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, pursuant to which it is collaborating with Astellas to develop and commercialize XTANDI globally for all indications, dosages, and formulations of enzalutamide. 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 of 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 as a percentage of the aggregate net sales of XTANDI outside of the United States, or ex-U.S. XTANDI net sales. Astellas has sole responsibility for promoting XTANDI outside of the United States and for recording all XTANDI net sales both inside and outside of 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 was also eligible to receive up to $335.0 million in development milestone payments and up to $320.0 million in sales milestone payments under the Astellas Collaboration Agreement. As of the fourth quarter of 2015, the Company had earned all of the development and sales milestone payments under 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.

The Astellas Collaboration Agreement further provides for a standstill period during which Astellas and its Affiliates, as defined in the Astellas Collaboration Agreement, agreed to certain restrictive covenants, including that they would not, directly or indirectly (subject to certain exceptions), unless invited to do so by the Company, acquire (a) all or substantially all of the Company’s consolidated assets or (b) beneficial ownership of more than five percent of any voting securities of the Company or any subsidiary or Affiliate of the Company. The standstill period will expire in September 2016.

(b) Collaboration Revenue

Collaboration revenue was as follows:


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2016		2015		2016		2015
Collaboration revenue:
Related to U.S. XTANDI net sales	$	165,129	$	149,220	$	318,922	$	261,230
Related to ex-U.S. XTANDI net sales		41,036		25,591		69,740		41,358
Related to upfront and milestone payments		—		846		—		2,257

Total	$	206,165	$	175,657	$	388,662	$	304,845

The Company is currently involved in litigation with UCLA regarding certain terms of its license agreement and other matters, which are discussed in Note 11, “Commitments and Contingencies.”

Collaboration Revenue Related to U.S. XTANDI Net Sales

Under the Astellas Collaboration Agreement, Astellas records all U.S. XTANDI net sales. The Company and Astellas share equally all pre-tax profits and losses from U.S. XTANDI net 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 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 net sales in the period in which such sales occur. Collaboration revenue related to U.S. XTANDI net sales consists of the Company’s share of pre-tax profits and losses from U.S. XTANDI net 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 net 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 net sales was as follows:


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2016			2015			2016			2015
U.S. XTANDI net sales (as reported by Astellas)	$	330,257		$	298,440		$	637,843		$	522,460
Shared U.S. development and commercialization costs		(95,055	)		(84,947	)		(225,639	)		(195,260	)

Pre-tax U.S. profit	$	235,202		$	213,493		$	412,204		$	327,200

Medivation’s share of pre-tax U.S. profit	$	117,601		$	106,747		$	206,102		$	163,600
Reimbursement of Medivation’s share of shared U.S. costs		47,528			42,473			112,820			97,630

Collaboration revenue related to U.S. XTANDI net sales	$	165,129		$	149,220		$	318,922		$	261,230

Collaboration Revenue Related to Ex-U.S. XTANDI Net Sales

Under the Astellas Collaboration Agreement, Astellas records all ex-U.S. XTANDI net sales. Astellas is responsible for all development and commercialization costs for XTANDI outside of 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 as a percentage of ex-U.S. XTANDI net sales. The Company recognizes collaboration revenue related to ex-U.S. XTANDI net sales in the period in which such sales occur. Collaboration revenue related to ex-U.S. XTANDI net sales consists of royalties from Astellas on those sales.

Collaboration Revenue Related to Upfront and Milestone Payments

As of the fourth quarter of 2015, the Company had earned all development and sales milestone payments under the Astellas Collaboration Agreement. Collaboration revenue related to upfront and milestone payments from Astellas for the three and six months ended June 30, 2015 was $0.8 million and $2.3 million, respectively, which comprised amortization of deferred upfront and development milestones.

(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 six months ended June 30, 2016, development cost-sharing payments from Astellas were $15.1 million and $28.4 million, respectively. For the three and six months ended June 30, 2015, development cost-sharing payments from Astellas were $17.6 million and $31.4 million, respectively. For the three and six months ended June 30, 2016, commercialization cost-sharing payments to Astellas were $4.5 million and $23.3 million, respectively. For the three and six months ended June 30, 2015, commercialization cost-sharing payments to Astellas were $2.7 million and $22.8 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.