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Summary of Significant Accounting Policies (Policies)
6 Months Ended
Jun. 30, 2015
Organization, Consolidation and Presentation of Financial Statements [Abstract]  
Basis of Presentation and Principles of Consolidation

(a) Basis of Presentation and Principles of Consolidation

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States, or U.S. GAAP, for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. The unaudited consolidated financial statements have been prepared on the same basis as the annual audited consolidated financial statements. In the opinion of management, all adjustments, consisting of normal recurring adjustments necessary for the fair statement of the Company’s financial condition, results of operations and cash flows for the periods presented, have been included. The results of operations of any interim period are not necessarily indicative of the results of operations for the full year or any other interim period.

The unaudited consolidated financial statements and related disclosures have been prepared with the presumption that users of the interim unaudited consolidated financial statements have read or have access to the audited consolidated financial statements for the preceding year. Accordingly, these unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the fiscal year ended December 31, 2014, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014, or the Annual Report, filed with the U.S. Securities and Exchange Commission, or SEC, on February 25, 2015. The consolidated balance sheet at December 31, 2014 has been derived from the audited consolidated financial statements at that date.

The unaudited consolidated financial statements include the accounts of the Company and its 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 11, “Stockholders’ Equity,” are presented at their actual amounts unless otherwise indicated. Amounts presented herein may not calculate or sum precisely due to rounding.

Use of Estimates

(b) Use of Estimates

The preparation of unaudited 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 contingent purchase consideration, intangible assets, goodwill, the Convertible Notes, determining whether the Company is the primary beneficiary of any variable interest entities, leases, taxes, research and development and other accruals, share-based compensation, and the calculation of diluted net income (loss) per common share.

Significant Accounting Policies

(c) Significant Accounting Policies

Reference is made to Note 2, “Summary of Significant Accounting Policies,” included in the notes to the Company’s audited consolidated financial statements included in its Annual Report. As of the date of the filing of this Quarterly Report on Form 10-Q, or Quarterly Report, there were no significant changes to the significant accounting policies described in the Company’s Annual Report, except for the Company’s accounting policy with respect to diluted net income per common share beginning in the second quarter of 2015 as discussed in Note 5, “Net Income per Common Share”.

New Accounting Pronouncements

(e) New Accounting Pronouncements

In April 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2015-05, “Intangibles–Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement.” ASU 2015-05 provides guidance to help companies evaluate the accounting for fees paid by a customer in a cloud computing arrangement. The new guidance clarifies that if a cloud computing arrangement includes a software license, the customer should account for the license consistent with its accounting for other software licenses. If the arrangement does not include a software license, the customer should account for the arrangement as a service contract. The revised guidance will not change a customer’s accounting for service contracts. The ASU may be adopted prospectively or retrospectively and is effective for reporting periods beginning after December 15, 2015. Early adoption is permitted. The Company is currently assessing the impact that the amended guidance will have on its consolidated financial statements and related disclosures.

 

In April 2015, the FASB issued ASU 2015-03, “Interest – Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs,” which requires that debt issuance costs related to a recognized debt liability be presented on the balance sheet as a direct deduction from the carrying amount of the debt liability, consistent with debt discounts. The ASU requires retrospective adoption and is effective for reporting periods beginning after December 15, 2015. Early adoption is permitted. The Company currently does not expect that the adoption of ASU 2015-03 will have a material impact on its consolidated financial statements and related disclosures.

In February 2015, the FASB issued ASU 2015-02, “Consolidation (Topic 820): Amendments to the Consolidation Analysis.” The amended guidance provides a revised consolidation model for all reporting entities to use in evaluating whether they should consolidate certain legal entities. All legal entities will be subject to reevaluation under this revised consolidation model. The revised consolidation model, among other things, (i) modifies the evaluation of whether limited partnerships and similar legal entities are voting interest entities, (ii) eliminates the presumption that a general partner should consolidate a limited partnership, and (iii) modifies the consolidation analysis of reporting entities that are involved with voting interest entities through fee arrangements and related party relationships. The amended guidance is effective for fiscal years beginning after December 15, 2015, including interim periods within that reporting period. The Company currently does not expect that the adoption of ASU 2015-02 will have a material impact on its consolidated financial statements and related disclosures.

In May 2014, the 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. In July 2015, the FASB decided to delay the effective date of the new revenue standard by one year to December 15, 2017 for annual reporting periods beginning after that date. The FASB also agreed to permit early adoption of the standard, but not before the original effective date of 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.

Goodwill and Intangible Assets

GOODWILL AND INTANGIBLE ASSETS

In the fourth quarter of 2014, the Company entered into a License Agreement with CureTech, pursuant to which it licensed exclusive worldwide rights to CureTech’s late-stage clinical molecule, MDV9300. The Company concluded that the in-license transaction is an acquisition of a business in accordance with FASB Accounting Standards Codification, or ASC, 805-10, “Business Combinations.” The transaction resulted in identifiable intangible assets of $101.0 million consisting entirely of in-process research and development, or IPR&D, and goodwill of $10.0 million. The Company accounts for IPR&D as indefinite-lived intangible assets until regulatory approval or discontinuation at which time the Company evaluates impairment, converts the carrying value into a definite-lived intangible asset and determines the economic life for amortization purposes. The Company assesses the impairment of intangible assets and goodwill on an annual basis or more frequently whenever events or changes in circumstances may indicate that the carrying value might not be recoverable.

The Company applies the rules in ASU No. 2011-08, “Testing Goodwill for Impairment,” which amends the rules for testing goodwill for impairment by allowing an entity the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is more likely than not that the fair value of a reporting unit is greater than its carrying amount, then performing the two-step impairment test is unnecessary.

The Company applies the rules in ASU No. 2012-02, “Testing Indefinite-Lived Intangibles Assets for Impairment,” which provides entities with an option to perform a qualitative assessment of indefinite-lived intangible assets other than goodwill for impairment to determine if additional impairment testing is necessary.

The Company evaluated its goodwill and indefinite-lived intangible assets utilizing the simplified approach as of June 30, 2015. The Company determined that its goodwill and indefinite-lived intangible assets were not impaired at June 30, 2015. The Company was not required to perform the two-step quantitative impairment test.

Net Income (Loss) Per Common Share

The computation of basic net income per common share is based on the weighted-average number of common shares outstanding during each period. The computation of diluted net income 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, stock appreciation rights, ESPP shares, warrants, and shares issuable upon conversion of convertible debt.

Income Taxes

INCOME TAXES

The Company calculates its quarterly income tax provision in accordance with the guidance provided by ASC 740-270, “Interim Income Tax Accounting,” whereby the Company forecasts its estimated annual effective tax rate and then applies that rate to its year-to-date pre-tax book income (loss). Income tax expense for the three and six months ended June 30, 2015 was $14.6 million and $12.8 million, respectively. A discrete tax benefit of $2.8 million related to the loss on extinguishment of Convertible Notes was included in the provision for income taxes for the three and six months ended June 30, 2015. The provision for income taxes was higher than the tax computed at the U.S. federal statutory rate due primarily to state income taxes and non-deductible stock-based compensation. Income tax expense for both the three and six months ended June 30, 2014 was $1.6 million.

The effective tax rate was 36.1% for both the three and six months ended June 30, 2015. The effective tax rate was 3.3% and 4.3% for the three and six months ended June 30, 2014, respectively. The increase in the effective tax rate for the three and six months ended June 30, 2015 as compared to the prior year periods was due to the release of a portion of the valuation allowance during the fourth quarter of 2014.

The Company reduced its current Federal and state taxes payable by $13.6 million related to excess tax benefits from stock-based compensation, increasing additional paid-in capital. In addition, the Company recorded a credit to additional paid-in capital of $4.4 million related to certain tax impacts of the extinguishment of Convertible Notes.

The Company records a valuation allowance to reduce deferred tax assets to reflect the net amount that is more likely than not to be realized. 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 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 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 net tax assets and a decrease to income tax expense.

The future effective tax rate is subject to volatility and may be materially impacted by various internal and external factors. These factors may include, but are not limited to, the amount of income tax benefits and charges from: interpretations of existing tax laws; changes in tax laws and rates; future levels of research and development expenditures; changes in the mix of earnings in countries with differing statutory tax rates in which the Company may conduct business; changes in the valuation of deferred tax assets and liabilities; state income taxes; the tax impact of stock-based compensation; accounting for uncertain tax positions; closure of statute of limitations or settlement of tax audits; changes in estimates of prior years’ items; tax costs for acquisition-related items; changes in accounting standards; non-deductible officers’ compensation; limitations on the utilization of net operating losses and tax credits due to changes in ownership; and overall levels of income before taxes.

Litigation

(f) Litigation

The Company is party to legal proceedings, investigations, and claims in the ordinary course of its business, including the matters described below. 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.