Summary of Significant Accounting Policies (Policies)

12 Months Ended

Dec. 31, 2014

Basis of Presentation and Principles of Consolidation

(a) Basis of Presentation and Principles of Consolidation

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. The number of shares issuable under the Amended and Restated 2004 Equity Incentive Award Plan, or the Medivation Equity Incentive Plan, and the Medivation, Inc. 2013 Employee Stock Purchase Plan, or ESPP, disclosed in Note 10, “Stockholders’ Equity,” are presented at their actual amounts. Amounts presented herein may not calculate or sum precisely due to rounding.

Certain prior period amounts have been reclassified to conform to the current year presentation. There was no effect on net income (loss) or stockholders’ equity related to these reclassifications.

Use of Estimates

(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. Management bases its estimates on historical experience and on assumptions believed to be reasonable under the circumstances. Although management believes that these estimates are reasonable, actual future results could differ materially from those estimates. In addition, had different estimates and assumptions been used, the consolidated financial statements could have differed materially from what is presented.

Significant estimates and assumptions used by management principally relate to revenue recognition, including reliance on third party information, estimating the performance periods of the Company’s deliverables under collaboration agreements, and estimating the various deductions from gross sales to calculate net sales of XTANDI. Additionally, significant estimates and assumptions used by management include those related to business combination accounting, the Convertible Notes, determining whether the Company is the primary beneficiary of any variable interest entities, leases, taxes, research and development and other accruals, and share-based compensation.

Capital Structure

(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.

Information regarding shares and amount of common stock, additional paid-in-capital, and net income (loss) per common share for all periods presented reflects the two-for-one forward 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.

Cash and Cash Equivalents

(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.

Short-Term Investments

(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.

Restricted Cash

(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 certain of its lessors.

Fair Value of Financial Instruments

(g) Fair Value of Financial Instruments

The estimated fair value of the Company’s cash equivalents is based on quoted market prices. The estimated fair value of contingent consideration is determined utilizing a model that considers the probability of achieving each milestone and an appropriate discount rate. The estimated fair value of the Company’s Convertible Notes is determined using recent trading prices of the Convertible Notes. Other financial instruments, including bank deposits, receivable from collaboration partner, accounts payable, accrued expenses, and other current liabilities are carried at cost, which the Company believes approximates fair value because of the short-term maturities of these instruments.

Concentration of Credit Risk

(h) Concentration of Credit Risk

Financial instruments that potentially subject the Company to credit risk consist of cash, cash equivalents, short-term investments and receivable from collaboration partner. 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.

Property and Equipment

(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 generally 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 are amortized over their estimated useful life or the related lease term, whichever is shorter.

Convertible Notes

(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.

Leases

(k) Leases

At the inception of a lease, the Company evaluates the lease agreement to determine whether the lease is an operating, capital or build-to-suit lease using the criteria in ASC 840, “Leases.”

Certain lease agreements also require the Company to make additional payments for taxes, insurance, and other operating expenses incurred during the lease period, which are expensed as incurred.

Operating Leases

For operating leases, the Company recognizes rent expense on a straight-line basis over the 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.

Capital Leases

Capital leases are recorded as an asset within property and equipment, net and as an obligation at an amount equal to the present value of the minimum lease payments during the lease term. The asset is generally amortized over its estimated useful life or the related lease term, whichever is shorter. Lease payments under capital leases are recognized as a reduction of the capital lease obligation and interest expense.

Build-to-Suit Leases

In certain lease arrangements, the Company is involved in the construction of the building. To the extent the Company is involved with the structural improvements of the construction project or takes construction risk prior to the commencement of a lease, ASC 840-40, “Leases – Sale-Leaseback Transactions (Subsection 05-5),” requires the Company to be considered the owner for accounting purposes of these types of projects during the construction period. Therefore, the Company records an asset in property and equipment, net on the consolidated balance sheets, including capitalized interest costs, for the replacement cost of the Company’s portion of the pre-existing building plus the amount of estimated structural construction costs incurred by the landlord and the Company as of the balance sheet date. The Company records a corresponding build-to-suit lease obligation on its consolidated balance sheets representing the amounts paid by the lessor.

Once construction is complete, the Company considers the requirements for sale-leaseback accounting treatment, including evaluating whether all risks of ownership have been transferred back to the landlord, as evidenced by a lack of continuing involvement in the leased property. If the arrangement does not qualify for sale-leaseback accounting treatment, the building asset remains on the Company’s consolidated balance sheets at its historical cost, and such asset is depreciated over its estimated useful life. The Company bifurcates its lease payments into a portion allocated to the building and a portion allocated to the parcel of land on which the building has been built. The portion of the lease payments allocated to the land is treated for accounting purposes as operating lease payments, and therefore is recorded as rent expense in the consolidated statements of operations. The portion of the lease payments allocated to the building is further bifurcated into a portion allocated to interest expense and a portion allocated to reduce the build-to-suit lease obligation. The interest rate used for the build-to-suit lease obligation represents the Company’s estimated incremental borrowing rate, adjusted to reduce any built in loss. The initial recording of these assets and liabilities is classified as non-cash investing and financing items, respectively, for purposes of the consolidated statements of cash flows.

Business Combinations

(l) Business Combinations

Business combinations are accounted for under the acquisition method of accounting. The purchase price, including the fair value of any contingent consideration, is allocated between tangible and intangible assets acquired and liabilities assumed from the acquired business based on their estimated fair values, with the residual of the purchase price recorded as goodwill. Transaction costs are expensed as incurred.

Contingent Consideration

The Company determines the fair value of contingent consideration payable at the acquisition date using a probability-based income approach utilizing an appropriate discount rate. Each reporting period thereafter, the Company re-measures the contingent consideration and records increases or decreases in their fair value as non-cash adjustments in the consolidated statements of operations. Changes in the fair value of contingent consideration payable can result from adjustments to the estimated probability and assumed timing of achieving the underlying milestones, as well as from changes to the discount rates and periods.

In-Process Research and Development

In-process research and development, or IPR&D, represents the fair value assigned to incomplete research projects that the Company acquires through business combinations which, at the time of acquisition, have not reached technological feasibility. The amounts are capitalized and accounted for as indefinite-lived intangible assets, subject to impairment testing until completion or abandonment of the projects. Upon successful completion of each project, the Company will make a determination as to the then useful life of the intangible asset, generally determined by the period in which the substantial majority of the cash flows are expected to be generated, and begin amortization over that period. The Company tests IPR&D for impairment at least annually, or more frequently if impairment indicators exist, by first assessing qualitative factors to determine whether it is more likely than not that the fair value of the IPR&D is less than its carrying amount. If the Company concludes it is more likely than not that the fair value is less than the carrying amount, a quantitative test that compares the fair value of the IPR&D with its carrying value is performed. If the fair value is less than the carrying amount, a non-cash impairment change is recognized in the consolidated statements of operations.

Goodwill

Goodwill represents the excess of the consideration transferred over the fair value of net assets of businesses acquired. Goodwill is assigned to reporting units and evaluated for impairment on at least an annual basis, or more frequently if impairment indicators exist. The impairment test for goodwill uses a two-step approach, which is performed at the entity level as the Company has one reporting unit. Step 1 compares the fair value of the reporting unit to its carrying value including goodwill. If the carrying value exceeds the fair value, there is potential impairment and Step 2 must be performed. Step 2 compares the carrying value of the reporting unit’s goodwill to its implied fair value (e.g., the fair value of the reporting unit less the fair value of the unit’s assets and liabilities, including identifiable intangible assets). If the carrying value of goodwill exceeds its implied fair value, the excess is recorded as a non-cash impairment charge in the consolidated statement of operations.

Litigation

(m) 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 significant 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. Gain contingencies, if any, are recorded as a reduction of expense when they are realized.

Collaboration Agreement Payments

(n) Collaboration Agreement Payments

The Company accounts for the various payment flows under its collaboration agreement with Astellas, or the Astellas Collaboration Agreement, 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 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 United States. In the case of the Astellas Collaboration Agreement, the period in which the Company performed its deliverables began in the fourth quarter of 2009 and is currently estimated to conclude in the second quarter of 2015 upon completion of the Company’s remaining performance obligations. 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 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 its collaboration agreements could impact the timing of future revenue recognition.

Upfront Payments

The Company received non-refundable, upfront 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 consist 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 milestone payments. 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 upfront 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 remaining performance period of the Astellas Collaboration Agreement.

The latter category of milestone payments consists of those triggered by potential marketing 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 United States and receives royalties on sales of products outside the United States. The Company recognizes 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 sales deductions, including estimates of potential future product returns, 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 consolidated financial statements and disclosures. Certain of this information provided by Astellas is subject to estimates, including estimates used in determining gross-to-net revenue 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, the deductions from gross sales used to derive net sales of XTANDI are determined in a manner consistent with GAAP, 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.

Research and Development Expenses and Accruals

(o) Research and Development Expenses and Accruals

R&D expenses are charged to expense as incurred unless there is an alternative future use in other research and development projects or otherwise. R&D expenses are comprised of costs incurred in performing research and development activities, including personnel-related costs, share-based compensation, and facilities-related overhead, outside contracted services including clinical trial costs, manufacturing and process development costs for both clinical and pre-clinical materials, research costs, upfront and development milestone payments under license agreements and other consulting services. Non-refundable advance payment for goods and services that will be used in future research and development activities are expensed when the activity has been performed or when the goods have been received rather than when the payment is made. 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 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, contract research organizations and clinical manufacturing 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 and clinical manufacturing organizations that manufacture clinical trial materials. 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 accrual 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. During the course of a clinical trial, the Company adjusts its rate of clinical trial expense recognition if actual results differ from its estimates. The Company makes estimates of its accrued clinical trial expenses as of each balance sheet date based on facts and circumstances known at that time. Although the Company does not expect its estimates to be materially different from amounts actually incurred, its understanding of the status and timing of services performed relative to the actual status and timing of services performed may vary and may result in the Company reporting amounts that are too high or too low for any particular period. This could result in adjustment to the Company’s R&D expense in future periods. The Company has had no significant adjustments to previously recorded research and development amounts.

Stock-Based Compensation

(p) 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 and ESPP shares pursuant to the ESPP. The Company accounts for stock-based compensation awards to employees and directors and ESPP shares in accordance with ASC 718, “Stock Compensation,” and in the case of awards to consultants in accordance with ASC 505-50, “Equity-Based Payments to Non-Employees.”

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 when the performance objective is expected 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, 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 accounts for the ESPP as a compensatory plan. The fair value of each purchase under the Company’s ESPP is estimated on the date of the beginning of the offering period using the Black-Scholes valuation model, which requires the use of subjective assumptions related to the expected stock price volatility, 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.

Equity awards to consultants are typically remeasured at fair value at each reporting date until the awards vest in accordance with ASC 505-50.

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, stock appreciation rights, or ESPP shares. If the model permitted consideration of the unique characteristics of employee stock options, stock appreciation rights, and ESPP shares, the resulting estimate of fair value of the stock options, stock appreciation rights, and ESPP shares 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.

Promotional and Advertising Costs

(q) 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 and 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.

Income Taxes

(r) 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 to reflect the net amount that it believes is more likely than not to be realized. Realization of the deferred tax assets is dependent upon the generation of future taxable income, the amount and timing of which are uncertain. Based upon the weight of available evidence at December 31, 2014, the Company determined that it was more likely than not that a portion of its deferred tax assets would be realizable and consequently released the valuation allowance against Federal and certain state net deferred tax assets during the fourth quarter of 2014 and recorded a discrete tax benefit of $33.4 million during the fourth quarter of 2014. The decision to reverse a portion of the valuation allowance was made after management considered all available evidence, both positive and negative, including but not limited to the Company’s historical operating results, income or loss in recent periods, cumulative income in recent years, forecasted earnings, forecasted future taxable income, and significant risk and uncertainty related to forecasts. The release of the valuation allowance resulted in the recognition of certain deferred tax assets and a decrease to income tax expense.

Significant judgment in required in evaluating the Company’s uncertain income tax positions based on the guidance in ASC 740-10-25, “Accounting for Uncertainty in Income Taxes.” The Company recognizes a tax benefit from an uncertain tax position only if it is more likely than not that the position will be sustained upon examination by tax authorities. The tax benefit recognized in the financial statements on a particular tax position is measured on the largest benefit that is more likely than not to be realized. The Company evaluates uncertain tax positions on a quarterly basis and adjusts the liability for changes in facts and circumstances, such as new regulations or interpretations by the taxing authorities, new information obtained during a tax examination, significant amendment to an existing tax law, or resolution of an examination. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will impact the income tax provision in the period in which such determination is made. The resolution of our uncertain income tax positions is dependent on uncontrollable factors such as law changes, new case law, and the willingness of the income tax authorities to settle, including the timing thereof and other factors. Although The Company does not anticipate significant changes to its uncertain income tax positions in the next twelve months, items outside of the Company’s control could cause the uncertain income tax positions to change in the future, which would be recorded in the consolidated statements of operations. Interest and/or penalties related to income tax matters are recognized as a component of income tax expense as incurred.

New Accounting Pronouncements

(s) New Accounting Pronouncements

In July 2013, the FASB issued ASU No. 2013-11, “Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists.” This update clarifies that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss, or NOL, carryforward, a similar tax loss, or a tax credit carryforward if such settlement is required or expected in the event the uncertain tax position is disallowed. In situations where an NOL carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction or the tax law of the jurisdiction does not require, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The Company adopted this amended guidance prospectively as of January 1, 2014. The adoption of this amended guidance did not have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

In May 2014, the Financial Accounting Standards Board, or FASB, issued ASU 2014-09, “Revenue from Contracts with Customers” (Topic 606), a comprehensive new revenue recognition standard that will supersede the existing revenue recognition guidance. The new accounting guidance creates a framework by which an entity will allocate the transaction price to separate performance obligations and recognize revenue when (or as) each performance obligation is satisfied. Under the new standard, entities will be required to use judgment and make estimates, including identifying performance obligations in a contract, estimating the amount of variable consideration to include in the transaction price, allocating the transaction price to each separate performance obligation and determining when an entity satisfies its performance obligations. The standard allows for either “full retrospective” adoption, meaning that the standard is applied to all of the periods presented with a cumulative catch-up as of the earliest period presented, or “modified retrospective” adoption, meaning the standard is applied only to the most current period presented in the financial statements with a cumulative catch-up as of the current period. The accounting standard will be effective for reporting periods beginning after December 15, 2016. The Company has not yet selected a transition method and is currently evaluating the effect that the updated standard will have on its consolidated financial statements and related disclosures.

Out-of-Period Adjustment

(t) Out-of-Period Adjustment

In the first quarter of 2013, the Company recorded an out-of-period correcting adjustment that increased operating expenses and net loss by $3.6 million for the three months ended March 31, 2013. Management concluded that the adjustment is not material to the full year 2013 results or any previously reported financial statements.

Net Income (Loss) Per Common Share

The computation of basic net income (loss) per common share is based on the weighted- average number of common shares outstanding during each period. The computation of diluted net income (loss) per common share is based on the weighted-average number of common shares outstanding during the period plus, when their effect is dilutive, incremental shares consisting of shares subject to stock options, restricted stock units, performance share awards, stock appreciation rights, ESPP shares, warrants, and shares issuable upon conversion of convertible debt.

In periods in which the Company reports net income, the Company uses the “if-converted” method in calculating the diluted net income per common share effect of the assumed conversion of the Convertible Notes. Under the “if-converted” method, interest expense, net of tax, related to the Convertible Notes is added back to net income, and the Convertible Notes are assumed to have been converted into common shares at the beginning of the period (or issuance date) in periods in which there would have been a dilutive effect. The Convertible Notes can be settled in common stock, cash, or a combination thereof, at the Company’s election. During periods of net income, the Company’s intent and ability to settle the Convertible Notes in cash could impact the computation of diluted net income per common share.

Fair Value Measurements

The Company follows ASC 820-10, “Fair Value Measurements and Disclosures,” which among other things, defines fair value, establishes a consistent framework for measuring fair value and expands disclosure for each major asset and liability category measured at fair value on either a recurring or nonrecurring basis. Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, a three-tier fair value hierarchy has been established, which prioritizes the inputs used in measuring fair value as follows:

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Level 1—Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.

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Level 2—Inputs (other than quoted prices included in Level 1) are either directly or indirectly observable for the asset or liability through correlation with market data at the measurement date and for the duration of the instrument’s anticipated life.

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Level 3—Inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. Unobservable inputs are used when little or no market data are available. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.