and shall commit such resources (including employees, consultants, contractors, facilities, equipment and materials) as are commercially reasonable to conduct such Development activities and Commercialize such Licensed Products in the Territory.  Notwithstanding the foregoing, DS’s obligations with respect to the Commercialization of Licensed Products under this Section 3.6.1 shall also apply to Licensed Products for New Cancer Indications.

3.6.2ARQULE Diligence.  ARQULE shall use Commercially Reasonable Efforts during the Term to conduct ARQULE Development Activities in the Territory set forth in any Global Development Plan, if any, and to the extent applicable, all ARQULE Co-Commercialization Activities for which it is responsible in the Co-Commercialization Territory as set forth in the Co-Commercialization Agreement.

3.7Compliance.  Each Party shall perform its obligations under each Global Development Plan and Product Commercialization Plan in good scientific manner and in compliance in all material respects with all Applicable Laws.  For purposes of clarity, with respect to each activity performed under a Global Development Plan and/or Product Commercialization Plan that will or would reasonably be expected to be submitted to a Regulatory Authority in support of a Regulatory Filing or Drug Approval Application, the Party performing such activity shall comply in all material respects with GLPs, GMPs or Good Clinical Practices (or, if and as appropriate under the circumstances, International Conference on Harmonization (ICH) guidance or other comparable regulation and guidance of any Regulatory Authority in any country or region in the Territory).

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3.8Cooperation.  ARQULE and DS shall cooperate in the performance of the Development Program and, subject to the terms of this Agreement and any confidentiality obligations to Third Parties, shall exchange such data, information and materials as is reasonably necessary for the other Party to perform its obligations under any Global Development Plan and Product Commercialization Plan.

3.9Global Commercialization Coordination.  At meetings of the JSC, representatives of the Parties will interact to ensure that the Commercialization activities and strategy are consistent on a global basis.  In connection therewith, ARQULE will have the right to (i) provide input into the global strategy applicable to the Commercialization of a Licensed Product and (ii) review the status of all significant Regulatory Filings applicable to the Commercialization of a Licensed Product.

3.10Reports; Information; Updates.

3.10.1Development Program Reports.  Each Party shall keep the JDC regularly informed of the progress of its efforts to Develop Licensed Products in the Field in the Territory.  Without limiting the generality of the foregoing, each Party shall, on at least a quarterly basis, provide the JDC with reports in reasonable detail regarding the status of all Clinical Trials, Manufacturing Development and other activities conducted under the Development Program, together with all raw data and results generated in each such Clinical Trial and such additional information that it has in its possession as may be reasonably requested from time to time by the JDC.

3.10.2Commercialization Reports.  Each Party shall keep the JSC regularly informed of the progress of its efforts to Commercialize Licensed Products in the Field in the Territory through periodic updates in advance of each JSC meeting.  Without limiting the generality of the foregoing, DS shall provide the JSC with annual written updates to each Product Commercialization Plan, which shall (a) summarize DS’s efforts to Commercialize Licensed Products, (b) identify the Regulatory Filings and Drug Approval Applications with respect to such Licensed Product that DS or any of its Affiliates or Sublicensees have filed, sought or obtained in the prior * (*) month period or reasonably expect to make, seek or attempt to obtain in the following * (*) month period and (c) summarize all clinical and other data

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generated by DS with respect to Licensed Products.  In addition, DS shall provide such additional information that it has in its possession as may be reasonably requested by ARQULE regarding the Commercialization of any Licensed Product, which request shall not be made more than * each Calendar Year.

3.10.3Right of Access.  Each Party shall provide the other Party with access to all clinical project plans and clinical data, results and information derived from or relating to all Clinical Trials conducted, and all Regulatory Filings prepared, with respect to Collaboration Compounds and/or Licensed Products (collectively, “Product-Related Data”) in English and at no additional cost or expense.  Notwithstanding anything to the contrary in this Agreement, ARQULE (a) may use, and provide to its Third Party licensees and collaborators, such Product-Related Data; provided, that, (i) ARQULE shall only have the right to share such Product-Related Data to its Third Party collaborators and licensees that have granted ARQULE the reciprocal right to share with DS clinical data, results and information, and information derived from or related to Regulatory Filings controlled by such Third Party collaborators and licensees for use with Licensed Products under this Agreement and (ii) ARQULE shall, upon DS’s request, use Commercially Reasonable Efforts to coordinate a global clinical trial targeting both within the Territory and the Asian Territory involving its Third Party collaborators and DS; (b) may use such Product-Related Data for the performance of its obligations and exercise of its rights under this Agreement; and (c) shall have a right of access, a right of reference and a right to use and incorporate all such Product-Related Data in any Regulatory Filings and Drug Approval Applications it makes with respect to Licensed Products.  The Parties shall cooperate so that such Product-Related Data is transferred to ARQULE as expeditiously as possible.

3.10.4Pharmacovigilence; Adverse Event Reports.

(a)Adverse Events.  Subject to the Regulatory Transition Plan, DS shall have the sole right and responsibility for furnishing timely notice to the applicable governmental agencies within the Territory of all side effects, drug interactions and other adverse effects identified or suspected with respect to the Licensed Products for the Targeted Indications administered, distributed, marketed and sold under authority of any IND, NDA or Regulatory Approvals issued by such governmental agencies.  ARQULE shall provide DS with any

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assistance that may be reasonably necessary to comply with all adverse reaction reporting requirements established by, or required under, any applicable IND, NDA or Regulatory Approvals and/or Applicable Laws within the Territory.  In addition to the updates described in Sections 3.10.1 and 3.10.2, DS shall provide ARQULE with all Adverse Event information and product complaint information relating to the Licensed Product as such information is compiled or prepared by DS in the normal course of business in connection with the Development or Commercialization of the Licensed Product and, in any event, within time frames consistent with reporting obligations under Applicable Laws.  DS shall provide such Adverse Event and product complaint information hereunder to ARQULE’s Alliance Manager unless ARQULE otherwise notifies DS.  At the request of ARQULE, DS and ARQULE shall meet with Kyowa to discuss information sharing and coordination with respect to reporting of Adverse Events and other safety matters.

(b)Global Safety Data Base.  Subject to the Regulatory Transition Plan, Adverse Events related to the use of the Licensed Product in the Territory shall be recorded in a single, centralized database, which shall be held by DS at DS’s facility.  The listings of all safety data will be provided to ARQULE and to Kyowa on the 1st and 15th of every month; provided, however, that in the event that either the 1st or the 15th  of a month is not a Business Day, then DS shall provide such listings on the next Business Day following such date.  Details of safety reporting activities relating to the Licensed Product in the Territory will be addressed in a pharmacovigilance agreement, which the Parties shall enter into after the Effective Date.

3.10.5Review of Regulatory Filings; Regulatory Meetings.

(a)Regulatory Filings.  DS shall (i) consult with ARQULE in good faith in the preparation of Key Regulatory Filings for Licensed Products and (ii) consider all comments of ARQULE in good faith, taking into account the due interests of ARQULE and the Development and Commercialization of the Licensed Product on a global basis.  In addition, subject to any Third Party confidentiality obligations, DS shall (i) provide ARQULE with drafts of each Key Regulatory Filing or correspondence pertaining to a Licensed Product and prepared for submission to the FDA or other Regulatory Authority at the same time as it is provided to internal reviewers at DS, and (ii) provide ARQULE with contemporaneous comments from

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internal reviewers at DS regarding such drafts and (iii) promptly provide ARQULE with copies of the document or other correspondence received from the FDA or other Regulatory Authority which relates to such Key Regulatory Filings pertaining to any Licensed Product.  DS shall advise ARQULE of the time period in which DS’s internal reviewers are required to complete their reviews and if ARQULE has not commented on such Key Regulatory Filing, or correspondence within such period, then ARQULE shall be deemed to have no comments on such Key Regulatory Filing or correspondence.  DS shall consider all comments of ARQULE in good faith, taking into account the best interests of the Collaboration and of the Development or Commercialization of the Licensed Product on a global basis.

(b)Regulatory Meetings.  DS shall provide ARQULE with at least thirty (30) days’ advance notice for a face-to-face meeting (and reasonable notice for telephonic meetings) with the FDA or other Regulatory Authority regarding a Drug Approval Application relating to, or Regulatory Approval for, any Licensed Product and ARQULE may provide advice to DS with respect to such meeting and elect to send up to two (2) persons to participate as an observer (at ARQULE’s sole cost and expense) in such meeting.

3.10.6Licensed Product Recalls.  In the event that any Regulatory Authority issues or requests a recall or takes similar action in connection with a Licensed Product, or in the event a Party reasonably believes that an event, incident or circumstance has occurred that may result in the need for a recall, market withdrawal or other corrective action regarding a Licensed Product either in the Territory or outside the Territory, such Party shall promptly advise the designated senior officer (the Vice-President of Regulatory Affairs in the case of ARQULE and the Vice-President of EU/US Quality Assurance, Daiichi Sankyo Pharma Development in the case of DS (or other respective designees)) of the other Party thereof by telephone or facsimile.  Except with respect to Co-Commercialized Licensed Products (for which recalls shall be covered in the Co-Commercialization Agreement), following such notification, DS shall decide and have control of whether to conduct a recall or market withdrawal in the Territory (except in the event of a recall or market withdrawal mandated by a Regulatory Authority, in which case it shall be required) or to take other corrective action in any country in the Territory and the manner in which any such recall, market withdrawal or corrective action shall be conducted; provided, that, DS shall keep ARQULE regularly informed regarding any such recall, market withdrawal or

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corrective action.  All expenses incurred by DS in connection with any such recall, market withdrawal or corrective action (including, without limitation, expenses for notification, destruction and return of the affected Licensed Product and any refund to customers of amounts paid for such Licensed Product) shall be the sole responsibility of DS.

3.11Development Cost Sharing; Reconciliation.

3.11.1Development Cost Sharing.  ARQULE shall be responsible for (a) * percent (*%) of all Other Development Costs incurred by ARQULE; (b) the ARQULE Cost-Sharing Percentage of all Shared Development Costs incurred by DS; and (c) all Shared Development Costs incurred by ARQULE that DS is not obligated to reimburse pursuant to Section 3.11.2.  DS shall be responsible for (a) * percent (*%) of all Other Development Costs incurred by DS; (b) the DS Cost-Sharing Percentage of all Shared Development Costs incurred by ARQULE; and (c) all Shared Development Costs incurred by DS that ARQULE is not obligated to reimburse pursuant to Section 3.11.2.

3.11.2Reconciliation of Shared Development Costs.

(a)Reports; Reconciliation Payments.

(i)Within * following the end of each Calendar Quarter during the Term, each of ARQULE and DS shall submit to the other Party, and the Joint Finance Committee if it is established, a written report setting forth in reasonable detail all Shared Development Costs incurred by each such Party over such Calendar Quarter applicable to the conduct of the Development Program.  If the JFC has not been established, the JSC will designate one Party to prepare a report as set forth below. Within * following the receipt by the designated Party or the Finance Committee of such written reports, the designated Party or the Joint Finance Committee shall issue a written consolidated report setting forth in reasonable detail (a) the calculation of all such Shared Development Costs incurred by both Parties over such Calendar Quarter, (b) the calculation of the net amount owed by DS to ARQULE or by ARQULE to DS in order to ensure the appropriate sharing of such Shared Development Costs, and (c) the cumulative amount of the Deferred Development Costs to be recovered by DS from milestones and royalties.  Unless disputed, amounts reimbursed to

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either Party in respect of the Shared Development Costs shall be paid in U.S. Dollars according to the exchange procedure set forth in Section 4.3.5 within * (*) days of the time the consolidated report is provided.  In the event of a dispute concerning reimbursement settlement amounts, the portion in dispute shall be placed in an interest-bearing escrow account and allocated between the Parties upon good faith resolution of the dispute or by arbitration pursuant to Section 12.1.  If necessary, mutually agreed to adjustments or corrections to the reimbursement costs shall be made to the consolidated report before it is submitted for payment.  Otherwise, adjustments shall be made in the subsequent consolidated report.  Each Party shall have the right to audit the other Party’s records with respect to such consolidated report, in accordance with Section 3.11.2(b).

(ii)Notwithstanding anything to the contrary in Section 3.11.2(a)(i), that portion of Shared Development Costs incurred by DS for which ARQULE is otherwise responsible under Section 3.11.1 that are attributable to the conduct of any Phase 3 Development Activities (“Phase 3 Costs”) and that, together with Phase 3 Costs previously borne by ARQULE, exceed milestone payments and royalties previously paid to ARQULE (“Deferred Development Costs”) shall be borne by DS; provided, that, notwithstanding the foregoing, the Parties shall continue to have the responsibility to exchange the reports contemplated by Section 3.11.2 with respect to such Deferred Development Costs.  The aggregate amount of the Deferred Development Costs borne by DS shall be creditable by DS against the amount of (A) any milestone payments due and payable by DS to ARQULE on and after the date of deferral and (B) any royalty payments due and payable by DS to ARQULE on and after the date of deferral, until the Deferred Development Costs are recovered in full.

(b)Records; Audit Rights.  Each Party shall keep and maintain for * (*) years, or such other period of time as required by Applicable Laws if longer than * (*) years, complete and accurate records of Shared Development Costs incurred with respect to Licensed Products in sufficient detail to allow confirmation of same by the JSC and the other Party.  Each Party (the “Cost Auditing Party”) shall have the right for a period of * (*) years, or such other period of time as required by Applicable Laws if longer than * (*) years, after such Shared Development Cost is reconciled in accordance with Section 3.11.2(a) to appoint at its expense an independent certified public accountant reasonably acceptable to the other Party (the “Cost

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Audited Party”) to audit the relevant records of the Cost Audited Party and its Affiliates to verify that the amount of such Development Costs was correctly determined.  The Cost Audited Party and its Affiliates shall each make its records available for audit by such independent certified public accountant during regular business hours at such place or places where such records are customarily kept, upon thirty (30) days written notice from the Cost Auditing Party.  Such audit right shall not be exercised by the Cost Auditing Party more than once in any Calendar Year and the records of Shared Development Costs for a given period may not be audited more than once.  All records made available for audit shall be deemed to be Confidential Information of the Cost Audited Party.  The results of each audit, if any, shall be binding on both Parties absent manifest error.  In the event there was an error in the amount of Shared Development Costs reported by the Cost Audited Party hereunder, (a) if the amount of Shared Development Costs was over reported, the Cost Audited Party shall promptly (but in any event no later than * (*) days after the Cost Audited Party’s receipt of the report so concluding) make payment to the Cost Auditing Party of the Cost Audited Party’s Cost-Sharing Percentage of over reported amount and (b) if the amount of Shared Development Costs was underreported, the Cost Auditing Party shall promptly (but in any event no later than * (*) days after the Cost Auditing Party’s receipt of the report so concluding) make payment to the Cost Audited Party of the Cost Audited Party’s Cost-Sharing Percentage of underreported amount.  The Cost Auditing Party shall bear the full cost of such audit unless such audit discloses an over reporting by the Cost Audited Party of more than * percent (*%) of the aggregate amount of Shared Development Costs reportable in any Calendar Year, in which case the Cost Audited Party shall reimburse the Cost Auditing Party for all costs incurred by the Cost Auditing Party in connection with such audit.

3.12Co-Commercialization Option.

3.12.1Exercise of Co-Commercialization Option.

(a)Notice of Last Patient/Last Visit and Anticipated NDA Filing.  DS shall give ARQULE written notice of (i) the date of the Last Patient/Last Visit in the last Phase 3 Clinical Trial for a Licensed Product to be conducted for the first Targeted Indication prior to the filing of an NDA for such Licensed Product for such Targeted Indication (“Last Patient/Last

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Visit Notice”), and (ii) its decision to file the NDA covering each Licensed Product for a second Targeted Indication after the unblinding of the data (if a blinded trial) for such Targeted Indication but at least * (*) days prior to the anticipated date of such anticipated filing (the “NDA Filing Notice”).

(b)Exercise of Co-Commercialization Option.  During the First Co-Commercialization Option Period, or in the event that ARQULE does not exercise the Co-Commercialization Option during the First Co-Commercialization Option Period, the Second Co-Commercialization Option Period, ARQULE shall have the option (the “Co-Commercialization Option”), in its sole discretion, to Co-Commercialize any Licensed Product in the Co-Commercialization Territory by providing written notice to DS (the “Co-Commercialization Option Notice”) which notice shall identify the Licensed Product (each, such Licensed Product, a “Co-Commercialized Licensed Product”).  If ARQULE exercises its Co-Commercialization Option with respect to any Licensed Product, (i) such Licensed Product will be deemed to be a Co-Commercialized Licensed Product for purposes of this Agreement, and (ii) the Parties shall (A) negotiate a Co-Commercialization Agreement for such Co-Commercialized Licensed Product in accordance with Section 3.12.1(c) and (B) form the USJMC in accordance with Section 2.5.

(c)Negotiation of Co-Commercialization Agreement.

(i)Preparation, Negotiation, Execution and Delivery.  Within * (*) days after ARQULE provides a Co-Commercialization Option Notice, the Parties shall commence the preparation of a Co-Commercialization Agreement (the “Co-Commercialization Agreement”) which shall (1) provide for the terms applicable to such Co-Commercialization; (2) conform in all material respects with the terms and conditions set forth in this Agreement and on Schedule 3 attached hereto; and (3) include such additional provisions as are usual and customary for inclusion in a co-promotion agreement between companies in the pharmaceutical industry.  For purposes of clarity, any additional terms negotiated by the Parties for inclusion in the Co-Commercialization Agreement shall supplement and shall not materially expand, limit or change the terms set forth in this Agreement and on Schedule 3 attached hereto.  The Parties hereby acknowledge and agree that the Co-Commercialization Agreement shall provide that (1)

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the Parties shall share Co-Commercialization Activities with respect to such Co-Commercialization Licensed Product in the Co-Commercialization Territory with ARQULE providing, on an Indication-by-Indication basis, at its option, up to * percent (*%) (which may include no Primary Detail Equivalents for a particular Targeted Indication) of all required Primary Detail Equivalents, but no more than * (*) representatives unless a Licensed Product is approved for * or more Targeted Indications, pursuant to the Co-Commercialization Plan; (2) DS shall be responsible for all account management of community, academic and Veterans hospitals and associated activities, including, but not limited to, communication with hospital pharmacy and the pharmacy and therapeutics committee, formulary management and contracting; (3) DS shall reimburse ARQULE for the fully-burdened cost incurred by ARQULE in conducting such Co-Commercialization Activities, but in no event shall such rate be in excess of the fully burdened cost to DS of employing or otherwise engaging its own representatives who detail its oncology products in the Co-Commercialization Territory (including incentive compensation for the ARQULE sales personnel on the same basis as the incentive compensation of DS personnel in the Co-Commercialization Territory); (4) such ARQULE sales personnel shall engage in Detailing the Co-Commercialized Licensed Product and any other product being co-promoted by ARQULE and DS in the first position, but shall not expend more than * percent (*%) of the detailing effort on any other products unless the Parties agree, and shall not promote any other product that is directly competitive with the Co-Commercialized Licensed Product or any other product of DS; provided, that in the event ARQULE’s sales personnel promote any product that is not being co-promoted by ARQULE and DS, there shall be a reduction in DS’s reimbursement of ARQULE’s cost that is proportional to the percentage of detailing effort expended on products that are not being co-promoted by ARQULE and DS; and (5) the Parties shall create the USJMC with equal representation to oversee the global Commercialization of the Licensed Product, including the Co-Commercialization of the Co-Commercialized Licensed Product in the Co-Commercialization Territory.  Disputes shall be referred to the JSC for resolution in accordance with Section 2.1.5.  For clarity, in the event that ARQULE exercises the Co-Commercialization Option, the Parties shall negotiate and execute the Co-Commercialization Agreement as set forth herein and form the USJMC as set forth in Section 2.5, whether or not ARQULE will provide any Primary Detail Equivalents for any particular Indication.  The Parties shall negotiate the Co-Commercialization Agreement in good faith and with sufficient diligence as is required to

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execute and deliver the Co-Commercialization Agreement within * (*) days after ARQULE provides the Co-Commercialization Option Notice.

(ii)Dispute Resolution.  In the event the Parties fail to execute and deliver the Co-Commercialization Agreement within the * (*) day period described in Section 3.12.1(c)(i), the Parties shall (1) use reasonable efforts to complete such negotiations and to execute and deliver the Co-Commercialization Agreement as soon as possible after such * (*) day period and (2) without limiting the generality of the foregoing, after the expiration of such * (*) day period, each produce a list of issues on which they have failed to reach agreement and submit its list to the JSC to be resolved in accordance with Section 2.1.5.

3.12.2Co-Commercialization Plan.  As soon as practicable following the exercise by ARQULE of a Co-Commercialization Option, the USJMC shall prepare a co-commercialization plan (the “Co-Commercialization Plan”) for each Co-Commercialized Licensed Product for the Co-Commercialization Territory which shall include, but not be limited to, (a) demographics and market dynamics, market strategies, and estimated launch date of such Co-Commercialized Licensed Product in the Co-Commercialization Territory, (b) a sales and expense forecast (including at least five (5) years of estimated sales and expenses), manufacturing plans and targeted label claims for such Co-Commercialized Licensed Product in the Co-Commercialization Territory, (c) a marketing plan (including five (5) year advertising and Detailing forecasts and Pricing strategies) for such Co-Commercialized Licensed Product in the Co-Commercialization Territory, (d) a five (5) year budget for such Co-Commercialized Licensed Product for the Co-Commercialization Territory, and (e) sales force strategy, training plans, territorial divisions and allocation of targeted audience.  The USJMC shall use reasonable commercial efforts to prepare such Co-Commercialization Plan within * (*) days after ARQULE’s exercise of its Co-Commercialization Option.  The Co-Commercialization Plan shall be updated by the USJMC not less than annually.  The Co-Commercialization Plan and annual written updates thereto shall be approved by the USJMC by a date to be established by the USJMC taking into account DS’s and ARQULE’s annual budget planning calendars, but no later than December 31 of each Calendar Year.

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3.12.3         Labeling.  All product labels for Co-Commercialized Licensed Products shall include, in equal prominence, the names of both DS and ARQULE.  The JSC shall have the responsibility of meeting not less frequently than annually and deciding whether changes in the particular appearance in labeling of packaging and containers of Co-Commercialized Licensed Products or in the product information are required.

3.12.4         Cooperation; Additional Information.  In connection with ARQULE’s consideration of the exercise of a Co-Commercialization Option with respect to each Licensed Product, DS shall provide ARQULE with any information Controlled by DS and reasonably requested by ARQULE that is necessary or useful to ARQULE in determining whether to exercise such Co-Commercialization Option.

3.13         Expansion of the Field.  If at any time during the Term of this Agreement, either Party desires to add one or more Non-Cancer Indications to the Field that it wishes to pursue with respect to a Collaboration Compound or Licensed Product for purposes of this Agreement, such Party shall give written notice to the other Party, specifying the particular Collaboration Compound or Licensed Product and Non-Cancer Indication (each, an “Indication Proposal Notice”).  The other Party shall consider each such Indication Proposal Notice in good faith and shall, on or before * (*) days from the date of the Indication Proposal Notice, provide the proposing Party with a written response as to whether or not it is willing to add such Non-Cancer Indication to the Field, which consideration shall include a determination by the other Party in good faith as to whether it Controls the Technology and Patent Rights applicable to such Collaboration Compound or Licensed Product for such Non-Cancer Indication.  If the other Party indicates in its response that it is willing to add such Non-Cancer Indication to the Field, the Parties shall for a period of * (*) days from the date the proposing Party receives the written response from the other Party negotiate in good faith to complete and execute any amendment to this Agreement that may be required to add the Non-Cancer Indication to the definition of Field for purposes of this Agreement, including, without limitation, the inclusion of any amendments to the applicable Global Development Plans, and/or Product Commercialization Plans, as well as any amendments to the compensation payable by DS pursuant to Article 4, that may be required to add such Non-Cancer Indication to the Field; provided, that, (a) if any such Non-Cancer Indication is added to the Field, the royalties for such Non-Cancer Indication will be the same as

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for the other Targeted Indications and (b) such Non-Cancer Indication will be included as a Targeted Indication for purposes of determining whether a Milestone Event has been achieved in Section 4.2.1.  Upon the execution of such amendment by the Parties, any Non-Cancer Indication on which the Parties so agree shall be referred to herein as an “Approved Non-Cancer Indication” for purposes of this Agreement.

3.14         Additional Cancer Indications.  Either Party may at any time propose to the JDC a Clinical Trial of a Licensed Product for a Cancer Indication for the treatment of a type of tumor that is not already included in the Global Development Plan, and is not a type of tumor that is within the scope of an approved Cancer Indication for a Licensed Product that has received Commercialization Regulatory Approval (a “New Cancer Indication”).  The JDC shall consider such proposal and if such Clinical Trial is not approved by the JDC within * (*) days of the date that such trial was proposed to the JDC (or in the event such trial was proposed to the JDC other than at a meeting of the JDC, within * (*) days of the date that the JDC first meets (whether in person or by teleconference) following the date such trial was proposed to the JDC), then the matter shall be resolved as a Joint Decision as set forth in Section 2.2.5.  During the decision period, the proposing Party shall timely provide all information reasonably requested by any member of the JDC that would be material to making a determination as to whether such proposed Clinical Trial should be approved.  If such Clinical Trial is not approved by the JSC or the Designated Senior Officers, then the proposing Party shall have the right to conduct such Clinical Trial, at is own expense, unless the JSC or the Designated Senior Officers determine, as a Joint Decision, that there is a substantial safety risk in the proposed Clinical Trial that is greater than the safety risk in other Clinical Trials of the same Licensed Product being conducted by the Parties for other Targeted Indications, or that there is a material risk of adversely affecting the label of the Licensed Product for other Targeted Indications as a result of the proposed Clinical Trial.  The Party conducting such proposed Clinical Trial shall furnish the other Party with a copy of the proposed protocol at least * (*) days prior to submission to the FDA or EMEA, as applicable, and shall give good faith consideration to comments received from the other Party within such * (*) day period.  If the Licensed Product involved in such Clinical Trial receives Commercialization Regulatory Approval in the United States, in any Major European Country or from the EMEA for the New Cancer Indication, then the other Party shall reimburse the proposing Party for *% of the External Development Costs relating to such Clinical Trial (“Total

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Reimbursable Costs”) that the other Party would have otherwise been responsible for if the JDC would have approved such trial (i.e., *% of *% of the External Development Costs incurred in such Clinical Trial), provided that, (a) in the event that Commercialization Regulatory Approval is obtained in the United States prior to its being obtained from the EMEA or in any Major European Country, then the other Party shall reimburse the proposing Party for * percent (*%) of the Total Reimbursable Costs and shall only be responsible for reimbursing the remaining * (*%) of the Total Reimbursable Costs at such time as Commercialization Regulatory Approval is obtained from either the EMEA or in any Major European Country and (b) in the event that Commercialization Regulatory Approval is obtained from either the EMEA or in any Major European Country prior to its being obtained in the United States, then the other Party shall reimburse the proposing Party for * percent (*%) of the Total Reimbursable Costs and shall only be responsible for reimbursing the remaining * percent (*%) of the Total Reimbursable Costs at such time as Commercialization Regulatory Approval is obtained in the United States.  The foregoing right may only be exercised once in any twenty-four month period by each Party.  No milestone payments will be due for such a Clinical Trial until Commercialization Regulatory Approval is obtained in the United States, the EMEA or any Major European Country, as applicable; provided that if Commercialization Regulatory Approval is obtained in a “niche” Targeted Indication that will not materially increase the sale of the Licensed Product, as determined by the JSC as a Joint Decision, then no milestone payments will be due for the conduct of such Clinical Trial or as a result of such Commercialization Regulatory Approval.  If Commercialization Regulatory Approval is obtained in the Target Indication that is not in a “niche” Targeted Indication that will materially increase the sale of the Licensed Product, as determined by the JSC as a Joint Decision, then all milestones based on Clinical Trials and Commercialization Regulatory Approval of the Targeted Indication will be due upon receipt of Commercialization Regulatory Approval (unless the relevant number of milestones have been fully paid for other Targeted Indications).  The rights provided by this section shall apply only to New Cancer Indications.  Neither Party shall, unless expressly approved by the JDC, have the right to conduct a Clinical Trial for a Cancer Indication that is not a New Cancer Indication.  Examples of Cancer Indications that are not New Cancer Indications, include, but are not limited to, new dosing regimens, combinations with other therapeutic agents, patient sub-sets, and line of therapy for a tumor when the tumor is already within the Global Development Plan, or the tumor

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is already within the scope of an approved Cancer Indication for a Licensed Product that has received Commercialization Regulatory Approval.  For the avoidance of doubt, DS’s obligations with respect to Regulatory Filings of Licensed Products under Section 3.1.4(b) and the Commercialization of Licensed Products under Section 3.6.1 shall apply to Licensed Products for New Cancer Indications.

3.15         Additional Phase 5 Clinical Trials.  In the event that DS proposes a Phase 5 Clinical Trial that is not approved by the JDC or the JSC, DS may, at its option, conduct such Phase 5 Clinical Trial at its sole expense, unless the JSC or the Designated Senior Officers determine, as a Joint Decision, that there is a substantial safety risk in such Phase 5 Clinical Trial that is greater than the safety risk in other Clinical Trials of the same Licensed Product being conducted by the Parties, or that there is a material risk of adversely affecting the label of the Licensed Product as a result of such Phase 5 Clinical Trial.  DS shall furnish ARQULE with a copy of the proposed protocol at least * (*) days prior to the submission to the FDA, the EMEA or the Regulatory Authority in any Major European Country, if so submitted and as applicable, and shall give good faith consideration to comments received from ARQULE within such * (*) day period.  The out of pocket costs and internal costs incurred by DS in conducting such Phase 5 Clinical Trial shall not constitute a Shared Development Cost that is reimbursable under Section 3.11.

4.             PAYMENTS

4.1          Up-front Fee.  DS shall pay ARQULE a non-refundable, non-creditable up-front fee (the “Upfront Fee”) in the aggregate amount of Sixty Million Dollars (U.S. $60,000,000), payable by wire transfer in accordance with the wire transfer instructions of ARQULE provided in writing to DS, at the later of (i) thirty (30) days after the execution of the Binding Letter of Intent or (ii) within five (5) Business Days after the waiting period under the Hart-Scott-Rodino Act has expired or earlier been terminated.

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4.2           Milestone Payments.

4.2.1        Milestones.

(a)           Development and Regulatory Milestones.  Subject to Sections 4.2.2(c) and (d), DS shall make the following non-refundable payments to ARQULE within * (*) days after the occurrence of each of the following milestone events for each Licensed Product that achieves each such milestone:

Milestone Event	Milestone Payment
1. *	$* million
2. *	$* million
3. *	$* million
4. *	$* million
5. *	$* million
6. *	$* million
7. *	$* million
8. *	$* million
9. *	$* million
10. *	$* million

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Milestone Event	Milestone Payment
11. *	$* million
12. *	$* million
13. *	$* million
14. *	$* million
15. *	$* million
16. *	$* million
17. *	$* million
18. *	$* million
19. *	$* million
20. *	$* million

(b)           Sales Milestones.  In addition to the milestone payments contemplated by Section 4.2.1(a), DS shall make each of the following non-refundable, one-time

(1)           DS agrees to use best industry practices in order to execute the First Commercial Sale.

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payments to ARQULE within * (*) days after the first occurrence of the corresponding milestone event for the applicable Licensed Product:

Milestone Event	Milestone Payment
Annual Net Sales in a Calendar Year of $* million	$* million
Annual Net Sales in a Calendar Year of $* million	$* million
Annual Net Sales in a Calendar Year of $* billion	$* million
Annual Net Sales in a Calendar Year of $* billion	$* million

4.2.2        Notice and Payment of Milestones.

(a)           Definition of Indication.  For purposes of clarity, the use of the term Targeted Indication, if it is a Cancer Indication, in Section 4.2.1(a) above shall refer to a particular tumor type and not to changes in, or expansion of, the regulatory label applicable to a given tumor type.

(b)           Notice of Milestone Events.  DS shall provide ARQULE with prompt written notice upon each occurrence of a milestone event set forth in Section 4.2.1.  In the event that, notwithstanding the fact that DS has not given such a notice, and ARQULE believes any such milestone event has occurred, it shall so notify DS in writing and shall provide to DS the data, documentation or other information that supports its belief.  Any dispute under this Section 4.2.2 that relates to whether or not a milestone event has occurred shall first be referred to the JSC to be resolved in accordance with Section 2.1.5, but if not resolved as set forth in Section 2.1.5, shall be subject to arbitration under Section 12.1.

(c)           Skipped Milestones.  If at the time any given milestone payment set forth in Section 4.2.1 is due and one or more preceding milestone payments for antecedent milestone events,  for the same Indication in the case of development and regulatory milestones, have not been paid, then such unpaid preceding milestone payments shall be paid at such time as well.  For example, (i) if a milestone payment is made for the Acceptance of a Drug Approval Application with respect to a Licensed Product for the second Indication but no Phase 3 Clinical

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Trials were conducted with respect to that Licensed Product for the second Indication, the milestone payment associated with the Initiation of a Phase 3 Clinical Trial for that Licensed Product will be paid concurrently with the milestone payment for the Acceptance of a Drug Approval Application for the second Indication and (ii) if the first Calendar Year in which Net Sales reach $* million is also the first Calendar Year in which Net Sales reach $* million, then both the milestone payment for achievement of $* million of Net Sales and the milestone payment for achievement of $* million of Net Sales will be paid concurrently.

(d)           MiT Tumor Milestones.  Notwithstanding anything to the contrary in this Section 4.2.1, in the event both of (i) the milestone event numbers 4, 8, 12, 16 or 20 in Section 4.2.1(a) above (the “MiT Tumor Milestones”) and (ii) milestone event numbers 3, 7, 11, 15 or 19 in Section 4.2.1(a) above occurs, only the corresponding milestone payments to the early to occur milestone events between (i) and (ii) shall be paid.  For the purposes of determining occurrence of other milestone events, the MiT Tumor Milestones shall not be counted in the first, second or third Indications.

4.3          Payment of Royalties; Royalty Rates; Accounting and Records.

4.3.1        Payment of Royalties.  DS shall pay ARQULE a royalty based on Annual Net Sales of each Licensed Product in the Territory in each Calendar Year (or partial Calendar Year) commencing with the First Commercial Sale of such Licensed Product in any country in the Territory and ending upon the last day of the last Royalty Term for such Licensed Product, at the following rates:

Annual Net Sales Increment in the Territory	Royalty Rate applicable for such tier
Up to $* million	*%
Above $* million, but less than or equal to $* billion	*%
Above $* billion	*%

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(a)           Adjustments to Royalties.

(i)            In the event that a Licensed Product is sold as part of a Combination Product, where “Combination Product” means any unified dose (e.g., not a kit of two separate and distinct drug dosage forms) of pharmaceutical product which is comprised of Licensed Product and other therapeutically active compound(s) and/or ingredients (collectively the “Other Products”), Net Sales of Licensed Product, for the purposes of determining royalty payments, shall be determined by multiplying the Net Sales of the Combination Product by the fraction, A / (A+B) where A is the weighted average sale price of the Licensed Product when sold separately in finished form, and B is the weighted average sale price of the Other Products sold separately in finished form, in each case in the country of sale of the Combination Product in the Calendar Quarter of such sale.  In the event that no separate sales are made of either the Licensed Product or the Other Products, the reasonably estimated commercial value thereof will be used instead of the sale price.  Each of “weighted average sale price” and “reasonably estimated commercial value” shall be determined as set forth below:

“Weighted average sale price” and “reasonably estimated commercial value,” as the case may be, for a Licensed Product and Other Products shall be calculated once at the commencement of each Calendar Year and such amount shall be used during all applicable royalty reporting periods for the entire following Calendar Year.  When determining the weighted average sale price of a Licensed Product or Other Products, the weighted average sale price shall be calculated by dividing the Net Sales (translated into U.S. dollars in accordance with Section 4.3.5 hereof) by the units of active ingredient sold during the twelve (12) months (or the number of months sold in a partial Calendar Year) of the preceding Calendar Year for the respective Licensed Product or Other Products.  “Estimated commercial value” shall be determined by agreement of the Parties using criteria to be mutually agreed upon by the Parties.  If the Parties do not agree, such dispute shall be first referred to the JSC to be resolved in accordance with Section 2.1.5, but if not resolved as set forth in Section 2.1.5, shall be resolved in accordance with Section 12.1 hereof.  In the Calendar Year in which the First Commercial Sale occurs, a forecasted weighted average sale price will be used for the License Product and Other Products, if applicable.  Any over or under payment due to a difference between forecasted

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and actual weighted average sale prices will be paid or credited in the first royalty payment of the following Calendar Year.

(ii)           Generic Licensed Products.  In the event that one or more Third Parties sell a Generic Licensed Product (as defined below) in any country in which a Licensed Product is then being sold by DS, then, (i) during any Calendar Quarter in which sales of the Generic Licensed Product by such Third Parties are equal to or greater than * percent (*%) but less than * percent (*%) of aggregate unit sales of Licensed Products and Generic Licensed Products in such country (as measured by prescriptions or other similar information available from a Third Party Data Provider and applicable to such country) the applicable royalties in effect with respect to such Licensed Product in such country as specified in Section 4.3.1 shall be reduced by * percent (*%) and (ii) during any Calendar Quarter in which sales of the Generic Licensed Products by such Third Parties are equal to or greater than * percent (*%) of aggregate unit sales of Licensed Products and Generic Licensed Products in such country (as measured by prescriptions or other similar information available from a Third Party Data Provider and applicable to such country) the applicable royalties in effect with respect to such Licensed Product in such country as specified in Section 4.3.1 shall be reduced by * percent (*%).  Notwithstanding the foregoing, (i) DS’s obligation to pay royalties at * percent (*%) of the applicable royalty rates shall be reinstated on the first day of the Calendar Quarter immediately following the Calendar Quarter in which sales of such Generic Licensed Products account for less than * percent (*%) but more than * percent (*%) of aggregate unit sales of Licensed Products and Generic Licensed Products in such country and (ii) DS’s obligation to pay royalties at the full royalty rates shall be reinstated on the first day of the Calendar Quarter immediately following the Calendar Quarter in which sales of such Generic Licensed Products account for * percent (*%) or less of aggregate unit sales of Licensed Products and Generic Licensed Products in such country.  For purposes of this Section 4.3.1(a)(ii), a “Generic Licensed Product” means a pharmaceutical product that contains the same active ingredient as a Licensed Product and is bioequivalent to such Licensed Product; provided, that, any product sold by DS or any Affiliate or licensee of DS shall not be a Generic Licensed Product for purposes of this Agreement.

(b)           Limit on Royalty Reductions.  Notwithstanding Sections 4.3.1(a)(ii), in no event shall the royalties owed under Sections 4.3.1 with respect to a Licensed

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Product in a country be reduced by operation of Sections 4.3.1(a)(ii), by more than * percent (*%) of what would otherwise be owed under Section 4.3.1 with respect to such Licensed Product in such country.

(c)           Payment Dates and Reports.  Royalty payments shall be made by DS within * (*) days after the end of each Calendar Quarter, commencing with the Calendar Quarter in which the First Commercial Sale of a Licensed Product occurs.  DS shall also provide, at the same time each such payment is made, a report showing: (a) the Net Sales of each Licensed Product by type of Licensed Product and country in the Territory; (b) the total amount of deductions from gross sales to determine Net Sales; (c) the applicable royalty rates for Licensed Products in each country in the Territory after applying any reductions set forth above; and (d) a calculation of the amount of royalty due to ARQULE.

4.3.2        Records; Audit Rights.  DS and its Affiliates and Sublicensees shall keep and maintain for * (*) years, or such other period of time as required by Applicable Laws if longer than * (*) years, from the date of each payment of royalties hereunder complete and accurate records of gross sales and Net Sales by DS and its Affiliates and Sublicensees of each Licensed Product, in sufficient detail to allow royalties to be determined accurately.  ARQULE shall have the right for a period of * (*) years, or such other period of time as required by Applicable Laws if longer than * (*) years, after receiving any such payment to appoint at its expense an independent certified public accountant reasonably acceptable to DS to audit the relevant records of DS and its Affiliates and Sublicensees to verify that the amount of such payment was correctly determined.  DS and its Affiliates and Sublicensees shall each make its records available for audit by such independent certified public accountant during regular business hours at such place or places where such records are customarily kept, upon thirty (30) days written notice from ARQULE.  Such audit right shall not be exercised by ARQULE more than once in any Calendar Year or more than once with respect to sales of a particular Licensed Product in a particular period.  All records made available for audit shall be deemed to be Confidential Information of DS.  The results of each audit, if any, shall be binding on both Parties absent manifest error.  In the event there was an underpayment by DS hereunder, DS shall promptly (but in any event no later than * (*) days after DS’s receipt of the report so concluding) make payment to ARQULE of any shortfall.  Should the audit lead to the discovery

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of a discrepancy to DS’s detriment, then DS may credit the amount of the discrepancy without interest against any future payments due to ARQULE under Section 4.3.1.  ARQULE shall bear the full cost of such audit unless such audit discloses an underreporting by DS of more than * percent (*%) of the aggregate amount of royalties payable in any Calendar Year, in which case DS shall reimburse ARQULE for all costs incurred by ARQULE in connection with such audit.

4.3.3        Overdue Payments.  All royalty payments not made within the time period set forth in Section 4.3.1(c), including underpayments discovered during an audit, and all milestone payments not made within the time period specified in Section 4.3.1, shall bear interest at a rate of * percent (*%) per month from the due date until paid in full or, if less, the maximum interest rate permitted by Applicable Laws.  Any such overdue royalty or milestone payment shall, when made, be accompanied by, and credited first to, all interest so accrued.

4.3.4        Payments; Withholding Tax.

(a)           Payments in U.S. Dollars.  All payments made by DS under this Article 4 shall be made by wire transfer in U.S. dollars in accordance with instructions given in writing from time to time by ARQULE.

(b)           Withholding Taxes.  If Applicable Laws require withholding of income or other taxes imposed upon any payments made by DS to ARQULE under this Agreement, DS shall (i) make such withholding payments as may be required, (ii) subtract such withholding payments from such payments, (iii) submit appropriate proof of payment of the withholding taxes to ARQULE within a reasonable period of time, and (iv) promptly provide ARQULE with all official receipts with respect thereto.  DS shall render ARQULE reasonable assistance in order to allow ARQULE to obtain the benefit of any present or future treaty against double taxation which may apply to such payments.

4.3.5        Foreign Currency Exchange.  All payments to be made by DS to ARQULE or by ARQULE to DS under this Agreement shall be made in United States dollars and shall be paid by bank wire transfer to such bank account as may be designated in writing by the other Party from time to time.  If, in any Calendar Quarter, Net Sales are made in any currency other than United States dollars, such Net Sales shall be converted into United States

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dollars using the conversion rate as of the last day of such Calendar Quarter as published in the Wall Street Journal.

5.             CONFIDENTIALITY

5.1           Confidentiality.

5.1.1        Confidentiality Obligations.  ARQULE and DS each recognizes that the other Party’s Confidential Information and Proprietary Materials constitute highly valuable assets of such other Party.  ARQULE and DS each agrees that, subject to Sections 5.1.2 and 5.3, (a) it will not disclose, and will cause its Affiliates and sublicenses (or Sublicensees, as the case may be) not to disclose, any Confidential Information or Proprietary Materials of the other Party, and (b) it will not use, and will cause its Affiliates and Sublicensees not to use, any Confidential Information or Proprietary Materials of the other Party except as expressly permitted hereunder.  The obligations of each Party under this Section 5.1.1 shall remain in effect during the Term and for an additional ten (10) years following the expiration or termination of this Agreement.

5.1.2        Limited Disclosure.  ARQULE and DS each agrees that disclosure of its Confidential Information or any transfer of its Proprietary Materials may be made by the other Party to (a) any employee, consultant or Affiliate of such other Party who requires such Confidential Information or Proprietary Materials for a Party to exercise its rights or carry out its responsibilities under this Agreement or (b) Third Party subcontractor engaged by a Party under an agreement approved by the JDC pursuant to Section 6.2.1 to enable such other Party to exercise its rights or to carry out its responsibilities under this Agreement; provided, that, any such disclosure or transfer shall only be made to Persons who are bound by written obligations as described in Section 5.1.3.  In addition, ARQULE and DS each agrees that the other Party may disclose its Confidential Information (a) on a need-to-know basis to such other Party’s legal and financial advisors, (b) as reasonably necessary in connection with an actual or potential (i) permitted sublicense of such other Party’s rights hereunder, (ii) debt or equity financing of such other Party or (iii) merger, acquisition, consolidation, share exchange or other similar transaction involving such Party and any Third Party, and (c) for any other purpose with the other Party’s consent, not to be unreasonably withheld.  In addition, each Party agrees that the other Party may disclose such Party’s Confidential Information or provide such Party’s Proprietary Materials (A) 

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as reasonably necessary to file, prosecute or maintain Patent Rights, or to file, prosecute or defend litigation related to Patent Rights, in accordance with this Agreement; or (B) as required by Applicable Laws as determined by the disclosing Party in its reasonable discretion; provided, that, in the case of any disclosure under this clause (B), the disclosing Party shall (1) if practicable, provide the other Party with reasonable advance notice of and an opportunity to comment on any such required disclosure and (2) if requested by the other Party, cooperate in all reasonable respects with the other Party’s efforts to obtain confidential treatment or a protective order with respect to any such disclosure, at the other Party’s expense.  Notwithstanding the foregoing, (x) DS may disclose Mechanism of Inhibition Information only to individuals who are employees of DS and its Affiliates, who are directly engaged in the Development of a Collaboration Compound and who require such Mechanism of Inhibition Information in order to perform the Development activities assigned to them (each, a “Permitted Employee”), and not to consultants, Third Party subcontractors and (y) DS may not include any Mechanism of Inhibition Information in any hardcopy or electronic database or other archive to which any person who is not a Permitted Employee has access.

5.1.3        Employees, Consultants and Third Party Subcontractors.  ARQULE and DS each hereby represents that all of its employees and consultants, all of the employees and consultants of its Affiliates, and all of its Third Party subcontractors who participate in the activities of the Collaboration or have access to Confidential Information or Proprietary Materials of the other Party are or will, prior to their participation or access, be bound by written obligations to maintain such Confidential Information or Proprietary Materials in confidence.  Each Party agrees to use, and to cause its Affiliates to use, reasonable efforts to enforce such obligations and to prohibit its employees and consultants from using such information except as expressly permitted hereunder.  Each Party will be liable to the other for any disclosure or misuse by its employees, consultants, Affiliates or Third Party subcontractors of Confidential Information or Proprietary Materials of the other Party.

5.2           Publicity.  The Parties acknowledge that the terms of this Agreement constitute Confidential Information of each Party and may not be disclosed except as permitted by Sections 5.1.2 and 5.2.  Notwithstanding the foregoing, the terms of this Agreement may be disclosed by a Party to investment bankers, analysts, investors and potential investors, lenders and potential

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lenders and other sources and other potential sources of financing, or any acquirer or merger partner and potential acquirer or merger partner but only to the extent reasonably necessary.  In addition, a copy of this Agreement may be filed by either Party with the Securities and Exchange Commission if such filing is required by law or regulation.  In connection with any such filing, such Party shall endeavor to obtain confidential treatment of economic and trade secret information, and shall provide the other Party with the proposed confidential treatment request with reasonable time for such other Party to provide comments, which comments shall be reasonably considered by the filing Party.  Except for public announcements of the occurrence of any milestone event and any event that ARQULE reasonably believes is material under Applicable Laws, neither Party shall issue a press or news release or make any similar public announcement (it being understood that publication in scientific journals, presentation at scientific conferences and meetings and the like are intended to be covered by Section 5.3 and not subject to this Section 5.2) related to the Development Program without the prior written consent of the other Party.  Each Party shall provide the other Party an advance copy of any proposed press release relating to this Agreement or any Licensed Product to the extent reasonably practicable and shall consider any comments or proposals for a joint press release if agreed to by the Parties.

5.3           Publications and Presentations.  The Parties acknowledge that scientific publications and presentations must be strictly monitored to prevent any adverse effect from premature publication or dissemination of results of the activities hereunder.  Each Party agrees that, except as required by Applicable Laws, it shall not publish or present, or permit to be published or presented, the results of the Development Program without the prior review by and written approval of the other Party.  Each Party shall provide to the other Party the opportunity to review each of the submitting Party’s proposed abstracts, manuscripts or presentations (including, without limitation, information to be presented verbally) that relate to the Development Program at least * (*) days prior to its intended presentation or submission for publication, and such submitting Party agrees, upon written request from the other Party given within such * (*) day period, not to submit such abstract or manuscript for publication or to make such presentation until the other Party is given up to * (*) days from the date of such written request to seek appropriate patent protection for any material in such publication or presentation that it reasonably believes may be patentable.  Notwithstanding the foregoing, in the event that a

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Party reasonably requests a response by the other Party in less than * (*) days, then the reviewing Party shall use Commercially Reasonable Efforts to respond in the time period requested.  Once such abstracts, manuscripts or presentations have been reviewed and approved by each Party, the same abstracts, manuscripts or presentations do not have to be provided again to the other Party for review for a later submission for publication.  Each Party also shall have the right to require that any of its Confidential Information that is disclosed in any such proposed publication or presentation be deleted prior to such publication or presentation.  In any permitted publication or presentation by a Party, the other Party’s contribution shall be duly recognized, and co-authorship shall be determined in accordance with customary standards.  Each Party (a) expressly acknowledges that the other Party’s business may be substantially dependent on its ability to publish results in scientific journals, presentation at scientific conferences and meetings and (b) agrees that it shall not unreasonably withhold, condition or delay its consent to any request by the other Party to publish results of the Development Program in accordance with its internal publication guidelines.

5.4           Prior Approved Publication.  Notwithstanding Sections 5.2 and 5.3, either Party may include in a public disclosure or in a scientific or medical publication or representation, without prior delivery to or review by the other Party, any information which has previously been included in a public disclosure or scientific or medical publication that has been reviewed pursuant to Section 5.2 or Section 5.3 or published or publicly disclosed by the other Party.

5.5           Mechanism of Inhibition Information.  Notwithstanding anything to the contrary set forth herein, including without limitation, the right to disclose Confidential Information of ARQULE set forth in Section 5.2 and the rights to publish set forth in Section 5.3, DS shall in no event disclose any Mechanism of Inhibition Information.

6.             LICENSE GRANTS; EXCLUSIVITY

6.1           Licenses.

6.1.1        ARQULE License Grants.

(a)           Development Program.  Subject to the other terms of this Agreement, ARQULE hereby grants to DS an exclusive, except as to ARQULE as set forth

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herein, royalty-free, worldwide license or sublicense (with respect to Licensed Technology and Licensed Patent Rights licensed by Third Parties to ARQULE) during the Term, with the right to grant sublicenses solely as provided in Section 6.2.1, under Licensed Technology and Licensed Patent Rights for the sole purpose of conducting DS Development Activities as part of the Development Program, including without limitation, the Manufacture of Collaboration Compounds and Licensed Products for use in Development.

(b)           Commercialization Licenses.  Subject to the other terms of this Agreement, ARQULE hereby grants to DS (i) an exclusive, except as to ARQULE as set forth herein, royalty-bearing license or sublicense (with respect to Licensed Technology and Licensed Patent Rights licensed by Third Parties to ARQULE) during the Term, with the right to grant sublicenses subject to Section 6.2.2, under Licensed Technology and Licensed Patent Rights for the sole purpose of Commercializing Co-Commercialized Licensed Products in the Field in the U.S. Territory and (ii) an exclusive (even as to ARQULE), royalty-bearing license or sublicense (with respect to Licensed Technology and Licensed Patent Rights licensed by Third Parties to ARQULE) during the Term, including the right to grant sublicenses solely as provided in Section 6.2.2, under Licensed Technology and Licensed Patent Rights for the sole purpose of Commercializing Licensed Products in the Field in the ROW Territory.

6.1.2        DS License Grants.

(a)           Development Program.  Subject to the other terms of this Agreement, DS hereby grants to ARQULE a non-exclusive, royalty-free, worldwide license during the Term, with the right to grant sublicenses solely as provided in Section 6.2.1, under DS Technology, DS Patent Rights for the sole purpose of conducting ARQULE Development Activities as part of the Development Program.

(b)           Co-Commercialized Licensed Products.  Subject to the other terms of this Agreement, DS hereby grants to ARQULE a non-exclusive, royalty-free license during the Term, without the right to grant sublicenses, under DS Technology and DS Patent Rights for the sole purpose of Commercializing Co-Commercialized Licensed Products in the Field in the U.S. Territory.

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(c)           Licensed Products.  Subject to the other terms of this Agreement, DS hereby grants to ARQULE a non-exclusive, perpetual, royalty-free, worldwide license, with the right to grant sublicenses solely as provided in this Section 6.1.2(c), under DS Technology, DS Patent Rights and DS’s interest in Joint Technology and Joint Patent Rights, to develop, have developed, make, have made, sell, have sold, import and have imported Licensed Products for any and all uses within and outside of the Field outside the Territory.  ARQULE shall have the right to grant sublicenses under the license granted to it under this Section 6.1.2(c) solely to Third Party licensees and collaborators (i) that are developing and/or commercializing Licensed Products outside of the Territory and (ii) that have granted ARQULE the reciprocal right to include Technology and/or Patent Rights of such Third Party licensee or collaborator as Licensed Technology and/or Licensed Patent Rights under this Agreement.

6.1.3        Disclosure of Technology.  Each Party shall disclose to the other Party all Technology and Patent Rights Controlled by such Party that is reasonably necessary or useful for the Development, or Commercialization of Licensed Products, and all such Technology and Patent Rights shall be included in the licenses granted in this Section 6.1.

6.2           Right to Sublicense.

6.2.1        Development Program Licenses.  Notwithstanding anything contained herein to the contrary, either Party shall have the right to grant sublicenses under the license granted to it under Sections 6.1.1(a) and 6.1.2(a), respectively, solely to Third Party subcontractors engaged by such Party to perform designated functions related to the conduct of Development activities under the Development Program or to Affiliates; provided, that, (a) except as to sublicenses to Affiliates, such Party shall obtain the prior approval of the JDC, as reflected in minutes of the JDC, to each sublicense grant; (b) such Party shall remain responsible for the satisfactory accomplishment of such work in accordance with the terms and conditions of this Agreement; and (c) each such Third Party subcontractor shall enter into a written agreement containing such provisions as are normal and customary for similar types of agreements.

6.2.2        Commercialization Licenses.  DS shall have the right to grant sublicenses to Sublicensees and Affiliates of DS under the Commercialization license granted to it under Section 6.1.1(b), with respect to Licensed Products for sale in the Territory in the Field;

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provided, that, (a) to the extent any such sublicense is with respect to the Commercialization of a Licensed Product in the United States to an entity other than an Affiliate of DS, DS shall obtain the prior written consent of ARQULE, which may be withheld in its sole discretion; (b) it shall be a condition of any such sublicense that such Sublicensee or Affiliate of DS agrees to be bound by all terms of this Agreement applicable to the Commercialization of Licensed Products in the Field in the Territory (including, without limitation, Article 5); (c) DS shall provide written notice to ARQULE of any such proposed sublicense at least * (*) days prior to such execution and provide copies to ARQULE of each such sublicense within ten (10) days of its execution; (d) if DS grants a sublicense to a Sublicensee or Affiliate of DS, DS shall be deemed to have guaranteed that such Sublicensee or Affiliate of DS will fulfill all of DS’s obligations under this Agreement applicable to the subject matter of such sublicense; (e) DS shall not be relieved of its obligations pursuant to this Agreement as a result of such sublicense.

6.3           No Other Rights.  DS shall have no rights to use or otherwise exploit ARQULE Technology, ARQULE Patent Rights, or ARQULE Proprietary Materials, and ARQULE shall have no rights to use or otherwise exploit DS Technology, DS Patent Rights or DS Proprietary Materials, in each case, except as expressly set forth herein.

6.4           Exclusivity.

6.4.1        ARQULE.  During the Term of this Agreement, ARQULE shall not, and shall cause each of its Affiliates to not, conduct any activity, either on its own, or with, for the benefit of, or sponsored by any Third Party, or sponsor any activity by a Third Party, in any case that involves the development or commercialization, or grant any license or other rights to any Third Party to utilize any Technology or Patent Rights Controlled by ARQULE or any of its Affiliates for the express purpose of developing or commercializing, any c-MET Inhibitor in the Territory except *.

6.4.2        DS.  During the Term of this Agreement, DS shall not, and shall cause each of its Affiliates to not, conduct any activity, either on its own, or with, for the benefit of, or sponsored by any Third Party, or sponsor any activity by a Third Party, in any case that that

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involves the development or commercialization, or grant any license or other rights to any Third Party to utilize any Technology or Patent Rights Controlled by DS or any of its Affiliates for the express purpose of developing or commercializing (a) any Collaboration Compound or Licensed Product (i) * or (ii) within the Territory for any use outside of the Field or (b)* except (A) hereunder in the Development Program or the Development or Commercialization of Licensed Products and (B) in connection with the conduct of any Permitted Transactions.

6.4.3        Future Negotiations.  Notwithstanding any provision of this Agreement or the Existing License Agreement, at the request of DS, ARQULE agrees to negotiate in good faith with DS (i) to permit DS to negotiate and enter into an agreement with Kyowa with respect to the Development and/or Commercialization of Licensed Products in the Asian Territory and (ii) to discuss the release of DS from the restriction set forth in Section 6.4.2(b) in order to permit DS to develop and/or commercialize * that is not * of * or * in the Asian Territory.

6.4.4        Permitted Transactions.  If either Party enters into an agreement for a Permitted Transaction, all Technology and Patent Right granted to such Party under the Permitted Transaction shall be included without further action in the licenses granted to the other Party by Section 6.1.1 or 6.1.2.

6.5           Use of Third Party Technology.

6.5.1        Existing License Agreement.  Notwithstanding anything to the contrary set forth in this Agreement, any royalties (or any other payments) to be paid under the Existing License Agreement shall be the sole responsibility of ARQULE.

6.5.2        Additional Third Party Development Technology.  Neither Party shall have any obligation to use any Patent Rights (other than the Licensed Patent Rights, Joint Patent Rights or DS Patent Rights) in connection with the Development or Commercialization of any Collaboration Compound or Licensed Product, and each Party hereby agrees that, except as provided in the Global Development Plan or as agreed to between the Parties following a proposal submitted in accordance with this Section 6.5.2, it shall not use any Technology owned or controlled by a Third Party (“Third Party Development Technology”) in the Development and/or Commercialization of any Collaboration Compound or Licensed Product if the other Party

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would thereby be required to pay a royalty or other compensation to the Third Party holder of rights to that Technology in connection therewith.  Either Party may at any time during the Term submit to the other Party and to the JDC a proposal to license Third Party Development Technology that such party reasonably believes would be necessary or useful in order to Develop or Commercialize any Collaboration Compound or Licensed Product.  Such proposal shall contain, at a minimum, information supporting the rationale for such license from a scientific, regulatory and commercial standpoint, an estimated Development critical path and a good faith estimate of the cost of such license.  Any decision with respect to the license of any such Third Party Development Technology shall be a Unanimous Decision for purposes of this Agreement.  If, in making any such Unanimous Decision, the JDC is unable to reach a determination with respect to any issue relating to a proposed license agreement, then such issue shall be resolved in accordance with the procedures set forth in Section 2.1.5.  If such issue cannot be resolved pursuant to Section 2.1.5, then neither Party shall proceed with the activities in the conduct of the Development Program to the extent doing so would infringe such Third Party Development Technology.  If the JDC determines, as a Unanimous Decision, that a license to such Third Party Development Technology should be obtained, (a) unless otherwise determined by the JDC, the Party that submitted the proposal shall be responsible for negotiating and executing such license agreement and (b) the Parties shall * for * percent (*%) of the * in such license agreement with respect to the license of such Third Party Development Technology.

7.             INTELLECTUAL PROPERTY RIGHTS

7.1           ARQULE Intellectual Property Rights.  ARQULE shall have sole and exclusive ownership of all right, title and interest, or exclusive license rights, on a worldwide basis in and to any and all ARQULE Technology and ARQULE Patent Rights.

7.2           DS Intellectual Property Rights.  DS shall have sole and exclusive ownership of all right, title and interest on a worldwide basis in and to any and all DS Technology, Product Trademark and DS Patent Rights.

7.3           Joint Intellectual Property Rights.  DS and ARQULE shall jointly own all Joint Technology and Joint Patent Rights.  Notwithstanding anything to the contrary contained herein or under Applicable Laws, except to the extent exclusively licensed to one Party under this

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Agreement set forth herein, the Parties hereby agree that, except as prohibited by Section 6.4, either Party may use or license or sublicense to Affiliates or Third Parties all or any portion of its interest in Joint Technology, Joint Patent Rights or jointly owned Confidential Information or Proprietary Materials for use outside the Field, or for use in the Field in connection with products that are not c-MET Inhibitors, without the prior written consent of the other Party, without restriction and without the obligation to provide compensation to the other Party; provided, that, during the Term of this Agreement, neither Party may use or license or sublicense to Third Parties all or any portion of its interest is Joint Technology and/or Joint Patent rights or jointly owned Confidential Information or Proprietary Materials for use in the Field in connection with any product that is a c-MET Inhibitor.

7.4           Patent Coordinators.  ARQULE and DS shall, by written notice to the other Party, each appoint a patent coordinator reasonably acceptable to the other Party (each, a “Patent Coordinator”) to serve as such Party’s primary liaison with the other Party on matters relating to patent filing, prosecution, maintenance and enforcement.  Each Party may replace its Patent Coordinator at any time by notice in writing to the other Party.  The initial Patent Coordinators shall be:

For ARQULE: Robert Connaughton, Deputy General Counsel, ARQULE, INC.

For DS: Dr. Kazuo Sato, General Manager, Intellectual Property, DAIICHI SANKYO, CO., LTD.

7.5           Inventorship.  The Patent Coordinators shall initially determine inventorship of Program Technology under U.S. patent law.  In case of a dispute between the Patent Coordinators over inventorship and, as a result, whether any particular Technology is ARQULE Technology, DS Technology or Joint Technology, such dispute shall be resolved according to U.S. patent law.

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8.             FILING, PROSECUTION AND MAINTENANCE OF PATENT RIGHTS

8.1           Patent Filing, Prosecution and Maintenance.

8.1.1        DS’s Prosecution Rights.

(a)           DS Program Technology.  Subject to Sections 8.1.4 and 8.1.5, DS, acting through patent counsel or agents of its choice, shall be responsible for the preparation, filing, prosecution and maintenance, at its sole cost and expense, of Patent Rights covering DS Program Technology.  At DS’s request, ARQULE shall cooperate with DS in all reasonable respects in connection with such preparation, filing, prosecution and maintenance of such Patent Rights, including but not limited to obtaining assignments to reflect chain of title consistent with the terms of this Agreement, gaining United States patent term extensions, supplementary protection certificates and any other extensions that are now or become available in the future wherever applicable.

(b)           DS Background Technology.  DS, at its sole expense and acting through patent counsel or agents of its choice, shall be responsible for the preparation, filing, prosecution and maintenance of all Patent Rights covering DS Background Technology.

8.1.2        ARQULE Prosecution Rights.

(a)           ARQULE Program Technology.  Subject to Sections 8.1.4 and 8.1.5, ARQULE, acting through patent counsel or agents of its choice, shall be responsible for the preparation, filing, prosecution and maintenance, at its sole cost and expense, of Patent Rights covering ARQULE Program Technology.  At ARQULE’s request, DS shall cooperate with and assist ARQULE in all reasonable respects in connection with such preparation, filing, prosecution and maintenance of such Patent Rights, including but not limited to obtaining assignments to reflect chain of title consistent with the terms of this Agreement, gaining United States patent term extensions, supplementary protection certificates and any other extensions that are now or become available in the future wherever applicable.

(b)           ARQULE Background Technology.  ARQULE, at its sole expense and acting through patent counsel or agents of its choice, shall be responsible for the preparation, filing, prosecution and maintenance of all Patent Rights covering ARQULE Background Technology.

8.1.3        Joint Prosecution.  In the case of Joint Patent Rights, the Parties shall meet through the Patent Coordinators or hold a teleconference or video conference to discuss in

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good faith and agree upon the content and form of any application for a Joint Patent Right and hereby agree that only the application in the form as agreed between the Parties may be filed in respect of the Joint Patent Rights.  Any dispute between the Patent Coordinators shall be released to the JSC for resolution pursuant to Section 2.1.5.  The Parties shall share the costs equally in respect of the preparation of the application, filing, prosecution, grant and maintenance of any Joint Patent Right jointly filed; and jointly instruct an appropriately qualified patent attorney to draft, file and prosecute the application and each Party will have equal control over the prosecution of the filing such that the patent attorney will only be able to act on unanimous instructions.  In the event that one Party is (i) not interested, or (ii) not willing to equally share the related cost and expense, with respect to any Joint Patent Rights in a given country, then the other Party shall have the right, at its own cost and expense, to file for and prosecute such Joint Patent Rights in such country in both Parties’ names.

8.1.4        Information and Cooperation.  Each Party that has responsibility for filing and prosecuting any Patent Rights under this Section 8.1 (a “Filing Party”) shall (a) regularly provide the other Party (the “Non-Filing Party”) with copies of all patent applications filed hereunder for Program Technology and other material submissions and correspondence with the patent offices, in sufficient time to allow for review and comment by the Non-Filing Party; and (b) provide the Non-Filing Party and its patent counsel with an opportunity to consult with the Filing Party and its patent counsel regarding the filing, filing countries or regions, and contents of any such application, amendment, submission or response.  The advice and suggestions of the Non-Filing Party and its patent counsel shall be taken into consideration in good faith by such Filing Party and its patent counsel in connection with such filing.  Each Filing Party shall pursue in good faith all reasonable claims and take such other reasonable actions, as may be requested by the Non-Filing Party in the prosecution of any Patent Rights covering any Program Technology under this Section 8.1; provided, however, if the Filing Party incurs any additional expense as a result of any such request, the Non-Filing Party shall be responsible for the cost and expenses of pursuing any such additional claim or taking such other activities.  In addition, DS agrees that if ARQULE claims any action taken under Section 8.1.1(a) would be detrimental to Patent Rights covering ARQULE Background Technology, ARQULE shall provide written notice to DS and the Patent Coordinators shall, as promptly as possible

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thereafter, meet to discuss and resolve such matter and, if they are unable to resolve such matter, the Parties shall refer such matter to a mutually agreeable outside patent counsel for resolution.

8.1.5        Abandonment.

(a)           Patent Rights owned solely by ARQULE or DS.  If a Filing Party decides to abandon or to allow to lapse any of the Patent Rights covering any Program Technology for which it has responsibility, it shall inform the Non-Filing Party of such decision promptly and, in any event, so as to provide the Non-Filing Party a reasonable amount of time to meet any applicable deadline to establish or preserve such Patent Rights in such country or region.  The Non-Filing Party shall have the right to assume responsibility for continuing the prosecution of such Patent Rights in such country or region and paying any required fees to maintain such Patent Rights in such country or region or defending such Patent Rights, through patent counsel or agents of its choice, which shall be at the Non-Filing Party’s sole expense.  The Non-Filing Party shall not become an assignee of any such Patent Rights as a result of its assumption of any such responsibility.  Upon transfer of such responsibility under this Section 8.1.5(a), the Filing Party shall promptly deliver to the Non-Filing Party copies of all necessary files related to the Patent Rights with respect to which responsibility has been transferred and shall take all actions and execute all documents reasonably necessary for the Non-Filing Party to assume such responsibility.

(b)           Joint Patent Rights.  If one Party decides to abandon its share of the Joint Patent Rights in any country or region (the “Abandoning Party”), it shall inform the other Party (the “Maintaining Party”) of such decision promptly.  The Maintaining Party shall have the right to assume all responsibility for continuing the prosecution of such Patent Rights in such country or region and paying any required fees to maintain such Patent Rights in such country or region or defending such Patent Rights, through patent counsel of its choice, which shall be at the Maintaining Party’s sole expense.  Upon abandonment of the Abandoning Party’s share of any Joint Patent Rights under this Section 8.1.5(b), the Abandoning Party shall take all actions and execute all documents reasonably necessary for the Maintaining Party to assume such responsibility.

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8.2           Legal Actions.

8.2.1        Third Party Infringement.

(a)           Notice.  In the event either Party becomes aware of (i) any possible infringement of any ARQULE Patent Rights, DS Patent Rights or Joint Patent Rights through the Development or Commercialization of a c-MET Inhibitor, or (ii) the submission by any Third Party of an abbreviated new drug application under the Hatch-Waxman Act for a product that includes a Licensed Product or Collaboration Compound or Backup Compound (each, an “Infringement”), that Party shall promptly notify the other Party and provide it with all details of such Infringement of which it is aware (each, an “Infringement Notice”).

(b)           DS Right to Enforce.

(i)            Enforcement of DS Background Patent Rights.  In the event that any Infringement relates to any Patent Rights covering DS Background Technology, DS shall have the sole right but not the obligation to enforce such claim.

(ii)           Enforcement of DS Program Patent Rights.  In the event that any Infringement relates to any DS Program Patent Rights, then DS shall have the first right (but not the obligation) to enforce such claim, which may include the institution of legal proceedings or other action.  DS shall keep ARQULE reasonably informed on a quarterly basis, in person or by telephone, prior to and during any such enforcement.  ARQULE shall assist DS, upon request, in taking any action to enforce any such Patent Rights and shall join in any such action if deemed to be a necessary party.  DS shall incur no liability to ARQULE as a consequence of such litigation or any unfavorable decision resulting therefrom, including any decision holding any such claim invalid, not infringed or unenforceable.  All costs, including without limitation attorneys’ fees, relating to such legal proceedings or other action shall be borne by DS.  If DS does not take commercially reasonable steps to abate the Infringement of such Patent Rights within * (*) days from any Infringement Notice (or * (*) days in the case of an Infringement resulting from the submission by any Third Party of an abbreviated new drug application under the Hatch-Waxman Act), then ARQULE shall have the right and option to do so at its expense.

(c)           ARQULE Right to Enforce.

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(i)            Enforcement of ARQULE Background Patent Rights.  In the event that any Infringement relates to any Patent Rights covering ARQULE Background Technology, ARQULE shall have the sole right but not the obligation to enforce such claim.

(ii)           Enforcement of ARQULE Program Patent Rights.  In the event that any Infringement relates to any ARQULE Program Patent Rights, then ARQULE shall have the first right (but not the obligation) to enforce such claim, which may include the institution of legal proceedings or other action.  ARQULE shall keep DS reasonably informed on a quarterly basis, in person or by telephone, prior to and during any such enforcement.  DS shall assist ARQULE, upon request, in taking any action to enforce any such Patent Rights and shall join in any such action if deemed to be a necessary party.  ARQULE shall incur no liability to DS as a consequence of such litigation or any unfavorable decision resulting therefrom, including any decision holding any such claim invalid, not infringed or unenforceable.  All costs, including without limitation attorneys’ fees, relating to such legal proceedings or other action shall be borne by ARQULE.  If ARQULE does not take commercially reasonable steps to abate the Infringement of such Patent Rights within * (*) days from any Infringement Notice (or * (*) days in the case of an Infringement resulting from the submission by any Third Party of an abbreviated new drug application under the Hatch-Waxman Act), then DS shall have the right and option to do so at its expense.  For purposes of clarity, notwithstanding anything to the contrary herein, DS shall have no right to enforce any ARQULE Patents Rights covering Product Technology.

(d)           Joint Patent Rights.  In the event of an Infringement of a Joint Patent Right, then, the Parties shall enter into good faith discussions as to whether and how to eliminate the Infringement.  Subject to the foregoing, (i) ARQULE shall have the first right and option to eliminate such Infringement by reasonable steps, which may include the institution of legal proceedings or other action and (ii) all costs, including without limitation attorneys’ fees, relating to such legal proceedings or other action shall be borne by ARQULE.  If ARQULE does not take or initiate commercially reasonable steps to eliminate the Infringement within * (*) days from any Infringement Notice (or * (*) days in the case of an Infringement resulting from the submission by any Third Party of an abbreviated new drug application under the Hatch-Waxman Act), then DS shall have the right and option to do so at its expense.  Neither DS nor ARQULE

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shall admit the invalidity or unenforceability of any Joint Patent Rights or Valid Claims therein without the other Party’s prior written consent.

(e)           Representation of Either Party.  Each Party shall have the right to be represented by counsel that it selects in any legal proceedings or other action instituted under this Section 8.2.1 by the other Party.

(f)            Cooperation by the Parties.  In any action, suit or proceeding instituted under this Section 8.2.1, the Parties shall cooperate with and assist each other in all reasonable respects in the Territory.  Upon the reasonable request of the Party instituting such action, suit or proceeding, the other Party shall join such action, suit or proceeding and shall be represented using counsel of its own choice, at the requesting Party’s expense.  If a Party with the right to initiate legal proceedings under this Section 8.2.1 lacks standing to do so and the other Party has standing to initiate such legal proceedings, then the Party with standing shall initiate such legal proceedings at the request and expense of the other Party.

(g)           Allocation of Recoveries.  Any amounts recovered by DS pursuant to actions under Section 8.2.1(b)(ii) or 8.2.1(d), whether by settlement or judgment, shall be allocated in the following order: (i) first, to reimburse DS and ARQULE for their reasonable out-of-pocket expenses in making such recovery (which amounts shall be allocated pro rata if insufficient to cover the totality of such expenses); and (ii) second, (A) with respect to actual damages, to DS and ARQULE in the * and (B) with respect to punitive, special or consequential damages, * percent (*%) to DS and * percent (*%) to ARQULE.  Any amounts recovered by ARQULE pursuant to actions under Section 8.2.1(c)(ii) or 8.2.1(d) shall be allocated in the following order: (X) first, to reimburse ARQULE and DS for their reasonable out of pocket expenses in making such recovery (which amounts shall be allocated pro rata if insufficient to cover the totality of such expenses); and (Y) then, 100% to ARQULE.

8.2.2        Defense of Claims.  In the event that any action, suit or proceeding is brought against either Party or any Affiliate or Sublicensee of either Party alleging the infringement of the Technology or Patent Rights of a Third Party by reason of or the

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Development or Commercialization of any Licensed Product, such Party shall notify the other Party within five (5) days of the earlier of (a) receipt of service of process in such action, suit or proceeding, or (b) the date such Party becomes aware that such action, suit or proceeding has been instituted, and the JSC shall meet as soon as possible to discuss the overall strategy for defense of such matter.  Except as agreed by the JSC (subject to dispute resolution as a Unanimous Decision), (a) DS shall have the obligation to defend such action, suit or proceeding in the Territory; (b) ARQULE and/or any of its Affiliates or sublicensees shall have the right to separate counsel at its own expense in any such action, suit or proceeding; and (c) the Parties shall cooperate with each other in all reasonable respects in any such action, suit or proceeding.  All expenses of such action, suit or proceeding shall be borne by DS.  Each Party shall promptly furnish the other Party with a copy of each communication relating to the alleged infringement that is received by such Party including all documents filed in any litigation.  In no event shall either Party settle or otherwise resolve any such action, suit or proceeding brought against the other Party or any of its Affiliates or sublicensees without the other Party’s prior written consent.

8.2.3        Trademark Prosecution and Registration.  DS shall be responsible for the filing, prosecution, maintenance, defense and enforcement of all Product Trademarks created during the Development and/or Commercialization at DS’s expense.  DS grants ARQULE the non-exclusive, royalty-free, non-assignable (except in connection with an assignment of this Agreement pursuant to Section 12.10), non-transferable (except in connection with an assignment of this Agreement pursuant to Section 12.10) and non-sublicensable license of the Product Trademark in USA.  All goodwill deriving from the use of the Product Trademark will accrue solely and exclusively to DS.  ARQULE shall use the Product Trademark only in accordance with reasonable standards.  In any circumstances, ARQULE may not apply or register the same or a confusingly similar trademark without prior written consent of DS.  ARQULE agrees not to engage in any form of conduct, or make any statements or representations, that disparage or otherwise harm the reputation, goodwill or commercial interest related to the Product Trademark.  In all Licensed Product primary and secondary packages and labels and all marketing and promotional literature, ARQULE shall be presented and described as the Party who developed the Licensed Product, and the ARQULE name and logo shall appear in the same in size and prominence as the DS name and logo on all Licensed Product primary and secondary packages and labels and all marketing and promotional literature used in the

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Territory, unless prohibited by Applicable Laws; provided, however, that if it is commercially impracticable to do so, the Parties will discuss in good faith an alternate presentation of their names and logos.

8.2.4        Trademark Infringement in USA and Kyowa’s Territory.  If, during the Term, any Third Party uses, infringes, threatens to infringe or otherwise damages the Product Trademark in the U.S. Territory or Asian Territory, each Party shall immediately notify the other.  DS shall have the right, but not the obligation, to take all reasonable steps, whether by action, suit, proceeding, or otherwise to prevent further infringement of or damage to the Product Trademark in the U.S. Territory.  The Parties agree to fully cooperate with each other in the prosecution, defense and/or settlement of any such suits.

8.2.5        Domain Name for INN and Trademark.  The Parties shall collaborate to register and maintain the domain names that correspond to the International Nonproprietary Names (“INN”) of the Licensed Products and the Product Trademarks or their candidates for the Licensed Product in the Territory in order to prevent the registration of such domain names by Third Parties in bad faith.  ARQULE shall inform DS of (i) the first to the third INN candidates for registering the related domain name considering the priority of INN candidates, and (ii) the INN selected by WHO, so that DS may register the corresponding domain names in timely and efficient manner.

9.             TERM AND TERMINATION

9.1           Term.  This Agreement shall commence on the Effective Date and shall continue in full force and effect, unless otherwise terminated pursuant to Section 9.2, until (a) such time as DS is no longer Developing at least * (*) Licensed Product or (b) if, as of the time DS is no longer Developing at least * (*) Licensed Product, DS is Commercializing a Licensed Product, such time as all Royalty Terms for all Licensed Products have ended, whichever is later (the “Term”).  Upon the expiration of this Agreement as set forth in this Section 9.1, the license rights granted hereunder shall be converted to perpetual and fully paid-up licenses.

9.2           Termination.  Subject to Section 12.1(d), this Agreement may be terminated by either Party as follows:

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9.2.1        Unilateral Right to Terminate Agreement.

(a)           DS Rights to Terminate.  DS may terminate this Agreement, (A) at any time prior to the Initiation of Phase 3 Clinical Trials with respect to a Licensed Product on not less than ninety (90) days’ prior written notice to ARQULE and (B) at any time on and after the Initiation of Phase 3 Clinical Trials with respect to a Licensed Product on not less than one hundred eighty (180) days’ prior written notice to ARQULE.

(b)           ARQULE Right to Terminate.  Except to the extent the following is unenforceable under the law of a particular jurisdiction where a patent application with ARQULE Patent Rights is pending or a patent within ARQULE Patent Rights is issued, ARQULE may terminate this Agreement immediately upon written notice to DS in the event that DS or any of its Affiliates Challenges any ARQULE Patent Right or assists a Third Party in initiating a Challenge of any ARQULE Patent Right.

9.2.2        Termination for Breach.  Except as set forth herein, either Party may terminate this Agreement, effective immediately upon written notice to the other Party, for a material breach by the other Party of any obligation under this Agreement that remains uncured * (*) days (* (*) days in the event that the breach is a failure of either Party to make any payment required hereunder) after the non-breaching Party first gives written notice to the other Party of such breach and its intent to terminate this Agreement if such breach is not cured.

9.2.3        Termination for Insolvency.  In the event that either Party files for protection under bankruptcy laws, makes an assignment for the benefit of creditors, appoints or suffers appointment of a receiver or trustee over all or substantially all of its property, files a petition under any bankruptcy or insolvency act or has any such petition filed against it which is not discharged within * (*) days of the filing thereof, then the other Party may terminate this Agreement effective immediately upon written notice to such Party.  In connection therewith, all rights and licenses granted under this Agreement are, and shall be deemed to be, for purposes of Section 365(n) of the United States Bankruptcy Code, licenses of rights to “intellectual property” as defined under Section 101(35A) of the United States Bankruptcy Code.

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9.3           Consequences of Termination of Agreement.  In the event of the termination of this Agreement pursuant to Section 9.2, the following provisions shall apply, as applicable.

9.3.1        Termination by ARQULE under 9.2.1(b), 9.2.2 or 9.2.3 or by DS under Section 9.2.1(a).  If this Agreement is terminated by DS pursuant to Section 9.2.1(a) or by ARQULE pursuant to Section 9.2.1(b), 9.2.2 or 9.2.3:

(a)           all licenses and rights granted to DS, including without limitation, all licenses granted to DS under Article 6, shall immediately terminate and ARQULE shall no longer be subject to any obligations under Section 6.4.1;

(b)           DS shall continue to be subject to the obligations set forth in Section 6.4.2 for one (1) year following such termination;

(c)           each Party shall promptly return all Confidential Information and Proprietary Materials of the other Party that are not subject to a continuing license hereunder; provided, that, each Party may retain one copy of the Confidential Information of the other Party in its archives solely for the purpose of establishing the contents thereof and ensuring compliance with its obligations hereunder;

(d)           with respect to a termination of this Agreement by DS pursuant to Section 9.2.1(a) only, from the period commencing on the date that ARQULE receives the notice described in Section 9.2.1(a), DS shall (i) relinquish its right to representation on any Committee that is formed under this Agreement and (ii) all decisions that were designated as DS Decisions, Joint Decisions and Unanimous Decisions shall be made solely by ARQULE;

(e)           upon request of ARQULE, DS shall promptly, and in any event within sixty (60) days after ARQULE’s request (which request may specify any or all of the actions in clauses (i) through (xii);

(i)            assign to ARQULE, free of charge, the ownership of all Product Trademarks applicable to Licensed Products; provided that after such assignment ARQULE shall assume all responsibility for maintaining such Product Trademarks, and if

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ARQULE does not request such assignment, DS may terminate or withdraw from registration, all such Product Trademarks.

(ii)           assign to ARQULE, free of charge, or at DS’s choice, grant ARQULE an exclusive, worldwide, royalty-free license, with the unrestricted right to sublicense, under all DS Patent Rights and DS Technology specific to the Collaboration Compounds and Licensed Products and a non-exclusive worldwide, royalty-free license, with the unrestricted right to sublicense, under all other DS Patent Rights and DS Technology necessary or useful for ARQULE to Develop and Commercialize the Licensed Products.

(iii)          transfer to ARQULE all of its right, title and interest in all Regulatory Filings, Drug Approval Applications and Regulatory Approvals then in its name applicable to Licensed Products, if any, and all Confidential Information Controlled by it as of the date of termination relied on by such Regulatory Filings, Drug Approval Applications and Regulatory Approvals;

(iv)          notify the applicable Regulatory Authorities and take any other action reasonably necessary to effect such transfer;

(v)           provide ARQULE with copies all correspondence between DS and such Regulatory Authorities relating to such Regulatory Filings, Drug Approval Applications and Regulatory Approvals;

(vi)          assign (or cause its Affiliates to assign) to ARQULE all agreements with any Third Party with respect to Manufacture of Collaboration Compounds and Licensed Products or the conduct of Clinical Trials for the Licensed Products,  including, without limitation, agreements with contract research organizations, clinical sites and investigators, unless expressly prohibited by any such agreement (in which case DS shall cooperate with ARQULE in all reasonable respects to secure the consent of such Third Party to such assignment);

(vii)         cooperate with ARQULE, cause its Affiliates to cooperate with ARQULE and use Commercially Reasonable Efforts to require any Third Party with which DS has an agreement with respect to the conduct of Clinical Trials for Licensed Products or the

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Manufacture of Licensed Products (including, without limitation, agreements with contract manufacturing organizations, contract research organizations, clinical sites and investigators), to cooperate with ARQULE in order to accomplish the transfer to ARQULE of similar rights as held by DS under its agreements with such Third Parties;

(viii)        provide ARQULE at cost with all supplies of Collaboration Compounds and Licensed Products in the possession of DS or any Affiliate or contractor of DS;

(ix)           provide ARQULE with copies of all reports and data generated or obtained by DS or its Affiliates pursuant to this Agreement that relate to any Licensed Product that have not previously been provided to ARQULE;

(x)            grant to ARQULE the right to use and disclose in connection with the Development and Commercialization of Licensed Products all DS Confidential Information Controlled by DS that is necessary or useful for the Development and Commercialization of Licensed Products, and agree that all such DS Confidential Information shall be subject to clause (i) of the second sentence of Section 5.1.1 as if it were ARQULE Confidential Information but shall not be subject to clause (ii) of the second sentence of Section 5.1.1;

(xi)           if DS has Manufactured, is Manufacturing or is having manufactured such Licensed Product or any intermediate of such Licensed Product as of the date of termination, (A) transfer copies of all documents and materials Controlled by DS and embodying DS Technology and/or DS Patent Rights that are at the time of such termination being used by DS or its Third Party manufacturers to Manufacture a Collaboration Compound or Licensed Product, including but not limited to all suppliers, analytical methods, quality standards, specifications, commercial API formula, process chemistry, Manufacturing process descriptions, process flows, cycle times, process parameters, process equipment type and sizes, cleaning methods, commercial API samples, master safety data sheets, and stability reports (the “DS Manufacturing Know-How”) solely to enable the Manufacture of a Collaboration Compound or Licensed Product by ARQULE, its Affiliates or any Third Party manufacturer of ARQULE; (B) promptly make available to ARQULE or any such Third Party manufacturer a reasonable number of appropriately trained personnel to provide, on a mutually convenient

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timetable, technical assistance in the transfer of DS Manufacturing Know-How to ARQULE at ARQULE’s reasonable expense to reimburse DS for the time expended by DS personnel; (C) cooperate with ARQULE, cause its Affiliates to cooperate with ARQULE and use Commercially Reasonable Efforts to require its Third Party manufacturers of a Collaboration Compound or Licensed Product to cooperate with ARQULE in order to accomplish the transfer to ARQULE of similar rights as held by DS under its Third Party manufacturer agreements; and (D) supply ARQULE with its requirements of such Collaboration Compound or Licensed Product for up to * (*) months following such termination at a transfer price equal to (1) DS’s Manufacturing Cost thereof for the first * (*) months and (2) DS’s Manufacturing Cost thereof, plus * percent (*%) for the second * (*) month period; and

(xii)          enter into negotiations with ARQULE and agree upon and implement a plan for the orderly transition of Development and Commercialization from DS to ARQULE in a manner consistent with Applicable Laws and standards of ethical conduct of human Clinical Trials, including without limitation, the transfer of the global safety data to ARQULE, and will seek to replace all DS personnel engaged in any Development or Commercialization activities, in each case, as promptly as practicable.

(f)            ARQULE shall reimburse DS for its actual out-of-pocket costs of complying with Section 9.3.1(e)(i), (ii), (iii), (iv), (v), (vi), (vii), (viii) and (ix), up to a total of * dollars (US $*).

9.3.2        Termination by DS.  If this Agreement is terminated by DS pursuant to Section 9.2.2 or 9.2.3:

(a)           all licenses granted by ARQULE to DS pursuant to Section 6.1.1 (including any additional licenses required to Manufacture API), shall survive the termination in each case subject to DS’s continued payment of all milestone, royalty and other payments under and in accordance with this Agreement with respect thereto;

(b)           all licenses granted by DS to ARQULE pursuant to Section 6.1.2(a) and 6.1.2(b) shall continue, provided, that, the Parties shall negotiate, in good faith, the terms of payment to DS by ARQULE for any such licenses, and in the case of termination by DS

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pursuant to Section 9.2.2, ARQULE shall continue to be subject to the obligations set forth in Section 6.4.1 for one (1) year following such termination; and

(c)           each Party shall promptly return all Confidential Information and Proprietary Materials of the other Party that are not subject to a continuing license hereunder; provided, that, each Party may retain one copy of the Confidential Information of the other Party in its archives solely for the purpose of establishing the contents thereof and ensuring compliance with its obligations hereunder.

9.4           Surviving Provisions.  Termination or expiration of this Agreement for any reason shall be without prejudice to:

(a)           survival of rights specifically stated in this Agreement to survive, including without limitation as set forth in Section 9.3;

(b)           the rights and obligations of the Parties provided in Articles 1, 5, 7, 8 (with respect to Joint Patent Rights and DS Patent Rights licensed to ARQULE pursuant to Section 9.3.1(e)(ii)), 10, 11 and 12 and Sections 3.10.4(b), 6.3, 9.3 and 9.4 shall survive such termination except as provided in this Article 9;

(c)           the obligations of either Party that have accrued prior to termination or expiration, including, without limitation, any milestone, royalty relating to a date or period prior to termination or expiration; and

(d)           any other rights or remedies provided at law or equity which either Party may otherwise have.

10.          REPRESENTATIONS AND WARRANTIES

10.1         Mutual Representations and Warranties.  ARQULE and DS each represents and warrants to the other, as of the Effective Date, as follows:

10.1.1      Organization.  It is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization, and has all requisite power and authority, corporate or otherwise, to execute, deliver and perform this Agreement.

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10.1.2      Authorization.  The execution and delivery of this Agreement and the performance by it of the transactions contemplated hereby have been duly authorized by all necessary corporate action and will not violate (a) such Party’s certificate of incorporation or bylaws, (b) any agreement, instrument or contractual obligation to which such Party is bound in any material respect, (c) any requirement of any Applicable Laws, or (d) any order, writ, judgment, injunction, decree, determination or award of any court or governmental agency presently in effect applicable to such Party.

10.1.3      Binding Agreement.  This Agreement is a legal, valid and binding obligation of such Party enforceable against it in accordance with its terms and conditions.

10.1.4      No Inconsistent Obligation.  It is not under any obligation, contractual or otherwise, to any Person that conflicts with or is inconsistent in any respect with the terms of this Agreement or that would impede the diligent and complete fulfillment of its obligations hereunder.

10.2         Additional Representations of ARQULE.  ARQULE represents and warrants to DS as follows:

10.2.1      Licensed Technology.  All Licensed Technology existing as of the Effective Date is Controlled by ARQULE.

10.2.2      Licensed Patent Rights.  To the actual knowledge of the Chief Executive Officer, the President, any Vice President or ARQULE’s internal patent counsel, as of the Effective Date, except as previously disclosed to DS, (i) no Third Party has initiated, or threatened in writing to initiate, any litigation against ARQULE or its Affiliates, including, without limitation, by initiating any declaratory judgment lawsuit, or by sending a cease-and-desist letter, alleging that the Licensed Patent Rights are invalid or unenforceable or that the use of the Licensed Patent Rights or Licensed Technology as contemplated by this Agreement infringes the Patent Rights of such Third Party and (ii) the Licensed Patent Rights listed on Schedule 2 are not invalid or unenforceable.

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10.3         Covenants of DS Relating to Existing License Agreement.

(a)           DS acknowledges receipt from ARQULE of a copy of the Existing License Agreement, with all financial information redacted.  As used in this Section 10.3, “Licensed Product,” “Back-Up Compound,” “Cancer Field,” “Regulatory Approval,” “Regulatory Activities,” “API,” “ARQULE Trademarks” and “Additional Field” shall have the meanings set forth in the Existing License Agreement.

(b)           DS acknowledges that DS is an “Other Licensee” within the meaning of the Existing License Agreement and that ARQULE has certain obligations and commitments under the Existing License Agreement with respect to Technology, Patent Rights and trademarks of an Other Licensee relating to Licensed Products.  DS agrees that ARQULE shall have the right to honor such obligations and fulfill such commitments, and that honoring such obligations and fulfilling such commitments shall not be a breach of this Agreement, notwithstanding anything to the contrary herein.  Such obligations and commitments include, without limitation:  (i) the rights of Kyowa with respect to ARQULE Trademarks set forth in Section 2.1.4 of the Existing License Agreement, (ii) the obligations of ARQULE and the rights of Kyowa with respect to Back-Up Compounds set forth in Section 3.7 of the Existing License Agreement, and (iii) the obligations of ARQULE and rights of Kyowa with respect to Indications in the Additional Field set forth in Section 3.8 of the Existing License Agreement.

(c)           Subject to reciprocal rights to DS as set forth in Section 3.1.4(b), DS hereby (i) agrees that DS shall provide to ARQULE, and that ARQULE shall have the right to provide to Kyowa, copies of any NDA or equivalent Drug Approval Application filed by DS with the FDA or the EMEA in the Cancer Field, and grants to Kyowa the right to access, reference, use and incorporate any such NDA consistent with the terms of the Existing License Agreement; (ii) agrees that DS shall provide to ARQULE, and that ARQULE shall have the right to provide to Kyowa, copies of any additional information or data with respect to Licensed Product generated by, or on behalf of, DS and owned or otherwise controlled by DS and necessary or useful for Kyowa to obtain any Regulatory Approvals or perform such other Regulatory Activities under the Existing License Agreement, or as is otherwise reasonably requested in writing by Kyowa; (iii) agrees that DS shall, at the request of ARQULE, attend regular meetings with Kyowa and ARQULE to discuss development and sales strategy with respect to Licensed Products; (iv) agrees to either grant a royalty-free license to ARQULE or

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Kyowa, in which case ARQULE or Kyowa shall pay or reimburse all maintenance fees in the Asian Territory, or at DS’s choice permit ARQULE to obtain, or to grant to Kyowa the right to obtain, at ARQULE’s or Kyowa’s own expense, registration in the Asian Territory of any Product Trademark used by DS in the Territory that does not incorporate the name or logo of DS and (v) grants to ARQULE an exclusive, royalty-free, fully paid-up, perpetual, irrevocable license, with the right to grant a sublicense to Kyowa, under DS Technology and DS Patent Rights and DS’s interest in Joint Technology and Joint Patent Rights to import and use Collaboration Compounds solely for use in Licensed Products and/or to develop, use, distribute for sale, offer for sale, sell, import and export Licensed Products in the Cancer Field, and the Additional Field if applicable under the Existing License Agreement, in the Asian Territory.

11.          INDEMNIFICATION

11.1         Indemnification of ARQULE by DS.  DS shall indemnify, defend and hold harmless ARQULE, its Affiliates, their respective directors, officers, employees and agents, and their respective successors, heirs and assigns (collectively, the “ARQULE Indemnitees”), against all liabilities, damages, losses and expenses (including, without limitation, reasonable attorneys’ fees and expenses of litigation) (collectively, “Losses”) incurred by or imposed upon ARQULE Indemnitees, or any of them, as a direct result of claims, suits, actions, demands or judgments of Third Parties, including, without limitation, personal injury and product liability claims (collectively, “Claims”), arising out of the Development of any Collaboration Compound or Licensed Product or the Commercialization (including, without limitation, the production, manufacture, promotion, import, sale or use by any Person) of any Licensed Product by DS or any of its Affiliates, Sublicensees, distributors or agents, and the Co-Commercialization of any Co-Commercialized Licensed Product by DS or any of its Affiliates, Sublicensees, distributors or agents, except with respect to any Claim or Losses that result from a breach of this Agreement by, or the gross negligence or willful misconduct of, ARQULE.

11.2         Indemnification of DS by ARQULE.  ARQULE shall indemnify, defend and hold harmless DS, its Affiliates, their respective directors, officers, employees and agents, and their respective successors, heirs and assigns (collectively, the “DS Indemnitees”), against all Losses incurred by or imposed upon DS Indemnitees, or any of them, as a direct result of Claims

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arising out of the Co-Commercialization by ARQULE or any of its Affiliates, sublicensees, distributors or agents of any Co-Commercialized Licensed Product, except with respect to any Claim or Losses that result from a breach of this Agreement by, or the gross negligence or willful misconduct of, DS.

11.3         Conditions to Indemnification.  A Person seeking recovery under this Article 11 (the “Indemnified Party”) in respect of a Claim shall give prompt notice of such Claim to the Party from which indemnification is sought (the “Indemnifying Party”); provided, that, the Indemnifying Party is not contesting its obligation under this Article 11, shall permit the Indemnifying Party to control any litigation relating to such Claim and the disposition of such Claim; provided, that, the Indemnifying Party shall (a) act reasonably and in good faith with respect to all matters relating to the settlement or disposition of such Claim as the settlement or disposition relates to such Indemnified Party and (b) not settle or otherwise resolve such claim without the prior written consent of such Indemnified Party (which consent shall not be unreasonably withheld, conditioned or delayed).  Each Indemnified Party shall cooperate with the Indemnifying Party in its defense of any such Claim in all reasonable respects and shall have the right to be present in person or through counsel at all legal proceedings with respect to such Claim.

11.4         Warranty Disclaimer.  EXCEPT AS OTHERWISE EXPRESSLY PROVIDED IN THIS AGREEMENT, NEITHER PARTY MAKES ANY WARRANTY WITH RESPECT TO ANY TECHNOLOGY, GOODS, SERVICES, RIGHTS OR OTHER SUBJECT MATTER OF THIS AGREEMENT AND EACH PARTY HEREBY DISCLAIMS ALL WARRANTIES, EXPRESS OR IMPLIED, INCLUDING, WITHOUT LIMITATION, WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE AND NONINFRINGEMENT.

11.5         No Warranty of Success.  Nothing contained in this Agreement shall be construed as a warranty, either express or implied, on the part of either Party that (a) the Development Program will yield a Licensed Product or otherwise be successful or meet its goals, time lines or budgets, or (b) the outcome of the Development Program will be commercially exploitable in any respect.

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11.6         Limited Liability.  NOTWITHSTANDING ANYTHING TO THE CONTRARY IN THIS AGREEMENT, AND EXCEPT WITH RESPECT TO EITHER PARTY’S OBLIGATIONS UNDER SECTION 11.1 AND 11.2 FOR INDEMNIFICATION PAYMENTS WITH RESPECT TO LOSSES PAID TO THIRD PARTIES, NEITHER PARTY SHALL BE LIABLE TO THE OTHER PARTY OR ANY OF ITS AFFILIATES FOR (I) ANY SPECIAL, PUNITIVE, INDIRECT, INCIDENTAL OR CONSEQUENTIAL DAMAGES, INCLUDING, WITHOUT LIMITATION, LOST PROFITS OR LOST REVENUES, OR (II) COST OF PROCUREMENT OF SUBSTITUTE GOODS, TECHNOLOGY OR SERVICES, WHETHER UNDER ANY CONTRACT, WARRANTY, NEGLIGENCE, STRICT LIABILITY OR OTHER LEGAL OR EQUITABLE THEORY.

12.          MISCELLANEOUS

12.1         Arbitration.  Any dispute, controversy or claim arising between the Parties with respect to this Agreement, including any dispute, controversy or claim relating to any Joint Decision (each, a “Dispute”), shall be resolved by binding arbitration before a panel of three (3) arbitrators in accordance with the rules of the AAA in effect at the time the proceeding is initiated.  In any such arbitration, the following procedures shall apply:

(a)           The panel will be comprised of one arbitrator chosen by DS, one by ARQULE and the third by the two so chosen.  If either, or both, of DS or ARQULE fails to choose an arbitrator or arbitrators within thirty (30) days after receiving notice of commencement of arbitration or if the two arbitrators fail to choose a third arbitrator within thirty (30) days after their appointment, then either or both Parties shall immediately request that the AAA select the remaining number of arbitrators to be selected, which arbitrator(s) shall have the requisite scientific background, experience and expertise.  The place of arbitration shall be Boston, Massachusetts.

(b)           Either Party may apply to the arbitrators for interim injunctive relief until the arbitration decision is rendered or the Dispute is otherwise resolved.  Either Party also may, without waiving any right or remedy under this Agreement, seek from any court having jurisdiction any injunctive or provisional relief necessary to protect the rights or property of that Party pending resolution of the Dispute pursuant to this Section 12.1.  The arbitrators

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shall have no authority to award punitive or any other type of damages not measured by a Party’s compensatory damages.  Each Party shall bear its own costs and expenses and attorneys’ fees in connection with any such arbitration; provided, that, the non-prevailing Party shall pay the costs and expenses incurred by the prevailing Party in connection with any such arbitration, including reasonable attorneys’ fees and costs.  The Parties acknowledge that while Section 12.3 shall apply to any such Dispute, it is the intention of the Parties not to use the discovery rules of the Commonwealth of Massachusetts in connection with any such Dispute.

(c)           Except to the extent necessary to confirm an award or decision or as may be required by Applicable Laws, neither Party nor any arbitrator may disclose the existence or results of any arbitration without the prior written consent of both Parties.  In no event shall any arbitration be initiated after the date when commencement of a legal or equitable proceeding based on the Dispute would be barred by the applicable Massachusetts statute of limitations.

(d)           In the event of a Dispute involving the alleged breach of this Agreement (including, without limitation, whether a Party has satisfied its diligence obligations hereunder), (i) neither Party may terminate this Agreement under Section 9.2.2 until resolution of the Dispute pursuant to this Section 12.1 and (ii) if the arbitrators render a decision that a breach of this Agreement has occurred, the arbitrators shall have no authority to modify the right of the non-breaching Party to terminate this Agreement in accordance with Section 9.2.2.

(e)           Any disputed performance or suspended performance pending the resolution of a Dispute that the arbitrators determine to be required to be performed by a Party shall be completed within a reasonable time period following the final decision of the arbitrators.

(f)            The decision of the arbitrators shall be the sole, exclusive and binding remedy between the Parties regarding the determination of all Disputes presented.  Any monetary payment to be made by a Party pursuant to a decision of the arbitrators shall be made in United States dollars, free of any tax or other deduction.

12.2         Notices.  All notices and communications shall be in writing and delivered personally or by internationally-recognized overnight express courier providing evidence of

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delivery or mailed via certified mail, return receipt requested, addressed as follows, or to such other address as may be designated from time to time:

If to DS:	If to ARQULE:
Daiichi Sankyo Co., Ltd.	ArQule, Inc.
3-5-1, Nihonbashi Honcho, Chuo-ku	19 Presidential Way
Tokyo 103-8426, Japan	Woburn, MA 01801, U.S.A.
Tel: +81-3-6225-1008	Tel: (781) 994-0300
Fax: +81-3-6225-1903	Fax: (781) 376-6019
Attention: Vice President, Licensing	Attention: General Counsel
	Attention Vice President, Business Development
	With a copy to:
	Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.
	One Financial Center
	Boston, Massachusetts 02111, U.S.A.
	Attention: Jeffrey Wiesen, Esq.
	Tel: (617) 542-6000
	Fax: (617) 542-2241

In addition, all notices to any Committee shall be sent to each Party’s designated members of such committees at such Party’s address stated above or to such other address as such Party may designate by written notice given in accordance with this Section 12.2.

Except as otherwise expressly provided in this Agreement or mutually agreed in writing, any notice, communication or document (excluding payment) required to be given or made shall be deemed given or made and effective upon actual receipt or, if earlier, (a) three (3) Business Days after deposit with an internationally-recognized overnight express courier with charges prepaid, or (b) five (5) Business Days after mailed by certified, registered or regular mail, postage prepaid, in each case addressed to a Parties at its address stated above or to such other address as such Party may designate by written notice given in accordance with this Section 12.2.

12.3         Governing Law.  This Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Massachusetts (U.S.A.), without regard to the application of principles of conflicts of law.

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12.4         Binding Effect.  This Agreement shall be binding upon and inure to the benefit of the Parties and their respective legal representatives, successors and permitted assigns.

12.5         Headings.  Section and subsection headings are inserted for convenience of reference only and do not form a part of this Agreement.

12.6         Counterparts.  This Agreement may be executed simultaneously in two or more counterparts, each of which shall be deemed an original and both of which, together, shall constitute a single agreement.

12.7         Amendment; Waiver.  This Agreement may be amended, modified, superseded or canceled, and any of the terms of this Agreement may be waived, only by a written instrument executed by each Party or, in the case of waiver, by the Party or Parties waiving compliance.  The delay or failure of either Party at any time or times to require performance of any provisions shall in no manner affect the rights at a later time to enforce the same.  No waiver by either Party of any condition or of the breach of any term contained in this Agreement, whether by conduct, or otherwise, in any one or more instances, shall be deemed to be, or considered as, a further or continuing waiver of any such condition or of the breach of such term or any other term of this Agreement.

12.8         No Third Party Beneficiaries.  Except as set forth in Sections 11.1 and 11.2, no Third Party (including, without limitation, employees of either Party) shall have or acquire any rights by reason of this Agreement.

12.9         Purposes and Scope.  The Parties hereto understand and agree that this Collaboration is limited to the activities, rights and obligations as set forth in this Agreement.  Nothing in this Agreement shall be construed (a) to create or imply a general partnership between the Parties, (b) to make either Party the agent of the other for any purpose, (c) to alter, amend, supersede or vitiate any other arrangements between the Parties with respect to any subject matters not covered hereunder, (d) to give either Party the right to bind the other, (e) to create any duties or obligations between the Parties except as expressly set forth herein, or (f) to grant any direct or implied licenses or any other right other than as expressly set forth herein.

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12.10       Assignment and Successors.  Neither this Agreement nor any obligation of a Party hereunder may be assigned by either Party without the consent of the other which shall not be unreasonably withheld, except that each Party may assign this Agreement and the rights, obligations and interests of such Party, (i) in whole or in part, to any of its Affiliates, or (ii) to any purchaser of all or substantially all of its assets to which this Agreement relates or to any successor corporation resulting from any merger, consolidation, share exchange or other similar transaction.

12.11       Force Majeure.  Neither DS nor ARQULE shall be liable for failure of or delay in performing obligations set forth in this Agreement, and neither shall be deemed in breach of its obligations, if such failure or delay is due to a Force Majeure.  In event of such Force Majeure, the Party affected shall use reasonable efforts to cure or overcome the same and resume performance of its obligations hereunder.

12.12       Interpretation.  The Parties hereto acknowledge and agree that: (a) each Party and its counsel reviewed and negotiated the terms and provisions of this Agreement and have contributed to its revision; (b) the rule of construction to the effect that any ambiguities are resolved against the drafting Party shall not be employed in the interpretation of this Agreement; and (c) the terms and provisions of this Agreement shall be construed fairly as to each Party and not in a favor of or against either Party, regardless of which Party was generally responsible for the preparation of this Agreement.  In addition, unless a context otherwise requires, wherever used, the singular shall include the plural, the plural the singular, the use of any gender shall be applicable to all genders, the word “or” is used in the inclusive sense (and/or) and the word “including” is used without limitation and means “including without limitation”.

12.13       Integration; Severability.  This Agreement is the entire agreement with respect to the subject matter hereof and supersedes all other agreements and understandings between the Parties with respect to such subject matter.  Notwithstanding the foregoing, this Agreement shall not supersede the Confidential Disclosure Agreement dated August 11, 2008 (the “Prior CDA”) between ARQULE and DS, which shall continue to be in full force and effect in accordance with its terms and conditions.  All disclosures and information from ARQULE to DS prior to the Effective Date shall be governed by the Prior CDA, and all disclosures and information from

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ARQULE to DS after the Effective Date shall be governed by this Agreement.  If any provision of this Agreement is or becomes invalid or is ruled invalid by any court of competent jurisdiction or is deemed unenforceable, it is the intention of the Parties that the remainder of the Agreement shall not be affected.

12.14       Further Assurances.  Each of ARQULE and DS agrees to duly execute and deliver, or cause to be duly executed and delivered, such further instruments and do and cause to be done such further acts and things, including, without limitation, the filing of such additional assignments, agreements, documents and instruments, as the other Party may at any time and from time to time reasonably request in connection with this Agreement or to carry out more effectively the provisions and purposes of, or to better assure and confirm unto such other Party its rights and remedies under, this Agreement.

12.15       Effective Date.  The Effective Date shall not occur until such time as the waiting period under the HSR Act shall have expired or earlier been terminated; provided, that, (a) no injunction (whether temporary, preliminary or permanent) prohibiting consummation of the transactions contemplated by this Agreement or any material portion hereof shall be in effect; and (b) no requirements or conditions shall have been imposed in connection therewith that are not otherwise reasonably satisfactory to the Parties (collectively, the “HSR Conditions”).

[Remainder of page intentionally left blank.]

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IN WITNESS WHEREOF, the Parties have caused this Agreement to be executed by their duly authorized representatives.

ARQULE, INC.
By:		/s/ Paolo Pucci
Name:			Paolo Pucci
Title:			Chief Executive Officer
DAIICHI SANKYO CO., LTD.
By:	/s/ Takashi Shoda
Name:			Takashi Shoda
Title:			President and Chief Executive Officer

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SCHEDULE 1

DESCRIPTION OF ARQ 197

ARQ 197 is a totally synthetic small molecule having a *.

Chemical Name:	*
Molecular Weight:	*
Molecular Formula:	*

1-1

SCHEDULE 2

ARQULE PATENT RIGHTS

Country/Code	Application Number	Filed	Publication Number	Publication Date
*	*	*
*	*	*	*	*
*	*	*
*	*	*	*	*
*	*	*	*	*
*	*	*
*	*	*	*	*
*	*	*	*	*
*	*	*	*	*
*	*	*	*	*
*	*	*
*	*	*	*	*
*	*	*	*	*
*	*	*
*	*	*	*	*
*	*	*
*	*	*	*	*
*	*	*
*	*	*
*	*	*
*	*	*
*	*	*	*	*
*	*	*	*	*

2-1

SCHEDULE 3

MATERIAL TERMS TO BE INCLUDED IN

CO-COMMERCIALIZATION AGREEMENT

The Co-Commercialization Agreement to be negotiated by the Parties shall contain the following material terms in addition to the provisions set forth in Section 3.12.1(c)(i) of the LICENSE, CO-DEVELOPMENT AND CO-COMMERCIALIZATION AGREEMENT.  Capitalized terms used in this Schedule 3 and not otherwise defined have the meanings given to them in the Agreement.

1.             Co-Commercialization Rights.

(a)           All Detailing calls shall be made in such markets as the USJMC reasonably considers to be appropriate for the successful Commercialization of Co-Commercialized Products based on objective, quantifiable information and market research data with the objectives of allocating to each of ARQULE and DS target audience and accounts from which each such Party will have the opportunity to attain its Detailing target.  The Parties recognize that it may be necessary from time to time to reassign individual accounts and/or target audience between the Parties and the USJMC shall be entitled to review the allocation of accounts as it reasonably determines to be appropriate.

(b)           Each Party shall use Commercially Reasonable Efforts to execute its responsibilities under each Co-Commercialization Plan, consistent with the applicable budget and in accordance with all Applicable Laws, and to cooperate diligently with each other in carrying out such Co-Commercialization Plan.

(c)           Except as otherwise specified in the Agreement or the Co-Commercialization Agreement, all decisions of the USJMC regarding the Co-Commercialization of Co-Commercialized Products (including, without limitation, managed care strategy) shall, if referred to the JSC for resolution of disagreements, be DS Decisions.

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2.             Integrated Sales Force.

(a)           ARQULE and DS shall use an integrated sales force to Detail each Co-Commercialized Product.  ArQule shall provide a sales force (secondary sales force) as set forth in Section 3.12(c)(i).  The ARQULE salesforce shall be deployed in overlap in high potential territories (as identified by ZS mapping) already covered by DS sales force (primary sales force).  The aggregate number of PDE’s for the primary and secondary sales force as well as the respective deployment will be determined by the USJMC and established pursuant to the Co-Commercialization Plan.

(b)           Each Party shall be responsible for ensuring that its sales personnel Detail each Co-Commercialized Product in a manner consistent with the Co-Commercialization Plan and/or the decisions of the USJMC.  In performing their respective Detailing obligations hereunder, each of the Parties agrees to (i) use sales personnel with an experience profile appropriate for the target audience and Detailing role as described in the Co-Commercialization Plan and (ii) in addition to DS providing the infrastructure contained in Section 8(c), provide its own sales management organization and infrastructure for its sales personnel.  All ARQULE sales personnel will be recruited by ARQULE at ARQULE’s sole expense, and all DS representatives will be recruited by DS at DS’s sole expense.

(c)           Each Party shall provide Scientific Affairs Liaisons (“SALs”), in proportion to the number of sales personnel provided by them.  DS will manage the SALs, develop the training program for SALs and train the SALs at DS’s expense.

(d)           The Parties will strive to establish a transparent and compatible sales reporting system for Co-Commercialized Products to facilitate call planning and sales personnel activities, and all costs related to such integration shall be borne by DS.

3.             Co-Commercialization Plan.

(a)           Preparation of Annual Co-Commercialization Plan.  The USJMC will prepare and amend the Co-Commercialization Plan (including the related budget) and update the Co-Commercialization Plan (and related budget) as set forth in the Agreement.

(b)           Reporting.  DS shall provide an update on the performance of the Co-Commercialization Plan to the USJMC no less frequently than quarterly.

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(c)           Detail Audit Rights.  Each of DS and ARQULE shall maintain written records of Details performed for a period of * (*) years from the date of performance.  Each Party shall have the right to inspect such records of the other Party to verify Detailing reports provided to the USJMC under the Co-Commercialization Agreement.  Each Audited Party shall make its records available for inspection by appropriate representatives of the Auditing Party during regular business hours at such place or places where such records are customarily kept, upon reasonable notice from the Auditing Party, solely to verify the accuracy of such statements.  Such inspection right shall not be exercised more than once in any Calendar Year.  All information concerning such statements, and all information learned in the course of any audit or inspection, shall be Confidential Information of the Audited Party.  The Auditing Party shall pay the costs of such inspections, except that in the event there is any downward adjustment in the number of Details shown by such inspection of more than * percent (*%) of the number of Details reported in such statement, the Audited Party shall pay the costs of such inspection.

4.             Control Over Marketing, Advertising and Detailing.

(a)           DS shall be responsible for the creation, preparation, production and reproduction of all marketing or promotional materials, as approved by the USJMC pursuant to procedures and timelines to be mutually agreed upon, consistent with the Co-Commercialization Plan. Whenever marketing or promotional materials are presented and described to the medical community (including, for example, the physician, pharmacy, governmental, reimbursement and hospital sectors), the Parties will be presented and described as joining in the promotion of the Co-Commercialization Product in the United States.  All marketing or promotional materials will state this arrangement and will display the names and logos of the Parties with equal prominence, as and to the extent permitted by Applicable Laws.

(b)           Neither Party shall engage in any advertising or use any label, package, literature or other written material in connection with a Co-Commercialized Product in the Co-Commercialization Territory, unless the specific form and content thereof is approved by the USJMC.

(c)           General public relations materials of either Party need not be approved by the USJMC, but all representations and statements pertaining to Co-Commercialized Products

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that appear in general public relations materials of ARQULE or DS and include subject matter not previously approved by the USJMC shall be subject to the approval of the USJMC.

(d)           Each Party shall annually certify to the other Party that its field sales force (including persons responsible for managing the field sales force) is properly trained with respect to both C-Commercialized Product information and compliance with Applicable Laws.

5.             Sales Efforts in the U.S. Territory.  As part of each Co-Commercialization Plan for the U.S. Territory, the USJMC shall determine the targeted level of sales of the applicable Co-Commercialized Product for the target audience for the Calendar Year covered by such Co-Commercialization Plan. The Co-Commercialization Plan shall include the number of Details and the allocation between the Parties of such Details to the defined target audience.  The Co-Commercialization Plan shall also establish a minimum and maximum number of total Details by position (i.e., first or second position) to be conducted by the Parties each year for the Co-Commercialized Product. During the launch period for a Product for an Indication, a majority of Details will be in the first position.  The Co-Commercialized Product shall be included in each Party’s respective sales incentive bonus program for the corresponding sales representatives, with specified links to sales performance.  The Parties shall allocate physicians in the Co-Promotion target audience in an unbiased manner based on objective, quantifiable information and market research data with the objectives of allocating to each Party those physicians in the Co-Promotion target audience with the appropriate Detailing frequency to optimize the penetration of such Co-Commercialized Product and achieve such Co-Promotion’s sales target.  The Parties recognize that it may be necessary from time to time to reassign individual medical professionals in the target audience to optimize the targeted market opportunity, and, as a result, the USJMC shall be entitled to review the allocation of medical professionals in the target audience as it reasonably determines to be appropriate.  Neither Party may utilize Third Party contracted sales representatives without the express written consent of the other Party.  Such consent shall not be unreasonably withheld and shall be deemed given if not expressly denied in writing within fifteen (15) days of a request for such consent.

6.             Performance Criteria/Detailing Shortfall.  The Parties shall agree on criteria for measuring each Party’s performance under the Co- Commercialization Agreement.

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7.             Training Program.  DS shall (a) develop a training program for the promotion of all Co-Commercialized Products in the U.S. Territory and (b) train all sales personnel of both Parties to be used for the Co-Commercialization of Co-Commercialized Products in the U.S. Territory prior to commencement of Detailing.  The Parties agree to utilize such training programs on an ongoing basis to assure a consistent, focused promotional strategy and all such training shall be carried out at a time that is mutually acceptable to ARQULE and DS.  No sales personnel of either Party may Detail a Co- Commercialized Product unless such person successfully completes the training program described in this Section 7.  The costs of such training programs (including, without limitation, the out-of-pocket costs of the development, production, printing of such training materials) shall be borne by DS.

8.             Co-Promotion Mechanism.

(a)           Sales.  All sales of Co-Commercialized Products in the U.S. Territory shall be booked by DS.  If, during the term of the Co-Promotion Agreement, ARQULE receives orders from customers for a Co-Commercialized Product, it shall refer such orders to DS.

(b)           Processing of Orders for Co-Commercialized Products.

(i)            DS shall have sole responsibility for arranging for the distribution and warehousing of Co-Commercialized Products and for all billing and collections for Co-Commercialized Products.

(ii)           All orders for Co-Commercialized Products received and accepted by DS during the term of the Co-Promotion Agreement shall be executed by DS in a reasonably timely manner consistent with the general practices applied by it in executing orders for other pharmaceutical products sold by it or its Affiliates.

(iii)          DS shall have the discretion to reject any order received by it for a Co-Commercialized Product; provided, however, that DS shall not reject such orders on an arbitrary basis, but only with reasonable justification and consistent with the general policies applied by it with respect to orders for other pharmaceutical products sold by it or its Affiliates.

(iv)          DS shall comply with all Applicable Laws in selling any Co-Commercialized Product.

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(c)           DS shall supply the following functions in relation to the Co-Commercialization of Co-Commercialized Product (i) customer operations/service; (ii) production forecasting and inventory control; (iii) strategic contracting (rebates, Medicaid, Medicare, contract analysis); (iv) managed care internal management (including managed care account managers), (v) managed care external distribution, (vi) sales operations/services, (vii) freight, (viii) accounts payable, (ix) credit and collections, (x) state and federal government affairs representatives, (xi) reimbursement of Medicare and Medicaid expenses and (xii) operation of a vendor hotline.

9.             Regulatory Matters.

(a)           DS shall furnish ARQULE with efficacy and safety information reasonably requested by ARQULE to assist ARQULE in promoting the Co-Commercialized Product in the United States, including without limitation relevant clinical and safety data included in the NDA for the Co-Commercialized Product and additional information, if any, related to the efficacy and safety profile of the Co-Commercialized Product.

(b)           DS and ARQULE will have joint responsibility for and will make all decisions with respect to any recall, market withdrawal, or any other corrective action related to the Co-Commercialized Product in the United States.  DS will notify and consult with ARQULE prior to implementation of any such actions that are reasonably likely to result in a material adverse effect on the marketability of the Co-Commercialized Product in the United States and shall consider in good faith any comments ARQULE may have with respect to such implementation.  DS and ARQULE will be jointly responsible for interactions with the FDA or other Regulatory Authorities with regard to such corrective action.

(c)           In accordance with Section 3.10.4(b), the parties shall exercise Commercially Reasonable Efforts to execute a mutually satisfactory pharmacovigilance agreement for the Territory (the “Pharmacovigilance Agreement”) at least ninety (90) days prior to the date of Commercialization Regulatory Approval in the United States.  The Pharmacovigilance Agreement shall provide for, but not be limited to, the exchange of (i) drug safety information; (ii) Co-Commercialized Product defect information; (iii) reporting data regarding lack of efficacy; (iv) International Conference on Harmonisation (ICH) seven (7) and fifteen (15) day reports; (v) the creation and maintenance of a Master Drug Safety Database; (vi) 

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evaluations derived from drug safety data; and (vii) such other information and data as may be reasonably agreed upon by the parties.  DS will be solely responsible for submitting, recording and storing all data to the FDA and other appropriate regulatory authorities.

(d)           DS will be solely responsible for submitting, recording and storing all FDA 2253 submissions.

10.           Miscellaneous.  Other customary terms, including confidentiality, indemnification and termination.

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EX-23.1

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EXHIBIT 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

        We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (File Nos. 333-130159, 333-128741, 333-128740, 333-128738, 333-148793 and 333-148794) and Form S-3 (File Nos. 333-109564, 333-111181 and 333-143162) of ArQule, Inc., of our report dated March 6, 2009 relating to the financial statements and the effectiveness of internal control over financial reporting, which appears in this Form 10-K.

/s/ PricewaterhouseCoopers LLP

Boston, Massachusetts
March 6, 2009

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EXHIBIT 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

EX-31.1

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Exhibit 31.1

CERTIFICATE OF CHIEF EXECUTIVE OFFICER

I, Paolo Pucci, certify that:

1.

I have reviewed this annual report on Form 10-K of ArQule, Inc.;

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.

The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)

Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)

Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.

The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: March 6, 2009
	/s/ PAOLO PUCCI Paolo Pucci Chief Executive Officer

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Exhibit 31.1

CERTIFICATE OF CHIEF EXECUTIVE OFFICER

EX-31.2

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Exhibit 31.2

CERTIFICATE OF PRINCIPAL FINANCIAL OFFICER

I, Peter S. Lawrence certify that:

1.

I have reviewed this annual report on Form 10-K of ArQule, Inc.;

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.

The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)

Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)

Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.

The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: March 6, 2009
	/s/ PETER S. LAWRENCE Peter S. Lawrence President and Chief Operating Officer (Principal Financial Officer)

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Exhibit 31.2

CERTIFICATE OF PRINCIPAL FINANCIAL OFFICER

EX-32

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Exhibit 32

ArQule, Inc.

CERTIFICATE OF THE CHIEF EXECUTIVE OFFICER AND
PRINCIPAL FINANCIAL OFFICER

        The undersigned, Paolo Pucci, Chief Executive Officer of ArQule, Inc. (the "Company") and Peter S. Lawrence, President and Chief Operating Officer (Principal Financial Officer) of the Company, both duly elected and currently serving, do each hereby certify that, to the best of his/her knowledge:

1.

The annual report on Form 10-K for the period ending December 31, 2008, filed on behalf of the Company pursuant to the Securities Exchange Act of 1934 (the "Exchange Act") and containing the financial statements of the Company, fully complies with the requirements of section 13(a) of the Exchange Act; and



2.

The information contained in such annual report fairly presents, in all material respects, the financial condition and results of operations of the Company for the dates and periods covered by such annual report.

        This certification accompanies the Company's Annual Report on Form 10-K for the year ended December 31, 2008 pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (the "2002 Act") and shall not be deemed filed by the Company for purposes of Section 18 of the Exchange Act.

        This certification is being made for the exclusive purpose of compliance by the Chief Executive Officer and Acting Principal Accounting and Financial Officer of the Company with the requirements of Section 906 of the 2002 Act, and may not be disclosed, distributed or used by any person for any reason other than as specifically required by law.

        IN WITNESS WHEREOF, the undersigned have executed this Certificate as of the 6th day of March 2009.

/s/ PAOLO PUCCI
Name:	Paolo Pucci
Title:	Chief Executive Officer
/s/ PETER S. LAWRENCE
Name:	Peter S. Lawrence
Title:	President and Chief Operating Officer (Principal Financial Officer)

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Exhibit 32

ArQule, Inc. CERTIFICATE OF THE CHIEF EXECUTIVE OFFICER AND PRINCIPAL FINANCIAL OFFICER