Merck KGaA ( MKGAF ) recently announced that it has entered into a global agreement with Threshold Pharmaceuticals, Inc. ( THLD ), for the development and commercialization of the latter's hypoxia-targeted candidate, TH-302.

TH-302 is currently being evaluated in late-stage studies, initiated in September 2011, in patients with soft tissue sarcoma. Also, the candidate is currently in a phase II trial in patients with advanced pancreatic cancer. Top-line results are expected in February 2012. TH-302 is also being studied in additional clinical studies in patients with other solid tumors and hematological malignancies.

According to the terms of the agreement, while Merck KGaA will have co-development rights and exclusive global commercialization rights to the candidate, Threshold Pharma will be responsible for the development of the candidate in the US for the soft tissue sarcoma indication.

Following the US Food and Drug Administration (FDA) approval for the said indication, Merck KGaA will initially be responsible for the commercialization of TH-302, while Threshold Pharma will receive tiered, double-digit royalty on sales. As a part of the agreement, Threshold Pharma will have the option to co-promote the candidate in the US.

Outside the US, Merck KGaA will be solely responsible for the commercialization of TH-302 and Threshold Pharma will receive tiered, double-digit royalty on sales in these territories.

Merck KGaA and Threshold Pharma will jointly develop TH-302 for all other cancer indications.

Under the deal, Threshold Pharma will receive an upfront payment of €19 million ($25 million) and is eligible to receive up to €26.5 million ($35 million) as development milestone payments during 2012. Threshold Pharma can also receive a €15 million ($20 million) milestone payment if the candidate delivers positive phase II results in pancreatic cancer. Further, Merck KGaA will pay 70% of worldwide development costs for TH-302.

We believe this agreement is a positive development for the company as it will help expand Merck KGaA's oncology portfolio.

We currently have a Zacks #4 Rank (short-term Sell rating) on Merck KGaA.