UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

For the quarterly period ended March 31, 2016

or

For the transition period from                      to                      

COMMISSION FILE NUMBER: 001-32836

 

MEDIVATION, INC.

(Exact name of registrant as specified in its charter)

 

 

525 Market Street, 36th floor

San Francisco, California 94105

(Address of principal executive offices) (Zip Code)

(415) 543-3470

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o    No  x

As of April 29, 2016, 164,624,777 shares of the registrant’s Common Stock, $0.01 par value per share, were outstanding.

 

 

 

 

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MEDIVATION, INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTER ENDED MARCH 31, 2016

TABLE OF CONTENTS

 

 

 

 

 

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PART I. FINANCIAL INFORMATION

MEDIVATION, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

(unaudited)

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

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MEDIVATION, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

 

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MEDIVATION, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands)

(unaudited)

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

 

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MEDIVATION, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

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MEDIVATION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2016

(unaudited)

 

NOTE 1. DESCRIPTION OF BUSINESS

Medivation, Inc. (the “Company” or “Medivation”) is a biopharmaceutical company focused on the development and commercialization of medically innovative therapies to treat serious diseases for which there are limited treatment options. It has one commercial product, XTANDI® (enzalutamide) capsules, or XTANDI, through the Company’s collaboration with Astellas Pharma, Inc., or Astellas. XTANDI has received marketing approval in the United States, Europe and numerous other countries worldwide for the treatment of patients with metastatic castration-resistant prostate cancer, or mCRPC, and in Japan for the treatment of patients with castration-resistant prostate cancer, or CRPC. The Company and Astellas are also conducting investigational studies of enzalutamide in prostate cancer, advanced breast cancer, and hepatocellular carcinoma. Under the Company’s collaboration agreement with Astellas, it shares equally with Astellas all profits (losses) related to U.S. net sales of XTANDI. The Company also receives royalties ranging from the low teens to the low twenties as a percentage of ex-U.S. XTANDI net sales.

The Company seeks to become a more fully-integrated biopharmaceutical company through the continued commercialization of XTANDI, the acquisition or in-license and development and commercialization of other product opportunities, and through the advancement of its own proprietary research and development programs. The Company expects that its future growth may come from both its internal research efforts, focused in oncology, neurology and other areas, and third-party business development activities, such as its acquisition of all worldwide rights to talazoparib (which is referred to as MDV3800) from BioMarin Pharmaceutical Inc., or BioMarin, in the fourth quarter of 2015 and its license of exclusive worldwide rights to pidilizumab (which is referred to as MDV9300) from CureTech, Ltd., or CureTech, in the fourth quarter of 2014.

 

 

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(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.

(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

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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.

(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.

(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.

(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.

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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.

(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.

 

 

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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:

 

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The Company is currently involved in litigation with UCLA regarding certain terms of its license agreement and other matters, which are discussed in Note 13, “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:

 

 

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 months ended March 31, 2015 was $1.4 million, which was comprised of 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 months ended March 31, 2016 and 2015, development cost-sharing payments from Astellas were $13.3 million and $13.8 million, respectively. For the three months ended March 31, 2016 and 2015, commercialization cost-sharing payments to Astellas were $18.7 million and $20.1 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.

 

 

NOTE 4. DERIVATIVE FINANCIAL INSTRUMENTS

The Company receives royalties from Astellas on net sales of XTANDI outside of the United States, which are paid to the Company in U.S. dollars and calculated by converting the respective countries’ XTANDI net sales in local currency to U.S. dollars.

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Because a significant portion of ex-U.S. sales of XTANDI have been generated in the European Union and in Japan, the royalties received from Astellas related to such sales are dependent on the value of the U.S. dollar versus the Euro and Japanese Yen. The Company also conducts certain R&D activities outside of the United States, with expenses incurred in various currencies, including the Euro and Japanese Yen, and these expenses partially offset the currency exposure related to its collaboration revenue from royalties.

In the first quarter of 2016, the Company began using forward foreign currency exchange contracts to hedge a portion of its gross collaboration royalty revenue, equal to the royalty revenue amount net of the Company’s R&D expense related to the Euro and the Japanese Yen. These derivative instruments are designated as cash flow hedges and have maturity dates of 15 months or less. 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 items 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.

The effective portion of changes in the fair value of these instruments is initially recorded as a component of accumulated other comprehensive income (loss), or OCI, in stockholders’ equity, and subsequently reclassified into earnings as collaboration revenue when the underlying exposure is reflected in collaboration revenue. All of the gains and losses related to the hedged forecasted transactions reported in accumulated OCI at March 31, 2016 are expected to be reclassified to collaboration revenue within the next 12 months. There were no amounts related to ineffectiveness for the quarter ended March 31, 2016. Additionally, the Company did not discontinue any of its cash flow hedges during the three months ended March 31, 2016.

As of March 31, 2016, the Company had an average derivative USD equivalent notional amount on its open contracts of $5.4 million. The Company plans to enter into approximately eight foreign currency forward contracts per quarter covering a rolling four-quarter period.

The obligations of the Company under its foreign exchange contracts are secured obligations under the terms of the Company’s senior secured credit facility. In addition, the Company‘s foreign exchange contracts are subject to standard International Swaps and Derivatives Association (ISDA) master agreements which provide for various events of default, including a cross default to the Company’s senior secured credit facility. If an event of default or termination event where the Company is the defaulting party occurs, the counterparties to these contracts could request immediate payment on the derivatives. The aggregate fair value of all foreign exchange contracts with credit-risk-related contingent features that are in a liability position as of March 31, 2016, is $0.5 million. In addition, the agreements governing such contracts permit the Company, subject to applicable requirements, to net settle transactions of the same currency with a single net amount payable by one party to the other.

While all of the Company’s derivative contracts allow the right to offset assets or liabilities, it is the Company’s policy to present its derivatives on a gross basis in the unaudited condensed consolidated balance sheets. The following table summarizes the classification and fair values of derivative instruments on the Company’s unaudited condensed consolidated balance sheet:

 

 

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The following table summarizes the effect of the Company’s foreign currency exchange contracts on its unaudited condensed consolidated financial statements:

 

 

As of March 31, 2016, the Company held one type of financial instrument – derivative contracts related to foreign currency exchange contracts. The following table summarizes the potential effect of offsetting derivatives by type of financial instrument on our unaudited condensed consolidated balance sheet:

 

 

 

NOTE 5. INTANGIBLE ASSETS AND GOODWILL

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.

The following table summarizes the Company’s indefinite-lived intangible assets as of March 31, 2016 and December 31, 2015:

 

 

The carrying amount of goodwill was $18.6 million as of March 31, 2016 and December 31, 2015.

 

 

NOTE 6. 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 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.

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For the three months ended March 31, 2016, employee stock-based awards to purchase approximately 4.2 million shares of the Company’s common stock were excluded from the computation of diluted net income per common share because their effect would have been anti-dilutive. For the three months ended March 31, 2015, approximately 22.8 million potentially dilutive common shares were excluded from the diluted net loss per common share computation because such securities had an anti-dilutive effect on net loss per common share due to the Company’s net loss for the period.

The following table reconciles the numerator and denominator used to calculate diluted net income (loss) per common share:

 

 

 

NOTE 7. BUILD-TO-SUIT LEASE OBLIGATION

In the fourth quarter of 2013, the Company entered into a property lease for approximately 52,000 square feet of space located in San Francisco, California. In the second quarter of 2015, the Company entered into an amended lease agreement to reduce the amount of leased space at this property to approximately 44,000 square feet. The lease agreement expires in August 2024, and the Company has an option to extend the lease term for up to an additional five years.

The Company was deemed, for accounting purposes only, to be the owner of the entire project including the building shell, even though it was not the legal owner. In connection with the Company’s accounting for this transaction, the Company capitalized $14.5 million as a build-to-suit property within property and equipment, net, and recognized a corresponding build-to-suit lease obligation for the same amount. The Company also recognized, as an additional build-to-suit lease property and obligation, structural tenant improvements totaling $3.6 million for amounts paid by the landlord and $3.5 million for capitalized interest during the construction period through 2015. As a result of the amended agreement, the Company surrendered a portion of the property totaling approximately 8,000 square feet to the lessor. Accordingly, the Company derecognized a portion of the build-to-suit asset totaling $3.2 million and a portion of the build-to-suit lease obligation totaling $3.2 million during 2015 related to the portion of the property that was surrendered to the lessor.

During the first quarter of 2016, construction on the property was substantially completed and the property was placed in service. As such, the Company evaluated its lease to determine whether it had met the requirements for sale-leaseback accounting, 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. The Company determined that the construction project did not qualify for sale-leaseback accounting and will instead be accounted for as a financing lease, given the Company’s expected continuing involvement after the conclusion of the construction period. As a result, the building asset remains on the Company’s unaudited condensed consolidated balance sheets at its historical cost of $18.4 million and the Company began depreciating the asset over its estimated useful life in the first quarter of 2016. Additionally, the Company is allocating its monthly lease payments between land rent, which is recorded as an operating lease expense, interest expense, and reduction of the related lease obligation. As of March 31, 2016, the total amount of the build-to-suit lease obligation was $17.4 million, of which $17.3 million was classified as a non-current liability on the unaudited condensed consolidated balance sheets. The Company expects to derecognize the build-to-suit lease asset and lease obligation at the end of the lease term.

Expected future lease payments under the build-to-suit lease as of March 31, 2016 are included in Note 13, “Commitments and Contingencies.”

 

 

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NOTE 8. OTHER BALANCE SHEET ITEMS

(a) Property and Equipment, Net

Property and equipment, net, consisted of the following:

 

 

(b) Accounts Payable, Accrued Expenses and Other Current Liabilities

Accounts payable, accrued expenses and other current liabilities consisted of the following:

 

 

Accounts payable represents short-term liabilities for which the Company has received and processed a vendor invoice prior to the end of the reporting period. Accrued expenses and other current liabilities represent, among other things, compensation and related benefits to employees, royalties due to licensors of technologies, estimated amounts due to third-party vendors for services rendered prior to the end of the reporting period, invoices received from third-party vendors that have not yet been processed, taxes payable, interest payable and other accrued items.

 

 

NOTE 9. DEBT

(a) Revolving Credit Facility

In October 2015, the Company entered into an amendment and restatement of its original credit agreement (the “Credit Agreement”) with JPMorgan Chase Bank, N.A., as administrative agent, and the lenders from time to time party thereto (the “Lenders”), providing for: (i) a five-year $300 million revolving loan facility (the “Revolving Credit Facility”); and (ii) an uncommitted accordion facility subject to the satisfaction of certain conditions (collectively, the “Senior Secured Credit Facility”). The Revolving Credit Facility includes a $50 million multicurrency sub-facility, a $20 million letter of credit sub-facility and a $10 million swing line loan sub-facility.

Loans under the Revolving Credit Facility bear interest, at the Company’s option, at a rate equal to either (a) the LIBOR rate, plus an applicable margin ranging from 1.75% to 2.50% per annum, based upon the secured leverage ratio (as defined in the Credit Agreement) or (b) the prime lending rate, plus an applicable margin ranging from 0.75% to 1.50% per annum, based upon the senior secured net leverage ratio (as defined in the Credit Agreement). In October 2015, the Company borrowed $75.0 million under the Revolving Credit Facility, which the Company repaid in January 2016. The interest rate for this borrowing was 2.1250% and was applied on an actual/360 day basis. There were no balances outstanding under the Revolving Credit Facility at March 31, 2016.

The obligations under the Credit Agreement and any swap obligations and banking services obligations owing to a lender (or an affiliate of a lender) thereunder are and will be guaranteed by the Company and each of the Company’s existing and subsequently

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acquired or organized direct and indirect domestic subsidiaries (other than certain immaterial domestic subsidiaries, certain Domestic Foreign Holding Companies, and certain domestic subsidiaries whose equity interests are owned directly or indirectly by certain foreign subsidiaries) (collectively, the “Loan Parties”). The obligations under the Credit Agreement and any such swap and banking services obligations are secured, subject to customary permitted liens and other agreed upon exceptions, by a perfected security interest in (i) all tangible and intangible assets of the Loan Parties, except for certain customary excluded assets, and (ii) all of the capital stock owned by the Loan Parties thereunder (limited, in the case of the stock of certain non-U.S. subsidiaries of the Company and Domestic Foreign Holding Companies, to 65% of the capital stock of such subsidiaries).

The Credit Agreement contains customary representations and warranties and customary affirmative and negative covenants, including, among other things, restrictions on indebtedness, liens, investments, mergers, dispositions, prepayment of other indebtedness and dividends and other distributions. Under the terms of the Credit Agreement, the Company is required to comply with a maximum senior secured net leverage ratio and minimum interest coverage ratio covenants. At March 31, 2016, the Company was in compliance with these covenants.

In accordance with ASU 2015-15, the Company deferred $1.7 million of debt issuance costs associated with the Revolving Credit Facility, including underwriting, legal and accounting fees, and is amortizing this amount ratably over the five-year access period of the facility. Amortization of the debt issuance costs is recorded as non-cash interest expense on the unaudited condensed consolidated statements of operations.

(b) Convertible Notes Due 2017

In March 2012, the Company issued $258.8 million aggregate principal amount of the Convertible Notes. The Company was required to pay interest semi-annually in arrears on April 1 and October 1 of each year. The Convertible Notes were convertible upon the occurrence of certain conditions into shares of the Company’s common stock.

 

During 2015, the Company settled all of its Convertible Notes. During the second quarter of 2015, the Company settled a total of $91.0 million aggregate principal amount of the Convertible Notes through a combination of $92.1 million in cash and 2,099,358 shares of its common stock. During the third quarter of 2015, the Company settled a total of $167.8 million aggregate principal amount of the Convertible Notes through a combination of $167.8 million in cash and 3,539,218 shares of its common stock. The Company recorded a non-cash loss on extinguishment of the Convertible Notes of $7.9 million and $13.2 million in the second and third quarters of 2015, respectively, which was included in other income (expense), net, on the condensed consolidated statements of operations. Forfeited accrued interest payable totaling $1.7 million was reclassified to additional paid-in capital during 2015. Upon settlement, the Convertible Notes were no longer outstanding, interest ceased to accrue thereon, and all rights of the holders of the Convertible Notes ceased to exist.

 

 

NOTE 10. STOCKHOLDERS’ EQUITY

(a) Stock Purchase Rights

All shares of the Company’s common stock, if issued prior to the termination by the Company of its rights agreement, dated as of December 4, 2006, include stock purchase rights. The rights are exercisable only if a person or group acquires twenty percent or more of the Company’s common stock or announces a tender or exchange offer which would result in ownership of twenty percent or more of the Company’s common stock. Following the acquisition of twenty percent or more of the Company’s common stock, the holders of the rights, other than the acquiring person or group, may purchase Medivation common stock at half of its fair market value. In the event of a merger or other acquisition of the Company, the holders of the rights, other than the acquiring person or group, may purchase shares of the acquiring entity at half of their fair market value. The rights were not exercisable at March 31, 2016.

(b) Medivation Equity Incentive Plan

The Medivation Equity Incentive Plan provides for the issuance of options and other stock-based awards, including stock appreciation rights, restricted stock units and performance share units. The vesting of all outstanding awards under the Medivation Equity Incentive Plan will accelerate, and all such awards will become immediately exercisable, upon a “change of control” of Medivation, as defined in the Medivation Equity Incentive Plan.

In 2015, the Company’s stockholders approved an amendment and restatement of the Medivation Equity Incentive Plan to increase the aggregate number of shares of common stock authorized for issuance under the Medivation Equity Incentive Plan from 42,300,000 to 47,700,000. As of March 31, 2016, approximately 5.7 million shares were available for issuance under the Medivation Equity Incentive Plan.

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Performance Share Units

The Company granted 129,150 target number of PSUs during the first quarter of 2016 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, or the Committee, of the actual achievement of the performance objectives, subject to specified change of control exceptions. Each recipient of a PSU must remain an employee of the Company through the date the Committee determines actual performance has been achieved in order to earn the shares eligible under the award. For a portion of the PSUs tied to revenue goals, each recipient must remain an employee of the Company for one year after the initial date the Committee determined actual performance was achieved in order to earn that particular portion of the shares eligible under the award. 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.

(c) ESPP

The Company’s ESPP permits eligible employees to purchase shares of the Company’s common stock through payroll deductions at the lower of 85% of the fair market value of the common stock at the beginning or end of a purchase period. Eligible employee purchases are limited on an annual basis to $25,000 in accordance with Section 423 of the Internal Revenue Code. The number of shares of common stock authorized for issuance under the ESPP is 6,000,000 shares. As of March 31, 2016, a total of 397,536 shares have been issued under the ESPP.

(d) Stock-Based Compensation

Stock-based compensation expense was as follows:

 

 

 

NOTE 11. 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

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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.

 

 

NOTE 12. FAIR VALUE DISCLOSURES

The following table presents the Company’s financial assets and liabilities that are measured at fair value on a recurring basis:

 

 

The Company estimates the fair values of Level 2 assets or liabilities, including foreign currency derivative contracts, by taking into consideration valuations obtained from third-party pricing sources. These pricing sources utilize industry standard valuation models, including both income and market-based approaches, for which all significant inputs are observable, either directly, or indirectly, to estimate fair value. These inputs include market pricing based on real-time trade data for the same or similar assets, issuer credit spreads, benchmark yields, foreign currency rates, London Interbank Offered Rates (LIBOR), and other observable inputs. The Company validates the prices provided by its third-party pricing sources by understanding the models used, obtaining market values from other pricing sources, and/or analyzing pricing data in certain instances. For additional information regarding the Company’s foreign currency derivative transactions, see Note 4, “Derivative Financial Instruments.”

In connection with the acquisitions of MDV3800 and MDV9300, the Company recorded contingent consideration liabilities pertaining to amounts potentially payable to BioMarin and CureTech, respectively. The fair value of contingent consideration is considered a Level 3 liability and was estimated utilizing a model with key assumptions that included estimated revenues or completion of certain development, regulatory and sales milestone targets during the earn-out period, volatility, and estimated discount rates corresponding to the periods of expected payments. The estimated fair value of the contingent consideration liability is measured at each reporting date based on significant inputs not observable in the market. The Company assesses these estimates on an ongoing basis as additional data impacting the assumptions is obtained. Changes in the estimated fair value of contingent consideration are reflected as non-cash adjustments to operating expenses in the unaudited condensed consolidated statements of operations.

During the three months ended March 31, 2016, the Company recorded fair value adjustments of $0.5 million and $2.5 million as increases to R&D and SG&A expenses, respectively, related to the BioMarin contingent consideration liability. During the three months ended March 31, 2016, the Company also recorded fair value adjustments of $0.6 million and $2.3 million as increases to R&D and SG&A expenses, respectively, related to the CureTech contingent consideration liability. During the three months ended March 31, 2015, the Company recorded fair value adjustments of $1.0 million and $3.0 million as increases to R&D and SG&A expenses, respectively, related to the CureTech contingent consideration liability. All of these adjustments were primarily due to the time value of money.

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BioMarin is entitled to contingent payments totaling up to $160.0 million upon the achievement of defined regulatory and sales-based milestones, and mid-single digit royalties on net sales of products that contain MDV3800 during the royalty term specified in the related purchase agreement. CureTech is entitled to contingent payments totaling up to $85.0 million upon attainment of certain development and regulatory milestones, up to $245.0 million upon the achievement of certain annual worldwide net sales thresholds, and tiered royalties ranging from 5% to 11% on annual worldwide net sales. CureTech is also entitled to a $5.0 million milestone payment upon completion of the Manufacturing Technology Transfer as described in Note 13, “Commitments and Contingencies.”

Contingent consideration may change significantly as development progresses and additional data is obtained that will affect the Company’s assumptions regarding probabilities of successful achievement of related milestones used to estimate the fair value of the liability and the timing in which they are expected to be achieved. Updates to these assumptions could have a significant impact on our results of operations. For example, a significant increase in the probability of achieving a milestone would result in a significantly higher fair value measurement, while a significant increase in the expected timing of achieving a milestone would result in a significantly lower fair value measurement. Considerable judgment is required to interpret the market data used to develop the assumptions. The estimates of fair value may not be indicative of amounts that could be realized in a current market exchange. Accordingly, the use of different market assumptions and/or different valuation techniques could result in materially different fair value estimates.

There were no transfers between Level 1 and Level 2 financial instruments during the three months ended March 31, 2016. The following table includes a roll-forward of the fair value of Level 3 financial instruments for the period presented:

 

 

The following table presents the total balance of the Company’s other financial instruments that are not measured at fair value on a recurring basis:

 

 

Due to their short-term maturities, the Company believes that the fair value of its bank deposits, receivable from collaboration partner, accounts payable and accrued expenses, short-term borrowings under the Revolving Credit Facility, and other current assets and liabilities approximate their carrying value.

 

 

NOTE 13. COMMITMENTS AND CONTINGENCIES

(a) Lease Obligations

The Company leases approximately 158,000 square feet of office space, including approximately 143,000 square feet of office space at its corporate headquarters, pursuant to operating lease agreements expiring at various dates through December 2019. The Company has the option to extend the lease term of its corporate headquarters, which expires in June 2019, for an additional five years.

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Future operating lease obligations as of March 31, 2016 are as follows:

 

 

The Company is considered the “accounting owner” for a build-to-suit property and has recorded a build-to-suit lease obligation on its unaudited condensed consolidated balance sheets. Additional information regarding the build-to-suit lease obligation is included in Note 7, “Build-To-Suit Lease Obligation.”

Expected future lease payments under the build-to-suit lease as of March 31, 2016 are as follows:

 

 

(b) License Agreement with UCLA

Under an August 2005 license agreement with UCLA, the Company’s subsidiary Medivation Prostate Therapeutics, Inc., or MPT, holds an exclusive worldwide license under several UCLA patents and patent applications covering XTANDI and related compounds. Under the Astellas Collaboration Agreement, the Company granted Astellas a sublicense under the patent rights licensed to it by UCLA.

The Company is required to pay UCLA (a) an annual maintenance fee, (b) $2.8 million in aggregate milestone payments upon achievement of certain development and regulatory milestone events with respect to XTANDI (all of which has been paid as of March 31, 2016), (c) ten percent of all Sublicensing Income, as defined in the agreement, which the Company earns under the Astellas Collaboration Agreement, and (d) a four percent royalty on global net sales of XTANDI, as defined. Under the terms of the Astellas Collaboration Agreement, the Company shares this royalty obligation equally with Astellas with respect to sales in the United States, and Astellas is responsible for this entire royalty obligation with respect to sales outside of the United States. The Company is currently involved in litigation with UCLA, which is discussed in the section titled “Litigation” below.

UCLA may terminate the agreement if the Company does not meet a general obligation to diligently proceed with the development, manufacturing and sale of licensed products, or if it commits any other uncured material breach of the agreement. The Company may terminate the agreement at any time upon advance written notice to UCLA. If neither party terminates the agreement early, the agreement will continue in force until the expiration of the last-to-expire patent on a country-by-country basis.

(c) Clinical Manufacturing Agreements

Manufacturing Services and Supply Agreements

Contemporaneous with the execution of the License Agreement with CureTech, the Company entered into a Manufacturing Services and Supply Agreement, or MSA, with CureTech pursuant to which CureTech will provide clinical trial supply of MDV9300 over a three-year period. In accordance with the terms of the MSA, as amended, the Company paid CureTech upfront and setup fees of $3.0 million during the fourth quarter of 2014, $0.2 million during the second quarter of 2015 and $0.1 million during the third quarter of 2015. The Company is required to pay CureTech a one-time milestone payment of $5.0 million upon the completion of the

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Manufacturing Technology Transfer, as defined. In accordance with the terms of the MSA, the Company is also responsible for providing Manufacturing Funding totaling up to $19.3 million for clinical trial materials of MDV9300 over the three-year term of the MSA, of which $9.0 million has been paid through March 31, 2016. The Manufacturing Funding is contingent upon the successful achievement of the requirements set forth in the Manufacturing Plan, and any such amounts may be reduced or eliminated by the Company under the terms of the MSA.

Development and Manufacturing Services Agreement

During the fourth quarter of 2014, the Company entered into a Development and Manufacturing Services Agreement with a third-party clinical manufacturing organization. The term of the agreement is for the longer of (i) a period of five years or (ii) through the completion of the Services, as defined. Under the current statement of work under this agreement, as amended, the Company intends to transfer the current manufacturing process of MDV9300 from CureTech to this third party, further scale up and production of Phase 3 clinical trial material of MDV9300 from this entity’s manufacturing facility. The estimated total consideration payable under the current statement of work, as amended, is approximately $15.2 million, of which approximately $6.2 million has been paid through March 31, 2016.

(d) 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 when they are realized.

In May 2011, the Company filed a lawsuit in San Francisco Superior Court against the Regents of the University of California, or the Regents, and one of its professors, alleging breach of contract and fraud claims, among others. The Company’s allegations in this lawsuit include that it has exclusive commercial rights to apalutamide, an investigational drug originally known as ARN-509 (previously also referred to as JNJ-56021927, or JNJ-927), which is currently being developed by Aragon Pharmaceuticals, or Aragon. In August 2013, Johnson & Johnson and Aragon completed a transaction in which Johnson & Johnson acquired all apalutamide assets owned by Aragon. The Company sought remedies including a declaration that it is the proper licensee of apalutamide, contractual remedies conferring to it exclusive patent license rights regarding apalutamide, and other equitable and monetary relief. On August 7, 2012, the Regents filed a cross-complaint against the Company seeking declaratory relief that the Regents are entitled to ten percent of any sales milestone payments under the Astellas Collaboration Agreement.

On December 20, 2012, and January 25, 2013, the Court granted summary judgment motions filed by defendants Regents and Aragon, resulting in dismissal of all claims against Regents and Aragon, but denied such motions filed by the remaining Regents professor. On April 15, 2013, the Company filed a Notice of Appeal seeking appeal of the judgment in favor of Aragon, which is now wholly-owned by Johnson & Johnson. The bench trial of the Regent’s cross-complaint against the Company was conducted in July 2013, and on January 15, 2014, the Court entered a judgment in the cross-complaint in favor of Regents. The Company appealed this judgment on February 13, 2014 along with the December 2012 summary judgment order in favor of Regents. The jury trial of the Company’s breach of contract and fraud claims against the remaining Regents professor was conducted in October and November 2013. On November 15, 2013, the jury rendered a verdict in the case, finding in favor of the Company on one of the breach of contract claims, and in favor of the Regents professor on the fraud claims.  The Company appealed the resulting judgment on the fraud claims.  All appeals from this matter were consolidated, oral arguments were heard on February 23, 2016, and the matter was submitted.  A decision of the appellate court is required to be rendered within 90 days of when the matter is submitted.  On March 8, 2016, the Court’s submission was vacated, on its own order, stating that “further consideration of the merits of the issues raised on appeal is required.”  The Company awaits further instructions from the Court.

On April 11, 2014, the Regents filed a complaint against the Company in which the Regents allege that the “Operating Profits” the Company has received (and will continue to receive) from Astellas, as a result of the Astellas Collaboration Agreement, constitute Sublicensing Income under the license agreement between the Company and the Regents and that the Company and its subsidiary, MPT, have failed to pay the Regents ten percent of such Operating Profits. The Company denies the Regents’ allegations and is vigorously defending the litigation. The Company is currently awaiting a trial date to be set by the Courts.

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While the Company believes it has meritorious positions with respect to the claims above and intends to advance its positions in these lawsuits vigorously, including on appeal, the process of resolving matters through litigation or other means is inherently uncertain, and it is not possible to predict the ultimate resolution of any such proceeding. The actual costs of defending the Company’s position may be significant, and the Company may not prevail.

 

 

NOTE 14. SUBSEQUENT EVENT

 

On April 28, 2016, the Company confirmed that it had received an unsolicited, non-binding proposal from Sanofi to acquire all outstanding shares of Medivation common stock for $52.50 in cash, which followed a private letter received by the Company from Sanofi on April 15, 2016. On April 29, 2016, the Company announced that its Board of Directors, after consultation with its financial and legal advisors, unanimously determined that the unsolicited proposal from Sanofi to acquire Medivation for $52.50 per share in cash substantially undervalues Medivation and is not in the best interests of the Company and its stockholders.

 

 

The following discussion and analysis should be read in conjunction with our audited consolidated financial statements and notes thereto for the year ended December 31, 2015, included in our Annual Report on Form 10-K for the year ended December 31, 2015, or Annual Report. The following discussion and analysis contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. We intend that these forward-looking statements be subject to the safe harbors created by those provisions. Forward-looking statements are generally written in the future tense and/or are preceded by words such as “may,” “should,” “could,” “expect,” “suggest,” “believe,” “estimate,” “continue,” “anticipate,” “intend,” “plan,” or similar words, or negatives of such terms or other variations on such terms of comparable terminology. These forward-looking statements include, but are not limited to, statements regarding the commercialization of XTANDI® (enzalutamide) capsules, or XTANDI, the continuation and success of our collaboration with Astellas Pharma, Inc., or Astellas, the timing, progress and results of our clinical trials, and our future drug development activities, including those with respect to talazoparib (which is referred to as MDV3800) and pidilizumab (which is referred to as MDV9300). The forward-looking statements contained in this Quarterly Report on Form 10-Q, or Quarterly Report, involve a number of risks, uncertainties and assumptions, many of which are outside of our control. Factors that could cause actual results to differ materially from projected results include, but are not limited to, those discussed in “Risk Factors” in Item 1A of Part II below. Readers are expressly advised to review and consider those Risk Factors. Although we believe that the assumptions underlying the forward-looking statements contained in this Quarterly Report are reasonable, any of the assumptions could be inaccurate, and therefore there can be no assurance that the results anticipated by such statements will occur. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by us or any other person that the results or conditions described in such statements or our objectives and plans will be achieved. Furthermore, past financial or operations performance is not necessarily indicative of future performance. We disclaim any intention or obligation to update, supplement or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Overview

We are a biopharmaceutical company focused on the development and commercialization of medically innovative therapies to treat serious diseases for which there are limited treatment options. We have one commercial product, XTANDI® (enzalutamide) capsules, or XTANDI, through our collaboration with Astellas Pharma, Inc., or Astellas. XTANDI has received marketing approval in the United States, Europe and numerous other countries worldwide for the treatment of patients with metastatic castration-resistant prostate cancer, or mCRPC, and in Japan for the treatment of patients with castration-resistant prostate cancer, or CRPC. We and Astellas are also conducting investigational studies of enzalutamide in prostate cancer, advanced breast cancer, and hepatocellular carcinoma. Under our collaboration agreement with Astellas, we share equally with Astellas all profits (losses) related to U.S. net sales of XTANDI. We also receive royalties ranging from the low teens to the low twenties as a percentage of ex-U.S. XTANDI net sales.  

We seek to become a more fully-integrated biopharmaceutical company through the continued commercialization of XTANDI, the acquisition or in-license and development and commercialization of other product opportunities, and through the advancement of our own proprietary research and development programs. We expect that our future growth may come from both our internal research efforts, focused in oncology, neurology and other areas, and third-party business development activities, such as our acquisition of all worldwide rights to talazoparib (which we refer to as MDV3800) from BioMarin Pharmaceutical Inc., or BioMarin, in the fourth quarter of 2015 and our license of exclusive worldwide rights to pidilizumab (which we refer to as MDV9300) from CureTech, Ltd., or CureTech, in the fourth quarter of 2014.

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2016 Clinical and Business Highlights

The following summarizes our recent clinical and business highlights:

The Phase 1 investigator-sponsored study evaluated escalating doses of talazoparib (≥ 0.5 mg given orally once daily) with either temozolomide (≥ 25 mg/m2 given orally on days 1-5; Arm A) or irinotecan (≥ 25 mg/m2 given by intravenous infusion every two weeks; Arm B) every 28 days in patients with advanced malignancies. Study participants ranged in age from 21 to 77 years (median: 57 years) and had received one to fifteen prior chemotherapy regimens (median: 6). The primary endpoint of the study was the determination of the maximum tolerated dose. Secondary endpoints included pharmacokinetics, tumor response and biomarkers.  The most common grade 3/4 adverse events (≥ 5%) observed in patients treated with talazoparib plus temozolomide were neutropenia (28%), anemia (33%), and thrombocytopenia (33%). Among those treated with talazoparib plus irinotecan, the most common adverse events were thrombocytopenia (13%), anemia (27%) and neutropenia (31%). No significant pharmacokinetic interactions were observed between talazoparib and either temozolomide or irinotecan.

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2016 Financial Highlights

 

 

Critical Accounting Policies and the Use of Estimates

The preparation of our consolidated financial statements and related footnotes requires us to make estimates, assumptions and judgments 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. We have based our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. We have discussed the development, selection and disclosure of these estimates with the Audit Committee of our Board of Directors. Actual results could differ materially from these estimates under different assumptions or conditions. A detailed description of our significant accounting policies is included in the footnotes to our audited consolidated financial statements included in our Annual Report.

We have identified our most critical accounting policies and estimates upon which our financial statements depend as those relating to: revenue recognition, including reliance on third-party information, estimating the various deductions from gross sales used to calculate net sales of XTANDI, and estimating the performance periods of our deliverables under collaboration agreements; business combinations, including estimates related to goodwill, intangible assets and contingent consideration; stock-based compensation; research and development expenses and accruals; litigation; convertible notes; leases, including build-to-suit lease arrangements; the calculation of diluted net income per common share; and income taxes. As of March 31, 2016, there have been no significant or material changes to our critical accounting policies or estimates from that disclosed in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included in our Annual Report.

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Results of Operations

Collaboration Revenue

We have a collaboration agreement with Astellas pursuant to which we are collaborating with Astellas to develop and commercialize XTANDI globally. The terms of the collaboration agreement are described in Note 3, “Collaboration Agreement,” to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report. Collaboration revenue consists of three components: (a) collaboration revenue related to U.S. XTANDI net sales; (b) collaboration revenue related to ex-U.S. XTANDI net sales; and (c) collaboration revenue related to upfront and milestone payments.

Collaboration revenue was as follows (in thousands):

 

 

We are currently involved in litigation with UCLA regarding certain terms of our license agreement and other matters, which are discussed in Part II, Item 1, “Legal Proceedings.”

Collaboration Revenue Related to U.S. XTANDI Net Sales

Collaboration revenue related to U.S. XTANDI net sales was as follows (in thousands):

 

 

U.S. net sales of XTANDI (as reported by Astellas) for the three months ended March 31, 2016 were $307.6 million, an increase of $83.6 million, or 37%, compared with net sales for the prior year period. The majority of the increase was due to higher sales volumes with a minor increase resulting from changes in price elements. The increase in price elements includes a net favorable adjustment of $4.2 million for the three months ended March 31, 2016 related to changes in prior period estimates of deductions against gross sales.

In the fourth quarter of 2015, we experienced cyclical buying patterns of XTANDI in the U.S. by the Astellas distribution channel partners. Specifically, fourth quarter 2015 U.S. XTANDI net sales (as reported by Astellas) included approximately one-half week of additional channel partner inventory. As a result, the fourth quarter 2015 channel partner inventory levels were reduced in the first quarter of 2016. In addition, the estimated gross-to-net sales discount applied by Astellas in the first quarter of 2016 was higher than the fourth quarter of 2015 because of the impact of Medicare Part D coverage gap in the new calendar year.

Collaboration revenue related to U.S. XTANDI net sales for the three months ended March 31, 2016 was $153.8 million, an increase of $41.8 million, or 37%, from the prior year. The increase in the first quarter of 2016 was the result of an increase in our share of pre-tax U.S. profit in the collaboration with Astellas as well as an increase in their reimbursement of our shared U.S. costs.

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

Net sales of XTANDI outside of the United States (as reported by Astellas) were approximately $240.0 million and approximately $133.0 million for the three months ended March 31, 2016 and 2015, respectively. Collaboration revenue attributable to ex-U.S. XTANDI net sales was $28.7 million and $15.8 million for the three months ended March 31, 2016 and 2015, respectively.

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Net sales of XTANDI outside of the United States (as reported by Astellas) in the first quarter of 2016 increased approximately 80% compared to net sales in the first quarter of 2015. Changes in foreign currency exchange rates reduced the U.S. dollar equivalent of such first quarter 2016 net sales (as reported by Astellas) by approximately 1% compared to the first quarter of 2015.

Collaboration Revenue Related to Upfront and Milestone Payments

As of the fourth quarter of 2015, we 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 months ended March 31, 2015 was $1.4 million, which was comprised of amortization of deferred upfront and development milestones.   

Research and Development Expenses

Research and development, or R&D, expenses were as follows (dollars in thousands):

 

 

R&D expenses increased by $32.9 million, or 74%, to $77.6 million for the three months ended March 31, 2016, from $44.7 million for the prior year period. The increase was primarily due to a $23.5 million increase in third-party clinical and preclinical development costs as a result of increased activities, including direct expenses associated with our MDV3800 and enzalutamide programs, a $6.4 million increase in personnel-related costs and a $3.0 million increase in facilities and information technology costs. The higher MDV3800 expenses were primarily due to the ongoing Phase 3 EMBRACA trial and the planned initiation of additional clinical studies in multiple tumor types.

Under the Astellas Collaboration Agreement, we and Astellas share certain development costs in the United States. Development cost-sharing payments from Astellas were $13.3 million and $13.8 million for the three months ended March 31, 2016 and 2015, respectively. Development cost-sharing payments from Astellas are recorded as reductions in R&D expenses.

We were engaged in four R&D programs during the periods presented: (1) the development of enzalutamide for the treatment of prostate cancer, advanced breast cancer, and hepatocellular carcinoma; (2) the development of MDV3800; (3) the development of MDV9300; and (4) multiple proprietary research and drug discovery projects. R&D costs are identified as either directly allocable to one of our R&D programs or indirect costs, with only direct costs being tracked by specific program. Direct costs consist primarily of clinical, preclinical, and drug discovery costs, cost of supplying drug substance and drug product for use in clinical and preclinical studies, including clinical manufacturing costs, upfront and development milestone payments under license agreements, non-cash fair value adjustments related to contingent purchase consideration, non-cash in-process research and development, or IPR&D, impairment charges, personnel costs, contract research organization fees, and other contracted services pertaining to specific clinical and preclinical studies. Indirect costs consist of corporate overhead costs and other administrative and support costs. The following table summarizes the direct costs attributable to each program and total indirect costs (in thousands):

 

 

Our R&D programs may be subject to change from time to time as we evaluate our priorities and available resources.

For a detailed discussion of the risks and uncertainties associated with the timing and cost of completing a product development plan, see Part II, Item 1A, “Risk Factors—Risks Related to Our Future Product Development Candidates” of this Quarterly Report.

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Selling, General and Administrative Expenses

Selling, general and administrative, or SG&A, expenses were as follows (dollars in thousands):

 

 

SG&A expenses increased by $12.9 million, or 15%, to $96.8 million for the three months ended March 31, 2016, from $83.9 million for the prior year period. The increase was primarily due to higher personnel-related costs and higher sales, marketing and medical affairs costs, including certain collaboration expenses incurred by Astellas that do not recur to the same degree in subsequent quarters of the year. These increases were partially offset by accrued payments of $5.9 million to UCLA associated with potential milestone payments from Astellas recognized during the three months ended March 31, 2015. SG&A expenses for the three months ended March 31, 2016 included non-cash fair value adjustments of $4.8 million for contingent purchase consideration related to our BioMarin and CureTech acquisitions, which were recorded as increases to SG&A expenses. SG&A expenses for the three months ended March 31, 2015 included a non-cash fair value adjustment of $3.0 million for contingent purchase consideration related to our CureTech acquisition, which was recorded as an increase to SG&A expenses. We also incurred $1.5 million of higher royalty expenses in the first quarter of 2016 compared to the prior year period as a result of an increase in net sales of XTANDI.

Under our collaboration with Astellas, we are responsible for fifty percent of the cost of goods sold and the royalty payable to UCLA on U.S. net sales of XTANDI. Our share of these items is included in SG&A expenses in our unaudited condensed consolidated statements of operations. As such, those components of our reported SG&A expenses will fluctuate in correlation with net sales of XTANDI in the United States.

Under the Astellas Collaboration Agreement, we and Astellas share certain commercialization costs in the United States. Commercialization cost-sharing payments to Astellas were $18.7 million and $20.1 million for the three months ended March 31, 2016 and 2015, respectively. Commercialization cost-sharing payments to Astellas are recorded as increases in SG&A expenses.

Other Income (Expense), Net

The components of other income (expense), net were as follows (in thousands):

 

 

Other income (expense), net consists of cash interest expense and non-cash interest expense and the impact of changes in foreign exchange rates on our foreign currency-denominated payables, which were not significant.

Income Tax (Expense) Benefit

Income tax (expense) benefit and the effective income tax rate were as follows (dollars in thousands):

 

 

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 for the 2016 period 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 provision for income taxes was higher than the

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tax computed at the U.S. federal statutory rate for the 2015 period due primarily to state income taxes and non-deductible stock-based compensation.

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

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

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 we 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.

Liquidity and Capital Resources

Our principal source of liquidity is cash generated from our collaboration agreement with Astellas, which is described elsewhere in this Quarterly Report.

At March 31, 2016, we had cash and cash equivalents of $317.4 million, compared with $225.9 million at December 31, 2015. At March 31, 2016, our collaboration receivable from Astellas was $186.6 million, compared with $391.6 million at December 31, 2015. Based on our current expectations, we believe our net current assets, amounts that are available under our Revolving Credit Facility, and our projected cash flows will be sufficient to fund our currently planned operations for at least the next twelve months. This estimate is based on a number of assumptions that may prove to be wrong. In addition, we may choose to raise additional funds in the form of equity, debt, or otherwise due to market conditions or strategic considerations even if we believe we have sufficient funds for our current and future operating plans. For example, we may choose to raise additional capital to fund business development activities, and for other general corporate purposes. For a detailed discussion of the risks and uncertainties associated with our sources of liquidity and access to capital, see Part II, Item 1A, “Risk Factors—Risks Related to the Operation of Our Business.”

In October 2015, we entered into an amendment and restatement of our original credit agreement (the “Credit Agreement”) described elsewhere in this Quarterly Report. The Credit Agreement provides for (i) a five-year $300.0 million Revolving Credit Facility; and (ii) an uncommitted accordion facility subject to the satisfaction of certain conditions (collectively, the “Senior Secured Credit Facility”). The Revolving Credit Facility includes a $50.0 million multicurrency sub-facility, a $20.0 million letter of credit sub-facility, and a $10.0 million swing line loan sub-facility. In October 2015, we borrowed $75.0 million under the Revolving Credit Facility, which we repaid in January 2016. There were no balances outstanding under the Revolving Credit Facility at March 31, 2016.

Cash Flow Analysis

The following table summarizes our cash flows (in thousands):

 

 

Net cash provided by operating activities totaled $165.7 million for the three months ended March 31, 2016, which consisted of our net income of $4.8 million, non-cash items of $22.9 million and positive changes in our operating assets and liabilities of $138.0 million, which included the collection of a $175.0 million sales milestone payment from Astellas, partially offset by cash utilized in operations that arose in the ordinary course of business.

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Net cash provided by operating activities totaled $57.2 million for the three months ended March 31, 2015, which consisted of positive changes in our operating assets and liabilities of $40.3 million and our net loss of $3.1 million adjusted for non-cash items of $20.1 million. Net cash provided by operating activities was primarily driven by collaboration revenue related to U.S. XTANDI net sales, royalties on ex-U.S. XTANDI net sales and sales milestone payments received from Astellas during 2015, partially offset by cash utilized in operations that arose in the ordinary course of business.

Net cash used in investing activities totaled $9.3 million for three months ended March 31, 2016, and consisted of capital expenditures. Net cash used in investing activities totaled $2.5 million for the three months ended March 31, 2015, and consisted of an increase in letters of credit collateralized by restricted cash to secure various leases of $1.6 million and capital expenditures of $1.0 million.

Net cash used in financing activities totaled $64.9 million for the three months ended March 31, 2016, and consisted primarily of the repayment of our borrowing under the Revolving Credit Facility of $75.0 million, partially offset by proceeds from the issuance of common stock under equity incentive and stock purchase plans of $7.7 million and excess tax benefits from stock-based compensation of $2.5 million. Net cash provided by financing activities totaled $11.3 million for the three months ended March 31, 2015, and primarily consisted of proceeds from the issuance of common stock under equity incentive and stock purchase plans.

Commitments and Contingencies

There have been no significant changes in our contractual cash obligations, commercial commitments and contingencies since December 31, 2015, as disclosed in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included in our Annual Report.

Off-Balance Sheet Arrangements

We are involved with a variable interest entity, or VIE, that performs contract research for us. We have not consolidated this entity because we do not have the power to direct the activities that most significantly impact the VIE’s economic performance and, thus, we are not considered the primary beneficiary of the VIE.

 

 

Market risk is the exposure to loss resulting from changes in interest rates, foreign currency exchange rates, commodity prices and equity prices. There were no material changes to our market risk exposures from those disclosed in Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” of our Annual Report except for our foreign currency exchange risk as discussed below.

Foreign Currency Exchange Risk

Under the Astellas Collaboration Agreement, Astellas records all ex-U.S. XTANDI sales and pays us a tiered royalty ranging from the low teens to the low twenties as a percentage of such sales. The royalties we receive from Astellas on net sales of XTANDI outside of the United States are calculated by converting the respective countries’ XTANDI net sales in local currency to U.S. dollars. The royalties are paid to us in U.S. dollars on a quarterly basis. To date, a significant portion of ex-U.S. sales of XTANDI have been generated in the European Union and in Japan. Therefore, the royalties we receive from Astellas related to ex-U.S. sales of XTANDI are dependent on the value of the U.S. dollar versus the Euro and Japanese Yen. A strengthening of the U.S. dollar compared to current exchange rates would likely result in lower collaboration revenue related to ex-U.S. XTANDI sales. We also conduct certain R&D activities outside of the United States, with expenses incurred in various currencies, including the Euro and Japanese Yen, and these expenses partially offset the currency exposure related to our collaboration revenue from royalties.

In the first quarter of 2016, we began using forward foreign currency exchange contracts to hedge a portion of our gross collaboration royalty revenue, equal to the royalty revenue amount net of our R&D expense related to the Euro and the Japanese Yen. As of March 31, 2016, we had open foreign currency forward contracts with notional amounts of $43.0 million. A hypothetical 10% adverse movement in foreign currency exchange rates compared with the U.S. dollar relative to exchange rates at March 31, 2016 would have resulted in a reduction in fair value of these contracts of approximately $4.0 million on this date and, if realized, would negatively affect earnings over the remaining life of the contracts.

Foreign exchange gains and losses recorded in our unaudited condensed consolidated statements of operations for the three months ended March 31, 2016 and 2015 were not significant.

 

 

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Evaluation of Disclosure Controls and Procedures

We maintain “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) under the Exchange Act, that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms and that such information is communicated to our management, including our Chief Executive Officer (principal executive officer) and Chief Financial Officer (principal financial officer), as appropriate to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognizes that disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable, but not absolute, assurance that the objectives of the disclosure controls and procedures are met. Our disclosure controls and procedures have been designed to meet the reasonable assurance standards. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

As required by Rule 13a-15(b) or Rule 15d-15(b) of the Exchange Act, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer (principal executive officer) and Chief Financial Officer (principal financial officer) of the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2016. Based on the foregoing, our Chief Executive Officer (principal executive officer) and Chief Financial Officer (principal financial officer) concluded that our disclosure controls and procedures were effective as of March 31, 2016 at the reasonable assurance level.

Changes in Internal Controls

There were no changes in our internal control over financial reporting during the three months ended March 31, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 

PART II. OTHER INFORMATION

We are involved in legal proceedings, investigations, and claims in the ordinary course of our business, including the matters described below.  

In May 2011, we filed a lawsuit in San Francisco Superior Court against the Regents of the University of California, and one of its professors, alleging breach of contract and fraud claims, among others. Our allegations in this lawsuit include that we have exclusive commercial rights to apalutamide, an investigational drug originally known as ARN-509 (previously also referred to as JNJ-56021927, or JNJ-927), which is currently being developed by Aragon Pharmaceuticals, or Aragon. In August 2013, Johnson & Johnson and Aragon completed a transaction in which Johnson & Johnson acquired all apalutamide assets owned by Aragon. We sought remedies including a declaration that we are the proper licensee of apalutamide, contractual remedies conferring to us exclusive patent license rights regarding apalutamide, and other equitable and monetary relief. On August 7, 2012, the Regents filed a cross-complaint against us seeking declaratory relief that the Regents are entitled to ten percent of any sales milestone payments under the Astellas Collaboration Agreement.

On December 20, 2012, and January 25, 2013, the Court granted summary judgment motions filed by defendants Regents and Aragon, resulting in dismissal of all claims against Regents and Aragon, but denied such motions filed by the remaining Regents professor. On April 15, 2013, we filed a Notice of Appeal seeking appeal of the judgment in favor of Aragon, which is now wholly-owned by Johnson & Johnson. The bench trial of the Regent’s cross-complaint against us was conducted in July 2013, and on January 15, 2014, the Court entered a judgment in the cross-complaint in favor of Regents. We appealed this judgment on February 13, 2014 along with the December 2012 summary judgment order in favor of Regents. The jury trial of our breach of contract and fraud claims against the remaining Regents professor was conducted in October and November 2013. On November 15, 2013, the jury rendered a verdict in the case, finding in our favor on one of the breach of contract claims, and in favor of the Regents professor on the fraud claims.  We appealed the resulting judgment on the fraud claims.  All appeals from this matter were consolidated, oral arguments were heard on February 23, 2016, and the matter was submitted.  A decision of the appellate court is required to be rendered within 90 days of when the matter is submitted.  On March 8, 2016, the Court’s submission was vacated, on its own order, stating that “further consideration of the merits of the issues raised on appeal is required.”  We await further instructions from the Court.

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On April 11, 2014, the Regents filed a complaint against us in which the Regents allege that the “Operating Profits” we have received (and will continue to receive) from Astellas, as a result of the Astellas Collaboration Agreement, constitute Sublicensing Income under the license agreement between us and the Regents and that we and our subsidiary, Medivation Prostate Therapeutics, Inc., have failed to pay the Regents ten percent of such Operating Profits. We deny the Regents’ allegations and are vigorously defending the litigation. We are currently awaiting a trial date to be set by the Courts.

While we believe we have meritorious positions with respect to the claims above and intend to advance our positions in these lawsuits vigorously, including on appeal, the process of resolving matters through litigation or other means is inherently uncertain, and it is not possible to predict the ultimate resolution of any such proceeding. The actual costs of defending our position may be significant, and we may not prevail.

Risks facing our business have not changed substantively from those discussed in our Annual Report on Form 10-K for the year ended December 31, 2015, except for those risk factors below designated by an asterisk (*). Our business faces significant risks, some of which are set forth below to enable readers to assess, and be appropriately apprised of, many of the risks and uncertainties applicable to the forward-looking statements made in this Quarterly Report. You should carefully consider these risk factors as each of these risks could adversely affect our business, operating results, cash flows and financial condition. If any of the events or circumstances described in the following risk factors actually occurs, our business may suffer and the trading price of our common stock could decline and our financial condition or results of operations could be harmed. Given these risks and uncertainties, you are cautioned not to place undue reliance on forward-looking statements. These risks should be read in conjunction with the other information set forth in this Quarterly Report. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not currently known to us, or that we currently believe to be immaterial, may also adversely affect our business.

Risks Related to XTANDI® (enzalutamide) capsules

We and Astellas may not be able to further commercialize XTANDI in the United States, and may fail to continue to generate significant revenue from the sale of XTANDI in the United States. XTANDI may fail to obtain regulatory approval and reimbursement, to be successfully commercialized and to generate significant revenue outside the United States.

We only have one commercial product, XTANDI® (enzalutamide) capsules, or XTANDI, which is approved in the United States to treat men with metastatic castration-resistant prostate cancer, or mCRPC. However, the further commercialization of XTANDI in the United States for the treatment of mCRPC and any other patient populations for which XTANDI is being developed and may subsequently be approved, may not be successful for a number of reasons, including:

If the further commercialization of XTANDI in the United States is unsuccessful, our ability to generate revenue from product sales and maintain profitability would be adversely affected and our business could be severely negatively impacted.

XTANDI has received marketing approval in the European Union (or Europe, or EU) for the treatment of patients with mCRPC and in Japan for the treatment of patients with castration-resistant prostate cancer, and numerous other countries worldwide for the

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treatment of patients with mCRPC. Additional marketing applications for the mCRPC indication are under review in numerous other countries. Unless we and Astellas can obtain additional regulatory approval and reimbursement of XTANDI outside the United States, Japan and the EU, Astellas’ ability to successfully commercialize XTANDI further and our ability to generate additional revenue from XTANDI worldwide, could be significantly limited.

XTANDI may fail to effectively compete commercially with other approved products and other products in development.

There are a number of currently marketed therapies for advanced prostate cancer that compete directly with XTANDI. In addition, several companies are currently developing products or are expected to be marketing products in the near future that compete or may compete directly with XTANDI in its currently approved indication for mCRPC and any other indication for which enzalutamide may be subsequently approved. Our current and future competitors are generally large pharmaceutical companies with considerably greater financial, human, and development and commercialization resources and experiences than ours, including Johnson & Johnson, Sanofi, and Bayer Pharma AG. Some competitive drugs already have acquired substantial shares in these markets or are generic which may make it more difficult for us to compete successfully in these markets notwithstanding any positive results that we may generate from our current or potential future clinical trials for enzalutamide. Also, intense competition from products and compounds in development could impact our ability to successfully conduct upstream clinical trials, as trials may become more difficult to enroll, or complete successfully, as patients may have more treatment options with demonstrated efficacy and safety. Factors upon which XTANDI would have to compete successfully include efficacy, safety, price and cost effectiveness. We cannot guarantee that we and Astellas will be able to compete successfully in the context of any of these factors.

*Pricing pressure from third parties and price competition could substantially impact Astellas’ or our ability to generate revenue from XTANDI and, therefore, negatively impact our business.

The realized price of XTANDI could be subject to pricing pressure from aggressive competitive pricing activity and managed care organizations and institutional purchasers, who use cost considerations to restrict the sale of preferred drugs that their physicians may prescribe. To the extent that payors believe similar lower-priced, branded or generic competitor products may be suitable alternatives for patients, we and our partner Astellas may consider reducing the price of XTANDI or be subject to formulary restrictions, which could result in a loss of sales revenue and/or market share. Additionally, XTANDI currently competes against products and could compete in the future with products marketed by some of the world’s largest and most experienced pharmaceutical companies, such as Johnson & Johnson, who have more resources and greater flexibility to engage in aggressive price competition in order to gain revenues and market share. It is uncertain whether we and Astellas could successfully compete with such competition and our failure to compete or a decision to reduce the price of XTANDI in order to compete could severely impact our business.

Moreover, non-profit groups have recently petitioned the U.S. federal government to exercise their “march-in” rights under the Bayh-Dole Act due to the difference in price of XTANDI in the U.S. versus abroad since certain patents which cover XTANDI were allegedly developed with federal funding.  In March 2016, the National Institutes of Health, or NIH, reiterated its continuing position that drug pricing does not meet the statutory requirements justifying use of its march-in authority.  Subsequently, several members of Congress, including presidential candidate Bernie Sanders, requested that the U.S. Department of Health and Human Services and NIH hold public hearings to determine if we and our partner Astellas have not met the statutory requirement to make XTANDI available to U.S. residents on reasonable terms.  While the government has yet to exercise its march-in rights in response to pricing pressures or shortage problems, it may do so in the future which would significantly negatively impact our ability to generate revenue from XTANDI.

Competition from other approved products, including those that mechanistically operate similarly to XTANDI, could negatively impact the expected use or duration of therapy of XTANDI, and impact our ability to generate revenue.

We are competing and will continue to compete against drugs that operate similarly to XTANDI. If XTANDI is unable to successfully compete for a position in the prostate cancer treatment paradigm ahead of drugs like Zytiga and/or potentially apalutamide (formerly JNJ-56021927, or JNJ-927, and ARN-509), which are now being investigated in Phase 3 clinical studies in earlier stage prostate cancer, sales of XTANDI may be negatively impacted. In addition, the availability of multiple other approved agents to treat the same patients being treated with XTANDI could cause treating physicians to switch patients off of XTANDI and onto competing therapies more quickly than would otherwise be the case, which could also negatively impact XTANDI net sales.

Competition from generic products could potentially harm our business and result in a decrease in our revenue.

Like other branded pharmaceutical companies, we face competition from generic products that could potentially harm our business and result in a decrease in our revenue. Such competition may arise from the loss or expiration of intellectual property rights on enzalutamide or a competitor product, or the approval by the FDA of a generic of our product or a competitor product, such as Zytiga, any of which could adversely affect our business by putting downward pressure on the price and market share of XTANDI. Generic products for the treatment of prostate cancer that have already been approved by the FDA, e.g., Casodex, are

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generally sold at a lower price than branded drugs. Furthermore, Abbreviated New Drug Applications (ANDAs) requesting approval for generic versions of Zytiga were submitted to the FDA on April 28, 2015. See the risk factor below entitled, “Risks Related to the Pharmaceutical Industry, Including the Activities of Medivation, Inc.— If the FDA or other applicable regulatory authorities approve generic products that compete with any of our products or product candidates, the sales of our products or product candidates may be adversely affected,” for additional information regarding general risks related to generic and biosimilar competition in our industry.

We have recently increased our promotional efforts and focus in the United States to include urologists as well as oncologists. If we are not successful in marketing XTANDI to these physician audiences, the commercial potential of XTANDI may not be realized.

We have recently increased promotional efforts in the United States to include urologists as well as oncologists as a result of the expanded label of XTANDI in the United States to treat mCRPC patients who have not yet received chemotherapy (September 2014). Our efforts include expanding and dividing our sales force into urology- and oncology-focused teams. Failure to successfully commercialize XTANDI to urologists and oncologists would have a negative impact on our business and future prospects.

We are dependent upon our collaborative relationship with Astellas to further develop, fund, manufacture and commercialize XTANDI, and if such relationship is unsuccessful, or if Astellas terminates our collaboration agreement with them, it could negatively impact our ability to conduct our business and generate revenue from XTANDI.

Under our collaboration agreement with Astellas, Astellas is responsible for developing, seeking regulatory approval for, and commercializing XTANDI outside the United States and is responsible globally for all manufacture of product for both clinical and commercial purposes. We and Astellas are jointly responsible for commercializing XTANDI in the United States. We and Astellas share equally the costs (subject to certain exceptions), profits and losses arising from development and commercialization of XTANDI in the United States. For clinical trials useful both in the United States and in Europe or Japan, we are responsible for one-third of the total costs and Astellas is responsible for the remaining two-thirds. We are subject to a number of risks associated with our dependence on our collaborative relationship with Astellas, including:

Due to these factors and other possible disagreements with Astellas, we may be delayed or prevented from further developing, manufacturing or commercializing XTANDI or we may become involved in litigation or arbitration, which would be time consuming and expensive. For example, we understand that Astellas has not made a final decision on the phase 3 clinical trial evaluating enzalutamide in triple negative breast cancer.

If Astellas were to terminate our collaborative relationship unilaterally, we would need to undertake development and commercialization activities for XTANDI solely at our own expense and/or seek one or more other partners for some or all of these activities, worldwide. If we pursued these activities on our own, it would significantly increase our capital and infrastructure requirements, might limit the indications we are able to pursue for XTANDI, and could prevent us from effectively commercializing XTANDI. If we sought to find one or more other pharmaceutical company partners for some or all of these activities, we may not be

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successful in such efforts, or they may result in collaborations that have us expending greater funds and efforts than our current relationship with Astellas.

*We are dependent on third-party manufacturers for commercial supply of XTANDI and for clinical trial materials and if we fail to receive such adequate supplies, global sales of XTANDI could be limited and clinical trials could be delayed.

We require adequate supplies of enzalutamide for commercial supply of XTANDI, and for use in clinical trials. Under our collaboration agreement, Astellas has the responsibility to manufacture commercial supplies of XTANDI for all markets and provide material for clinical studies. Astellas fulfills its manufacturing and supply obligations largely through third-party contract manufacturers. Consequently, we are, and expect to remain, dependent on Astellas and its contract manufacturers for commercial and clinical trial materials. If Astellas cannot provide the materials on a timely basis due to, for example, raw materials availability, quality issues or failure of the contracting facilities to perform or comply with current good manufacturing practices, or cGMP, it could result in decreased sales or put at risk ongoing clinical studies.  If Astellas or its contract manufacturers do not perform, we may be forced to incur additional expenses, delays, or both, to arrange or take responsibility for contract manufacturers to manufacture or package XTANDI or enzalutamide on our behalf, as we do not have any internal manufacturing or packaging capabilities.

We also rely on our own third-party vendors for clinical supplies. If clinical supplies cannot be provided on a timely basis it could put at risk our sponsored clinical studies with XTANDI or enzalutamide.

In some instances, we and Astellas are dependent on third-party suppliers of raw materials, intermediates or finished goods of commercial supplies of XTANDI and clinical trial materials. If any of these suppliers or subcontractors fails to meet our or Astellas’ needs, we may not have readily available alternatives. If we or Astellas experience a material supplier or subcontractor inability to supply, our ability to satisfactorily and timely complete our clinical trial or delivery obligations could be negatively impacted which could result in reduced sales, termination of contracts and damages to our relationships with clinical trial sites and the medical community. We could also incur additional costs to address and resolve such an issue. Any of these events could have a negative impact on our results of operations and financial condition.

We are dependent on Astellas to distribute and sell XTANDI, and if Astellas fails to adequately perform these activities, our business would be negatively impacted.

Under our collaboration agreement with Astellas, we and Astellas have the right to jointly promote XTANDI to customers in the United States. However, Astellas has the sole right to distribute and sell XTANDI to customers in the United States and the sole right to promote, distribute and sell XTANDI to customers outside the United States. We are thus partially dependent on Astellas to successfully promote XTANDI in the United States, and solely dependent on Astellas to successfully distribute and sell XTANDI in the United States and to promote, distribute and sell XTANDI outside of the United States. In the United States, we depend on customer support from specialty pharmaceutical distributors and wholesalers in Astellas’ network. Astellas has contracted with a limited number of specialty pharmaceutical distributors and wholesalers to deliver XTANDI to end users. The use of specialty pharmacies and wholesalers requires significant coordination with Astellas’ sales and marketing, medical affairs, regulatory affairs, legal and finance organizations and involves risks, including but not limited to risks that these specialty pharmacies and wholesalers will:

We generally do not have control over the resource or degree of effort that any of the specialty pharmacies and distributors may devote to XTANDI, and if their performance is substandard, this will adversely affect sales of XTANDI. If Astellas’ network of specialty pharmacies and distributors fails to adequately perform, it could negatively impact sales of XTANDI, which would negatively impact our business, results of our operations, cash flows and liquidity.

XTANDI may not be commercially successful if not widely covered and appropriately reimbursed by third-party payors, and we are dependent upon Astellas for the execution of third-party payor access and reimbursement strategies for XTANDI.

Our ability to successfully commercialize XTANDI for its approved indications depends, in part, on the extent to which coverage and adequate reimbursement for XTANDI is available from government and health administration authorities, private health insurers, managed care programs and other third-party payors, both in the United States and globally.

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In addition, even if third-party payors ultimately elect to cover and reimburse XTANDI, most payors will not reimburse 100% of the cost, but rather require patients to pay a portion of the cost through a co-payment. Thus, even if reimbursement is available, the percentage of drug cost required to be borne by patients may make use of XTANDI financially difficult or impossible for certain patients, which would have a negative impact on sales of XTANDI. For example, in the United States there exists a coverage gap, or “donut hole”, in the Medicare Part D coverage for prescription medications for participants, which renews annually each January 1st. While in the donut hole, Medicare Part D participants, including many patients in XTANDI’s approved indication, may have to pay out-of-pocket a substantial portion of their prescription drug costs, which may discourage physicians from prescribing or patients from accessing XTANDI. It is increasingly difficult to obtain coverage and adequate reimbursement levels from third-party payors, and we may be unable to achieve these objectives. Moreover, our commercial prospects would be further weakened if payors approve coverage for XTANDI only as second- or later-line treatments, or if they place XTANDI in tiers requiring unacceptably high patient co-payments. Since launch, several third-party payors have included in their coverage criteria use of XTANDI after patient treatment on Zytiga plus prednisone or if there is a contra-indication to prednisone or Zytiga. These coverage situations may persist even with expanded indications for XTANDI. Because XTANDI works via a similar molecular signaling pathway as Zytiga does, patients who have already failed treatment with Zytiga may not have as strong a response on XTANDI as would patients who are Zytiga-naïve. Failure to overturn coverage decisions or stop additional coverage decisions could materially harm our (or our partner’s) ability to successfully market XTANDI in the United States. Achieving coverage and acceptable reimbursement levels typically involves negotiating with individual payors and is a time-consuming and costly process. Therefore, obtaining acceptable coverage and reimbursement from one payor does not guarantee similar acceptable coverage or reimbursement from another payor. Additionally, even if favorable coverage and adequate reimbursement levels are achieved, the payor may change its decision in the future. We are dependent upon Astellas globally for the achievement of such coverage and acceptable reimbursement, and for negotiation with individual payors.

We and Astellas are required to undertake certain studies to comply with post-marketing requirements or commitments in the EU and the United States, which could result in adverse modifications to XTANDI’s existing labeling, and risk XTANDI’s ability to obtain additional regulatory approvals for additional patient populations.

In the EU, we and Astellas are required to collect efficacy data on mCRPC patients previously treated with Zytiga to determine XTANDI’s efficacy response in such patients, which we do not expect to be as good as in patients naïve to Zytiga, and anticipate that these results may be available as early as 2016. In the United States, we and Astellas are required to conduct an open-label safety study of XTANDI in patients with known risk factor(s) for seizure and to report the results of that study to the FDA in 2019. If the results of this study reveal unacceptable safety risks, this could result in decreased commercial utilization of XTANDI for mCRPC patients in the United States and in the EU, failure to obtain approval in other indications, and modifications to the existing label for XTANDI, including potentially a boxed warning, or additional clinical testing. Any one or more of these outcomes would seriously harm our business. Additionally, we could receive additional post-marketing requirements as we seek approval of XTANDI in additional patient populations. Failure to conduct the post-marketing requirements or commitments in a timely manner may result in withdrawal of approval for XTANDI and substantial civil and/or criminal penalties.

*If significant patient safety issues were to arise for XTANDI or our other product candidates, our future sales may be reduced, adversely affecting our results of operations.

The data supporting the marketing approvals for our products and forming the basis for the safety warnings in our product labels were obtained in controlled clinical trials of limited duration and, in some cases, from post-approval use. As our products are used over longer periods of time by many patients with underlying health problems, taking numerous other medicines, we expect to continue to find new issues such as safety, resistance or drug interactions of XTANDI or in other products, which may require us to provide additional warnings or contraindications on our labels or narrow our approved indications, each of which could reduce the market acceptance of these products. For example, in 2015, based upon routine pharmacovigilance review and signal detection, we and Astellas submitted a label change to the FDA after identifying two post-marketing reports of posterior reversible encephalopathy syndrome, or PRES, in patients receiving XTANDI. PRES is a neurological disorder which can present with rapidly evolving symptoms including seizure, headache, lethargy, confusion, blindness, and other visual and neurological disturbances, with or without associated hypertension. A diagnosis of PRES requires confirmation by brain imaging, preferably magnetic resonance imaging, or MRI. Because PRES was reported voluntarily from a post-marketing population of uncertain size, it is not possible to reliably estimate the frequency or establish a causal relationship to XTANDI. Discontinue XTANDI in patients who develop PRES.

Regulatory authorities have been moving towards heightened pharmacovigilance, including requests for additional post-approval analyses to detect possible safety signals, and more transparent pharmacovigilance, such as making additional stand-alone safety information directly available to the public through websites and other means, e.g., periodic safety update report summaries, risk management plan summaries and various adverse event data. Safety information, without the appropriate context and expertise, may be misinterpreted and lead to misperception or legal action which may potentially cause our product sales or stock price to decline.

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Further, if serious safety, resistance or drug interaction issues arise with XTANDI, product sales could be limited or halted by us or by regulatory authorities and our results of operations would be adversely affected.

XTANDI and any other product candidates that may receive regulatory approval in the future will be subject to ongoing regulatory obligations and continued regulatory review, which may result in significant additional expense as well as significant penalties if we fail to comply with regulatory requirements or experience unanticipated problems with our products and product candidates.

We are required to monitor the safety and efficacy of XTANDI and any other products candidates that are approved by the FDA. In addition, the manufacturing processes, labeling, packaging, distribution, adverse event reporting, storage, advertising, promotion, import, export and recordkeeping for any approved products, such as XTANDI, will be subject to extensive and ongoing regulatory requirements. These requirements include submissions of safety and other post-marketing information and reports, registration and listing, as well as continued compliance with current good clinical practices, or cGCP, for any clinical trials that we conduct post-approval. We and our contract manufacturers will be subject to periodic unannounced inspections by the FDA to monitor and ensure compliance with cGMP. We must also comply with requirements concerning advertising and promotion for XTANDI and any other product candidates for which we obtain marketing approval in the future. Promotional communications with respect to prescription drugs, including biologics, are subject to a variety of legal and regulatory restrictions and must be consistent with the information in the product’s approved labeling. Thus, we will not be able to promote XTANDI or any other products candidates for which we might obtain approval in the future for indications or uses for which they are not approved. Later discovery of previously unknown problems with XTANDI or any other product candidate for which we might obtain approval in the future, including adverse events of unanticipated severity or frequency, or with our third-party manufacturers or manufacturing processes, or failure to comply with regulatory requirements, may result in, among other things:

The FDA’s and other regulatory authorities’ policies may change and additional government regulations may be enacted that could affect the marketing of XTANDI or prevent, limit or delay regulatory approval of our other product candidates. We cannot predict the likelihood, nature or extent of government regulation that may arise from future legislation or administrative action, either in the United States or abroad. If we are slow or unable to adapt to changes in existing requirements or the adoption of new requirements or policies, or if we are not able to maintain regulatory compliance, we may lose any marketing approval that we may have obtained and we may not sustain profitability.

If we are unable to successfully develop enzalutamide for breast cancer with a suitable diagnostic, we may not be able to obtain regulatory approval for enzalutamide for breast cancer or realize the full potential for enzalutamide.

We may initiate a Phase 3 clinical trial evaluating enzalutamide in triple negative breast cancer, or TNBC. A key element of our strategy to develop enzalutamide in TNBC is the use of a companion diagnostic to identify patients with TNBC appropriate for treatment with enzalutamide. Patients whose tumors test positive for a gene expression profile may be more likely to respond to

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treatment with enzalutamide; patients whose tumors test negative may not be responsive to treatment with enzalutamide. Both regulatory approval and, if approval is obtained, successful commercialization of enzalutamide in TNBC will, therefore, likely depend on our successful development of such a companion diagnostic.

We and Astellas have entered into a collaboration with NanoString Technologies, Inc. to translate our gene expression signature algorithm into a companion diagnostic assay using NanoString’s nCounter Dx Analysis System.  However, we may encounter difficulties in developing enzalutamide for TNBC and/or developing the companion diagnostic for clinical, regulatory and/or commercial reasons including issues related to analytical validation, reproducibility or clinical validation.

Companion diagnostics are subject to regulation by the FDA as a medical device and require separate regulatory clearance prior to commercialization. Companion diagnostics are also subject to regulation by foreign regulatory authorities and such regulations may change or new regulations may be enacted during our development of the companion diagnostic. We may be unable to alter our development program in time to comply with the revised or new regulations, or we may only be able to do so by expending greater funds and efforts, and any delay or failure to obtain regulatory approval could delay or prevent the approval of enzalutamide for TNBC.

Risks Related to our License and Manufacturing and Supply Agreement with CureTech, Ltd.

The clinical molecule MDV9300 we licensed from CureTech is a biologic molecule, and we do not have long-standing experience or expertise in the development, manufacture, or commercialization of biologic molecules.

Under the license agreement, we are responsible for all development, manufacturing, and commercialization activities for MDV9300 for all indications, including in oncology. We have limited history, experience, or expertise in the development, manufacturing and commercialization, including regulatory interactions, commercial manufacturing, and distribution of biologic molecules, like MDV9300.

The successful development, testing, manufacturing and commercialization of biologics involves a long, expensive, and uncertain process. There are unique risks and uncertainties with biologics, including:

We are currently dependent on CureTech to produce clinical supply of MDV9300 that meets global regulatory standards and CureTech is dependent on its suppliers for sufficient quantities of raw materials, starting materials, and supplies. If CureTech fails to manufacture clinical supply of MDV9300 in sufficient quantities or fails to source raw or starting materials or supplies in sufficient quantities, our ability to conduct clinical trials could be further delayed or otherwise negatively impacted.

Our failure to successfully develop, manufacture, or commercialize MDV9300 could significantly impact our ability to generate value from the License Agreement with CureTech.

*Our Phase 2 clinical trial of MDV9300 in DLBCL has been delayed, which could result in increased cost and could delay, prevent or limit our ability to generate value from and realize the commercial potential of MDV9300.

In early January 2016, we advised the FDA of our conclusion that MDV9300 does not bind PD-1, and the agency placed the investigational new drug applications, or INDs, on clinical hold and requested that we revise our characterization of MDV9300 in the related investigator brochure, protocols and informed consent documents. We submitted the revised documents in early February 2016, and the FDA lifted the clinical hold in March 2016.  We intend to submit an amendment to our INDs for MDV9300 to modify

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the production process to better support our planned clinical activities in the first half of 2016 and intend that patients in our Phase 2 DLBCL trial will be treated with MDV9300 manufactured in accordance with the amended IND. We do not intend to proceed with the trial until MDV9300 manufactured in accordance with the amended INDs is available. These circumstances contributed to a delay in the DLBCL trial and to a partial impairment charge recorded in the fourth quarter of 2015, and it is possible they could contribute to further delays or increased costs that could prevent or limit our ability to generate value from and realize the commercial potential of MDV9300.

*If we are unable to determine the binding target for MDV9300, we may fail to successfully develop MDV9300 for DLBCL, multiple myeloma or any other indication, and we may not be able to obtain regulatory approval or realize the full potential for MDV9300.

Although the molecule was originally understood to work primarily via PD-1 (Programmed Death-1) binding, our work as well as that of others has also suggested other potential binding activity.  During 2015, we conducted testing and characterization work to better identify the binding target and, in late December 2015, we concluded that MDV9300 does not bind PD-1. While we intend to continue work to identify the binding target and thereafter develop a target-specific release assay, these activities are time consuming, expensive and there is no assurance that we will be successful since the binding mechanism is currently unknown. Furthermore, there can be no assurance that we will not experience additional development issues in the future which may cause further delays or unanticipated costs, or that we will be able to solve such development issues. Our failure to identify the binding target for MDV9300 or to develop a target-specific release assay would significantly impact our ability to obtain regulatory approval and could materially harm our business.

The development and commercialization of MDV9300 may face strong competition from other immuno-oncology agents that have already received marketing approval and are being developed for additional indications by larger companies with substantial resources and relatively more experience developing, manufacturing, and commercializing biologic molecules.

The immuno-oncology field is competitively crowded with more than 100 immuno-oncology agents, including biologic molecules, vaccines, modified T-cells, and adjuvants, currently approved and on the market or in development for various tumor types and patient populations by larger more experienced companies than ours, such as Bristol Myers Squibb, Roche, AstraZeneca, Pfizer and Merck. This competitive environment could compromise our ability to develop MDV9300 by limiting the availability of clinical trial investigators, sites, and/or appropriate clinical patients, which could slow, delay or limit the progress of MDV9300’s development. Even if we are able to successfully develop MDV9300 and obtain regulatory approval for it in an oncology indication, the competition from already approved immuno-oncology molecules and other agents in the same or similar oncology indications could significantly limit our ability to generate revenue from MDV9300. While we have some experience developing and in certain aspects of the commercialization of small molecule products, we may be required to hire additional qualified employees with experience developing, manufacturing, and commercializing, including regulatory interactions, commercial manufacturing, and distributing biological molecules, like MDV9300. Many of our competitors are large, multinational pharmaceutical and biotechnology companies with considerably more resources and experience with biological molecules than us.

Risks Related to Our Future Product Development Candidates

Our business strategy depends on our ability to identify and acquire additional product candidates.  We may never acquire or identify such product candidates for reasons that may not be in our control, or are otherwise unforeseen or unforeseeable to us.

A key component of our business strategy is to diversify our product development risk by identifying and acquiring new product opportunities for development. However, we may not be able to identify promising new technologies. In addition, the competition to acquire promising biomedical technologies is fierce, and many of our competitors are large, multinational pharmaceutical, biotechnology and medical device companies with considerably more financial, development and commercialization resources and experience than we have. Thus, even if we succeed in identifying promising technologies, we may not be able to compete against our larger competitors with considerably more financial resources or we may not be able to acquire rights to them on acceptable terms or at all. If we are unable to identify and acquire new technologies, we will be unable to diversify our product risk. We believe that any such failure would have a significant negative impact on our prospects.

*Pharmaceutical and biological product candidates require extensive, time-consuming and expensive preclinical and clinical testing to establish safety and efficacy, and to obtain regulatory approval. If we are unable to successfully develop and test our product candidates, we will not be successful.

The research and development of pharmaceuticals and biological products is an extremely risky industry. Only a small percentage of product candidates that enter the development process ever receive regulatory approval. The process of conducting the preclinical and clinical testing required to establish safety and efficacy and obtain regulatory approval is expensive and uncertain and

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takes many years. If we are unable to complete preclinical or clinical trials of current or future product candidates, due to safety concerns with a product candidate, or if the results of these trials are not satisfactory to convince regulatory authorities of their safety or efficacy, we will not be able to obtain regulatory approval for commercialization. As more product candidates within a particular class of drugs proceed through clinical development to regulatory review and approval, the amount and type of clinical data that may be required by regulatory authorities may increase or change.  

We cannot be certain if any of our product candidates will be approved by regulatory authorities. Furthermore, even if we are able to obtain regulatory approvals for any of our product candidates, those approvals may be for indications that are not as broad as desired or may contain other limitations that would adversely affect our ability to generate revenue from sales of those products. Moreover, if we are not able to differentiate our product against other approved products within the same class of drugs, or if any of the other circumstances described above occur, our business would be materially harmed and our ability to generate revenue from that class of drugs would be severely impaired.

Enrollment and retention of patients in clinical trials of enzalutamide and other product candidates are expensive and time-consuming processes, could be made more difficult or rendered impossible by competing treatments or clinical trials of competing drugs in the same or other indications, and could result in significant delays, cost overruns, or both, in our product development activities, or in the failure of such activities.

We may encounter delays in enrolling, or be unable to enroll, a sufficient number of patients to complete any of our clinical trials, and even once enrolled we may be unable to retain a sufficient number of patients to complete any of our trials. Patient enrollment and retention in clinical trials depends on many factors, including the size of the patient population, the nature of the trial protocol, the existing body of safety and efficacy data with respect to the study drug, the number and nature of competing treatments and ongoing clinical trials of competing drugs for the same indication, the proximity of patients to clinical sites and the eligibility criteria for the study. Furthermore, any negative results we may report in clinical trials of enzalutamide or any potential future product candidates may make it difficult or impossible to recruit and retain patients in other clinical studies of that same product candidate. Delays or failures in planned patient enrollment and/or retention may result in increased costs, program delays or both, which could have a harmful effect on our ability to develop enzalutamide or any product candidates, or could render further development impossible.

Our reliance on third parties for the operation of our business may result in material delays, cost overruns and/or quality deficiencies in our development programs.

We currently rely on third parties to perform key product development tasks, such as laboratories to conduct preclinical testing, clinical research organizations to help us manage our clinical studies, investigators and investigative sites who conduct the clinical trials, and contract manufacturing organizations to manufacture our product candidates at appropriate scale for preclinical and clinical trials. In addition, we currently rely on Astellas and its third party vendors to supply commercial quantities of XTANDI. To manage our business successfully, we will need to identify, engage and properly manage qualified third parties that will perform these development and manufacturing activities. For example, we need to monitor the activities of our vendors closely to ensure that they are performing their tasks correctly, on time, on budget and in compliance with strictly enforced regulatory standards. We need to monitor investigators who participate in our clinical trials to ensure that they are conducting the trial in compliance with the protocol, cGCP and all applicable laws.  Our ability to identify and retain key vendors, investigators and investigative sites with the requisite knowledge is critical to our business and the failure to do so could negatively impact our business. Because all of our key vendors perform services for other clients in addition to us, we also need to ensure that they are appropriately prioritizing our projects. If we fail to manage our key vendors well, we could incur material delays, cost overruns or quality deficiencies in our development and commercialization programs, as well as other material disruptions to our business.

Patient safety issues may arise from investigator-sponsored research with our product candidates, which may adversely affect our development program for such product candidates.

We are committed to improving patient care through research that advances the medical and scientific knowledge of XTANDI and our product candidates.  In support of this commitment, we, in collaboration with our partner Astellas, have established an investigator-sponsored research program as a mechanism for independent researchers to seek support for preclinical and clinical research studies with enzalutamide.  We also provide support for investigator-sponsored research with MDV3800 and MDV9300.  However, because we are not the sponsor of investigator-sponsored research studies, we cannot control how such studies are conducted.  If new patient safety issues arise from use of our product candidates in these investigator-sponsored research studies, our development programs may be adversely affected which could impact our business and the results of our operations.

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Risks Related to the Operation of our Business

We may incur substantial costs in the foreseeable future as we continue our development and commercialization activities and may not maintain or increase profitability on a quarterly or annual basis.

We have incurred significant costs principally from funding our research and development activities, from general and administrative expenses and from our XTANDI commercialization activities. We may incur substantial costs in the foreseeable future as we continue to finance the commercialization of XTANDI in the U.S. market, preclinical and clinical studies of enzalutamide, MDV3800, MDV9300 and early stage programs, potential business development activities, and our corporate overhead costs, which could impact our ability to maintain or increase profitability on a quarterly or annual basis. Our ability to generate revenue sufficient to offset these costs in order to maintain or increase profitability on a quarterly or annual basis is dependent on our ability, alone or with collaboration partners, to successfully commercialize products for which we receive marketing approval.

Our operating results are unpredictable and may fluctuate. If our operating results are below the expectations of securities analysts or investors, the market value of our common stock could decline.

Our operating results are difficult to predict and will likely fluctuate from quarter to quarter and year to year. Due to the competitive market for mCRPC therapies, XTANDI net sales will be difficult to predict from period to period. As a result, you should not rely on XTANDI net sales results in any period as being indicative of future performance and sales of XTANDI may be below the expectation of securities analysts or investors in the future. Additionally, you should not place undue reliance on the forward-looking statements about expectations for future XTANDI net sales from our partner Astellas, as we may not agree with such statements, or from us, as XTANDI net sales results are difficult to predict. We believe that our quarterly and annual results of operations may be affected by a variety of factors, including:

In addition, we measure compensation cost for stock-based awards made to employees at the grant date of the award, based on the fair value of the award, and recognize the cost as a non-cash operating expense over the employee’s requisite service period. As the variables that we use as a basis for valuing these awards change over time, including our underlying stock price and stock price volatility, the magnitude of the non-cash expense that we must recognize may vary significantly.

We are required to evaluate the fair value of intangible assets, including in-process research and development, or IPR&D, for impairment at least annually or more frequently if impairment indicators exist. These assets are initially measured at fair value and therefore any change to our assumptions used in the valuations could potentially lead to impairment. Some of the more common potential risks leading to impairment include competition, earlier than expected loss of exclusivity, pricing pressures, adverse regulatory changes or clinical trial results, delay or failure to obtain regulatory approval and additional development costs, inability to achieve expected synergies, higher operating costs, changes in tax laws and other macro-economic changes. If any of these or similar issues arise during development, we may need to re-evaluate our IPR&D and incur a non-cash impairment charge, adversely affecting our consolidated results of operations.

Additionally, each reporting period, we revalue contingent consideration obligations associated with business acquisitions to their fair value and record increases in fair value as non-cash contingent consideration expense and decreases in fair value as non-cash

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contingent consideration income. Changes in contingent consideration result from changes in assumptions regarding the probability of successful achievement of related milestones, the estimated timing in which the milestones may be achieved and the discount rates used to estimate the fair value of the liability. Contingent consideration may change significantly as our development programs progress, revenue estimates evolve and additional data is obtained, impacting our estimates.

For these and other reasons, it is difficult for us to accurately forecast future profits or losses. As a result, it is possible that in some quarters our operating results could be below the expectations of securities analysts or investors.

Sales fluctuations of XTANDI as a result of inventory levels at Astellas’ customers (such as pharmaceutical wholesalers and distributors) may cause our revenue to fluctuate, which could adversely affect our financial results and the market value of our common stock.

The pharmaceutical wholesalers and distributors with whom Astellas has entered into inventory management agreements make estimates to determine end user demand and may not always be effective in matching their inventory levels to actual end user demand. As a result, changes in inventory levels held by those wholesalers and distributors can cause our operating results to fluctuate unexpectedly if sales of XTANDI to these wholesalers do not match end user demand. Adverse changes in economic conditions or other factors may cause wholesalers and distributors to reduce their inventories of XTANDI. As inventory of XTANDI in the distribution channel fluctuates from quarter to quarter, we may see corresponding fluctuations in reported collaboration revenue from XTANDI net sales.

*A significant and growing amount of the collaboration revenue we generate is in currency other than U.S. dollars, primarily the Euro and the Japanese yen, thereby exposing us to foreign currency exchange rate risk.

A significant and growing amount of our collaboration revenue is generated from royalties on ex-U.S. net sales of XTANDI. The royalties we receive from Astellas on net sales of XTANDI outside of the United States are calculated by converting the respective countries’ XTANDI net sales in local currency to U.S. dollars for payment to us on a quarterly basis. A strengthening of the U.S. dollar relative to current currency exchange rates would result in lower collaboration revenue related to ex-U.S. XTANDI net sales than otherwise would have been reported by us and paid to us.

Beginning in the first quarter of 2016, we implemented a policy to hedge a portion of our exposure to fluctuating currency rates for the Euro and the Japanese yen in order to mitigate unexpected short-term volatility of such rates. Depending on the size of the exposures and the relative movements of exchange rates, if we fail to effectively hedge our exposures, we could experience adverse effects on our reported financial results.

*If we fail to attract and keep senior management personnel, we may be unable to successfully develop our product candidates, identify and acquire promising new technologies, conduct our clinical trials, and commercialize our products, and our business could be harmed.

Our future success depends upon the continued services of our executive officers and our ability to attract, retain, and motivate highly qualified management to oversee our business. None of our executive officers is bound by an employment agreement for any specific term, and they may terminate their employment at any time. We are particularly dependent on the continued services of David Hung, M.D., our president and chief executive officer and a member of our board of directors. Dr. Hung identified enzalutamide for acquisition and has primary responsibility for identifying and evaluating other potential product candidates. We believe that Dr. Hung’s services in this capacity would be difficult to replace.

Although we have not historically experienced unique difficulties attracting and retaining qualified employees, we could experience such problems in the future. Competition for qualified personnel in the biotechnology and pharmaceutical fields is intense, especially in the San Francisco Bay Area. Recent acquisition interest in the company from third parties may make it harder for us to effectively compete for such talent because of perceived uncertainty regarding the company’s future. If we are unable to attract and retain qualified personnel on acceptable terms,  or there is a significant turnover in our senior management or among our employees as a result of the uncertainty created by the acquisition interest, we may face challenges to our inability to recruit and hire additional personnel which could impair the successful commercialization of XTANDI, delay or prevent continued development activities for enzalutamide, MDV3800, MDV9300 and other product candidates, delay or prevent the transfer and integration of MDV3800 into our business and adversely affect or preclude the identification and acquisition of new product candidates, any of which events could harm our business.

*We may encounter difficulty managing our growth and expanding our operations successfully.

Our business has experienced significant growth, which we expect will continue as we expand our commercialization efforts for XTANDI, seek to advance our product candidates through clinical trials, and integrate the acquisition of MDV3800 and other

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potential business development activities. We expect that we will need to expand our development, regulatory, manufacturing, and commercial capabilities in concert with contracting with third parties to provide certain of these activities for us. To that end, we must be able to hire, train and integrate additional personnel effectively in order to manage our commercialization and development activities, which may be difficult if we are impeded from doing so because of acquisition interest in the company from third parties and uncertainty regarding the company’s future.

Our failure to accomplish any of these tasks could prevent us from successfully growing our company. Our management may need to divert a disproportionate amount of its attention away from our day-to-day activities and devote a substantial amount of time to managing these growth activities.  If we are not able to effectively manage the expansion of our operations, it may result in weaknesses in our infrastructure, operational mistakes, loss of business opportunities, loss of employees and reduced productivity among remaining employees.  In addition, our expenses may increase more than expected, our ability to generate and/or grow revenues could be reduced, and we may not be able to implement our business strategy.  Thus, our future financial performance and our ability to develop and commercialize our product candidates and to compete effectively will depend, in part, on our ability to manage any future growth effectively.

We will need to expand our organization to successfully commercialize our un-partnered product candidates outside of the United States in some degree, and we may experience difficulties, which could disrupt our operations and harm our business.

We have no experience marketing or selling outside of the United States. To successfully commercialize MDV3800, MDV9300, or any other products that emerge from our development programs, we will need to build or otherwise secure these capabilities from third parties. Developing a commercial infrastructure outside the United States is a significant undertaking that requires substantial financial and managerial resources.  We may need to establish internal marketing and sales capabilities for several major ex-U.S. geographies to reach the commercial potential of MDV3800, MDV9300, or any other products that result from our development programs.  Such expansion would require attracting, retaining and motivating the necessary skilled personnel and, in addition, it may require significant capital and operating expenditures. As a result, such activity may divert human and financial resources from other projects, such as the development or acquisition of additional product candidates. If we encounter unexpected or unforeseen delays in establishing a commercial infrastructure outside the United States, for example, it may negatively impact our ability to launch a commercial product or it may increase the cost and number of resources required for successful commercialization.  In addition, it may negatively impact the future financial performance of our business and our ability to generate sufficient revenue to sustain our business.  In the future, as a result of these financial and execution risks of expanding geographically ourselves, we may choose to partner with others who have existing capability to commercialize these products.

Debt and lease obligations could adversely affect our financial condition. In addition, we may not have sufficient funds to service our debt and lease obligations when payments are due.

At March 31, 2016, we had approximately $52.0 million of minimum lease commitments. We have incurred in the past, and may incur in the future, additional indebtedness to meet our financing needs, including for example in connection with business development activities and for other general corporate purposes. Substantial indebtedness could have significant effects on our business, results of operations and financial condition. For example, it could:

Each of these factors may have a material and adverse effect on our financial condition and viability.

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With the acquisition of new product candidates in recent periods, we may need additional funds to support our operations, and such funding may not be available to us on acceptable terms, or at all, which would force us to delay, scale back or eliminate some or all of our currently-planned development programs and other operations, to restructure or refinance our indebtedness, or to determine to do any combination of the foregoing. Raising additional capital may subject us to unfavorable terms or conditions, may cause dilution to our existing stockholders, or may restrict our operations or require us to relinquish rights to our product candidates and technologies.

We require significant capital to fund our operations. We have historically funded our operations primarily through public offerings of our common stock, the issuance of the Convertible Notes (which we redeemed in July 2015 and are no longer outstanding), and from the upfront, milestone, and cost-sharing payments under agreements with our current and former collaboration partners, from collaboration revenue related to XTANDI net sales and, more recently and to a lesser extent, from short-term borrowings under a Revolving Credit Facility. At March 31, 2016, we had cash and cash equivalents totaling $317.4 million available to fund our operations. We expect to devote substantial financial resources to our future operations. Based on our current expectations, we believe our current capital resources, amounts available to us under our Revolving Credit Facility, and projected operating and other cash flows will be sufficient to fund our currently planned operations for at least the next twelve months.  This estimate is based on a number of assumptions that may prove to be wrong, including assumptions regarding the amount and timing of net sales of XTANDI, potential XTANDI approvals in new markets and for other indications, and potential receipt of profit sharing and royalty payments under our Astellas Collaboration Agreement, causing us to exhaust our available cash, cash equivalents, and short-term investments sooner than anticipated. For example, we may be required or choose to seek additional funds for the commercialization of XTANDI in the United States, to expand our preclinical and clinical development activities for enzalutamide, MDV3800, MDV9300 and other existing or potential future product candidates, to fund business acquisitions, investments or to in-license technologies, particularly if we face challenges or delays in connection with our clinical trials, and to maintain minimum cash balances that we deem reasonable and prudent. Our ability to raise additional funds on acceptable terms will be dependent on the climate of worldwide capital markets, which could be challenging for companies such as ours.

We may be constrained by our obligations under the Revolving Credit Facility to operate our business to its full potential.

The terms of our Revolving Credit Facility contain customary representations and warranties and customary affirmative and negative covenants, including, among other things, restrictions on indebtedness, liens, investments, mergers, dispositions, prepayment of other indebtedness and dividends and other distributions. Furthermore, under the terms of the Revolving Credit Facility, we are required to comply with a maximum senior secured net leverage ratio and minimum interest coverage ratio covenants. These terms may restrict our ability to operate our business in the manner we deem most effective or desirable, and may restrict our ability to fund our operations through new public offerings of our common stock or strengthen our candidate development pipeline through acquisitions or in-licenses which cause us to exceed our maximum senior secured net leverage ratio.

Failure to comply with the representations and warranties or affirmative and negative covenants could constitute an event of default which, if continued beyond the cure period, would allow the Administrative Agent (as defined in the Revolving Credit Facility), at the request of or with the consent of the Lenders holding a majority of the loans and commitments under the facility, to terminate the commitments of the Lenders to make further loans and declare all the obligations of the Loan Parties under the Revolving Credit Facility to be immediately due and payable, either of which would harm our business.

We may have additional tax liabilities.

We are subject to income taxes in various jurisdictions. Significant judgment is required in determining our provision for income taxes and other tax liabilities. Our effective income tax rate in the future is subject to volatility and could be adversely affected by a number of factors, including 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 we may conduct business, changes in the valuation of deferred tax assets and liabilities, state income taxes, the tax impact of stock-based compensation, 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. The impact of our income tax provision resulting from these items may be significant and could have a negative impact on our net income.

We are also subject to non-income based taxes, such as payroll, sales, use, net worth, property, and goods and services taxes in the United States. We may have additional exposure to non-income based tax liabilities.

We are regularly subject to audits by tax authorities in the jurisdictions in which we conduct business. Although we believe our tax positions are reasonable, the final outcome of tax audits and related litigation could be materially different than that reflected in our historical income tax provisions and accruals, and we could be subject to assessments of additional taxes and/or substantial fines or penalties. The resolution of any audits or litigation could have an adverse effect on our financial position and results of operations.

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We and our subsidiaries are engaged in a number of intercompany transactions. Although we believe that these transactions reflect arm’s length terms and that proper transfer pricing documentation is in place, which should be respected for tax purposes, the transfer prices and terms and conditions of such transactions may be scrutinized by tax authorities, which could result in additional tax and/or penalties becoming due.

Intellectual property protection for our product candidates is crucial to our business, and is subject to a significant degree of legal risk, particularly in the life sciences industry.

The success of our business will depend in part on our ability to obtain and maintain intellectual property protection, primarily patent protection for the XTANDI product and any potential future product candidates, as well as successfully asserting and defending these patents against third-party challenges. We and/or our collaborators will only be able to protect the XTANDI product and our potential future product candidates from unauthorized commercialization by third parties to the extent that valid and enforceable patents or trade secrets cover them. Furthermore, future protection of our proprietary rights is uncertain because legal means may afford only limited protection and may not adequately protect our rights or permit us or our potential future collaborators to gain or keep our competitive advantage.

The patent positions of life sciences companies can be highly uncertain and involve complex legal and factual questions for which important legal principles remain unresolved. Further, changes in either the patent laws or in interpretations of patent laws in the United States or other countries may diminish the value of our intellectual property rights. Accordingly, we cannot predict the breadth of claims that may be granted or enforced for our patents or for third-party patents that we have licensed. For example:

Further, even if we can obtain protection for and defend the intellectual property position of the XTANDI product or any potential future product candidates, we or any of our potential future collaborators still may not be able to exclude competitors from developing or marketing competing drugs. Should this occur, we and our potential future collaborators may not generate any revenues or profits from the XTANDI product or any potential future product candidates or our revenue or profits would be significantly decreased.

We could become subject to litigation or other challenges regarding intellectual property rights, which could divert management attention, cause us to incur significant costs, prevent us from selling or using the challenged technology and/or subject us to competition by lower priced generic products.

During the course of obtaining patent protection, we may receive rejections from national patent offices or be subject to pre-grant opposition proceedings instituted by third parties.  Even after a patent is granted and issued by the national patent office, many countries allow post-grant opposition proceedings.   In the U.S., these post-grant opposition proceedings include inter partes review whereby a third party can seek to challenge and invalidate an issued patent in an administrative proceeding before the U.S. Patent and Trademark Office, rather than through litigation in court, which is often lengthier and costlier.  Our patents and patent applications, or those of our licensors, could face other challenges, such as interference proceedings, opposition proceedings, re-examination proceedings, derivation proceedings and pre-grant submissions. Any such challenge, if successful, could result in the invalidation of, or in a narrowing of the scope of, any of our patents and patent applications subject to the challenge. Any such challenges, regardless of their success, would likely be time-consuming and expensive to defend and resolve and would divert our management’s time and attention.

Generic and other pharmaceutical manufacturers are and have been very aggressive in challenging the validity of patents held by proprietary pharmaceutical companies, especially if these patents are commercially significant. Pursuant to the provisions of the Hatch-Waxman Act, the XTANDI patents listed in the FDA “Orange Book” could be challenged by generic manufacturers as early as four years from the initial approval of the XTANDI product in the United States, which occurred on August 31, 2012. Companies seeking approval to market a generic version of a reference drug may also seek to challenge the validity of patents listed in the Orange

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Book or other patents covering such reference drug by filing petitions for inter partes review with the U.S. Patent and Trademark Office. If a generic pharmaceutical company or other third party were able to successfully invalidate any of our present or future patents, the XTANDI product and any potential future product candidates that may ultimately receive marketing approval could face additional competition from lower-priced generic products that would result in significant price and revenue erosion and have a significantly negative impact on the commercial viability of the affected product candidate(s).

In addition, we may be a party to litigation to protect our intellectual property or to defend our activities in response to alleged infringement of a third party’s intellectual property. These claims and any resulting lawsuit, if successful, could subject us to significant liability for damages and invalidation, or a narrowing of the scope, of our proprietary rights. These lawsuits, regardless of their success, would likely be time-consuming and expensive to litigate and resolve and would divert management time and attention. Any potential intellectual property litigation also could force us or our potential licensees to do one or more of the following:

If we or our potential licensees are forced to take any of these actions, our business may be seriously harmed. Although we carry general liability insurance, our insurance does not cover potential claims of this type.

We may in the future initiate claims or litigation against third parties for infringement to protect our proprietary rights or to determine the scope and validity of our proprietary rights or the proprietary rights of competitors. These claims could result in costly litigation and the diversion of our technical and management personnel and we may not prevail in making these claims.  

We rely on license agreements for certain aspects of our product candidates and our technology, and failure to meet our obligations under those agreements could severely negatively impact our business, and ability to generate revenue.

We have entered into agreements with third-party commercial and academic institutions to license intellectual property rights and technology. For example, we have a license agreement with UCLA pursuant to which we were granted exclusive worldwide rights to certain UCLA patents related to XTANDI and a family of related compounds. Some of these license agreements, including our license agreement with UCLA, contain diligence and milestone-based termination provisions, in which case our failure to meet any agreed upon diligence requirements or milestones may allow the licensor to terminate the agreement. If our licensors terminate our license agreements or if we are unable to maintain the exclusivity of our exclusive license agreements, we may be unable to continue to develop and commercialize XTANDI or any potential future product candidates based on licensed intellectual property rights and technology.

In the future, we may need to obtain additional licenses of third-party technology that may not be available to us or are available only on commercially unreasonable terms, and which may cause us to operate our business in a more costly or otherwise adverse manner that was not anticipated.

From time to time we may be required to license technology from additional third parties to further develop XTANDI and any future product candidates. Should we be required to obtain licenses to any third-party technology, including any such patents based on biological activities or required to manufacture our product candidates, such licenses may not be available to us on commercially reasonable terms, or at all. The inability to obtain any third-party license required to develop any of our product candidates could cause us to abandon any related development efforts, which could seriously harm our business and operations.

We may become involved in disputes with Astellas, NanoString or any potential future collaborators over intellectual property ownership, and publications by our research collaborators and scientific advisors could impair our ability to obtain patent protection or protect our proprietary information, which, in either case, could have a significant impact on our business.

Inventions discovered under research, material transfer or other such collaboration agreements, including the Astellas Collaboration Agreement or NanoString collaboration agreement, may become jointly owned by us and the other party(ies) to such agreements in some cases and the exclusive property of one of the parties in other cases. Under some circumstances, it may be difficult to determine who owns a particular invention, or whether it is jointly owned, and disputes could arise regarding ownership of those inventions. These disputes could be costly and time consuming and an unfavorable outcome could have a significant adverse effect on our business if we were not able to protect or license rights to these inventions. In addition, our research collaborators and scientific advisors generally have contractual rights to publish our data and other proprietary information, subject to our prior review. Publications by our research collaborators and scientific advisors containing such information, either with our permission or in contravention of the terms of their agreements with us, may impair our ability to obtain patent protection or protect our proprietary information, which could significantly harm our business.

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Trade secrets may not provide adequate protection for our business and technology.

We also rely on trade secrets to protect our technology, especially where we believe patent protection is not appropriate or obtainable. However, trade secrets are difficult to protect. While we use reasonable efforts to protect our trade secrets, our or any potential collaborators’ employees, consultants, contractors or scientific and other advisors may unintentionally or willfully disclose our information to competitors. If we were to enforce a claim that a third party had illegally obtained and was using our trade secrets, our enforcement efforts would be expensive and time consuming, and the outcome would be unpredictable. In addition, courts outside the United States are sometimes less willing to protect trade secrets. Moreover, if our competitors independently develop equivalent knowledge, methods or know-how, it will be more difficult or impossible for us to enforce our rights and our business could be harmed.

Significant disruptions of information technology systems or breaches of data security could adversely affect our business.

Our business is increasingly dependent on critical, complex and interdependent information technology systems to record and maintain financial, clinical trial, safety, laboratory and other corporate records. The size and complexity of our computerized information systems make them vulnerable to breakdown, malicious intrusion, catastrophic events, computer viruses, and human error. We have experienced at least one successful intrusion into our computer systems, and although it did not have a material adverse effect on our operations, there can be no assurance of a similar result in the future as cyberattacks are increasing in their frequency, sophistication and intensity.

We have developed systems and processes that are designed to protect our information and prevent data loss and other security breaches, including systems and processes designed to reduce the impact of a security breach; however, such measures cannot provide absolute security, and we have taken and are continually taking additional security measures to protect against any future intrusion, including employee training. Moreover, the prevalent use of mobile devices that access our systems and confidential information and our relationships with third-party vendors, who may or could have access to our confidential information, increases the risk of data security breaches.

A data or security breach of our systems, or that of our third-party vendors, such as third-party clinical research organizations, third-party clinical manufacturing organization, clinical trial sites, and administrators of our corporate employee benefit plans or of our current and potential future collaboration partners, could lead to public exposure of personal information of our employees, clinical trial patients, customers and other business partners, modification of or prevent us from accessing our clinical trial databases, or the loss of trade secrets or other intellectual property.

If we or our third-party vendors or business partners experience significant data security breaches, we could suffer harm to our reputation, be compelled to comply with federal and/or state breach notification laws and foreign law equivalents, be subjected to liability under laws and regulations that protect personal data, be subjected to mandatory corrective action or government enforcement action, need to verify the correctness of clinical trial database contents, or be exposed to litigation claims.  In addition, because these breaches and other inappropriate access can be difficult to detect, any delay in identifying them may lead to increased harm of the type described above.  Prolonged disruption would divert management’s attention and could result in a delay to the development of our product candidate.

While we do carry some insurance for these types of claims, our insurance may not be sufficient in type or amount.

Risks generally associated with our company-wide implementation of an enterprise resource planning (ERP) system may adversely affect our business and results of operations or the effectiveness of our internal controls over financial reporting.

We commenced implementation of a company-wide ERP system to upgrade certain existing business, operational, and financial processes. ERP implementations are typically complex and time-consuming projects that may require substantial time and resources to complete. Our results of operations could be adversely affected if we experience delays or cost overruns during the ERP implementation process, or if the ERP system or associated process changes do not give rise to the benefits that we expect.

Risks Related to the Pharmaceutical Industry, Including the Activities of Medivation, Inc.

*Our industry is highly regulated by the FDA and comparable foreign regulatory agencies. We must comply with extensive, strictly enforced regulatory requirements to develop, obtain, and maintain marketing approval for any of our product candidates.

Securing FDA approval requires the submission of extensive preclinical and clinical data and supporting information for each therapeutic indication to establish the product candidate’s safety and efficacy for its intended use. It takes years to complete the testing of a new drug, biologic or medical device and development delays and/or failure can occur at any stage of testing. Any of our present

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and future clinical trials may be delayed, halted or approval of any of our products may be delayed or may not be obtained due to any of the following:

In addition, information generated during the clinical trial process is susceptible to varying interpretations that could delay, limit, or prevent regulatory approval at any stage of the approval process. Moreover, early positive preclinical or clinical trial results may not be replicated in later clinical trials. Failure to demonstrate adequately the quality, safety and efficacy of any of our product candidates would delay or prevent regulatory approval of the applicable product candidate. There can be no assurance that if clinical trials are completed, either we or our collaborative partners will submit applications for required authorizations to manufacture or market potential products or that any such application will be reviewed and approved by appropriate regulatory authorities in a timely manner, if at all.

*We may be subject, directly or indirectly, to federal and state healthcare fraud and abuse and false claims laws and regulations. Prosecutions under such laws have increased in recent years and we may become subject to such litigation. If we are unable to comply, or have not fully complied, with such laws, we could face substantial penalties.

Commercialization of drugs and biologics that receive FDA approval are subject, directly or indirectly, to various state and federal fraud and abuse laws, including, without limitation, the federal Anti-Kickback Statute and federal False Claims Act and the state law equivalents of such laws. These laws may impact, among other things, our sales, marketing, and education programs.

The federal Anti-Kickback Statute prohibits persons and entities from knowingly and willingly soliciting, offering, receiving or providing remuneration, directly or indirectly, in exchange for or to induce either the referral of an individual, or the furnishing or arranging for a good or service, for which payment may be made under a federal healthcare program such as the Medicare and Medicaid programs. The Anti-Kickback Statute is broad, and despite a series of narrow regulatory safe harbors and statutory exceptions, prohibits many arrangements and practices that are lawful in businesses outside of the healthcare industry. A focus of the Office of Inspector General, or OIG, of the U.S. Department of Health and Human Services has been financial assistance programs which provide financial assistance to patients who cannot afford their cost-sharing obligations for life saving prescription drugs. Grants made by pharmaceutical companies, including by us through our partner Astellas, to independent charities and non-profit organizations may be subsequently determined by the OIG to be an indirect remuneration to induce the recommendation or to arrange for the purchase of the pharmaceutical company’s product. Penalties for violations of the federal Anti-Kickback Statute include, among other things, criminal and administrative penalties and civil sanctions such as fines, imprisonment and possible exclusion from Medicare, Medicaid and other federal healthcare programs. Many states have adopted laws similar to the federal Anti-Kickback Statute, some of which apply to the referral of patients for healthcare items or services reimbursed by any source, including private insurance programs.

The federal False Claims Act prohibits persons and entities from knowingly filing, or causing to be filed, a false claim, or the knowing use of false statements, to obtain payment from the federal government. Suits filed under the False Claims Act, known as “qui tam” actions, can be brought by any individual on behalf of the government, and such individuals, commonly known as “whistleblowers,” may share in a proportion of any amounts paid by the entity to the government in fines or settlement. The frequency of filing qui tam actions has increased significantly in recent years, causing greater numbers of biotechnology and pharmaceutical

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companies to have to defend False Claims Act actions. When it is determined that an entity has violated the False Claims Act, the entity may be required to pay up to three times the actual damages sustained by the government, plus civil penalties for each separate false claim. Various states have also enacted laws modeled after the federal False Claims Act. Although we have developed, implemented, and continue to improve a program for compliance with all federal and state laws, we cannot guarantee that our compliance program will be sufficient or effective, that our employees will comply with our policies and that our employees will notify us of any violation of our policies, that we will have the ability to take appropriate and timely corrective action in response to any such violation, or that we will make decisions and take actions that will necessarily limit or avoid liability for whistleblower claims that individuals, such as employees or former employees, may bring against us or that governmental authorities may prosecute against us based on information provided by individuals. If one or more individuals bring a whistleblower claim against us or if a governmental authority prosecutes a claim against us on the basis of information provided by one or more individuals, and if we are found liable and a fine, injunction, Corporate Integrity Agreement and/or similar government oversight program is imposed on us or we agree to pay a fine or accept an injunction, Corporate Integrity Agreement and/or similar government oversight program in settlement of the claim, they could have a material adverse effect on our financial condition and impair or prevent us from conducting our business. In addition, the costs and fees associated with defending a whistleblower claim would be significant.

We may also be subject to federal criminal healthcare fraud statutes that were created by the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act of 2009, or HITECH. The HIPAA health care fraud statute prohibits, among other things, knowingly and willfully executing, or attempting to execute a scheme to defraud any healthcare benefit program, including private payors. A violation of this statute is a felony and may result in fines, imprisonment, and/or exclusion from government sponsored programs. The HIPAA false statements statute prohibits, among other things, knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false, fictitious or fraudulent statement or representation in connection with the delivery of or payment for healthcare benefits, items or services. A violation of this statute is a felony and may result in fines and/or imprisonment.

We, and our business activities, are also subject to the federal Physician Payments Sunshine Act, which is within the Patient Protection and Affordable Care Act, as amended by the Health Care Education and Reconciliation Act, (collectively, “PPACA”). The federal Physician Payments Sunshine Act, and its implementing regulations, require certain manufacturers of drugs, devices, biological, and medical supplies for which payment is available under Medicare, Medicaid, or the Children’s Health Insurance Program (with certain exceptions) to report annually information related to certain payments or other transfers of value provided to physicians and teaching hospitals and other healthcare providers. In addition, there has been a recent trend of increased federal and state regulation on payments made to physicians. Certain states mandate implementation of commercial compliance programs, impose restrictions on drug manufacturer marketing practices, and/or the tracking and reporting of gifts, compensation and remuneration to physicians.

We are unable to predict whether we could be subject to actions under any of these or other fraud and abuse laws, or the impact of such actions. If we are found to be in violation of any of the laws described above and other applicable state and federal fraud and abuse laws, we may be subject to penalties, including civil and criminal penalties, damages, fines, exclusion from government healthcare reimbursement programs and the curtailment or restructuring of our operations, any of which could have a material adverse effect on our business and results of operations.

We could be adversely affected by violations of the U.S. Foreign Corrupt Practices Act and other worldwide anti-bribery laws.

We are subject to the U.S. Foreign Corrupt Practices Act, or FCPA, which generally prohibits companies and their intermediaries from making payments to non-U.S. government officials for purpose of obtaining or retaining business or securing any other improper advantage. We are also subject to similar anti-bribery laws in the jurisdictions in which we operate. Failure to comply with the FCPA or related laws governing the conduct of business with foreign government entities could disrupt our business and lead to severe criminal and civil penalties, including criminal and civil fines, denial of government reimbursement for our products and exclusion from participation in government healthcare programs. Other remedial measures could include further changes or enhancements to our procedures, policies, and controls and potential personnel changes and/or disciplinary actions, any of which could have a material adverse impact on our business, financial condition, results of operations and liquidity. We could also be affected by any allegation that we, or any third-party vendors that we rely on to perform key product development tasks, violated such laws.

If the FDA or other applicable regulatory authorities approve generic products that compete with any of our products or product candidates, the sales of our products or product candidates may be adversely affected.

Once an NDA is approved, the product covered thereby becomes a “listed drug” which, in turn can be relied upon by potential competitors in support of an approval of an ANDA or 505(b)(2) application. U.S. laws and other applicable policies provide incentives to manufacturers to create modified, non-infringing versions of a drug to facilitate the approval of an ANDA or other application for a

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generic substitute. These manufacturers might only be required to conduct a relatively inexpensive study to show that their product has the same active ingredient(s), dosage form, strength, route of administration, and conditions of use, or labeling, as our product or product candidate and that the generic product is bioequivalent to ours, meaning it is absorbed in the body at the same rate and to the same extent as our product or product candidate. These generic equivalents, which must meet the same quality standards as branded pharmaceuticals, would be significantly less costly than ours to bring to market and companies that produce generic equivalents are generally able to offer their products at lower prices. Thus, after the introduction of a generic competitor, a significant percentage of sales of any branded product is typically lost to the generic product. Accordingly, competition from generic equivalents to our products or product candidates would materially adversely impact our revenues, profitability and cash flows and substantially limit our ability to obtain a return on the investments that we have made in our product candidates.

To the extent that we receive regulatory approval to market biological products in the future, we will face competition from biosimilar products. A growing number of companies have announced their intention to develop biosimilar products, some of which could potentially compete with our product candidates. Because of the abbreviated pathway for approval of biosimilars in the United State and abroad, we may in the future face greater competition from biosimilar products. This additional competition could have a material adverse effect on our business and results of operations.

Healthcare reform initiatives and other third party cost-containment pressures could cause us to sell our products at lower prices, resulting in decreased revenues.

The United States and some foreign jurisdictions have enacted or are considering enacting a number of legislative and regulatory proposals to change the healthcare system in ways that could affect our ability to profitably sell XTANDI and other product candidates should they receive marketing approval. Among policy makers and payors in the United States and elsewhere, there is significant interest in promoting changes in healthcare systems with the stated goals of containing healthcare costs, improving quality and/or expanding access. In the United States, the pharmaceutical industry has been a particular focus of these efforts and has been significantly affected by major legislative initiatives.

In March 2010, the PPACA became law in the United States. PPACA substantially changed and will continue to change the way healthcare is financed by both governmental and private insurers and significantly affects the pharmaceutical industry. The provisions of PPACA most relevant to the pharmaceutical industry include:

We anticipate that the PPACA, as well as other healthcare reform measures that may be adopted in the future, may result in more rigorous coverage criteria or maximum monthly out-of-pocket costs for patients, either of which could put additional downward

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pressure on the price that we receive for any approved product, and could seriously harm our business. Any reduction in reimbursement from Medicare or other government programs may result in a similar reduction in payments from private payors. If we fail to successfully secure and maintain adequate coverage and reimbursement of our products or are significantly delayed in doing so, we will have difficulty achieving market acceptance of our products and expected revenue and profitability which would have a material adverse effect on our business, results of operations and financial condition. In addition, we will face competition from other approved drugs against which we compete, and the marketers of such other drugs are likely to be significantly larger than us and therefore enjoy significantly more negotiating leverage with respect to the individual payors than we may have.

*We could experience adverse outcomes under existing litigation or become subject to product liability or other litigation, which could harm our ability to efficiently and effectively conduct our business, and, if successful, could materially and adversely harm our business and financial condition as a result of the costs of liabilities that may be imposed thereby.

Our business exposes us to the risk of product liability claims that is inherent in the development, manufacturing, distribution and sale of pharmaceutical products. If XTANDI, MDV3800, MDV9300 or any other potential future product candidate harms people, or is alleged to be harmful, we may be subject to costly and damaging product liability claims brought against us by clinical trial participants, consumers, health care providers, corporate partners or others. We have product liability insurance covering commercial sales of XTANDI and our ongoing clinical trials. However, the amount of insurance we maintain may not be adequate to cover all liabilities that we may incur. If we are unable to obtain insurance at an acceptable cost or otherwise protect against potential product liability claims, we may be exposed to significant litigation costs and liabilities, which may materially and adversely affect our business and financial position. If we are sued for injuries allegedly caused by XTANDI, MDV3800, MDV9300 or any other of our current or future product candidates, our litigation costs and liability could exceed our total assets and our ability to pay. Regardless of merit or eventual outcome, liability claims may result in:

In addition, we may from time to time become involved in various lawsuits and legal proceedings which arise in the ordinary course of our business, such as our litigation with the Regents of the University of California, or Regents. See Part II, Item 1, “Legal Proceedings” for additional information on this litigation. Any litigation to which we are subject could require significant involvement of our senior management and may divert management’s attention from our business and operations. An adverse result in any existing litigation, including our litigation with the Regents, or litigation costs associated with any existing or new litigation that may arise from time to time, such as a result of our rejection of the unsolicited proposal from Sanofi to acquire all of our outstanding shares for $52.50 per share, may adversely impact our operating results or financial condition.

Risks Related to Business Acquisitions, Licenses, Investments and Strategic Alliances

We may not be able to successfully integrate MDV3800, MDV9300 or any other potential future product candidates we may acquire or we may otherwise fail to realize their full potential.

A key component of our business strategy is to diversify our product development risk by identifying and acquiring new product opportunities for development such as our recent acquisition of MDV3800 from BioMarin and our earlier license of MDV9300 from CureTech. However, we cannot ensure that we will be able to manage the risks associated with the transfer of development, regulatory and manufacturing activities for the ongoing clinical trials of MDV3800 from BioMarin to us or manage the risks associated with integrating MDV3800 and MDV9300 into our existing business and infrastructure. We may encounter unexpected difficulties during the transfer, integration or further development of MDV3800 or MDV9300, any of which may cause us to expend greater funds and efforts or may slow, delay or limit the progress of MDV3800’s or MDV9300’s development. Unexpected difficulties may further be disruptive to our ongoing development efforts, put a strain on our existing personnel, infrastructure and business and divert management’s time and attention.

For MDV3800, other companies, such as AstraZeneca, Clovis Oncology, AbbVie, and Tesaro are developing PARP inhibitors for various oncology indications, some of which have already been approved and on the market and others which are further along in development than MDV3800, both of which could limit our development opportunities for MDV3800. The competitive environment

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could further compromise our ability to successfully enroll the ongoing clinical trial by limiting the availability of clinical trial investigators, sites and/or patients which could slow, delay or limit the progress of MDV3800’s development.

As a result of these or other problems and risks, we may never receive regulatory approval for MDV3800 or MDV9300, we may not realize the full potential or we may never generate significant value or revenues from these assets.

Business acquisitions, licenses, investments and strategic alliances could disrupt our operations and may expose us to increased costs and unexpected liabilities.

We may acquire or make investments in other companies, enter into other strategic relationships, or in-license technologies, such as our acquisition of MDV3800 and license of MDV9300. To do so, we may use cash, issue equity that could dilute our current stockholders, or incur debt or assume indebtedness. These transactions involve numerous risks, including but not limited to:

As a result of these or other problems and risks, businesses we acquire or invest in may not produce the revenues, earnings or business synergies that we anticipated, acquired or licensed technologies may not result in regulatory approvals, and acquired or licensed commercial products may not perform as expected. As a result, we may incur higher costs and realize lower revenues than we had anticipated. We cannot assure you that any acquisitions or investments we have made or may make in the future will be successfully identified and completed or that, if completed, the acquired business, licenses, investments, products, or technologies will generate sufficient revenue to offset the negative costs or other negative effects on our business. Failure to manage effectively our growth through acquisition or in-licensing transactions could adversely affect our growth prospects, business, results of operations, financial condition, and cash flow.

Funding may not be available for us to make acquisitions, investments, strategic alliances or in-license technologies in order to grow our business.

We have made and anticipate that we may continue to engage in strategic transactions to grow our business through acquisitions, investments, strategic alliances or in-licensing of technologies.  In particular, we may choose to partner in certain geographies to commercialize our successful product candidates.  Our growth plans rely, in part, on the successful identification and completion of these various strategic transactions. At any particular time, we may need to raise substantial additional cash or issue additional equity to finance such transactions, in addition to any amounts available from operations or under our Revolving Credit Facility. There is no assurance that we will be able to secure additional funding on acceptable terms, or at all, or obtain stockholder approvals necessary to issue additional equity to finance such transactions. If we are unsuccessful in obtaining financing, our business would be adversely affected.

Our consolidated financial statements may be impacted in future periods based on the accuracy of our valuations of our acquired businesses and other agreements.

Certain of our asset acquisition or license agreements may be accounted for as a business combination.  Accounting for business combinations may involve complex and subjective valuations of the assets and liabilities recorded, and in some instances contingent consideration, which is recorded in our consolidated financial statements pursuant to the standards applicable for business

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combinations in accordance with accounting principles generally accepted in the United States. Differences between the inputs and assumptions used in the valuations and actual results experienced at a later date could have a material effect on our consolidated financial statements in future periods.

We have substantial intangible assets and goodwill as a result of the acquisition of MDV3800 from BioMarin and the license of MDV9300 from CureTech. A significant impairment or write-down of intangible assets and/or goodwill would have a material adverse effect on our consolidated financial statements.

We are required to perform an annual, or in certain situations a more frequent, assessment of intangible assets and goodwill for possible impairment for accounting purposes. We recorded significant intangible assets and goodwill as a result of the CureTech and BioMarin transactions during the years ended December 31, 2014 and 2015, respectively. At March 31, 2016, we had intangible assets and goodwill of approximately $662.9 million, or approximately 50% of our total assets. During the fourth quarter of 2015, we recorded a $30.0 million impairment charge related to our IPR&D asset for MDV9300.  If our development activities with respect to IPR&D for acquired product candidates are not successful in future periods, we may be required to incur further non-cash impairment charges that could materially adversely affect our consolidated results of operations or our recorded assets and liabilities.

Risks Related to Ownership of Our Common Stock

*Our stock price has been and may continue to be volatile and our stockholders’ investment in our common stock could decline in value.

The market prices for our securities and those of other life sciences companies have been highly volatile and often unrelated or disproportionate to the operating performance of those companies, and may continue to be highly volatile in the future. There has been particular volatility in the market prices of securities of life sciences companies because of problems or successes in a given market segment or because investor interest has shifted to other segments. These broad market and industry factors may cause the market price of our common stock to decline, regardless of our operating performance. We have no control over this volatility and can only focus our efforts on our own operations, and even these may be affected due to the state of the capital markets.

The following factors, in addition to other risk factors described herein, may have a significant impact on the market price of our common stock:

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These factors and fluctuations, as well as political and other market conditions, may adversely affect the market price of our common stock. Securities-related class action litigation is often brought against a company following periods of volatility in the market price of its securities or offers by third parties to acquire the outstanding shares of a company. Securities-related litigation, whether with or without merit, could result in substantial costs and divert management’s attention and financial resources, which could harm our business and financial condition, as well as the market price of our common stock. Additionally, volatility or lack of positive performance in our stock price may adversely affect our ability to retain or recruit key employees, all of whom have been or will be granted equity awards as a part of their compensation.

If our operating results are below the expectations of securities analysts, the market price of our common stock could decline.

Various securities analysts follow our financial results and issue reports on us. These reports include information about our historical financial results, our projected development expenses, as well as the analysts’ estimates of our future performance. The analysts’ estimates are based upon their own opinions and are often different from our estimates or expectations. We expect our projected development expenses to increase as we advance our product pipeline and grow our infrastructure.  While management believes these expenses are an investment in the company’s long-term prospects, such expenses could substantially reduce our near-term earnings below the expectations of security analysts.  If our operating results are below their expectations, the market value of our common stock could decline, perhaps substantially.

We do not intend to pay cash dividends on our common stock for the foreseeable future.

We do not expect for the foreseeable future to pay cash dividends on our common stock. Any future determination to pay cash dividends on or repurchase shares of our common stock will be at the discretion of our board of directors and will depend upon, among other factors, our success in completing sales or partnerships of our programs, our results of operations, financial condition, capital requirements, contractual restrictions (such as our Revolving Credit Facility) and applicable law.

*Provisions of our corporate charter documents, our stockholder rights plan and Delaware law could make it more difficult for a third party to acquire us, even if the offer may be considered beneficial by our stockholders.

Provisions of the Delaware General Corporation Law could discourage potential acquisition proposals and could delay, deter or prevent a change in control. The anti-takeover provisions of the Delaware General Corporation Law impose various impediments to the ability of a third party to acquire control of us, even if a change in control would be beneficial to our existing stockholders. Specifically, Section 203 of the Delaware General Corporation Law, unless its application has been waived, provides certain default anti-takeover protections in connection with transactions between us and an “interested stockholder.” Generally, Section 203 prohibits stockholders who, alone or together with their affiliates and associates, own more than 15% of the subject company from engaging in certain business combinations for a period of three years following the date that the stockholder became an interested stockholder of such subject company without approval of the board or the vote of two-thirds of the shares held by the independent stockholders. Our board of directors has also adopted a stockholder rights plan, or “poison pill,” which would significantly dilute the ownership of a hostile acquirer. Additionally, provisions of our amended and restated certificate of incorporation and bylaws could deter, delay or prevent a third party from acquiring us.  For instance, our board also has the authority to issue, in certain circumstances, without stockholder approval, preferred stock with such terms as the board of directors may determine.  We believe that these provisions benefit our stockholders, although they may in certain circumstances make it more difficult or time consuming for an acquirer to effect a change of control or an acquisition of the company.

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We may issue additional shares of our common stock or instruments convertible into shares of our common stock, which could cause our stock price to fall and cause dilution to existing stockholders. In addition, a sale of a substantial number of shares of our common stock in the public market could cause the market price of our common stock to decline significantly.

We may from time to time issue additional shares of common stock or other instruments convertible into, or exchangeable or exercisable for, shares of our common stock, including in connection with potential in-licensing and acquisition transactions. The issuance of additional shares of our common stock would dilute the ownership interests of existing holders of our common stock.

The issuance of a substantial number of shares of our common stock, the sale of a substantial number of shares of our common stock that were previously restricted from sale in the public market, or the perception that these issuances or sales might occur, could depress the market price of our common stock. As a result, investors may not be able to sell their shares of our securities at a price equal to or above the price they paid to acquire them.

Furthermore, the issuance of additional shares of our common stock, or the perception that such issuances might occur, could impair our ability to raise capital through the sale of additional equity securities.

We rely on Astellas to timely deliver important financial information relating to net sales of XTANDI. In the event that this information is inaccurate, incomplete, or not timely, we may not be able to timely or fully meet our financial reporting obligations as required by the SEC.

Under the Astellas Collaboration Agreement, Astellas has exclusive control over the flow of information relating to net sales of XTANDI that we are dependent upon to meet our SEC reporting obligations. Astellas is required under the Astellas Collaboration Agreement to provide us with timely and accurate financial data related to net sales of XTANDI so that we may meet our reporting obligations under federal securities laws. In the event that Astellas fails to provide us with timely and accurate information, we may incur significant liability with respect to federal securities laws, our internal controls and procedures under the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, may be inadequate, and we could be required to record adjustments in future periods, any of which could adversely affect the market price of our common stock and subject us to securities litigation.

To the extent that we create any joint ventures or have any variable interest entities for which we are required to consolidate, we would need to rely on those entities to timely deliver important financial information to us. In the event that the financial information is inaccurate, incomplete, or not timely, we would not be able to meet our financial reporting obligations as required by the SEC.

While we currently do not have any joint ventures or variable interest entities that we are required to consolidate, to the extent we create such joint ventures or variable interest entities for which we would be required to consolidate and the financial statements of such entities are not prepared by us, we will not have direct control over their financial statement preparation. As a result, we will, for our financial reporting, depend on what these entities report to us, which could result in us adding monitoring and audit processes, which could increase the difficulty of implementing and maintaining adequate controls over our financial processes and reporting in the future. This may be particularly true when such entities do not have sophisticated financial accounting processes in place, or where we are entering into new relationships at a rapid pace, straining our integration capacity. Additionally, if we do not receive the information from the joint venture or variable interest entity on a timely basis, this could cause delays in our external reporting obligations as required by the SEC.

Changes in, or interpretations of, accounting principles could have a significant impact on our financial position and results of operations.

We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the United States of America, or U.S. GAAP. These principles are subject to interpretation by the SEC and various other bodies formed to interpret and create appropriate accounting principles. A change in these principles can have a significant effect on our reported results and may even retroactively affect previously reported transactions.

For example, the Financial Accounting Standards Board, or FASB, is currently working together with the International Accounting Standards Board, or IASB, on several projects to further align accounting principles and facilitate more comparable financial reporting between companies who are required to follow U.S. GAAP under SEC regulations and those who are required to follow International Financial Reporting Standards outside of the United States. These efforts by the FASB and the IASB may result in different accounting principles under U.S. GAAP that may result in materially different financial results for us in areas including, but not limited to, principles for recognizing revenue and lease accounting.

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Failure to maintain effective internal control over financial reporting in accordance with the Sarbanes-Oxley Act could have a material adverse effect on our stock price.

Section 404 of the Sarbanes-Oxley Act and the related rules and regulations of the SEC require an annual management assessment of the effectiveness of our internal control over financial reporting and a report by our independent registered public accounting firm attesting to the effectiveness of our internal control over financial reporting at the end of the fiscal year. If we fail to maintain the adequacy of our internal control over financial reporting, as such standards are modified, supplemented or amended from time to time, we may not be able to ensure that we can conclude on an ongoing basis that we have effective control over financial reporting in accordance with the Sarbanes-Oxley Act and the related rules and regulations of the SEC. If we cannot in the future favorably assess, or our independent registered public accounting firm is unable to provide an unqualified attestation report on, the effectiveness of our internal control over financial reporting, investor confidence in the reliability of our financial reports may be adversely affected, which could have a material adverse effect on our stock price.

 

 

See the Exhibit List which follows the signature page of this Quarterly Report on Form 10-Q, which is incorporated by reference here.

 

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

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