2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) Basis of Consolidation; Business Segments

The consolidated financial statements incorporate the accounts of Medivation, Inc. and its wholly-owned subsidiaries. All significant inter-company transactions and balances have been eliminated in consolidation. The Company operates in one business segment.

All tabular disclosures of dollar amounts are presented in thousands. All share and per share amounts are presented at their actual amounts.

(b) Use of Estimates

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States, or U.S. GAAP, requires that management make estimates and assumptions in certain circumstances that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Estimates and assumptions used by management principally relate to the performance periods of the Company's deliverables under its collaboration agreement with Astellas and its former collaboration agreement with Pfizer; services performed by third parties but not yet invoiced; the fair value and forfeiture rates of stock awards granted to employees, directors and consultants and the probability of attaining the performance objectives of performance share awards; the probability and potential magnitude of contingent liabilities; and deferred income taxes, income tax provisions and accruals for uncertain income tax positions.

Although management believes that estimates used in the preparation of the consolidated financial statements are reasonable under the circumstances, actual future results could differ from those estimates. In addition, had different estimates and assumptions been used, the consolidated financial statements could have differed materially from that which is presented.

(c) Risks and Uncertainties

The Company has incurred cumulative net losses of $250.3 million through December 31, 2011 and it expects to incur substantial additional losses for the foreseeable future as it pursues regulatory approval for, and, if approved, commercial launch of MDV3100 and continues to finance clinical and preclinical studies of its existing and potential future product candidates and its corporate overhead costs. At December 31, 2011, the Company had cash, cash equivalents and short-term investments totaling $145.1 million to fund its operations. The Company expects that its current resources will be sufficient to fund the presently budgeted costs of executing its current development and commercialization plan for the next 12 months. However, this statement is subject to significant risks and uncertainty and is based on a number of assumptions that may prove to be wrong and the Company could exhaust its available cash, cash equivalents and short-term investments earlier than presently anticipated. The Company may be required or choose to seek additional capital within the next 12 months to expand its clinical development activities for MDV3100 based on the positive results of the Company's Phase 3 AFFIRM trial in post-chemotherapy advanced prostate cancer patients, to fund costs of planning for and executing a commercial launch of MDV3100, should it receive marketing approval, if the Company faces challenges or delays in connection with its clinical trials or the potential approval and commercialization of MDV3100, or to maintain cash balances that the Company deems reasonable and prudent. The Company's ability to raise capital on acceptable terms, or at all, is subject to significant risks, many of which are beyond its control.

(d) Cash Equivalents

Cash and cash equivalents are stated at cost, which approximates fair market value. The Company considers all highly liquid investments with a remaining maturity of three months or less at the time of acquisition to be cash equivalents.

(e) Short-Term Investments

The Company considers all highly liquid investments with a remaining maturity at the time of acquisition of more than three months but no longer than 12 months to be short-term investments. The Company classifies its short-term investments as available-for-sale securities and reports them at fair value with related unrealized gains and losses included as a component of stockholders' equity. The amortized cost of debt securities in this category is adjusted for amortization of premiums and accretion of discounts to maturity, which is included in other (expense) income, net, on the consolidated statements of operations. Realized gains and losses and declines in value judged to be other-than-temporary, if any, on available-for-sale securities are included in other (expense) income, net. The cost of securities sold is based on the specific identification method. Interest and dividends on securities classified as available-for-sale are included in other (expense) income, net.

(f) Restricted Cash

Restricted cash represents certificates of deposit held in the Company's name with a major financial institution to secure the Company's contingent obligations under irrevocable letters of credit issued to the lessors of the Company's office facilities.

(g) Fair Value of Financial Instruments

The fair value of the Company's cash equivalents and short-term investments is based on quoted market prices. Other financial instruments, including receivables from collaboration partners, accounts payable and accrued expenses, are carried at cost, which the Company believes approximates fair value because of the short-term maturities of these instruments.

(h) Concentration of Credit Risk

Financial instruments that potentially subject the Company to credit risk consist of cash, cash equivalents, short-term investments and receivables from collaboration partners. The Company's current investment policy is to invest only in a) debt securities issued by, or backed by the full faith and credit of, the U.S. government, b) repurchase agreements that are fully collateralized by such debt securities, and c) money market funds invested exclusively in the types of securities described in a) and b) above. Given this investment policy, the Company does not believe its exposure to credit risk with respect to the issuers of the securities in which it invests is material, and accordingly has no formal policy for mitigating such risk. The Company's cash and cash equivalents are primarily invested in deposits and money market accounts with one major financial institution in the United States. Deposits in this financial institution may exceed the amount of insurance provided on such deposits.

(i) Property and Equipment

Property and equipment are recorded at cost, less accumulated depreciation and amortization. Repairs and maintenance costs are expensed in the period incurred. Property and equipment is depreciated on a straight-line basis over the estimated useful lives of the assets as follows:


Description		Estimated Useful Life
Office equipment and furniture		3years
Software and computer equipment		3-5 years
Laboratory equipment		5years
Leasehold improvements and fixtures		Lesser of estimated useful life or life of lease

(j) Leases

At the inception of a lease, the Company evaluates the lease agreement to determine whether the lease is an operating or a capital lease using the criteria in the Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC, 840, "Leases." For operating leases, the Company recognizes rent expense on a straight-line basis over the non-cancellable lease term and records the difference between cash rent payments and the recognition of rent expense as a deferred liability. Where lease agreements contain rent escalation clauses, rent abatements and/or concessions, such as rent holidays and tenant improvement allowances, the Company applies them in the determination of straight-line expense over the lease term. The Company currently has no capital leases. Certain lease agreements also require the Company to make additional payments under the lease term for taxes, insurance, and other operating expenses incurred during the lease period, which are expensed as incurred.

(k) Litigation

The Company records an accrual for exposures to various litigation matters as a charge to its consolidated statements of operations when it becomes probable and can be reasonably estimated. The exposure to legal matters is evaluated and estimated, if possible, following consultation with legal counsel. Such estimates are based on currently available information and, given the subjective nature and complexities inherent in making these estimates, the ultimate outcome of the Company's legal matters may be different than the amounts estimated, if any.

(l) Collaboration Agreement Payments

The Company accounts for the various payment flows under its collaboration agreement with Astellas and its former collaboration agreement with Pfizer in a consistent manner, as follows:

Estimated Performance Periods

Both the Astellas Collaboration Agreement and the former collaboration agreement with Pfizer contain multiple elements and deliverables, and required evaluation pursuant to ASC 605-25, "Revenue Recognition—Multiple-Element Arrangements." The Company evaluated the facts and circumstances of the collaboration agreements to determine whether it had obligations constituting deliverables under ASC 605-25. The Company concluded that it had multiple deliverables under both collaboration agreements, including deliverables relating to grants of technology licenses, and performance of manufacturing, regulatory and clinical development activities in the U.S. In the case of the Astellas Collaboration Agreement, the period in which the Company performs its deliverables began in the fourth quarter of 2009 and at December 31, 2011, management estimated that it would be completed in the fourth quarter of 2014. In the case of the former collaboration agreement with Pfizer, the period in which the Company performs its deliverables began in the fourth quarter of 2008 and at December 31, 2011, management estimated that it would be completed in the fourth quarter of 2013. The Company also concluded that its deliverables under each collaboration agreement should be accounted for as a single unit of accounting under ASC 605-25.

Estimation of the performance periods of the Company's deliverables requires the use of management's judgment. Significant factors considered in management's evaluation of the estimated performance periods include, but are not limited to, the Company's experience, along with Astellas' and Pfizer's experience, in conducting clinical development and regulatory activities. The Company reviews the estimated duration of its performance periods under both collaborations on a quarterly basis and makes any appropriate adjustments on a prospective basis.

During the year ended December 31, 2010, the Company extended the estimated completion date of its performance period under the former collaboration agreement with Pfizer from the second quarter of 2012 to the fourth quarter of 2013, based on the failure of the CONNECTION trial and the resulting longer period required to complete the clinical trials evaluating dimebon's potential safety and efficacy as a treatment for mild-to-moderate Alzheimer's disease.

In January 2012, Pfizer exercised its right to terminate the collaboration agreement. As a result, during the first quarter of 2012, the Company revised its estimate of the remaining performance period under the collaboration agreement. The Company expects to complete its remaining performance obligations pursuant to the terms of the former collaboration agreement with Pfizer in the first half of 2012.

Future changes in estimates of the performance periods under the collaboration agreements could significantly impact the timing of future revenue recognized under the applicable collaboration agreement.

Up-Front Payments

The Company has received non-refundable up-front cash payments of $110.0 million and $225.0 million under its collaboration agreement with Astellas and its former collaboration agreement with Pfizer, respectively. The Company recognizes these payments as collaboration revenue on a straight-line basis over the applicable estimated performance period.

Milestone Payments

The Company is eligible to receive milestone payments under the Astellas Collaboration Agreement based on achievement of specified development, regulatory and commercial events. Management evaluated the nature of the events triggering these contingent payments, and concluded that these events—except for (a) those relating to regulatory activities in Europe, development and regulatory activities in Japan, and commercial activities, all of which are areas in which the Company has no pertinent contractual responsibilities, and (b) the initiation of the Phase 3 PREVAIL trial, an event which management deemed to be reasonably assured at the inception of the Astellas collaboration—constituted substantive milestones. This conclusion was based primarily on the facts that (i) each triggering event represents a specific outcome that can be achieved only through successful performance by the Company of one or more of its deliverables, (ii) achievement of each triggering event was subject to inherent risk and uncertainty and would result in additional payments becoming due to the Company, (iii) each of these milestones was substantive, based primarily on the facts that the payments they trigger are non-refundable, (iv) achievement of the milestone entails risk and was not reasonably assured at inception of the collaboration agreement, (v) substantial effort is required to complete each milestone, (vi) the amount of each milestone payment is reasonable in relation to the value created in achieving the milestone, (vii) a substantial amount of time is expected to pass between the up-front payment and the potential milestone payments, and (viii) the milestone payments relate solely to past performance. Based on the foregoing, the Company will recognize any revenue from these milestone payments under the substantive milestone method in the period in which the underlying triggering event occurs.

For the contingent payments triggered by events that do not constitute substantive milestones, management concluded that the appropriate revenue recognition treatment depends on whether the triggering event occurs during or after the performance period. Where the triggering event occurs during the applicable performance period, the Company will amortize any revenue from this event on a straight-line basis over the applicable performance period. Where the triggering event occurs after the applicable performance period, the Company will recognize the associated revenue in the period in which the event occurs.

Royalties and Profit Sharing Payments

Under the Astellas Collaboration Agreement, the Company is eligible to receive profit sharing payments on sales of products in the U.S. and royalties on sales of products outside the U.S. The Company will recognize any revenue from these events based on the revenue recognition criteria set forth in ASC 605-10-25-1, "Revenue Recognition." Based on those criteria, the Company considers these potential payments to be contingent revenues, and will recognize them as revenue in the period in which the applicable contingency is resolved.

Cost-Sharing Payments

Under both the Astellas Collaboration Agreement and the former collaboration agreement with Pfizer, the Company and its collaboration partners share certain development and commercialization costs in the U.S. The parties make quarterly cost-sharing payments to one another in amounts necessary to ensure that each party bears its contractual share of the overall development and commercialization costs incurred. The Company's policy is to account for cost-sharing payments to its collaboration partners as increases in expense in its consolidated statements of operations, while cost sharing payments by its collaboration partners to the Company are presented as reductions in expense. Cost-sharing payments related to development activities and commercialization activities are recorded in research and development expenses and selling, general and administrative expenses, respectively.

(m) Research and Development

Research and development expenses include personnel and facility-related expenses, outside contracted services including clinical trial costs, manufacturing and process development costs, research costs and other consulting services. Research and development costs are expensed as incurred. In instances where the Company enters into agreements with third parties to provide research and development services to it, costs are expensed as services are performed. Amounts due under such arrangements may be either fixed fee or fee for service, and may include upfront payments, monthly payments, and payments upon the completion of milestones or receipt of deliverables.

The Company's cost accruals for clinical trials and other research and development activities are based on estimates of the services received and efforts expended pursuant to contracts with numerous clinical trial centers and contract research organizations. In the normal course of business the Company contracts with third parties to perform various research and development activities in the on-going development of its product candidates, including without limitation, third party clinical trial centers and contract research organizations that perform and administer the Company's clinical trials on its behalf. The financial terms of these agreements are subject to negotiation and vary from contract to contract and may result in uneven payment flows. Payments under these agreements depend on factors such as the achievement of certain events, the successful enrollment of patients, and the completion of portions of the clinical trial or similar conditions. The objective of the Company's accrual policy is to match the recording of expenses in its consolidated financial statements to the actual services received and efforts expended. As such, expense accruals related to clinical trials and other research and development activities are recognized based on the Company's estimate of the degree of completion of the event or events specified in the specific agreement.

The Company's estimates are dependent upon the time lines and accuracy of data provided by third parties regarding the status and cost of studies, and may not match the actual services performed by the organizations. This could result in adjustment to the Company's research and development expense in future periods. To date, the Company has had no significant adjustments.

(n) Stock-Based Compensation

The Company has granted stock options, restricted stock units, performance share awards and stock appreciation rights pursuant to the terms of its Amended and Restated 2004 Equity Incentive Award Plan. The Company accounts for stock-based compensation awards granted to employees and directors in accordance with ASC 718, "Stock Compensation," and has applied the provisions of the Securities and Exchange Commission, or SEC, Staff Accounting Bulletin, or SAB, No. 107 and No. 110, in its application of ASC 718. Stock compensation arrangements with consultants are accounted for in accordance with ASC 718 and ASC 505-50, "Equity-Based Payments to Non-Employees," using a fair value approach. The compensation costs of these arrangements are subject to remeasurement over the vesting terms as earned.

The Company determines stock-based compensation expense associated with stock options based on the estimated grant date fair value using the Black-Scholes valuation model, which requires the use of subjective assumptions related to expected stock price volatility, expected option term, expected dividend yield and risk-free interest rate. For employee and director stock options, the Company recognizes compensation expense over the vesting period of the awards that are ultimately expected to vest. Stock options granted to consultants are valued at their respective measurement dates and recognized as expense based on the portion of the total consulting services provided during the applicable period. As further consulting services are provided in each period, the Company revalues the associated awards and recognizes additional expense based on their then-current fair values.

Stock-based compensation expense associated with restricted stock units is based on the fair value of the Company's common stock on the grant date, which equals the closing market price of the Company's common stock on the grant date of the award. For restricted stock units, the company recognizes compensation expense over the vesting period of the awards that are ultimately expected to vest.

Performance share awards allow the recipients of such awards to earn fully vested shares of the Company's common stock based on the achievement of pre-established performance objectives specified in the awards. Stock-based compensation expense associated with performance share awards is based on the estimated grant date fair value of the Company's common stock using the Black Scholes valuation model and is recognized based upon the Company's best estimates of the achievement of the performance objectives specified in such awards and the resulting number of shares that are expected to be earned. The Company evaluates on a quarterly basis the probability of achieving the performance criteria. The cumulative effect on current and prior periods of a change in the estimated number of performance share awards expected to be earned is recognized as compensation expense or as reduction of previously recognized compensation expense in the period of the revised estimate.

The fair value of stock-settled and cash-settled stock appreciation rights is initially measured on the grant date using the Black-Scholes valuation model, which requires the use of subjective assumptions related to the expected stock price volatility, expected term, expected dividend yield and risk-free interest rate. Similar to stock options, compensation expense for stock-settled stock appreciation rights is recognized over the vesting period of the awards that are ultimately expected to vest based on the grant-date fair value. Cash-settled stock appreciation rights are liability-classified awards for which compensation expense and the liability are remeasured at each reporting date through the date of settlement based on the portion of the requisite service period rendered.

The Company applies a forfeiture rate when determining stock-based compensation expense to account for an estimate of the granted awards not expected to vest. If actual forfeitures differ from the expected rate, the Company may be required to make additional adjustments to compensation expense in future periods.

(o) Promotional and Advertising Costs

Promotional and advertising costs are classified as selling, general and administrative expenses, and are expensed as incurred. Promotional and advertising expenses consist primarily of the costs of designing, producing and distributing materials promoting the Company or its product candidates, including its corporate website. Promotional and advertising expenses were insignificant in the years ended December 31, 2011, 2010 and 2009.

(p) Income Taxes

The Company accounts for income taxes using an asset and liability approach in ASC 740-10, "Accounting for Income Taxes," which requires the recognition of taxes payable or refundable for the current year and deferred tax assets and liabilities for the future tax consequences of events that have been recognized in the consolidated financial statements or tax returns. The measurement of current and deferred tax assets and liabilities is based on provisions of the enacted tax law; the effects of future changes in tax laws or rates are not anticipated. The measurement of deferred tax assets is reduced, if necessary, by the amount of any tax benefits that, based on available evidence, is not expected to be realized.

The Company records a valuation allowance to reduce its deferred tax assets for the amount that it believes is more likely than not to be realized. Due to the Company's lack of earnings history, the Company intends to maintain a full valuation allowance on the U.S. deferred tax assets until sufficient positive evidence exists to support reversal of the valuation allowance.

The Company establishes reserves for uncertain income tax positions based on the guidance in ASC 740-10-25, "Accounting for Uncertainty in Income Taxes." When establishing reserves for uncertain income tax positions, the Company considers the technical support for the positions, past audit experience with similar situations and potential interest and penalties related to the matters. Recorded reserves represent the Company's best estimate of the amount, if any, that it may ultimately be required to pay to settle such matters. The resolution of uncertain income tax positions is dependent on uncontrollable factors such as law changes, new case law and the willingness of income tax authorities to settle, including the timing thereof and other factors. The Company does not expect significant changes to its uncertain income tax positions in the next 12 months. However, items outside of the Company's control could cause its uncertain income tax positions to change in the future, which would be recorded in the consolidated statements of operations. The Company's practice is to recognize interest and/or penalties related to income tax matters in income tax expense as incurred

(q) Basic and Diluted Net Loss per Common Share

Basic net loss per common share is computed by dividing the net loss by the weighted-average number of common shares outstanding during the period. Diluted net loss per common share is computed similarly to basic net loss per common share, except that the denominator is increased to include all potentially dilutive common shares, including outstanding options, warrants, restricted stock units, performance share awards and stock appreciation rights. Potentially dilutive common shares have been excluded from the diluted net loss per common share computations in all periods presented because such securities have an anti-dilutive effect on net loss per common share due to the Company's net loss in each of the years presented.

Potentially dilutive securities were as follows:


	December 31,
	2011		2010		2009
Stock options		4,301,808		5,041,303		5,603,960
Restricted stock units		101,617		173,119		10,834
Warrants		22,904		22,904		100,323
Stock appreciation rights		262,800		—		—
Performance shares eligible to be earned		62,500		—		—

Total		4,751,629		5,237,326		5,715,117

.(r) Recently Issued Accounting Pronouncements Impacting the Company

In June 2011, the FASB issued Accounting Standards Update, or ASU, No. 2011-05, "Comprehensive Income (Topic 220): Presentation of Comprehensive Income," with an objective of increasing the prominence of items reported in other comprehensive income, or OCI. This amendment provides companies with the option to present the total of comprehensive income, the components of net income and the components of OCI in either a single continuous statement of comprehensive income or in two separate but continuous statements. In addition, companies must present on the face of the financial statements, items reclassified from OCI to net income in the section of the financial statements where the components of net income and OCI are presented, regardless of the option selected to present comprehensive income. The amended guidance related to the presentation of comprehensive income is applicable retrospectively and is effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2011 and will be effective for the Company in the first quarter of fiscal 2012. In December 2011, the FASB issued ASU No. 2011-12, which defers changes in ASU No. 2011-05 that relate to the presentation of reclassification adjustments out of accumulated OCI to enable the FASB time to re-deliberate the presentation requirements. The adoption of this amendment concerns disclosure only and the Company does not expect it to have an impact on its consolidated financial position, results of operations or cash flows.

In May 2011, the FASB issued ASU No. 2011-04, "Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs." This amendment is intended to result in convergence between U.S. GAAP and International Financial Reporting Standards requirements for measurement of and disclosures about fair value. This guidance clarifies the application of existing fair value measurements and disclosures, and changes certain principles or requirements for fair value measurements and disclosures. The amendment will be effective for the Company in the second quarter of fiscal year 2012. The Company is currently assessing the potential impact, if any, this amendment may have on its consolidated financial position, results of operations and cash flows.

In March 2010, the FASB ratified Emerging Issues Task Force, or EITF, Issue No. 08-9, "Milestone Method of Revenue Recognition" (Issue 08-9). The ASU, resulting from Issue 08-9 amends ASC 605-28. The Task Force concluded that the milestone method is a valid application of the proportional performance model when applied to research or development arrangements. Accordingly, the consensus states that an entity can make an accounting policy election to recognize a payment that is contingent upon the achievement of a substantive milestone in its entirety in the period in which the milestone is achieved. A milestone is defined in the consensus as an event: (1) that can only be achieved based in whole or in part on either (a) the entity's performance or (b) on the occurrence of a specific outcome resulting from the entity's performance; (2) for which there is substantive uncertainty at the date the arrangement is entered into that the event will be achieved; and (3) that would result in additional payments being due to the entity. Issue 08-9 is effective for fiscal years, and interim periods within those years, beginning on or after June 15, 2010, and may be applied either prospectively to milestones achieved after the adoption date, or; retrospectively for all periods presented. The Company adopted the new guidance effective January 1, 2011, analyzed its impact on its consolidated financial statements, and concluded there was no such impact.

In September 2009, the FASB amended ASC 605 as summarized in ASU 2009-13, "Revenue Recognition: Multiple-Deliverable Revenue Arrangements." Guidance in ASC 605-25 on revenue arrangements with multiple deliverables has been amended to require an entity to allocate revenue to deliverables in an arrangement using its best estimate of selling prices if the vendor does not have vendor-specific objective evidence or third-party evidence of selling prices, and to eliminate the use of the residual method and require the entity to allocate revenue using the relative selling price method. The new guidance also requires expanded quantitative and qualitative disclosures about revenue from arrangements with multiple deliverables. The update is effective for fiscal years beginning on or after June 15, 2010, with early adoption permitted. Adoption may either be on a prospective basis for new revenue arrangements entered into or existing arrangements modified, after adoption of the update, or by retrospective application. The Company adopted this guidance on a prospective basis effective January 1, 2011, analyzed its impact on its consolidated financial statements, and concluded there was no such impact.