2. Collaboration and License Agreements with Merck & Co., Inc.

In July 2007, the Company entered into a collaboration agreement with Merck for the joint global development, manufacture and commercialization of ridaforolimus, the Company’s lead product candidate, for use in cancer (the “Collaboration Agreement”). In May 2010, the Company entered into an amended and restated agreement with Merck for ridaforolimus (the “License Agreement”), which replaced the Collaboration Agreement. These agreements are described below.

The Collaboration Agreement (July 2007 to May 2010)

Under the terms of the Collaboration Agreement, as in effect until May 4, 2010, Merck and the Company were conducting a broad-based development program for the use of ridaforolimus in multiple types of cancer. Each party funded 50 percent of global development costs incurred. Under the terms of the Collaboration Agreement, Merck paid the Company an initial up-front payment of $75 million in July 2007 and milestone payments of $53.5 million through May 4, 2010, based on the achievement of specified clinical and regulatory events.

The Company’s accounting policy for exclusive license arrangements is to recognize revenue when all revenue recognition criteria have been met. As the Collaboration Agreement included multiple elements, the Company identified the units of accounting and determined the related performance period. The Company assessed each of the deliverables related to the Collaboration Agreement against the separation criteria for multiple element arrangements and concluded that the license and research and development deliverables constituted one unit of accounting. This conclusion reflected the nature of the planned research and development services under the terms of the Collaboration Agreement and the ongoing research in multiple cancer indications. The up-front and milestone payments received were deferred and were being recognized as revenue through 2023, the estimated expiration of the patents related to the underlying technology, which was determined to be the performance period.

Development costs under the Collaboration Agreement were aggregated and split between the Company and Merck in accordance with the terms of the agreement. The Company’s share of such development costs from inception of the collaboration up to May 4, 2010 was reflected in operating expenses in the Company’s statement of operations.

The License Agreement (May 2010 to present)

Under the terms of the License Agreement, the Company has granted Merck an exclusive license to develop, manufacture and commercialize ridaforolimus in oncology, and Merck has assumed full responsibility for all activities related to the development, manufacture and commercialization of ridaforolimus and funds 100 percent of all ridaforolimus costs incurred after January 1, 2010. The License Agreement provides that Merck will develop ridaforolimus in multiple oncology indications. If ridaforolimus receives regulatory approval, Merck will be responsible for selling ridaforolimus worldwide, will record global sales and will pay the Company tiered double-digit royalties on global net sales. The Company has an option to co-promote ridaforolimus with up to 20 percent of the sales effort in all indications in the United States and, in such case, the Company would be compensated by Merck for its sales efforts. In the first quarter of 2011, the Company elected to exercise its option to co-promote ridaforolimus for the sarcoma indication, subject to the terms of a co-promotion agreement being negotiated by the Company and Merck.

Under the License Agreement, in 2010 Merck paid the Company an initial up-front fee of $50 million and approximately $12.8 million for its share of costs incurred in the period from January 1, 2010 to May 4, 2010 related to development, manufacture and commercial activities for ridaforolimus in accordance with the cost-sharing provisions of the Collaboration Agreement as in effect during that period. In addition, Merck has agreed to pay the Company up to $514 million in regulatory and sales milestone payments, based on the successful development of ridaforolimus in multiple potential cancer indications and upon achievement of specified product sales thresholds. Through December 31, 2011, Merck has paid the Company a $25 million milestone payment for the acceptance of the marketing authorization application in Europe for the sarcoma indication. Potential additional milestone payments include up to $40 million associated with potential regulatory approvals for the sarcoma indication (consisting of $25 million for marketing approval in the United States, $10 million for approval to sell ridaforolimus in the European Union, including first pricing and reimbursement approval granted by a regulatory authority in any major European country or by the European Medicines Agency (“EMA”), and $5 million for marketing approval of ridaforolimus in Japan), up to $249 million associated with potential regulatory filings and approvals for other cancer indications, and up to $200 million associated with the achievement of certain sales thresholds. Merck submitted a new drug application for ridaforolimus to the FDA and a marketing authorization application for ridaforolimus to the EMA in the third quarter of 2011, both of which have been accepted for review by these agencies.

Pursuant to the License Agreement, all ridaforolimus activities that had been the responsibility of the Company under the Collaboration Agreement were transitioned to Merck. Merck agreed to pay the Company for its internal transition services at agreed upon rates and reimburse the Company for all external costs incurred in connection with transition services or research and development activities. Accordingly, the remaining deliverables of the Company were limited to transition services for which the Company could establish fair value and all deferred revenue was recognized as of May 4, 2010. Any remaining service revenues are recognized when earned and other revenue recognition criteria are met.

The Company determined that this License Agreement was a new agreement for accounting purposes, as the economic terms and deliverables were materially modified from the prior arrangement. The Company assessed each of the deliverables related to the License Agreement against the separation criteria for multiple element arrangements and concluded that there are two units of accounting, namely the license and the transition services. The Company concluded that the license deliverable has stand-alone value, as the nature of the transition services could be provided by other vendors and there was objective and reliable evidence of the fair value of the undelivered transition services. The Company’s accounting policy for exclusive licenses is to recognize revenue when all revenue recognition criteria are met. Accordingly, the Company recognized the revenue associated with the delivered elements of the agreement in the second quarter of 2010.

The amounts recognized as license and collaboration revenue for the year ended December 31, 2010 included the following components related to the Merck agreements:

·	$50 million up-front payment pursuant to the License Agreement,

·	$12.8 million payment received from Merck pursuant to the License Agreement as payment for the Company’s 50 percent share of costs incurred from January 1, 2010 to May 4, 2010, and

·	$111.5 million representing the recognition of revenue deferred as of December 31, 2009 under the Company’s accounting for the Collaboration Agreement.

For the year ended December 31, 2011, license and collaboration revenue included the $25 million milestone payment received from Merck for acceptance of the submission of the marketing authorization application for ridaforolimus for the sarcoma indication in Europe.

For the years ended December 31, 2011 and 2010, the Company recorded service revenue of approximately $111,000 and $4.5 million, respectively. The cost of such services is reflected in operating expenses in the period in which they were incurred.

Merck is required to reimburse the Company for the cost of any services related to ridaforolimus being provided to the Company by outside service providers from May 4, 2010 until completion. Based on the nature of the arrangement with Merck for management of such services and reimbursement of their costs, reimbursement received from Merck for the cost of such services is reflected as an offset to the related cost and presented on a net basis in operating expenses. Such services were substantially completed in 2010. As noted above, the payment for all internal costs associated with transition services is presented on a gross basis as service revenue.