(3)

RESEARCH AND DEVELOPMENT COLLABORATIONS

(a)

GENENTECH, INC. JUNE 2003 COLLABORATION

(i)

Agreement Summary

In June 2003, the Company licensed its proprietary Hedgehog signaling pathway technologies to Genentech for human therapeutic use. The primary focus of the collaborative research plan has been to develop molecules that inhibit the Hedgehog signaling pathway for the treatment of various cancers. The collaboration is currently focused on Genentech and Roche’s commercialization and further development of Erivedge. Erivedge is approved and is being sold in the United States and several other countries and conditionally approved in Europe based on positive clinical data from the ERIVANCE BCC/SHH4476g trial, a pivotal Phase 2 study of Erivedge in patients with BCC. Roche and Genentech are also continuing Erivedge’s clinical development in less severe forms of BCC and have also recently initiated clinical studies of Erivedge in other diseases including in IPF and MF.

The Company is eligible to receive up to $115,000,000 in contingent cash payments under the collaboration for the development of Erivedge or another small molecule Hedgehog signaling pathway inhibitor, assuming the successful achievement by Genentech and Roche of specified clinical development and regulatory objectives. The Company has received $59,000,000 in contingent cash payments through December 31, 2015.

In addition to these payments, the Company’s wholly-owned subsidiary, Curis Royalty, is entitled to a royalty on net sales of Erivedge that ranges from 5% to 7.5%. The royalty rate applicable to Erivedge may be decreased by 2% (such that the applicable royalty rate will range from 3% to 5.5%) in certain specified circumstances, including when a competing product that binds to the same molecular target as Erivedge is approved by the applicable regulatory authority and is being sold in such country by a third party for use in the same indication as Erivedge or when there is no issued intellectual property covering Erivedge in a territory in which sales are recorded. During the third quarter of 2015, the FDA and the European Medicine Agency’s Committee for Medicinal Products for Human Use, or CHMP, approved another Hedgehog signaling pathway inhibitor, sonidegib, which is marketed by Novartis, for use in locally advanced BCC. During the fourth quarter of 2015, Genentech applied the 2% royalty reduction on U.S. sales of Erivedge as a result of the first commercial sale of sonidegib in the US. Future royalty payments related to Erivedge will service the outstanding debt and accrued interest to BioPharma-II until the debt is fully repaid (see Note 8).

Unless terminated earlier, the agreement shall expire six months after the later of the expiration of Genentech’s obligation to pay royalties to the Company under the agreement or such time as no activities have occurred under the agreement for a period of twelve months.

(ii)

Accounting Summary

The Company considers its arrangement with Genentech to be a revenue arrangement with multiple deliverables. The Company’s deliverables under this collaboration include an exclusive license to its Hedgehog signaling pathway inhibitor technologies, research and development services for the first two years of the collaboration, and participation on the joint steering committee. The Company applied the provisions of the FASB Codification Topic 605-25, Revenue Recognition, Multiple Element Arrangement to determine whether the performance obligations under this collaboration should be accounted for separately or should be accounted for as a single unit of account. The Company determined that the deliverables, specifically, the license, research and development services and steering committee participation, represented a single unit of account because the Company believes that the license, although delivered at the inception of the arrangement, did not have stand-alone value to Genentech without the Company’s research and development services and steering committee participation. During 2007, the Company reassessed its participation on the joint steering committee and concluded that its participation in the joint steering committee had become inconsequential and perfunctory. As a result, the Company determined that it had no further performance obligations under this collaboration and consideration received after this date is recognized in the Company’s financial statements in the period in which it was earned.

The Company received contingent payments from Genentech totaling $3,000,000 and $10,000,000 during the years ended December 31, 2014 and 2013, respectively, for the achievement of certain clinical development and regulatory objectives related to Erivedge. No such payments were received during the year ended December 31, 2015. The Company has recorded these amounts as revenue within “License Fees” in the Revenues section of its Consolidated Statement of Operations for the years ended December 31, 2014 and 2013.

As a result of its licensing agreements with various universities, the Company is obligated to make payments to these university licensors when certain non-royalty payments are received from Genentech. Through December 31, 2015, the Company has incurred aggregate research and development expenses over the term of this collaboration of $4,389,000 related to payments made to these university licensors in connection with the Company’s receipt of cash payments from Genentech for research, development and regulatory objectives achieved related to such university licensing agreements. In connection with the receipt of payments from Genentech, the Company recorded research and development expenses of $150,000 and $500,000 during the years ended December 31, 2014 and 2013, respectively, representing 5% of the total cash payments received during each year.

In addition, the Company recognized $8,030,942, $6,757,023 and $3,942,136 in royalty revenue from Genentech’s net sales of Erivedge during the year ended December 31, 2015, 2014 and 2013, respectively. The Company also recorded $405,756, $339,578 and $197,796, respectively, as cost of royalty revenues within the costs and expenses section of its Consolidated Statements of Operations and Comprehensive Loss during these same periods. Cost of royalty revenues is comprised of the 5% of the royalties earned by Curis Royalty with respect to Erivedge outside Australia, and 2% direct net sales in Australia (subject to decrease to 5% of royalties on expiration of the patent in April 2019), that the Company is obligated to pay to university licensors.

During the years ended December 31, 2015, 2014 and 2013, the Company also recognized “Research and development” revenue of $264,093, $265,047 and $291,448, respectively, related to expenses incurred on behalf of Genentech that were incurred by the Company and for which Genentech is obligated to reimburse the Company. During the years ended December 31, 2015 and 2014, Genentech incurred expenses of $432,756 and $225,707, respectively, under this collaboration which the Company is obligated to reimburse to Genentech, and which the Company has recorded as contra-revenues which have been net against research and development revenues in its Consolidated Statements of Operations and Comprehensive Loss. The Company will continue to recognize revenue for expense reimbursement as such reimbursable expenses are incurred, provided that the provisions of the FASB Codification Topic 605-45 are met.

The Company had recorded as amounts receivable from Genentech under this collaboration, comprised primarily of Erivedge royalties earned in the fourth quarters of 2015 and 2014, of $2,104,000 and $1,958,000, as of December 31, 2015 and 2014, respectively, in “Accounts receivable” in the Company’s Current Assets section of its Consolidated Balance Sheets.

(b)

AURIGENE

Collaboration Overview. In January 2015, the Company entered into an exclusive collaboration agreement with Aurigene for the discovery, development and commercialization of small molecule compounds in the areas of immuno-oncology and selected precision oncology targets. Under the collaboration agreement, Aurigene granted the Company an option to obtain exclusive, royalty-bearing licenses to relevant Aurigene technology to develop, manufacture and commercialize products containing certain of such compounds.

In October 2015, the Company exercised options to license the first two programs under this collaboration, resulting in an aggregate one-time payment of $6,000,000 by the Company to Aurigene. The first licensed program is focused on the development of orally-available small molecule antagonists of PD-1 and VISTA in the immuno-oncology field. The Company has named CA-170, a PD-L1/VISTA antagonist, as the development candidate from this program. The second licensed program is focused on orally-available small molecule inhibitors of Interleukin-1 receptor-associated kinase 4 (IRAK4) in the precision oncology field, with the development candidate designated CA-4948. Effective October 2015, the Company agreed to make additional payments to Aurigene totaling up to $2,000,000 for supplemental research, development and/or manufacturing activities in support of these two programs, of which the Company recognized $1,000,000 in research and development expense related to costs Aurigene incurred in 2015.

Also in October 2015, the Company named a preclinical program within the immuno-oncology part of the collaboration, which is focused on evaluating small molecule antagonists with dual PD-1 and T-cell immunoglobulin and mucin domain containing protein-3 (TIM-3) targeting properties.

The Company anticipates that it will select additional programs under this collaboration in the future, and the Company intends to have the collaboration’s steering committee recommend such additional programs in order for Aurigene to initiate or continue the relevant preclinical activities described in each program’s written plan. For each program, Aurigene has granted the Company an exclusive option, exercisable within 90 days after Aurigene delivers the relevant data regarding a development candidate, to obtain an exclusive, royalty-bearing license to develop, manufacture and commercialize compounds from such program, including the development candidate and products containing such compounds, anywhere in the world, except for India and Russia. For the development, manufacture, and commercialization of compounds from a particular program and products containing such compounds in India and Russia, Aurigene will grant the Company the royalty-bearing license described above for such program, and the Company will grant Aurigene an exclusive, royalty-free, fully paid license under the Company’s relevant technology upon exercise of the relevant option.

For each option to license (as described above) exercised by the Company, the Company is obligated to use commercially reasonable efforts to develop, obtain regulatory approval for, and commercialize at least one product in each of the U.S., specified countries in the European Union, and Japan, and Aurigene is obligated to use commercially reasonable efforts to perform its obligations under the development plan for such licensed program in an expeditious manner.

Subject to specified exceptions, Aurigene and the Company have agreed to collaborate exclusively with each other on the discovery, research, development and commercialization of programs and compounds within immuno-oncology for an initial period of approximately two years from the effective date of the collaboration agreement. At the Company’s option, and subject to specified conditions, it may extend such exclusivity for up to three additional one-year periods by paying to Aurigene exclusivity option fees on an annual basis. The first of such option fees is $7,500,000 and the Company currently estimates that this payment will be due in the first quarter of 2017.

In addition, beyond the up-to five years of exclusivity described above, and subject to specified exceptions and payment by the Company of an annual exclusivity fee on a program-by-program basis, Aurigene and the Company have agreed to collaborate exclusively with each other on each program for which there are ongoing activities in research or development, or for which the Company has exercised its option to acquire an exclusive license (as described above) and the Company or its affiliates or sublicensees are actively developing or commercializing a compound or product from such program in a major market.

For each product that may be commercialized, the Company has granted Aurigene the right, subject to certain conditions, to nominate one global drug substance or drug product supplier to provide up to 50% of the total requirements in the Company’s territory.

Up-front Equity Issuance. In connection with the collaboration agreement, the Company issued to Aurigene 17,120,131 shares of its common stock in partial consideration for the rights granted to the Company under the collaboration agreement. The shares were issued pursuant to a stock purchase agreement with Aurigene dated January 18, 2015.

Research Payments, Option Exercise Fees and Milestone Payments. The Company has agreed to make the following research, option exercise fees and milestone payments to Aurigene:

•

for the PD-1/VISTA and IRAK4 programs: up to $52,500,000 per program, comprised of: $3,000,000 for each option exercise, $3,000,000 upon acceptance of each IND filing, $4,000,000 upon dosing of the fifth patient in our first Phase 1 clinical trial in each program, as well as specified approval and commercial milestones, plus specified additional payments for approvals for additional indications, if any. Effective October 2015, the Company agreed to make additional payments to Aurigene totaling up to $2,000,000 for supplemental research, development and/or manufacturing activities in support of these two programs, of which $1,000,000 was accrued at December 31, 2015;

•

for the third and fourth programs: up to $50,000,000 per program, comprised of: $2,000,000 for a program selection fee that the Company paid in May 2015 for the third program, $3,000,000 for an option exercise fee if the program is licensed, $2,500,000 upon acceptance of an IND filing by the Company, as well as development milestones, specified approval and commercial milestones, plus specified additional payments for approvals for additional indications, if any; and

•

for any program thereafter: up to $140,500,000 per program, comprised of: up to a total of $53,000,000 for research fees, an option exercise fee, a preclinical milestone and development milestones, as well as specified filing, approval and commercial milestones, plus specified additional payments for approvals for additional indications, if any.

Royalties on Net Sales by the Company. The Company has agreed to pay Aurigene tiered royalties on the Company’s and its affiliates’ annual net sales of products at percentage rates ranging from the high single digits up to 10%, subject to specified reductions.

Amounts that the Company Receives from Sublicensees. The Company has agreed to make the following payments to Aurigene upon its entry into sublicense agreements on any program(s):

•

with respect to amounts that the Company and its affiliates receive from sublicensees under a licensed program in the U.S. or the European Union, a declining percentage of non-royalty sublicense revenues, such percentage correlating to the stage of the most advanced product for such licensed program at the time the sublicense is granted (for example, 25% of such amounts following the Company’s initiation of Phase 2 clinical study and 15% of such amounts after initiation of the first pivotal study). This sharing will also extend to royalties that the Company receives from sublicensees, subject to minimum royalty percentage rates that the Company is obligated to pay to Aurigene, which generally range from 5-10%;

•

with respect to amounts that the Company and its affiliates receive from sublicensees under a licensed program in Asia, 50% of such sublicensing revenues (including both non-royalty sublicensee revenues and royalties that the Company receives from sublicensees); and

•

with respect to amounts that the Company and its affiliates receive from sublicensees under a licensed program outside of the U.S., the European Union and Asia, a percentage of such non-royalty sublicense revenues ranging from 30% to 50%. The Company is also obligated to share 50% of royalties that the Company receives from sublicensees that it receives in these territories.

The Company’s royalty payment obligations (including with respect to royalties on sales by sublicensees) under the collaboration agreement will expire on a product-by-product and country-by-country basis on the later of (i) the expiration of the last-to-expire valid claim of the Aurigene patents covering the manufacture, use or sale of such product in such country and (ii) 10 years from the first commercial sale of such product in such country.

Term and Termination. The term of the collaboration agreement began upon signing and, unless earlier terminated, will expire upon either: (i) 90 days after the completion by Aurigene of its obligations under all research plans if the Company has not exercised the option with respect to at least one program by such time; or (ii) expiration of the last-to-expire royalty term for any and all products. Upon expiration (but not on earlier termination) of the collaboration agreement, all licenses granted by Aurigene to the Company that were in effect immediately prior to such expiration shall survive on a non-exclusive, royalty-free, fully paid, irrevocable, perpetual basis.

The collaboration agreement may be terminated, either in its entirety or with respect to a particular program, by either party for uncured material breach by the other party, other than an uncured material breach by the other party of its diligence obligations with respect to a program or licensed program. If an uncured material breach other than a diligence breach relates to a particular program or licensed program, the non-breaching party may terminate the collaboration agreement only with respect to that program or licensed program. However, after initiation of the first pivotal clinical trial of a product for a licensed program, Aurigene may not terminate the collaboration agreement with respect to such licensed program for an uncured non-diligence breach by the Company, except in the case of the Company’s uncured material breach of its payment obligations with respect to such licensed program, but Aurigene may pursue any and all remedies that may be available to it at law or in equity as a result of such breach. Similarly, after initiation of the first pivotal clinical trial of a product for a licensed program, the Company may not terminate the collaboration agreement with respect to the license the Company has granted Aurigene for the territory or India and Russia for such licensed program for an uncured non-diligence breach by Aurigene, but the Company may pursue any and all remedies that may be available at law or in equity as a result of such breach.

On a program-by-program basis, the Company may terminate the collaboration agreement as it relates to a program or licensed program for an uncured diligence breach by Aurigene in connection with such program or licensed program, and Aurigene may terminate the collaboration agreement as it relates to a licensed program for an uncured diligence breach by the Company in connection with such licensed program.

In addition, the Company may terminate the collaboration agreement in its entirety or as it relates to a particular program or licensed program or on a country-by-country basis, for any reason or for no reason at any time upon 60 days’ prior written notice to Aurigene.

In the event of termination of the collaboration agreement as it relates to any program prior to exercise of the option for such program, all rights and licenses granted by either Aurigene or the Company with respect to such program under the collaboration agreement (including the option for such program) will automatically terminate.

If the royalty term with respect to a product for any licensed program in any country has expired on or before any termination of the collaboration agreement in its entirety or as to such licensed program, the license granted by Aurigene to the Company with respect to such product in such country, as well as the corresponding license granted to Aurigene in its territory, shall survive a termination of the collaboration agreement.

Solely in the event of termination of the collaboration agreement by Aurigene for the Company’s uncured breach, or the Company’s termination of the collaboration agreement for convenience, the following will apply to any program that was a licensed program immediately prior to such termination:

•

the Company’s license with respect to any licensed program that is not a terminated program (defined below), either in the Company’s entire territory or in countries within our territory outside of the terminated region (defined below), as applicable, shall continue in full force and effect, subject to all terms and conditions of the collaboration agreement, including the Company’s payment obligations;

•

the Company’s license with respect to any terminated program, either in the Company’s entire territory or in the terminated region, as applicable, shall terminate and revert to Aurigene;

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the Company will grant Aurigene a perpetual, royalty-free (except for pass-through royalties and milestone payments payable by the Company under licenses to third party patent rights with respect to products developed or commercialized by or on behalf of Aurigene) license, with the right to sublicense, under the Company’s relevant patent rights and other technology solely to develop, manufacture and commercialize compounds and products for any terminated program, either in the Company’s entire territory or in the terminated region, as applicable. The foregoing license will be non-exclusive with respect to the Company’s patent rights and exclusive with respect to its other technology;

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the Company will grant to Aurigene a right of first negotiation, exercisable within 90 days after termination, to obtain an exclusive, royalty-bearing license, with the right to sublicense, under relevant patent rights solely to develop, manufacture and commercialize compounds and products for any terminated program, either in the Company’s entire territory or in the terminated region, as applicable, upon commercially reasonable terms and conditions to be negotiated in good faith by the parties;

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the Company will perform other specified activities and actions reasonably necessary for Aurigene to develop, manufacture and commercialize compounds and products for any terminated program, either in the Company’s entire territory or in the terminated region, as applicable; and

•

any license granted to Aurigene to develop, manufacture and commercialize compounds and products for any terminated program will survive termination of the collaboration agreement.

For purposes of the foregoing, “terminated program” means: (i) in the case of termination of the collaboration agreement in its entirety by Aurigene for the Company’s uncured non-diligence breach, any program that was a licensed program immediately prior to such termination, but excluding, except in the case of the Company’s uncured material breach of the Company’s payment obligations with respect to such licensed program, any such licensed program for which initiation of the first pivotal clinical trial of a product has occurred prior to such termination; (ii) in the case of any termination of the collaboration agreement as to a particular licensed program by Aurigene either for the Company’s uncured non-diligence breach (to the extent termination as to such licensed program is permitted) or the Company’s uncured diligence breach, such licensed program; (iii) in the case of the Company’s termination of the collaboration agreement in its entirety for convenience, any program that was a licensed program immediately prior to such termination; or (iv) in the case of the Company’s termination of the collaboration agreement as to a particular licensed program for convenience, such licensed program; provided, however, that, in the case of the preceding clauses (iii) and (iv), if the Company’s termination of the collaboration agreement in its entirety or as to a particular licensed program for convenience was with respect only to a particular country or subset of countries within the entire territory (as applicable, a “terminated region”), the applicable licensed program(s) shall be considered “terminated program(s)” only in the terminated region but shall remain licensed program(s) in the rest of the Company’s territory.

Accounting Summary. Under the terms of this collaboration agreement, the Company issued to Aurigene 17,120,131 shares of its common stock in partial consideration for the rights granted under the collaboration agreement at a value of $23,968,183 based on the closing share price of the Company’s common stock on the closing date of the stock purchase agreement, January 20, 2015, which was $1.40 per share. In addition, the Company made a cash payment of $379,632 pursuant to the collaboration agreement. As compounds licensed from Aurigene are in pre-clinical development and require substantial development, regulatory, and marketing approval efforts in order to reach technological feasibility, the Company recognized in-process research and development expense of $24,347,815 within its Consolidated Statement of Operations and Comprehensive Loss for the year ended December 31, 2015.

The Company also recognized $9,000,000 in research and development expenses within its Consolidated Statement of Operations and Comprehensive Loss for the year ended December 31, 2015 related to payments made to Aurigene in connection with the selection of a preclinical program under this collaboration, the option exercises to in-license the PD-1/VISTA and IRAK4 programs and supplemental research and development funding.

(c)

IAP LICENSE AGREEMENT WITH GENENTECH, INC.

On November 27, 2012, the Company entered into an exclusive license agreement, or the IAP license agreement, with Genentech, pursuant to which Genentech granted to the Company an exclusive, worldwide license to develop and commercialize CUDC-427.

Pursuant to the terms of the IAP license agreement, Genentech transferred to the Company know how, information and materials necessary to continue the development of CUDC-427. Genentech also assigned its existing IND application for CUDC-427 to the Company.

Under the terms of the agreement, the Company agreed to use commercially reasonable efforts to develop and commercialize CUDC-427, including to conduct at least one additional Phase 1 clinical trial of CUDC-427, and unless the results of the additional Phase 1 trial do not provide sufficient scientific or clinical justification for continued clinical development, to conduct a Phase 2 clinical trial to inform a decision to start a Phase 3 clinical trial. The Company is solely responsible for all future costs related to the development, registration and commercialization of products under the agreement.

Under the terms of the IAP agreement, the Company made a payment of $9,500,000 to Genentech as an up-front license fee and for technology transfer costs. Given that the compound licensed from Genentech is in clinical development and will require substantial development, regulatory and marketing approval efforts in order to reach technological feasibility, the Company recognized in-process research and development expense of $9,500,000 within the 2012 Consolidated Statement of Operations and Comprehensive Loss.

In addition, Genentech is eligible to receive milestone payments upon the first commercial sale of products containing CUDC-427 in certain territories, and escalating royalties on net sales of products, which royalties are subject to reduction in certain limited circumstances. On a product-by-product and country-by-country basis, the term of the Company’s royalty payment obligations will begin on the first commercial sale of a product in a country and will continue until the later of: (i) 10 years after the first commercial sale of such product in such country; and (ii) the date of expiration of Genentech’s patent rights covering such product in such country. Upon expiration of its royalty payment obligations with respect to a product in a country, the Company’s license with respect to such product in such country will become royalty-free and fully paid-up.

The IAP license agreement will continue in effect until expiration of all royalty payment obligations with respect to any product, unless earlier terminated by either party as described below. Upon expiration of the agreement, the Company’s license will become royalty-free, fully paid-up, irrevocable and perpetual.

Each of Genentech and the Company may terminate the IAP license agreement prior to expiration in the event of the uncured material breach of the agreement by the other party. In addition, the Company may terminate the IAP license agreement prior to expiration for any reason upon 90 days’ prior written notice to Genentech. Upon any termination of the IAP license agreement, the license granted to the Company will terminate and revert to Genentech. If Genentech terminates the IAP license agreement for an uncured material breach by the Company, or if the Company terminates the agreement for any reason other than uncured material breach by Genentech, Genentech will be entitled to certain licenses and other rights with respect to products existing as of the date of termination, and the Company may, under specified circumstances, be obligated to supply products to Genentech for a limited period of time after termination.

(d)

THE LEUKEMIA & LYMPHOMA SOCIETY AGREEMENT

(i)

Agreement Summary

In November 2011, the Company entered into an agreement under which The Leukemia & Lymphoma Society, or LLS, agreed to provide the Company with up to $4,000,000 in payments to support the Company’s ongoing development of CUDC-907, subject to the achievement of specified clinical development objectives with CUDC-907. Since the inception of the agreement, the Company has received $1,650,000 from LLS related to milestones achieved under this agreement.

In August 2015, the Company entered into an amendment of the November 2011 agreement with LLS. Under the amendment, LLS agreed to provide advisory services regarding both the CUDC-907 and IRAK4 programs, and LLS is no longer obligated to make milestone payments related to ongoing clinical development of CUDC-907.

The Company agreed to make up to $1,650,000 in future payments to LLS, which represents the aggregate payments previously received from LLS under the November 2011 agreement, pursuant to achievement of certain objectives, including a licensing, sale, or other similar transaction, as well as regulatory and commercial objectives, in each case related to the CUDC-907 program in hematological malignancies. However, if CUDC-907 does not continue to meet its clinical safety endpoints in future clinical trials in the defined field, or fails to obtain necessary regulatory approvals, all funding provided to us by LLS will be considered a non-refundable grant.

(ii)

Accounting Summary

The Company applied the provisions of ASC 605-28, Revenue Recognition, Milestone Method to determine whether the revenue earned under this agreement should be accounted for as substantive milestones. In determining whether the milestones in this arrangement are substantive, the Company considered whether uncertainty exists as to: (i) the achievement of the milestone event at the inception of the arrangement; (ii) the achievement of the milestone involves substantive effort and can only be achieved based in whole or part on the performance or the occurrence of a specific outcome resulting from the Company’s performance; (iii) the amount of the milestone payment appears reasonable either in relation to the effort expected to be expended or to the projected enhancement of the value of the delivered items; (iv) there is any future performance required to earn the milestone; and (v) the consideration is reasonable relative to all deliverables and payment terms in the arrangement. When a substantive milestone is achieved, the accounting guidance permits recognition of revenue related to the milestone payment in its entirety. The Company determined that the milestones achieved in 2013 under the LLS agreement were substantive and recognized related revenue totaling $650,000 in the year ended December 31, 2013. The Company did not receive any milestones under this agreement during the years ended December 31, 2015 and 2014.