NOTE 3 — COLLABORATION AGREEMENTS

(a) Collaboration Agreement with Astellas

In October 2009, the Company entered into the Astellas Collaboration Agreement pursuant to which it is collaborating with Astellas to develop and commercialize XTANDI globally. Under the agreement, decision making and economic participation differs between the U.S. market and the ex-U.S. market. In the United States, decisions are generally made by consensus, pre-tax profits and losses are shared equally, and, subject to certain exceptions, development and commercialization costs (including 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) are also shared equally. The primary exceptions to equal cost sharing in the U.S. market are that each party bears its own commercial full-time equivalent, or FTE, costs, and that development costs supporting regulatory approvals in both the United States and either Europe or Japan are borne one-third by the Company and two-thirds by Astellas. The Company and Astellas are co-promoting XTANDI in the U.S. market, with each company providing half of the sales and medical affairs effort in support of the product. Both the Company and Astellas are entitled to receive a fee for each qualifying detail made by its respective sales representatives. Outside the United States, decisions are generally made by Astellas and all development and commercialization costs (including cost of goods sold and the royalty on net sales payable to UCLA) are borne by Astellas. Astellas retains all ex-U.S. profits and losses, and pays the Company a tiered royalty ranging from the low teens to the low twenties on any aggregate net sales of XTANDI outside the United States, or ex-U.S. XTANDI sales. Astellas has sole responsibility for promoting XTANDI outside the United States, and for recording all XTANDI sales both inside and outside the United States. Both the Company and Astellas have agreed not to commercialize certain other products having a similar mechanism of action as XTANDI for the treatment of specified indications for a specified time period, subject to certain exceptions.

Under the Astellas Collaboration Agreement, Astellas paid the Company a non-refundable, up-front cash payment of $110.0 million in the fourth quarter of 2009. The Company is also eligible to receive up to $335.0 million in development milestone payments, plus up to an additional $320.0 million in sales milestone payments. As of September 30, 2013, the Company had received an aggregate of $78.0 million in development milestone payments under the Astellas Collaboration Agreement. The Company expects that any of the remaining $257.0 million in development milestone payments and the $320.0 million in sales milestone payments that the Company may earn in future periods will be recognized as revenue in their entirety in the period in which the underlying milestone event is achieved.

The remaining $257.0 million in development milestone payments the Company is eligible to receive under the Astellas Collaboration Agreement are as follows:

Milestone Event

4^th line prostate cancer
patients ⁽¹⁾

3^rd line prostate cancer
patients ⁽²⁾

2^nd line prostate cancer
patients ^{(3)
(4)}

First acceptance for filing of a marketing application in:

The U.S.

⁽⁵

⁾

10 million

15 million

The first major country in Europe

⁽⁵

⁾

5 million

10 million

Japan

⁽⁵

⁾

5 million

10 million

First approval of a marketing application in:

The U.S.

⁽⁵

⁾

30 million

60 million

The first major country in Europe

⁽⁵

⁾

15 million

30 million

Japan

15 million

30 million

⁽¹⁾

Defined as prostate cancer patients who meet each of the following three criteria: (a) prior treatment failure on either (i) one or more luteinizing hormone-releasing hormone, or LHRH, analog drugs or (ii) surgical castration; (b) prior treatment failure on one or more androgen receptor antagonist drugs; and (c) prior treatment failure on chemotherapy.

⁽²⁾

Defined as prostate cancer patients who meet each of the following three criteria: (a) prior treatment failure on either (i) one or more LHRH analog drugs or (ii) surgical castration; (b) prior treatment failure on one or more androgen receptor antagonist drugs; and (c) no prior exposure to chemotherapy for prostate cancer.

⁽³⁾	Defined as prostate cancer patients who meet each of the following two criteria: (a) prior treatment failure on either (i) one or more LHRH analog drugs or (ii) surgical castration; and (b) no prior treatment failure on one or more androgen receptor antagonist drugs.

⁽⁴⁾

An additional milestone payment of $7.0 million is payable upon the first to occur of: (a) first approval of a marketing application in the United States with a label encompassing 2nd line prostate cancer patients; (b) first approval of a marketing application in the first major country in Europe with a label encompassing 2nd line prostate cancer patients; (c) first approval of a marketing application in Japan with a label encompassing 2nd line prostate cancer patients; or (d) first patient dosed in a Phase 3 clinical trial other than the PREVAIL trial that is designed specifically to support receipt of marketing approval in 2nd line patients.

⁽⁵⁾	These milestone payments totaling $78.0 million have been received as of September 30, 2013.

Under the Company’s license agreement with UCLA, the Company is required to share with UCLA ten percent of the development milestone payments that the Company earns under the Astellas Collaboration Agreement. In ongoing litigation with UCLA initiated by the Company, UCLA has alleged in a cross-complaint that the Company is also required to share with UCLA ten percent of any sales milestone payments the Company may receive under the Astellas Collaboration Agreement. The Company disputes this allegation, and intends to defend its position vigorously. For more information about this litigation, see Note 11, “Commitments and Contingencies.”

The Company and Astellas are each permitted to terminate the Astellas Collaboration Agreement for an uncured material breach by the other party or for the insolvency of the other party. Astellas has a right to terminate the Astellas Collaboration Agreement unilaterally by advance written notice to the Company, but, except in certain specified circumstances, generally cannot exercise that termination right until the first anniversary of XTANDI’s first commercial sale. Following any termination of the Astellas Collaboration Agreement in its entirety, all rights to develop and commercialize XTANDI will revert to the Company, and Astellas will grant a license to the Company to enable it to continue such development and commercialization. In addition, except in the case of a termination by Astellas for the Company’s material breach, Astellas will supply XTANDI to the Company during a specified transition period.

Unless terminated earlier by the Company or Astellas pursuant to the terms thereof, the Astellas Collaboration Agreement will remain in effect: (a) in the United States, until such time as Astellas notifies the Company that Astellas has permanently stopped selling products covered by the Astellas Collaboration Agreement in the United States; and (b) in each other country of the world, on a country-by-country basis, until such time as (i) products covered by the Astellas Collaboration Agreement cease to be protected by patents or regulatory exclusivity in such country and (ii) commercial sales of generic equivalent products have commenced in such country.

(b) Former Collaboration Agreement with Pfizer

The Company entered into a collaboration agreement with Pfizer in October 2008. Under the terms of the agreement, the Company and Pfizer agreed to collaborate on the development and commercialization of its former product candidate dimebon for the treatment of Alzheimer’s disease and Huntington disease for the U.S. market. Pfizer paid the Company a non-refundable, up-front cash payment of $225.0 million in the fourth quarter of 2008. Under the terms of the former collaboration agreement with Pfizer, the Company and Pfizer shared the costs and expenses of developing and commercializing dimebon for the U.S. market on a 60%/40% basis, with Pfizer assuming the larger share. In January 2012, Pfizer exercised its right to terminate the collaboration agreement and the Company and Pfizer discontinued development of dimebon for all indications due to the negative Phase 3 trial results in both indications.

(c) Collaboration Revenue

Collaboration revenue consists of three components: (a) collaboration revenue attributable to U.S. XTANDI sales; (b) collaboration revenue attributable to ex-U.S. XTANDI sales; and (c) collaboration revenue attributable to up-front and milestone payments.

Collaboration revenue was as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2013		2012		2013		2012
Collaboration revenue:
Attributable to U.S. XTANDI sales	$	54,244	$	7,056	$	133,134	$	7,056
Attributable to ex-U.S. XTANDI sales		1,551		—		2,033		—
Attributable to up-front and milestone payments		4,232		57,742		41,163		137,479

Total	$	60,027	$	64,798	$	176,330	$	144,535

Collaboration Revenue Attributable to U.S. XTANDI Sales

Under the Astellas Collaboration Agreement, Astellas records all U.S. XTANDI sales. The Company and Astellas share equally all pre-tax profits and losses from U.S. XTANDI sales. Subject to certain exceptions, the Company and Astellas also share equally all XTANDI development and commercialization costs attributable to the U.S. market, including cost of goods sold and the royalty on net sales payable to UCLA under the Company’s license agreement with UCLA. The primary exceptions to 50/50 cost sharing are that each party bears its own commercial FTE costs and that development costs supporting regulatory approvals in both the United States and either Europe or Japan are borne one-third by the Company and two-thirds by Astellas. The Company recognizes collaboration revenue attributable to U.S. XTANDI sales in the period in which such sales occur. Collaboration revenue attributable to U.S. XTANDI sales consists of the Company’s share of pre-tax profits and losses from U.S. sales, plus reimbursement of the Company’s share of reimbursable U.S. development and commercialization costs. The Company’s collaboration revenue attributable to U.S. XTANDI sales in any given period will be mathematically equal to 50% of U.S. XTANDI net sales as reported by Astellas for the applicable period.

Collaboration revenue attributable to U.S. XTANDI sales was as follows:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2013			2012			2013			2012
Net U.S. sales (as reported by Astellas)	$	108,487		$	14,112		$	266,267		$	14,112
Shared U.S. development and commercialization costs		(58,901	)		(41,928	)		(178,002	)		(41,928	)

Pre-tax U.S. profit (loss)	$	49,586		$	(27,816	)	$	88,265		$	(27,816	)

Medivation’s share of pre-tax U.S. profit (loss)	$	24,793		$	(13,908	)	$	44,133		$	(13,908	)
Reimbursement of Medivation’s share of shared U.S. costs		29,451			20,964			89,001			20,964

Collaboration revenue attributable to U.S. XTANDI sales	$	54,244		$	7,056		$	133,134		$	7,056

XTANDI first became available for shipment on September 13, 2012. There was no collaboration revenue attributable to U.S. XTANDI sales prior to September 13, 2012.

Collaboration Revenue Attributable to Ex-U.S. XTANDI Sales

Under the Astellas Collaboration Agreement, Astellas records all ex-U.S. XTANDI sales. Astellas is responsible for all development and commercialization costs for XTANDI outside the United States, including cost of goods sold and the royalty on net sales payable to UCLA under the Company’s license agreement with UCLA, and pays the Company a tiered royalty ranging from the low teens to the low twenties on net ex-U.S. XTANDI sales. The Company recognizes collaboration revenue attributable to ex-U.S. XTANDI sales in the period in which such sales occur. Collaboration revenue attributable to ex-U.S. XTANDI sales consists of royalty payments from Astellas on those sales.

Collaboration revenue attributable to ex-U.S. XTANDI sales was $1.6 million and $2.0 million for the three and nine months ended September 30, 2013, respectively. There was no collaboration revenue attributable to ex-U.S. XTANDI sales for the three and nine months ended September 30, 2012.

Collaboration Revenue Attributable to Up-front and Milestone Payments

The Company records non-refundable, up-front payments under its current and former collaboration agreements as deferred revenue and recognizes these payments as collaboration revenue on a straight-line basis over the applicable estimated performance period. The Company’s performance period under the Astellas Collaboration Agreement began in the fourth quarter of 2009 and at September 30, 2013, management estimated that it would be completed in the fourth quarter of 2014. The Company’s performance period under its former collaboration agreement with Pfizer concluded in the third quarter of 2012 upon completion of the Company’s performance obligations.

The Company is eligible to receive milestone payments under the Astellas Collaboration Agreement based on the 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 recognizing the milestone payment as revenue on a straight-line basis over the estimated 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.

Through September 30, 2013, the Company has received an up-front payment of $110.0 million and development milestone payments of $78.0 million from Astellas, and a $225.0 million up-front payment under its former collaboration agreement with Pfizer.

Collaboration revenue attributable to up-front and milestone payments were as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2013		2012		2013		2012
Collaboration revenue attributable to up-front and milestone payments:
From Astellas	$	4,232	$	52,256	$	41,163	$	65,449
From Pfizer		—		5,486		—		72,030

Total	$	4,232	$	57,742	$	41,163	$	137,479

Deferred revenue under the Astellas Collaboration Agreement consisted of the following:


	September 30, 2013		December 31, 2012
Current	$	16,931	$	33,862
Long-term		4,233		8,465

Total	$	21,164	$	42,327

(d) 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 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, or R&D, expenses, and selling, general and administrative, or SG&A, expenses, respectively.

The following table summarizes the reductions in R&D expenses related to development cost-sharing payments:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2013		2012		2013		2012
Development cost-sharing payments from Astellas	$	13,070	$	11,003	$	31,617	$	39,131
Development cost-sharing payments from Pfizer		—		51		—		1,740

Total	$	13,070	$	11,054	$	31,617	$	40,871

The following table summarizes the (increases) reductions in SG&A expenses related to commercialization cost-sharing payments:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2013			2012			2013			2012
Commercialization cost-sharing payments to Astellas	$	(1,812	)	$	(1,187	)	$	(10,388	)	$	(1,857	)
Commercialization cost-sharing payments from Pfizer		—			—			—			9

Total	$	(1,812	)	$	(1,187	)	$	(10,388	)	$	(1,848	)