Terrapin Technologies Inc. could receive up to $22.5 million in a collaboration with Sanwa Kagaku Kenkyusho Co. Ltd. for development of a Type II diabetes drug.

Terrapin, a privately held company in South San Francisco, uses combinatorial chemistry and what it calls molecular fingerprinting, to identify and refine drug candidates for their ability to modulate disease-related proteins.

In the alliance with Sanwa, of Nagoya, Japan, Terrapin will be working with a family of small molecules that have demonstrated they can bind to and activate the insulin receptor to lower blood glucose levels in diabetes patients. Clinical trials will begin following selection of a lead compound.

Sanwa agreed to licensing fees, research and development funding, milestone payments and equity investments totaling as much as $22.5 million. In return, Sanwa received commercialization rights to the diabetes drug in Japan and other Asian countries. Terrapin will get royalties from Sanwa and retain rights to the treatment elsewhere in the world.

The companies also agreed to a separate pact for use of Terrapin's molecular fingerprinting technology in screening compounds for binding affinity to other disease targets provided by Sanwa. Financial terms were not disclosed. * Charles Craig