Summary of Significant Accounting Policies (Policies)

3 Months Ended

Mar. 31, 2016

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 condensed 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 condensed 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 for any interim period are not necessarily indicative of the results of operations for the full year or any other interim period.

The unaudited condensed consolidated financial statements and related disclosures have been prepared with the presumption that users of the interim unaudited condensed consolidated financial statements have read or have access to the audited consolidated financial statements for the preceding year. Accordingly, these unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the fiscal year ended December 31, 2015, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015, or the Annual Report, filed with the U.S. Securities and Exchange Commission, or SEC, on February 26, 2016. The consolidated balance sheet at December 31, 2015 has been derived from the audited consolidated financial statements at that date.

The unaudited condensed 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 10, “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 condensed 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 unaudited condensed 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, 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, derivatives and hedging, and the calculation of diluted net income 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 addition of the Company’s accounting policies with respect to derivative instruments related to its cash flow hedging program, which commenced during the first quarter of 2016 as discussed in Note 4, “Derivative Financial Instruments,” and performance share units.

Derivative Financial Instruments

(d) Derivative Financial Instruments

The Company uses forward foreign currency exchange contracts to hedge a portion of its gross collaboration revenue exposure from royalties related to the Euro and the Japanese Yen. These derivative instruments are designated as cash flow hedges and are recognized as either assets or liabilities at fair value in the Company’s unaudited condensed consolidated balance sheets. The effective portion of changes in the fair value of these instruments is initially recorded as a component of accumulated other comprehensive income (loss) in stockholders’ equity, and subsequently reclassified into earnings when the underlying exposure is reflected in earnings. Ineffectiveness, if any, is recorded immediately in earnings as other income (expense), net. The Company classifies the cash flows from these instruments in the same category as the cash flows from the hedged items, within net cash provided by operating activities in the unaudited condensed consolidated statement of cash flows.

The Company assesses, both at inception and on an ongoing basis, whether its cash flow hedge derivative instruments are highly effective in offsetting the changes in cash flows of the hedged items. At inception and on a quarterly basis, the Company documents and asserts that the critical terms of its derivatives (i.e. notional amounts, currency rate mechanisms, and timing) match the critical terms of the hedged items for the risk being hedged. As such, the Company will assume no ineffectiveness in the hedge relationship because all of the critical terms of the hedge and hedged item are matched. If the Company determines that a forecasted transaction is no longer probable of occurring, hedge accounting will be discontinued for the affected portion of the hedge instrument. If the hedged item becomes probable of not occurring, any related gain or loss on the contract will be recognized immediately in earnings as other income (expense), net.

In assessing hedge effectiveness, the Company also considers the risk of counterparty default under the hedge contract. The Company seeks to limit its counterparty credit risk by working only with counterparties that have certain financial credit ratings. The Company does not enter into derivative contracts for speculative or trading purposes.

Stock-Based Compensation

(e) Stock-Based Compensation

Performance Share Units

In the first quarter of 2016, the Company granted performance share units, or PSUs, to certain officers of the Company pursuant to the terms of the Medivation Equity Incentive Plan. The terms of the PSUs provide for target and maximum numbers of shares eligible to be earned based on the level of achievement of certain pre-determined revenue goals and clinical development milestones. For the PSUs tied to revenue goals, the actual number of shares of common stock that may ultimately be issued upon vest is calculated by multiplying the number of PSUs by a payout percentage ranging from 50% to 150%. For the PSUs tied to clinical development milestones, the actual number of shares of common stock that may ultimately be issued upon vest is calculated by multiplying the number of PSUs by a payout percentage of 100%. The PSUs will vest, if at all, upon certification by the Compensation Committee of the Company’s Board of Directors of the actual achievement of the performance objectives, subject to specified change of control exceptions.

Stock-based compensation expense associated with PSUs 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. The Company recognizes compensation expense over the vesting period of the awards that are ultimately expected to vest.

New Accounting Pronouncements

(f) New Accounting Pronouncements

In March 2016, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, 2016-09, “Compensation--Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.” ASU 2016-09 simplifies several aspects of the accounting for share-based payment award transactions. Changes that may impact public companies include changes in the accounting for income taxes, specifically excess tax benefits and tax deficiencies; the classification of excess tax benefits on the statement of cash flows as an operating activity; the option for companies to make an entity-wide accounting policy election to either estimate the number of share-based payment awards that are expected to vest (current GAAP) or account for forfeitures when they occur; and the classification of employee taxes paid when an employer withholds shares for tax withholding purposes as a financing activity on the statement of cash flows. Depending on the specific item to be changed, ASU 2016-09 requires certain changes to be applied either prospectively, retrospectively, or under a modified retrospective transition method to all periods presented. The amended guidance is effective for fiscal years beginning after December 15, 2016, including interim periods within that reporting period, and early adoption is permitted. The Company is currently evaluating the effect that the updated standard will have on its consolidated financial statements and related disclosures.

In March 2016, the FASB issued ASU 2016-05, “Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships.” ASU 2016-05 clarifies that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument under Topic 815 does not, in and of itself, require dedesignation of that hedging relationship provided that all other hedge accounting criteria continue to be met. The amended guidance is effective for fiscal years beginning after December 15, 2016, including interim periods within that reporting period, with the option to apply the amended guidance on either a prospective basis or a modified retrospective basis, and early adoption is permitted. The Company is currently evaluating the effect that the updated standard will have on its consolidated financial statements and related disclosures.

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842).” ASU 2016-02 includes a lessee accounting model that recognizes two types of leases - finance leases and operating leases. The standard requires that a lessee recognize on the balance sheet a right-to-use asset and a lease liability for all leases with lease terms of more than 12 months. The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee will depend on its classification as either a finance or operating lease. ASU 2016-02 also requires new qualitative and quantitative disclosures for the amount, timing, and uncertainty of cash flows arising from leases. The amended guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within that reporting period, and early adoption is permitted. ASU 2016-02 requires modified retrospective transition, which requires application of the guidance at the beginning of the earliest comparative period presented in the year of adoption; however, for all leases that commenced before the effective date, companies can elect not to reassess certain elements, including their lease classification or whether contracts are or contain embedded leases. The Company is currently evaluating the effect that the updated standard will have 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 August 2015, the effective date of the new revenue standard was delayed 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. In March 2016, the FASB issued ASU 2016-08, “Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net),” to clarify ASU 2014-09 implementation guidance on principal versus agent considerations. 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.

Intangible Assets

Intangible assets consist of in-process research and development, or IPR&D, acquired from business acquisitions. The Company accounts for IPR&D as indefinite-lived intangible assets until regulatory approval or discontinuation of the related R&D efforts. Upon obtaining regulatory approval, the Company reclassifies the IPR&D as a definite-lived intangible asset and determines the economic life for amortization purposes. The Company assesses the impairment of indefinite-lived 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.

Earnings Per 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 units, stock appreciation rights, ESPP shares, warrants, and shares issuable upon conversion of convertible debt.

In periods where the Company reports a net loss, all common stock equivalents are deemed anti-dilutive such that basic net loss per common share and diluted net loss per common share are equal.

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 months ended March 31, 2016 was $2.4 million. The provision for income taxes was lower than the tax computed at the U.S. federal statutory rate due primarily to the Federal research and development credit, partially offset by state income taxes, non-deductible officers’ compensation and non-deductible stock-based compensation. Income tax benefit for the three months ended March 31, 2015 was $1.8 million.

The effective tax rate was 33.1% and 36.3% for the three months ended March 31, 2016 and 2015, respectively. The decrease in the effective tax rate for the three months ended March 31, 2016 as compared to the prior year period was due to the Federal research and development tax credit which was permanently reinstated in the fourth quarter of 2015.

For the three months ended March 31, 2016, the Company reduced its current Federal and state taxes payable by $2.5 million related to excess tax benefits from stock-based compensation, increasing additional paid-in capital.

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 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 Policy

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 when they are realized.