Note 2. Revenue from Collaboration Agreement

Effective February 1994, the Company established a collaboration agreement with Bayer to discover, develop and market compounds that inhibit the function, or modulate the activity, of the RAS signaling pathway to treat cancer and other diseases. Together with Bayer, the Company concluded collaborative research under this agreement in 1999, and based on this research, a product development candidate, Nexavar, was identified. Bayer paid all the costs of research and preclinical development of Nexavar until the Investigational New Drug application, or IND, was filed in May 2000. Under the Company's collaboration agreement with Bayer, the Company is currently funding 50% of mutually agreed development costs worldwide, excluding Japan. Bayer is funding 100% of development costs in Japan and until December 31, 2011 paid the Company a royalty on sales in Japan. At any time during product development, either company may terminate its participation in development costs, in which case the terminating party would retain rights to the product on a royalty-bearing basis. If the Company does not continue to bear 50% of product development costs, Bayer would retain exclusive, worldwide rights to this product candidate and would pay royalties to the Company based on net sales.

In March 2006, the Company and Bayer entered into a co-promotion agreement to co-promote Nexavar in the United States. This agreement amends and generally supersedes those provisions of the collaboration agreement that relate to the co-promotion of Nexavar in the United States. Outside of the United States, the terms of the collaboration agreement continue to govern. Under the terms of the co-promotion agreement and consistent with the collaboration agreement, the Company and Bayer share equally in the profits or losses of Nexavar, if any, in the United States. If for any reason the Company does not continue to co-promote in the United States, but continue to co-fund development worldwide (excluding Japan), Bayer would first receive a portion of the product revenues to repay Bayer for its commercialization infrastructure, before determining the Company's share of profits and losses in the United States.

In October 2011, Onyx and Bayer entered into an agreement regarding Stivarga in which Onyx agreed that Bayer would pay Onyx a royalty of 20% of any future worldwide net sales of Stivarga in human oncology. Onyx and Bayer also agreed that Onyx will have no obligation to pay past or future development and commercialization costs of Stivarga. Onyx will, however, have the right to co-promote Stivarga in the United States with Bayer, and to provide related medical science liaisons, under a fee-for-service arrangement. If there is a future change of control or acquisition of Onyx, Bayer would have the right to terminate Onyx's co-promotion of Stivarga (but could not terminate Onyx's right to co-promote Nexavar in the U.S.). However, in event of a change of control or acquisition of Onyx, Onyx or its successor's right to receive royalties for Stivarga will survive. Development of Stivarga will be managed by the same joint governance bodies that manage development of Nexavar; however, in the event of disagreement Bayer has the right to make final decisions for Stivarga.

In October 2011, Onyx and Bayer also entered into a fourth amendment to their 1994 collaboration agreement with Bayer in which they agreed that Bayer will pay Onyx a one-time lump sum of $160.0 million and Bayer would have no obligation to pay royalties to Onyx for sales of Nexavar in Japan for any period after December 31, 2011. In addition, the provision of the collaboration agreement that governs a change of control or acquisition of Onyx was deleted in its entirety. As a result of the deletion of this section, Onyx's rights and obligations under the collaboration agreement, including profit sharing, co-development and co-promotion of Nexavar, will survive any change of control of Onyx.

The Company's collaboration agreement with Bayer will terminate when patents expire that were issued in connection with product candidates discovered under the agreement, or at the time when neither we nor Bayer are entitled to profit sharing under the agreement, whichever is latest. The Company's co-promotion agreement with Bayer will terminate upon the earlier of the termination of the Company's collaboration agreement with Bayer or the date products subject to the co-promotion agreement are no longer sold by either party in the United States due to a permanent product withdrawal or recall or a voluntary decision by the parties to abandon the co-promotion of such products in the United States. Either party may also terminate the co-promotion agreement upon failure to cure a material breach of the agreement within a specified cure period. The Company's agreement regarding Stivarga will terminate or a country-by-country basis when we are no longer entitled to receive royalties in a particular country. Refer to Note 4 "Royalty Revenue from Stivarga" for further details.

Nexavar is currently marketed and sold in 100 countries, for the treatment of patients with unresectable liver cancer and advanced kidney cancer. Outside of the United States, excluding Japan, Bayer incurs all of the sales and marketing expenditures, and the Company reimburses Bayer for half of those expenditures. In addition, for sales generated outside of the United States, excluding Japan, the Company reimburses Bayer a fixed percentage of sales for their marketing infrastructure. Research and development expenditures on a worldwide basis, excluding Japan, are equally shared by both companies regardless of whether the Company or Bayer incurs the expense.

In the United States, Bayer provides all product distribution and all marketing support services for Nexavar, including managed care, customer service, order entry and billing. Bayer is compensated for distribution expenses based on a fixed percent of gross sales of Nexavar in the United States. Bayer is reimbursed for half of its expenses for marketing services provided by Bayer for the sale of Nexavar in the United States. The companies share equally in any other out-of-pocket marketing expenses (other than expenses for sales force and medical science liaisons) that the Company and Bayer incur in connection with the marketing and promotion of Nexavar in the United States. Bayer manufactures all Nexavar sold in the United States and is reimbursed at an agreed transfer price per unit for the cost of goods sold.

In the United States, the Company contributes half of the overall number of sales force personnel required to market and promote Nexavar and half of the medical science liaisons to support Nexavar. The Company and Bayer each bear its own sales force and medical science liaison expenses. These expenses are not included in the calculation of the profits or losses of the collaboration.

Revenue from collaboration agreement consists of the Company's share of the pre-tax commercial profit generated from its collaboration with Bayer, reimbursement of the Company's shared marketing costs related to Nexavar and royalty revenue. Under the collaboration, Bayer recognizes all sales of Nexavar worldwide. The Company records revenue from collaboration agreement on a quarterly basis. Revenue from collaboration agreement is derived by calculating net sales of Nexavar to third-party customers and deducting the cost of goods sold, distribution costs, marketing costs (including without limitation, advertising and education expenses, selling and promotion expenses, marketing personnel expenses and Bayer marketing services expenses), Phase 4 clinical trial costs and allocable overhead costs. Reimbursement by Bayer of the Company's shared marketing costs related to Nexavar and royalty revenue is also included in the revenue from collaboration agreement line item.

The Company's portion of shared collaboration research and development expenses is not included in this line item, but is reflected under operating expenses. According to the terms of the collaboration agreement, the companies share all research and development, marketing and non-U.S. sales expenses. United States sales force and medical science liaison expenditures incurred by both companies are borne by each company separately and are not included in the calculation. Some of the revenue and expenses used to derive the revenue from collaboration agreement during the period presented are estimates of both parties and are subject to further adjustment based on each party's final review should actual results differ from these estimates.

Revenue from collaboration agreement was $288.4 million, $287.0 million and $265.4 million for the years ended December 31, 2012, 2011 and 2010, respectively, calculated as follows:

	Year Ended December 31,

	2012		2011		2010
	(In thousands)
Onyx's share of collaboration commercial profit	$	267,610	$	252,236	$	232,494
Reimbursement of Onyx's shared marketing expenses		20,806		22,946		23,122
Royalty revenue		-		11,781		9,734

Revenue from collaboration agreement	$	288,416	$	286,963	$	265,350

Through December 31, 2012, 2011 and 2010, the Company has invested $765.1 million, $686.4 million and $596.5 million, respectively, in the development of Nexavar, representing its share of the costs incurred to date under the collaboration.

Contract revenue from collaboration, related to Bayer, was $160.2 million for the year ended December 31, 2011, and there was no such revenue related to Bayer for the years ended December 31, 2012 or 2010. Contract revenue from collaboration for the year ended December 2012 relates to Pfizer, as discussed in Note 6 of the consolidated financial statements.