2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) Basis of Presentation

The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States, or U.S. GAAP, and include the accounts of the Company and its wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation. The Company operates in one business segment.

All tabular disclosures of dollar and share amounts are presented in thousands, unless otherwise indicated. All per share amounts are presented at their actual amounts. Amounts presented herein may not calculate or sum precisely due to rounding.

(b) Use of Estimates

The preparation of consolidated financial statements in accordance with 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. Although management believes that estimates used in the preparation of the consolidated financial statements are reasonable, 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 what is presented.

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; collaboration revenue related to the Astellas Collaboration Agreement; services performed by third parties but not yet invoiced; the fair value and forfeiture rates of stock awards under the Medivation Amended and Restated 2004 Equity Incentive Award Plan, or the Medivation Equity Incentive Plan, and the probability of attaining the performance objectives of performance share awards; the probability and potential magnitude of contingent liabilities; Convertible Notes, including the Company’s estimate of how the net proceeds thereof should be bifurcated between the debt component and the equity component; and deferred income taxes, income tax provisions and accruals for uncertain income tax positions.

(c) Capital Structure

On September 20, 2012, the Company filed a Certificate of Amendment to its Amended and Restated Certificate of Incorporation, as amended, effecting an increase in the total number of authorized shares of capital stock of the Company from 51,000,000 to 86,000,000 and an increase in the total number of authorized shares of common stock of the Company from 50,000,000 to 85,000,000.

On September 21, 2012, the Company filed a Certificate of Amendment to its Amended and Restated Certificate of Incorporation, as amended, effecting (i) an increase in the total number of authorized shares of capital stock of the Company from 86,000,000 to 171,000,000, (ii) an increase in the total number of authorized shares of common stock of the Company from 85,000,000 to 170,000,000, and (iii) a two-for-one forward split of its common stock effective as of 5:00 p.m., Eastern Time, on September 21, 2012.

The Company issued approximately 37.0 million shares of its common stock as a result of the two-for-one forward stock split. The par value of the Company’s common stock remained unchanged at $0.01 per share.

The information of shares of common stock (except par value per share), par, additional paid-in capital, and net (loss) income per common share information for all periods reflect the two-for-one forward stock split of the Company’s common stock. The number of shares of the Company’s common stock issuable upon exercise of outstanding stock options and vesting of other stock-based awards was proportionally increased, and the exercise price per share thereof was proportionally decreased, in accordance with the terms of the Medivation Equity Incentive Plan. Following the completion of the two-for-one forward stock split, the conversion rate of the Company’s Convertible Notes was adjusted to 19.5172 shares of common stock per $1,000 principal amount of the Convertible Notes, equivalent to a conversion price of approximately $51.24 per share of common stock.

(d) Cash and 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 income (expense), 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 income (expense), 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 income (expense), 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. The fair value of the Company’s Convertible Notes is based on the most recent trading price during the reporting period. 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 two major financial institutions in the United States. Deposits in these financial institutions 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
Furniture and fixtures		3-5 years
Computer equipment and software		3-5 years
Laboratory equipment		5 years
Leasehold improvements		Lesser of estimated useful life or life of lease

(j) Convertible Notes

The debt and equity components of the Company’s Convertible Notes have been bifurcated and accounted for separately based on the authoritative guidance in the Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC, 470-20, “Debt with Conversion and Other Options.” The debt component of the Convertible Notes, which excludes the associated equity conversion feature, was recorded at fair value on the issuance date. The equity component, representing the difference between the aggregate principal amount of the Convertible Notes and the fair value of the debt component, was recorded in additional paid-in capital on the consolidated balance sheet. The discounted carrying value of the Convertible Notes resulting from the bifurcation will be subsequently accreted to its principal amount through the recognition of non-cash interest expense.

Costs related to the issuance of the Convertible Notes, consisting primarily of investment banking, legal and other professional fees, were allocated to the debt and equity components of the Company’s Convertible Notes in proportion to the allocation of the principal. Amounts allocated to the debt component were capitalized and are being amortized as non-cash interest expense using the effective yield method over the five-year contract term of the Convertible Notes. Amounts allocated to the equity component were recorded against additional paid-in capital.

(k) 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 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.

(l) Litigation

The Company is party to legal proceedings, investigations, and claims in the ordinary course of its business. The Company records accruals for outstanding legal matters when it believes that it is both probable that a liability has been incurred and the amount of such liability can be reasonably estimated. The Company evaluates, on a quarterly basis, developments in legal matters that could affect the amount of any accrual and developments that would make a loss contingency both probable and reasonably estimable. To the extent new information is obtained and the Company’s views on the probable outcomes of claims, suits, assessments, investigations or legal proceedings change, changes in the Company’s accrued liabilities would be recorded in the period in which such determination is made. In addition, in accordance with the relevant authoritative guidance, for matters for which the likelihood of material loss is at least reasonably possible, the Company provides disclosure of the possible loss or range of loss; however, if a reasonable estimate cannot be made, the Company will provide disclosure to that effect.

(m) 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, 2012, management estimated that it would be completed in the first quarter of 2014. In the case of the former collaboration agreement with Pfizer, the period in which the Company performed its deliverables began in the fourth quarter of 2008 and concluded in the third quarter of 2012 upon completion of the Company’s performance obligations. 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 its collaboration partners’ experience, in conducting manufacturing, clinical development and regulatory activities. The Company reviews the estimated duration of its performance periods under its collaboration agreements on a quarterly basis and makes any appropriate adjustments on a prospective basis. Future changes in estimates of the performance period under the Astellas Collaboration Agreement could significantly impact the timing of future revenue recognition.

Up-Front Payments

The Company has received non-refundable, up-front cash payments of $110.0 million and $225.0 million under the Astellas Collaboration Agreement 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 fall into two categories: (a) events which involve the performance of the Company’s obligations under the Astellas Collaboration Agreement, and (b) events which do not involve the performance of the Company’s obligations under the Astellas Collaboration Agreement.

The former category of milestone payments consists of those triggered by development and regulatory activities in the United States and by the acceptance for review of marketing applications in Europe and Japan. Management concluded that each of these payments, with one exception, constitute 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 the milestone payments is non-refundable, (iv) substantial effort is required to complete each milestone, (v) the amount of each milestone payment is reasonable in relation to the value created in achieving the milestone, (vi) a substantial amount of time is expected to pass between the up-front payment and the potential milestone payments, and (vii) the milestone payments relate solely to past performance. Based on the foregoing, the Company recognizes any revenue from these milestone payments in the period in which the underlying triggering event occurs. The one exception is the milestone payment for initiation of the Phase 3 PREVAIL trial, an event which management deemed to be reasonably assured at the inception of the Astellas collaboration. This milestone payment was triggered in the third quarter of 2010, and the Company is amortizing it as revenue on a straight-line basis over the performance period of the Astellas Collaboration Agreement.

The latter category of milestone payments consists of those triggered by potential regulatory approvals in Europe and Japan, and commercial activities globally, all of which are areas in which the Company has no pertinent contractual responsibilities under the Astellas Collaboration Agreement. Management concluded that these payments constitute contingent revenues and thus recognizes them as revenue in the period in which the contingency is met.

Royalties and Profit (Loss) Sharing Payments

Under the Astellas Collaboration Agreement, the Company shares equally profits (losses) on sales of products in the U.S. and is eligible to receive 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 payments to be contingent revenues, and recognizes 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 (including in the case of the Astellas Collaboration Agreement, cost of goods sold and the royalty on net sales payable to The Regents of the University of California, or UCLA, under the Company’s license agreement with UCLA) in the United States. 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 shared U.S. 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 accounted for as reductions in expense. Cost-sharing payments related to development activities and commercialization activities are recorded in research and development expenses, or R&D expenses, and selling, general and administrative expenses, or SG&A expenses, respectively.

Reliance on Third-Party Information

Under the Astellas Collaboration Agreement, Astellas records all XTANDI sales globally and has operational responsibility for certain development and commercialization activities in the United States for which the Company shares costs. Thus, Astellas has control over certain XTANDI-related financial information needed to prepare the Company’s financial statements and related disclosures, including information regarding gross sales, net sales, gross-to-net deductions and shared U.S. development and commercialization costs incurred by Astellas. The Company is dependent on Astellas to provide it with such information in a timely and accurate manner for use in preparing the Company’s financial statements and disclosures. Certain of this information provided by Astellas is subject to estimates, including estimates used in determining gross-to-net deductions such as payor mix, discounts (including legally mandated discounts to government entities), returns, chargebacks, rebates, and participation levels in patient assistance programs, and estimates regarding accrued development and commercialization costs incurred by Astellas. Under the Astellas Collaboration Agreement, such estimates are reassessed periodically and trued-up as appropriate in accordance with Astellas’ internal accounting policies, as consistently applied. Should Astellas fail to provide the Company with any such financial information in a timely manner, or should any such financial information provided by Astellas, or any of the estimates upon which such financial information was based, prove to be inaccurate, the Company could be required to record adjustments in future periods and may be required to restate its results for prior periods.

(n) Research and Development Expenses

R&D expenses include personnel and facility-related expenses, outside contracted services including clinical trial costs, manufacturing and process development costs, research costs, milestone-related payments to the licensor of the Company’s enzalutamide technology, 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 up-front payments, monthly payments, and payments upon the completion of milestones or receipt of deliverables.

The Company’s 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 timeliness 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. The Company has had no significant adjustments to previously recorded amounts.

(o) Stock-Based Compensation

The Company has granted stock options, restricted stock units, performance share awards and stock appreciation rights pursuant to the terms of the Medivation Equity Incentive Plan. The Company accounts for stock-based compensation awards in accordance with ASC 718, “Stock Compensation.”

Stock-based compensation expense associated with stock options is based on the estimated grant date fair value using the Black-Scholes valuation model, which requires the use of subjective assumptions related to the expected stock price volatility, option term, risk-free interest rate and dividend yield. The Company recognizes compensation expense over the vesting period of the awards that are ultimately expected to vest.

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. 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 upon the achievement of pre-established performance objectives. Stock-based compensation expense associated with performance share awards 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, and is recognized upon a point in which the performance objective is believed to be achieved. 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, option term, risk-free interest rate and dividend yield. 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. Upon the conversion of cash-settled stock appreciation rights to stock-settled stock appreciation rights, the awards are remeasured using the then-current Black-Scholes assumptions and the remeasured liability is reclassified to additional paid-in capital.

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.

The Black-Scholes valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable; characteristics not present in the Company’s stock options or stock appreciation rights. If the model permitted consideration of the unique characteristics of employee stock options and stock appreciation rights, the resulting estimate of fair value of the stock options and stock appreciation rights could be different. In addition, if the Company had made different assumptions and estimates for use in the Black-Scholes valuation model, the amount of recognized and to be recognized stock-based compensation expense could have been different.

(p) Promotional and Advertising Costs

Promotional and advertising costs are classified as SG&A 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 products, including its corporate website. Under both the Astellas Collaboration Agreement and the former collaboration agreement with Pfizer, the Company and its collaboration partners share certain commercialization costs, including certain promotional and advertising costs, in the United States. See Note 3, “Collaboration Agreements,” for additional information regarding cost-sharing with its collaboration partners.

(q) Income Taxes

The Company accounts for income taxes using an asset and liability approach in accordance with the guidance provided by ASC 740-10, “Accounting for Income Taxes.” ASC 740-10 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. Based on the weight of available evidence, which includes the Company’s historical operating performance, reported cumulative net losses since inception and continuing net loss, the Company has established and continues to maintain a full valuation allowance on its 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.

(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 consecutive 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. 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 Company adopted this amended guidance retrospectively as of January 1, 2012. The adoption of this amended guidance impacted disclosure only and did not have an impact on the Company’s consolidated financial position, results of operations or cash flows. In February 2013, the FASB issued ASU No. 2013-02, which amends Topic 220 and requires companies to provide enhanced footnote disclosures to explain the effect of reclassification adjustments on OCI by component and provide tabular disclosure in the footnotes showing the effect of items reclassified from accumulated OCI on the line items of net income (loss). The provisions of this new guidance are effective for the Company as of January 1, 2013. The adoption of this guidance impacts 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 Company adopted this amended guidance as of January 1, 2012. The adoption of this amended guidance impacted disclosure only and did not have an impact on the Company’s consolidated financial position, results of operations or cash flows.