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EX-10.1 - EX-10.1 - MEDIVATION, INC.mdvn-ex101_336.htm
EX-31.2 - EX-31.2 - MEDIVATION, INC.mdvn-ex312_97.htm
EX-32.1 - EX-32.1 - MEDIVATION, INC.mdvn-ex321_96.htm
EX-10.7 - EX-10.7 - MEDIVATION, INC.mdvn-ex107_333.htm
EX-10.6 - EX-10.6 - MEDIVATION, INC.mdvn-ex106_334.htm
EX-10.5 - EX-10.5 - MEDIVATION, INC.mdvn-ex105_335.htm
EX-31.1 - EX-31.1 - MEDIVATION, INC.mdvn-ex311_98.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2016

or

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                      

COMMISSION FILE NUMBER: 001-32836

 

MEDIVATION, INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

13-3863260

(State or other jurisdiction of

incorporation or organization)

(IRS Employer

identification No.)

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.

 

Large accelerated filer

x

 

Accelerated filer

o

 

 

 

 

 

Non-accelerated filer

o

(Do not check if a smaller reporting company)

Smaller reporting company

o

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.

 

 

 

 


MEDIVATION, INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTER ENDED MARCH 31, 2016

TABLE OF CONTENTS

 

PART I — FINANCIAL INFORMATION

3

 

 

 

 

ITEM 1. FINANCIAL STATEMENTS.

3

 

 

 

 

 

 

CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited).

3

 

 

 

 

 

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited).

4

 

 

 

 

 

 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (unaudited).

5

 

 

 

 

 

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited).

6

 

 

 

 

 

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited).

7

 

 

 

 

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

22

 

 

 

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

29

 

 

 

 

ITEM 4. CONTROLS AND PROCEDURES.

30

 

 

 

PART II — OTHER INFORMATION

30

 

 

 

 

ITEM 1. LEGAL PROCEEDINGS

30

 

 

 

 

ITEM 1A. RISK FACTORS

31

 

 

 

 

ITEM 6. EXHIBITS.

55

 

 

 

 


PART I. FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

MEDIVATION, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

(unaudited)

 

 

 

March 31,

2016

 

 

December 31,

2015

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

317,361

 

 

$

225,853

 

Receivable from collaboration partner

 

 

186,593

 

 

 

391,558

 

Prepaid expenses and other current assets

 

 

24,416

 

 

 

15,877

 

Restricted cash

 

 

1,140

 

 

 

930

 

Total current assets

 

 

529,510

 

 

 

634,218

 

Property and equipment, net

 

 

59,849

 

 

 

58,142

 

Intangible assets

 

 

644,299

 

 

 

644,299

 

Deferred income tax assets

 

 

53,148

 

 

 

57,011

 

Restricted cash, net of current

 

 

11,996

 

 

 

12,206

 

Goodwill

 

 

18,643

 

 

 

18,643

 

Other non-current assets

 

 

8,037

 

 

 

7,072

 

Total assets

 

$

1,325,482

 

 

$

1,431,591

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable, accrued expenses and other current liabilities

 

$

121,995

 

 

$

186,203

 

Borrowings under Revolving Credit Facility

 

 

 

 

 

75,000

 

Contingent consideration

 

 

4,924

 

 

 

4,900

 

Current portion of build-to-suit lease obligation

 

 

110

 

 

 

 

Total current liabilities

 

 

127,029

 

 

 

266,103

 

Contingent consideration

 

 

268,303

 

 

 

262,368

 

Build-to-suit lease obligation, excluding current portion

 

 

17,278

 

 

 

17,406

 

Other non-current liabilities

 

 

12,658

 

 

 

13,035

 

Total liabilities

 

 

425,268

 

 

 

558,912

 

Commitments and contingencies (Note 13)

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Preferred stock, $0.01 par value per share; 1,000,000 shares authorized; no shares

   issued and outstanding

 

 

 

 

 

 

Common stock, $0.01 par value per share; 340,000,000 shares authorized;

   164,581,922 and 163,905,342 shares issued and outstanding at March 31, 2016

   and December 31, 2015, respectively

 

 

1,646

 

 

 

1,639

 

Additional paid-in capital

 

 

707,870

 

 

 

684,841

 

Accumulated other comprehensive loss

 

 

(317

)

 

 

 

Retained earnings

 

 

191,015

 

 

 

186,199

 

Total stockholders’ equity

 

 

900,214

 

 

 

872,679

 

Total liabilities and stockholders’ equity

 

$

1,325,482

 

 

$

1,431,591

 

 

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

 

3


MEDIVATION, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)

 

 

 

Three Months Ended

March 31,

 

 

 

2016

 

 

2015

 

Collaboration revenue

 

$

182,497

 

 

$

129,188

 

Operating expenses:

 

 

 

 

 

 

 

 

Research and development expenses

 

 

77,587

 

 

 

44,676

 

Selling, general and administrative expenses

 

 

96,827

 

 

 

83,939

 

Total operating expenses

 

 

174,414

 

 

 

128,615

 

Income from operations

 

 

8,083

 

 

 

573

 

Other income (expense), net:

 

 

 

 

 

 

 

 

Interest expense

 

 

(680

)

 

 

(5,608

)

Other, net

 

 

(209

)

 

 

137

 

Total other income (expense), net

 

 

(889

)

 

 

(5,471

)

Income (loss) before income tax (expense) benefit

 

 

7,194

 

 

 

(4,898

)

Income tax (expense) benefit

 

 

(2,378

)

 

 

1,780

 

Net income (loss)

 

$

4,816

 

 

$

(3,118

)

Basic net income (loss) per common share

 

$

0.03

 

 

$

(0.02

)

Diluted net income (loss) per common share

 

$

0.03

 

 

$

(0.02

)

Weighted average common shares used in the calculation of basic net income (loss) per

   common share

 

 

164,247

 

 

 

156,637

 

Weighted average common shares used in the calculation of diluted net income (loss) per

   common share

 

 

168,397

 

 

 

156,637

 

 

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

 

 

4


MEDIVATION, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands)

(unaudited)

 

 

 

Three Months Ended

March 31,

 

 

 

2016

 

 

2015

 

Net income (loss)

 

$

4,816

 

 

$

(3,118

)

Other comprehensive loss:

 

 

 

 

 

 

 

 

Unrealized losses on cash flow hedges, net of tax impact of $175 and $-- for the

   three months ended March 31, 2016 and 2015, respectively

 

 

(317

)

 

 

 

Other comprehensive loss

 

 

(317

)

 

 

 

Comprehensive income (loss)

 

$

4,499

 

 

$

(3,118

)

 

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

 

 

5


MEDIVATION, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

 

 

Three Months Ended

March 31,

 

 

 

2016

 

 

2015

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income (loss)

 

$

4,816

 

 

$

(3,118

)

Adjustments for non-cash operating items:

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

14,211

 

 

 

13,372

 

Change in fair value of contingent purchase consideration

 

 

5,959

 

 

 

4,000

 

Depreciation on property and equipment

 

 

2,416

 

 

 

1,531

 

Change in deferred income taxes

 

 

2,696

 

 

 

(1,402

)

Amortization of debt discount and debt issuance costs

 

 

85

 

 

 

3,910

 

Excess tax benefits from stock-based compensation

 

 

(2,490

)

 

 

 

Amortization of deferred revenue

 

 

 

 

 

(1,411

)

Other non-cash items

 

 

 

 

 

73

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Receivable from collaboration partner

 

 

204,965

 

 

 

58,124

 

Prepaid expenses and other current assets

 

 

(6,050

)

 

 

(520

)

Other non-current assets

 

 

(1,049

)

 

 

(1,335

)

Accounts payable, accrued expenses and other current liabilities

 

 

(26,869

)

 

 

(17,587

)

Interest payable

 

 

 

 

 

1,698

 

Current taxes payable

 

 

(32,565

)

 

 

 

Other non-current liabilities

 

 

(438

)

 

 

(113

)

Net cash provided by operating activities

 

 

165,687

 

 

 

57,222

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(9,328

)

 

 

(956

)

Change in restricted cash

 

 

 

 

 

(1,574

)

Net cash used in investing activities

 

 

(9,328

)

 

 

(2,530

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Principal repayment of borrowings under Revolving Credit Facility

 

 

(75,000

)

 

 

 

Proceeds from issuance of common stock under equity incentive and stock

   purchase plans

 

 

7,677

 

 

 

11,502

 

Excess tax benefits from stock-based compensation

 

 

2,490

 

 

 

 

Reduction of build-to-suit lease obligation

 

 

(18

)

 

 

(227

)

Principal repayment of Convertible Notes

 

 

 

 

 

(8

)

Net cash (used in) provided by financing activities

 

 

(64,851

)

 

 

11,267

 

Net increase in cash and cash equivalents

 

 

91,508

 

 

 

65,959

 

Cash and cash equivalents at beginning of period

 

 

225,853

 

 

 

502,677

 

Cash and cash equivalents at end of period

 

$

317,361

 

 

$

568,636

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 

 

Non-cash investing and financing activities:

 

 

 

 

 

 

 

 

Property and equipment expenditures incurred but not yet paid

 

$

964

 

 

$

918

 

Interest capitalized during construction period for build-to-suit lease transactions

 

 

 

 

$

527

 

 

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

 

6


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

7


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.

8


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.

 

 

9


NOTE 3. COLLABORATION AGREEMENT

(a) Collaboration Agreement with Astellas

In October 2009, the Company entered into a collaboration agreement with Astellas, or the Astellas Collaboration Agreement, pursuant to which it is collaborating with Astellas to develop and commercialize XTANDI globally for all indications, dosages, and formulations of enzalutamide. Under the agreement, decision making and economic participation differs between the U.S. market and the ex-U.S. market. In the United States, decisions are generally made by consensus, pre-tax profits and losses are shared equally, and, subject to certain exceptions, development and commercialization costs (including cost of goods sold and the royalty on net sales payable to The Regents of the University of California (“UCLA” or “the Regents”) under the Company’s license agreement with UCLA) are also shared equally. The primary exceptions to equal cost sharing in the U.S. market are that each party is responsible for its own commercial full-time equivalent, or FTE, costs, and that development costs supporting marketing approvals in both the United States and either Europe or Japan are borne one-third by the Company and two-thirds by Astellas. The Company and Astellas are co-promoting XTANDI in the U.S. market, with each company providing half of the sales and medical affairs effort in support of the product. Both the Company and Astellas are entitled to receive a fee for each qualifying detail made by its respective sales representatives. Outside of the United States, decisions are generally made by Astellas and all development and commercialization costs (including cost of goods sold and the royalty on net sales payable to UCLA) are borne by Astellas. Astellas retains all ex-U.S. profits and losses, and pays the Company a tiered royalty ranging from the low teens to the low twenties as a percentage of the aggregate net sales of XTANDI outside of the United States, or ex-U.S. XTANDI net sales. Astellas has sole responsibility for promoting XTANDI outside of the United States and for recording all XTANDI net sales both inside and outside of the United States. Both the Company and Astellas have agreed not to commercialize certain other products having a similar mechanism of action (as defined by the Astellas Collaboration Agreement) as XTANDI for the treatment of prostate cancer for a specified time period, subject to certain exceptions.

Under the Astellas Collaboration Agreement, Astellas paid the Company a non-refundable, upfront cash payment of $110.0 million in the fourth quarter of 2009. The Company was also eligible to receive up to $335.0 million in development milestone payments and up to $320.0 million in sales milestone payments under the Astellas Collaboration Agreement. As of the fourth quarter of 2015, the Company had earned all of the development and sales milestone payments under the Astellas Collaboration Agreement.

The Company and Astellas are each permitted to terminate the Astellas Collaboration Agreement for an uncured material breach by the other party or for the insolvency of the other party. Astellas has a right to terminate the Astellas Collaboration Agreement unilaterally by advance written notice to the Company. Following any termination of the Astellas Collaboration Agreement in its entirety, all rights to develop and commercialize XTANDI will revert to the Company, and Astellas will grant a license to the Company to enable it to continue such development and commercialization. In addition, except in the case of a termination by Astellas for the Company’s material breach, Astellas will supply XTANDI to the Company during a specified transition period.

Unless terminated earlier by the Company or Astellas pursuant to the terms thereof, the Astellas Collaboration Agreement will remain in effect: (a) in the United States, until such time as Astellas notifies the Company that Astellas has permanently stopped selling products covered by the Astellas Collaboration Agreement in the United States; and (b) in each other country of the world, on a country-by-country basis, until such time as (i) products covered by the Astellas Collaboration Agreement cease to be protected by patents or regulatory exclusivity in such country and (ii) commercial sales of generic equivalent products have commenced in such country.

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

(b) Collaboration Revenue

Collaboration revenue was as follows:

 

 

 

Three Months Ended

March 31,

 

 

 

2016

 

 

2015

 

Collaboration revenue:

 

 

 

 

 

 

 

 

Related to U.S. XTANDI net sales

 

$

153,793

 

 

$

112,010

 

Related to ex-U.S. XTANDI net sales

 

 

28,704

 

 

 

15,767

 

Related to upfront and milestone payments

 

 

 

 

 

1,411

 

Total

 

$

182,497

 

 

$

129,188

 

10


 

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:

 

 

 

Three Months Ended

March 31,

 

 

 

2016

 

 

2015

 

U.S. XTANDI net sales (as reported by Astellas)

 

$

307,586

 

 

$

224,020

 

Shared U.S. development and commercialization costs

 

 

(130,583

)

 

 

(110,313

)

Pre-tax U.S. profit

 

$

177,003

 

 

$

113,707

 

Medivation’s share of pre-tax U.S. profit

 

$

88,501

 

 

$

56,853

 

Reimbursement of Medivation’s share of shared U.S. costs

 

 

65,292

 

 

 

55,157

 

Collaboration revenue related to U.S. XTANDI net sales

 

$

153,793

 

 

$

112,010

 

 

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.

11


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:

 

 

 

March 31, 2016

 

 

 

Asset Derivatives

 

 

Liability Derivatives

 

 

 

Classification

 

Fair Value

 

 

Classification

 

Fair Value

 

Derivatives designated as hedges:

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency exchange contracts

 

Other current assets

 

 

 

 

Other current liabilities

 

$

(431

)

Foreign currency exchange contracts

 

Other non-current assets

 

 

 

 

Other non-current liabilities

 

 

(61

)

Total derivatives

 

 

 

 

 

 

 

 

$

(492

)

 

12


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

 

 

 

Three Months Ended

March 31, 2016

 

Derivatives designated as hedges:

 

 

 

 

Gains (losses) recognized in accumulated OCI (effective

   portion)

 

$

(492

)

Gains (losses) reclassified from accumulated OCI into

   collaboration revenue (effective portion)

 

 

 

Gains (losses) recognized in other income (expense), net

 

 

 

 

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:

 

As of March 31, 2016

 

Offsetting of Derivative Assets/Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross Amounts Not Offset

in the Condensed

Consolidated Balance Sheet

 

 

 

 

 

Description

 

Gross Amounts of

Recognized

Assets/Liabilities

 

 

Gross Amounts

Offset in the

Condensed

Consolidated

Balance Sheet

 

 

Amounts of

Assets/Liabilities

Presented

in the Condensed

Consolidated

Balance Sheet

 

 

Derivative

Financial

Instruments

 

 

Cash Collateral

Received/Pledged

 

 

Net Amount

(Legal Offset)

 

Derivative assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative liabilities

 

$

(492

)

 

 

 

 

$

(492

)

 

 

 

 

 

 

 

$

(492

)

 

 

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:

 

 

 

Carrying

 

 

 

Amount

 

Indefinite-lived intangible asset – MDV3800

 

$

573,299

 

Indefinite-lived intangible asset – MDV9300

 

 

71,000

 

Total

 

$

644,299

 

 

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.

13


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:

 

 

 

Three Months Ended

March 31,

 

 

 

2016

 

 

2015

 

Numerator:

 

 

 

 

 

 

 

 

Net income (loss)

 

$

4,816

 

 

$

(3,118

)

Denominator:

 

 

 

 

 

 

 

 

Weighted-average common shares, basic

 

 

164,247

 

 

 

156,637

 

Dilutive effect of common stock equivalents

 

 

4,150

 

 

 

 

Weighted-average common shares, diluted

 

 

168,397

 

 

 

156,637

 

 

 

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.”

 

 

14


NOTE 8. OTHER BALANCE SHEET ITEMS

(a) Property and Equipment, Net

Property and equipment, net, consisted of the following:

 

 

 

March 31,

2016

 

 

December 31,

2015

 

Leasehold improvements

 

$

22,615

 

 

$

19,074

 

Build-to-suit property

 

 

18,371

 

 

 

18,371

 

Computer equipment and software

 

 

17,300

 

 

 

16,083

 

Furniture and fixtures

 

 

6,014

 

 

 

5,714

 

Construction in progress

 

 

12,806

 

 

 

14,440

 

Laboratory equipment

 

 

1,447

 

 

 

748

 

 

 

 

78,553

 

 

 

74,430

 

Less: Accumulated depreciation

 

 

(18,704

)

 

 

(16,288

)

Total

 

$

59,849

 

 

$

58,142

 

 

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

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

 

 

 

March 31,

2016

 

 

December 31,

2015

 

Clinical and preclinical

 

$

45,635

 

 

$

48,975

 

Accounts payable

 

 

23,791

 

 

 

22,696

 

Payroll and payroll-related

 

 

15,988

 

 

 

29,215

 

Royalties payable

 

 

21,015

 

 

 

20,665

 

Accrued professional services and other current liabilities

 

 

15,566

 

 

 

14,282

 

Taxes payable

 

 

 

 

 

32,565

 

Other payable to licensor

 

 

 

 

 

17,500

 

Interest payable

 

 

 

 

 

305

 

Total

 

$

121,995

 

 

$

186,203

 

 

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

15


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.

16


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:

 

 

 

Three Months Ended

March 31,

 

 

 

2016

 

 

2015

 

Stock-based compensation expense recognized as:

 

 

 

 

 

 

 

 

R&D expense

 

$

6,037

 

 

$

5,811

 

SG&A expense

 

 

8,174

 

 

 

7,561

 

Total

 

$

14,211

 

 

$

13,372

 

 

 

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

17


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:

 

 

 

 

 

 

 

Fair Value Measurements Using:

 

 

 

Fair Value

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

March 31, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency derivative contracts

 

$

431

 

 

 

 

 

$

431

 

 

 

 

Contingent consideration

 

$

4,924

 

 

 

 

 

 

 

 

$

4,924

 

Non-current liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency derivative contracts

 

$

61

 

 

 

 

 

$

61

 

 

 

 

Contingent consideration

 

$

268,303

 

 

 

 

 

 

 

 

$

268,303

 

December 31, 2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contingent consideration

 

$

4,900

 

 

 

 

 

 

 

 

$

4,900

 

Non-current liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contingent consideration

 

$

262,368

 

 

 

 

 

 

 

 

$

262,368

 

 

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.

18


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:

 

 

 

Three Months Ended

March 31, 2016

 

Contingent consideration (current and non-current):

 

 

 

 

Balance at beginning of period

 

$

267,268

 

Amounts acquired or issued

 

 

 

Net change in fair value

 

 

5,959

 

Settlements

 

 

 

Transfers in and/or out of Level 3

 

 

 

Balance at end of period

 

$

273,227

 

 

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:

 

 

 

 

 

 

 

Fair Value Measurements Using:

 

 

 

Total Balance

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

March 31, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bank deposits (included in “Cash and cash

   equivalents”)

 

$

317,361

 

 

$

317,361

 

 

 

 

 

 

 

December 31, 2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bank deposits (included in “Cash and cash

   equivalents”)

 

$

225,853

 

 

$

225,853

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Borrowings under Revolving Credit Facility

 

$

75,000

 

 

$

75,000

 

 

 

 

 

 

 

 

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.

19


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

 

Years Ending December 31,

 

Operating

Leases

 

Remainder of 2016

 

$

7,028

 

2017

 

 

9,542

 

2018

 

 

9,743

 

2019

 

 

5,065

 

2020

 

 

 

2021 and thereafter

 

 

 

Total minimum lease payments

 

$

31,378

 

 

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:

 

Years Ending December 31,

 

Expected Cash

Payments

Under Build-

To-Suit Lease

Obligation

 

Remainder of 2016

 

$

1,639

 

2017

 

 

2,244

 

2018

 

 

2,311

 

2019

 

 

2,380

 

2020

 

 

2,452

 

2021 and thereafter

 

 

9,627

 

Total minimum lease payments

 

$

20,653

 

 

(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

20


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.

21


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.

 

 

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

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.

22


2016 Clinical and Business Highlights

The following summarizes our recent clinical and business highlights:

 

In April 2016, we announced that data from a Phase 2 investigator-sponsored study of enzalutamide was presented at the American Association for Cancer Research Annual Meeting 2016, or AACR, by the study’s lead investigator Ravi Madan, M.D., Clinical Director, Genitourinary Malignancies Branch at the National Cancer Institute.  The primary objective of the study was to evaluate the effect of a short-course of enzalutamide (three months) alone or in combination with a therapeutic cancer vaccine (PROSTVAC®) on prostate specific antigen kinetics four months after completing enzalutamide. Preliminary data from a 12-patient subset demonstrated that treatment with enzalutamide alone resulted in potential immune-activating properties in patients with non-metastatic castration sensitive prostate cancer.

 

In April 2016, we announced that Phase 1 data from an investigator-sponsored study of talazoparib in combination with low-dose chemotherapy was presented during a Clinical Trials Mini-Symposium at AACR by the study’s lead investigator Zev A. Wainberg, M.D., Associate Professor of Medicine at UCLA and Co-Director of the UCLA GI Oncology Program.  Data from the 40 patient trial demonstrated that combination treatment with talazoparib and low-dose chemotherapy resulted in stable disease or an objective response in 23 of 40 heavily pretreated patients with a variety of advanced cancers (clinical benefit rate of 58%). Most notably, objective responses were seen in four of seven (57%) heavily pretreated non-BRCA-mutated ovarian cancer patients when talazoparib was used in combination with either low-dose temozolomide or low-dose irinotecan. Six of seven individuals (86%) with non-BRCA ovarian cancer had clinical benefit (four partial responses and two stable disease through the first 16 weeks of study) and had a reduction in CA 125 levels by 50% or greater.  

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.

 

In April 2016, we announced that the Committee for Medicinal Products for Human Use, or CHMP, of the European Medicines Agency, or EMA, had issued a positive opinion recommending approval of a type II variation to include data from the head-to-head TERRAIN trial of enzalutamide versus bicalutamide in the European label for XTANDI. The CHMP’s positive recommendation does not change indications or contraindications, and the update to the Summary of Product Characteristics, or SmPC, took effect immediately and is applicable in all of the 28 member states of the European Union.

 

In March 2016, the first patient was enrolled in the Phase 3 ARCHES trial to evaluate the efficacy and safety of enzalutamide with androgen deprivation therapy versus placebo with androgen deprivation therapy in metastatic hormone sensitive prostate cancer, or mHSPC, patients. The global, randomized, double-blind, placebo-controlled study aims to enroll approximately 1,100 patients with mHSPC at approximately 250 centers globally. The primary endpoint of the trial is radiographic progression-free survival, or rPFS, defined as the time from randomization to the first objective evidence of radiographic disease progression as assessed by central review or death, whichever occurs first.

 

In February 2016, the U.S. Food and Drug Administration, or FDA, accepted for review a supplemental New Drug Application, or sNDA, for XTANDI in mCRPC, which includes findings from the Phase 2 TERRAIN and STRIVE studies, to update the relevant clinical sections within the current indication. XTANDI is approved by the FDA for the treatment of patients with mCRPC. The Prescription Drug User Fee Act, or PDUFA, goal date for a decision by the FDA is October 22, 2016.

 

Results from the Phase 2 STRIVE trial of enzalutamide compared to bicalutamide in men with CRPC were published in the Journal of Clinical Oncology.

 

Results from the Phase 2 TERRAIN trial of enzalutamide compared to bicalutamide in metastatic CRPC were published in Lancet Oncology.

 

In January 2016, we entered into a collaboration agreement with NanoString Technologies, Inc., or NanoString, and our partner Astellas to translate our gene expression profile into a companion diagnostic assay using NanoString’s nCounter® Dx Analysis System for potential use as a companion diagnostic test for enzalutamide for triple negative breast cancer, or TNBC.

23


2016 Financial Highlights

 

Net sales of XTANDI as reported by Astellas and collaboration revenue related to net sales of XTANDI are summarized in the table below (dollars in millions; amounts may not calculate or sum precisely due to rounding):

 

 

 

Three Months Ended

March 31,

 

 

 

2016

 

 

2015

 

Worldwide net sales of XTANDI (as reported by Astellas)