NOTE 3 — COLLABORATION AGREEMENT

(a) Collaboration Agreement with Astellas

In October 2009, the Company entered into a collaboration agreement with Astellas, or the Astellas Collaboration Agreement. 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 (“UCLA” or “the Regents”) 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 is responsible for its own commercial full-time equivalent, or FTE, costs, and that development costs supporting marketing 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 defined by the Astellas Collaboration Agreement) as XTANDI for the treatment of prostate cancer for a specified time period, subject to certain exceptions.

Under the Astellas Collaboration Agreement, Astellas paid the Company a non-refundable, upfront 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 and up to $320.0 million in sales milestone payments. As of September 30, 2014, the Company has earned an aggregate of $245.0 million in development milestone payments and $25.0 million in sales milestone payments under the Astellas Collaboration Agreement. The Company expects that any of the remaining $90.0 million in development milestone payments and the remaining $295.0 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 Company earned $45.0 million of the remaining development milestone payments in October 2014 which will be recognized as collaboration revenue during the fourth quarter of 2014 as described in the following table.

The triggering events for the remaining development milestone payments the Company is eligible to receive under the Astellas Collaboration Agreement as of September 30, 2014 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

⁾

⁽⁷

⁾

⁽⁷

⁾

The first major country in Europe

⁽⁵

⁾

⁽⁷

⁾

⁽⁷

⁾

Japan

⁽⁵

⁾

⁽⁷

⁾

⁽⁷

⁾

First approval of a marketing application in:

The U.S.

⁽⁵

⁾

⁽⁸

⁾

⁽⁸

⁾

The first major country in Europe

⁽⁵

⁾

15 million

30 million

Japan

⁽⁶

⁾

15 million

⁽⁹⁾

30 million

⁽⁹⁾

(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 2^nd line prostate cancer patients; (b) first approval of a marketing application in the first major country in Europe with a label encompassing 2^nd line prostate cancer patients; (c) first approval of a marketing application in Japan with a label encompassing 2^nd 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 2^nd line patients. This milestone payment was earned and recognized as collaboration revenue during the second quarter of 2014 and payment has been received.

(5)	These milestones totaling $78.0 million were earned and recognized as collaboration revenue prior to 2014 and payments have been received.

(6)	This milestone of $15.0 million was earned and recognized as collaboration revenue during the first quarter of 2014 and payment has been received.

(7)	These milestones totaling $55.0 million were earned and recognized as collaboration revenue during the second quarter of 2014 and payments have been received.

(8)	These milestones totaling $90.0 million were earned and recognized as collaboration revenue during the third quarter of 2014 and are included in receivable from collaboration partner on the consolidated balance sheet at September 30, 2014.

(9)	These milestones totaling $45.0 million were earned in October 2014 and will be recognized as collaboration revenue during the fourth quarter of 2014.

The triggering events for the remaining sales milestone payments the Company is eligible to receive are as follows:


Annual Global Net Sales in a Calendar Year	Milestone Payment⁽¹⁾
$800 million	$	50 million
$1.2 billion	$	70 million
$1.6 billion	$	175 million

(1)	Each milestone shall only be paid once during the term of the Astellas Collaboration Agreement.

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. 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) Collaboration Revenue

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

Collaboration revenue was as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2014		2013		2014		2013
Collaboration revenue:
Related to U.S. XTANDI sales	$	90,723	$	54,244	$	224,814	$	133,134
Related to ex-U.S. XTANDI sales		15,522		1,551		31,245		2,033
Related to upfront and milestone payments		94,233		4,232		179,698		41,163

Total	$	200,478	$	60,027	$	435,757	$	176,330

The Company is required to pay UCLA ten percent of all Sublicensing Income, as defined in the Company’s license agreement with UCLA. The Company is currently involved in certain litigation matters with UCLA regarding certain terms of the license agreement and other matters, which are discussed in Note 12, “Commitments and Contingencies.”

Collaboration Revenue Related 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 related 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 is responsible for its own commercial FTE costs and that development costs supporting marketing 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 related to U.S. XTANDI sales in the period in which such sales occur. Collaboration revenue related 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 related to U.S. XTANDI sales in any given period is equal to 50% of U.S. XTANDI net sales as reported by Astellas for the applicable period.

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


	Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2013			2014			2013
U.S. XTANDI sales (as reported by Astellas)	$	181,446		$	108,487		$	449,629		$	266,267
Shared U.S. development and commercialization costs		(69,616	)		(58,901	)		(217,866	)		(178,002	)

Pre-tax U.S. profit	$	111,830		$	49,586		$	231,763		$	88,265

Medivation’s share of pre-tax U.S. profit	$	55,915		$	24,793		$	115,881		$	44,133
Reimbursement of Medivation’s share of shared U.S. costs		34,808			29,451			108,933			89,001

Collaboration revenue related to U.S. XTANDI sales	$	90,723		$	54,244		$	224,814		$	133,134

Collaboration Revenue Related 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 related to ex-U.S. XTANDI sales in the period in which such sales occur. Collaboration revenue related to ex-U.S. XTANDI sales consists of royalties from Astellas on those sales.

Collaboration revenue related to ex-U.S. XTANDI sales was $15.5 million and $31.2 million for the three and nine months ended September 30, 2014, respectively. Collaboration revenue related 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.

Collaboration Revenue Related to Upfront and Milestone Payments

Collaboration revenue related to upfront and milestone payments from Astellas was as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2014		2013		2014		2013
Development milestones earned	$	90,000	$	—	$	167,000	$	20,000
Amortization of deferred upfront and development milestones		4,233		4,232		12,698		21,163

Total	$	94,233	$	4,232	$	179,698	$	41,163

Deferred revenue under the Astellas Collaboration Agreement was $4.2 million and $16.9 million at September 30, 2014, and December 31, 2013, respectively.

(c) Cost-Sharing Payments

Under the Astellas Collaboration Agreement, the Company and Astellas share certain development and commercialization costs (including 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. For the three and nine months ended September 30, 2014, development cost sharing payments from Astellas were $15.1 million and $48.5 million, respectively. For the three and nine months ended September 30, 2013, development cost sharing payments from Astellas were $13.1 million and $31.6 million, respectively. For the three and nine months ended September 30, 2014, commercialization cost-sharing payments to Astellas were $7.6 million and $17.8 million, respectively. For the three and nine months ended September 30, 2013, commercialization cost-sharing payments to Astellas were $1.8 million and $10.4 million, respectively. Development cost sharing payments from Astellas are recorded as reductions in research and development, or R&D, expenses. Commercialization cost sharing payments to Astellas are recorded as increases in selling, general, and administrative, or SG&A, expenses.