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, 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.

In accordance with the Company’s accounting policy, 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 consolidated statements of operations.

The License Agreement (May 2010 to present)

Under the terms of the License Agreement, the Company granted Merck an exclusive license to develop, manufacture and commercialize ridaforolimus in oncology, and Merck assumed full responsibility for all activities related to the development, manufacture and commercialization of ridaforolimus and agreed to fund 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 has agreed to 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.

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, 2012, Merck has paid the Company a $25 million milestone payment for the acceptance of the marketing authorization application in Europe for the sarcoma indication, which was subsequently withdrawn by Merck in November 2012. Potential additional milestone payments include up to $289 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 if ridaforolimus receives regulatory approval.

Pursuant to the License Agreement, all ridaforolimus activities that had been the responsibility of the Company under the Collaboration Agreement were transitioned to Merck in 2010. Merck agreed to pay the Company for its internal services at agreed upon rates and reimburse the Company for all external costs incurred in connection with transition services or research and development activities, and these services are reflected as service revenue in the Company’s consolidated statements of operations.

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 had 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:

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

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$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

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$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, 2012, 2011 and 2010, the Company recorded service revenue of approximately $44,000, $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. License revenue that is not related to the Merck arrangement is not material in any of the years presented.