On the Nasdaq Exchange, Threshold shares skyrocketed 78.29 percent to $2.30, as of 12:10 pm EDT.
Under the terms of the agreement, Merck will receive co-development rights and exclusive global commercialization rights, and will provide Threshold with an option to co-commercialize the drug in the U.S.
In return, Threshold will receive an upfront payment of $25 million, and could receive up to $35 million in additional development milestones throughout 2012, including $20 million based on positive results from its randomized phase two trial in pancreatic cancer.
Total milestone payments will come in at $525 million, comprised of $280 million in regulatory and development milestones, and $245 million in sales-based milestones.
"We are excited by the new resources that our partnership is going to bring to the development of TH-302 and the expertise in clinical development and commercialization that Merck will contribute to this program," said Barry Selick, Threshold president and CEO.
"This collaboration provides Threshold a strong and committed partner with a shared vision for TH-302."
In the U.S., Threshold will have the primary responsibility for developing the drug in the soft tissue sarcoma indication. Sarcomas are a group of aggressive cancers of the connective tissue of the body, for which there are limited treatment options.
Soft tissue sarcomas are currently treated with surgery, chemotherapy and radiation.
It is estimated that 10,520 people were diagnosed with soft tissue sarcoma in the U.S. in 2010, with an estimate of 3,920 people dying from the disease, according to the American Cancer Society.
The companies will jointly develop the TH-302 drug in all other cancer indications, with Merck paying 70 percent of the global development costs.
Following FDA approval, Threshold will receive a tiered, double-digit sales royalty from the commercialization of TH-302. Threshold also retains the option to co-promote the drug in the U.S., earning up to 50 percent of U.S. profits, based on certain revenue tiers, it said.
Outside the U.S., Merck will be solely responsible for the commercialization of the drug, with Threshold to receive a tiered, double-digit sales royalty.
Head of Merck's global business development and strategy segment, Susan Jane Herbert, said: "The addition of TH-302 to our pipeline provides an important opportunity in several different tumor types to expand our oncology development program.
"Given the fact that pancreatic cancer is a very difficult to treat indication, successful Phase II results could represent an important upside for our company."
TH-302 is currently being investigated in a global phase three clinical trial in patients with soft tissue sarcoma, as well as a randomized phase two trial in patients with advanced pancreatic cancer.
The drug works by targeting hypoxia, the low oxygen condition found in microenvironments of most solid tumours, as well as the bone marrows of some hematologic malignancies.