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MDVN > SEC Filings for MDVN > Form 10-Q on 10-May-2013All Recent SEC Filings

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Form 10-Q for MEDIVATION, INC.


10-May-2013

Quarterly Report


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 fiscal year ended December 31, 2012, included in our Annual Report on Form 10-K, or Annual Report, for the year ended December 31, 2012. 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," "believe," "estimate," "anticipate," "intend," "plan," or similar words, or negatives of such terms or 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, and the continuation and success of our collaboration with Astellas Pharma, Inc., or Astellas. 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 predicted 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 performance in operations, trading price of our common stock or of our 2.625% convertible senior notes due on April 17, 2017, or the Convertible Notes, is not necessarily indicative of future performance. We disclaim any intention or obligation to update 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 rapid development and commercialization of novel therapies to treat serious diseases for which there are limited treatment options. We select technologies for development that meet three primary criteria, namely, the technology has: (a) in the judgment of our scientific leadership, an above-average likelihood of working; (b) strong intellectual property and/or data exclusivity protection; and (c) the ability to target one or more serious diseases for which existing treatments are suboptimal. When selecting technologies for development, we focus primarily on those we believe have the ability to enter human studies within 12-18 months. We consider technologies without regard to therapeutic indication or therapeutic modality (i.e., small molecules, biologics, medical devices, etc). We may develop technologies through our own internal research activities, or in-license technologies from academic institutions or other third parties. Once we select a technology for development, we seek to advance it quickly, strategically and cost-effectively to commercialization. Our commercialization strategy for any of our product candidates that receives marketing approval will vary depending on the target customer base for that product candidate, our then current internal commercial capabilities, the extent to which we deem it prudent and cost-effective to build additional internal commercial capabilities, and the availability, quality and cost of third-party commercialization partners.

Our most advanced program is XTANDI® (enzalutamide) capsules, or XTANDI, which we have partnered with Astellas Pharma Inc., or Astellas. We in-licensed the intellectual property rights covering XTANDI in 2005, began our first clinical trial in 2007, entered into our collaboration agreement with Astellas, or the Astellas Collaboration Agreement, in 2009, reported positive Phase 3 overall survival data in 2011 in patients with metastatic castration-resistant prostate cancer, or mCRPC, who have previously received docetaxel, or post-chemotherapy mCRPC patients, and on August 31, 2012, received regulatory approval from the U.S. Food and Drug Administration, or FDA, for the treatment of post-chemotherapy mCRPC patients. We and Astellas began co-promoting XTANDI for that indication in the United States on September 13, 2012. On April 25, 2013, the Committee for Medicinal Products for Human Use, or CHMP, recommended European Commission, or EC, approval for XTANDI for the treatment of adult men with metastatic castration-resistant prostate cancer whose disease has progressed on or after docetaxel therapy. The CHMP's positive recommendation will be reviewed by the EC, which has the authority to approve medicines for the European Union. Marketing applications for XTANDI for the treatment of post-chemotherapy mCRPC patients are also under review in Switzerland, South Korea, Canada, and Brazil. Together with Astellas, we are also conducting multiple trials of enzalutamide in earlier prostate cancer disease states, including the Phase 3 PREVAIL trial in patients with mCRPC who have not received chemotherapy, or pre-chemotherapy mCRPC patients, and in patients with metastatic breast cancer. We also have ongoing programs with other agents in multiple different indications in the early stages of research and development. These early-stage programs are unpartnered.

In January 2012, our former collaboration partner Pfizer, Inc., or Pfizer, exercised its right to terminate our collaboration agreement for the development and commercialization of dimebon for the treatment of Alzheimer's disease and Huntington disease, due to negative Phase 3 trial results in both indications. We and Pfizer discontinued development of dimebon for all indications in January 2012, and completed the wind-down of our respective remaining collaboration activities in the third quarter of 2012.


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Financial History

On August 31, 2012, the FDA approved XTANDI for the treatment of post-chemotherapy mCRPC patients. This was the first marketing approval for XTANDI anywhere in the world. We and our collaboration partner Astellas commenced commercial sales of XTANDI in the U.S. on September 13, 2012. We did not generate any collaboration revenue attributable to U.S. XTANDI sales until the quarter ended September 30, 2012. We have funded our operations primarily through public offerings of our common stock, the issuance of our Convertible Notes, up-front, development milestone and cost-sharing payments under the Astellas Collaboration Agreement and our former collaboration agreement with Pfizer and, subsequent to September 13, 2012, collaboration revenue attributable to U.S. XTANDI sales.

We have incurred cumulative net losses of $318.7 million through March 31, 2013, and expect to incur substantial additional losses as we continue to finance the commercialization of XTANDI in the U.S market, clinical and preclinical studies of enzalutamide and our early stage technologies, and our corporate overhead costs. We do not know when, or if, we will become profitable, or whether XTANDI will be approved for sale in the U.S. market for any indication other than treatment of post-chemotherapy mCRPC patients or will be approved for sale in any other market for any indication.

Business Highlights

• On February 13, 2013, we announced positive results at the American Society of Clinical Oncology 2013 Genitourinary Cancers Symposium from our Phase 2 trial in 67 men with advanced prostate cancer who had not received any previous hormonal therapies. In this study, 93% of men experienced a prostate-specific antigen, or PSA, response, with the median response being a PSA reduction of 99.6%.

• On April 1, 2013, we announced we exceeded the protocol-specified number of radiographic progression-free survival, or PFS, events for the final analysis of the Phase 3 PREVAIL trial, and plan on conducting an interim overall survival, or OS, analysis in 2013. The PREVAIL trial is evaluating enzalutamide vs. placebo in 1,717 men with mCRPC who have not yet received chemotherapy, or pre-chemotherapy mCRPC. PREVAIL has co-primary endpoints of OS and PFS.

• On January 31, 2013, April 22, 2013 and April 26, 2013, Kathryn E. Falberg, Dawn Graham and Wendy L. Yarno, respectively, were elected to the Medivation Board of Directors. Ms. Falberg is serving as chair of the Audit Committee, Ms. Graham is serving as chair of the Nominating and Corporate Governance Committee, and Ms. Yarno is serving as chair of the Compensation Committee.

• On April 25, 2013, we received a positive opinion from the European Medicine Agency's Committee for Medicinal Products for Human Use, recommending European Commission approval for XTANDI (enzalutamide) capsules for the treatment of adult men with post-chemotherapy mCRPC.

Financial Highlights

• Net sales for XTANDI in the United States for the three months ended March 31, 2013, as reported by Astellas, were $75.4 million, an increase of $18.0 million, or 31%, from the quarter ended December 31, 2012.

• Collaboration revenue for the three months ended March 31, 2013 was $46.2 million, an increase of $9.3 million, or 25%, from the prior year period.

• Total operating expenses for the three months ended March 31, 2013 were $68.5 million, an increase of $32.8 million, or 92%, from the prior year period. Operating expenses included non-cash stock-based compensation of $8.3 million and $4.3 million for the three months ended March 31, 2013 and 2012, respectively.

• Cash, cash equivalents and short-term investments were $271.5 million at March 31, 2013, a decrease of $24.7 million, or 8%, from $296.2 million at December 31, 2012.

Critical Accounting Policies and the Use of Estimates

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


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An accounting policy is considered to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact the consolidated financial statements. We believe that certain of our accounting policies are critical because they are the most important to the preparation of our consolidated financial statements. These policies require our most subjective and complex judgments, often requiring the use of estimates about the effects of matters that are inherently uncertain. Our critical accounting policies have been consistently applied during the periods presented.

We have identified our most critical accounting policies and estimates upon which our financial statements depend as those relating to: revenue recognition, including estimates of the various deductions from gross sales used to calculate net sales of XTANDI, reliance on third-party information, and the estimated performance periods under the Astellas Collaboration Agreement and our former collaboration agreement with Pfizer; stock-based compensation; research and development expenses and accruals; litigation; Convertible Notes, including our estimate of how the net proceeds thereof should be bifurcated between the debt component and the equity component; and income taxes. For a discussion of our critical accounting policies and use of estimates, please refer to Part II, Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in our Annual Report.

Recent Accounting Pronouncements

Information regarding recent accounting pronouncements applicable to us is included in Note 2 to our unaudited consolidated financial statements included elsewhere in this Quarterly Report.

Results of Operations

Collaboration Revenue

Collaboration revenue consists of three components: (a) collaboration revenue attributable to U.S. XTANDI sales; (b) collaboration revenue attributable to ex-U.S. XTANDI sales; and (c) collaboration revenue attributable to up-front and milestone payments.

Collaboration revenue was as follows (in thousands):

                                                          Three Months Ended
                                                               March 31,
                                                           2013          2012
      Collaboration revenue:
      Attributable to U.S. XTANDI sales                 $   37,689     $     -
      Attributable to ex-U.S. XTANDI sales                      -            -
      Attributable to up-front and milestone payments        8,465       36,825

      Total                                             $   46,154     $ 36,825

Collaboration Revenue Attributable to U.S. XTANDI Sales

Under the Astellas Collaboration Agreement, Astellas records all U.S. XTANDI sales. We and Astellas share equally all pre-tax profits and losses from U.S. XTANDI sales. Subject to certain exceptions, we 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 our XTANDI license agreement. The primary exceptions to 50/50 cost sharing are that each party bears its own commercial full time equivalent, or FTE, cost, and that development costs supporting regulatory approvals in both the United States and either Europe or Japan are borne one-third by us and two-thirds by Astellas. Both we and Astellas are entitled to receive a fee for each qualifying detail made by our respective sales representatives. We recognize collaboration revenue attributable to U.S. XTANDI sales in the period in which such sales occur. Collaboration revenue attributable to U.S. XTANDI sales consists of our share of pre-tax profits and losses from U.S. sales, plus reimbursement of our share of reimbursable U.S. development and commercialization costs. Our collaboration revenue attributable to U.S. XTANDI sales in any given period will be mathematically equal to 50% of U.S. XTANDI net sales as reported by Astellas for the applicable period.

Under the Astellas Collaboration Agreement, the deductions from gross sales used to derive net sales of XTANDI are determined in a manner consistent with Astellas' internal accounting policies, consistently applied. The largest component of the deductions used in deriving net sales is legally mandated discounts or rebates to Medicare and other government payors. Because the indicated patient population for XTANDI consists largely of men over the age of 65, we believe that a significant portion of these men will be Medicare beneficiaries. Under the Astellas Collaboration Agreement, the estimates used in calculating gross-to-net deductions will be reassessed periodically and trued-up as appropriate in accordance with Astellas' internal accounting policies, as consistently applied.


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Net sales of XTANDI, in the United States, for the three months ended March 31, 2013, as reported by Astellas, were $75.4 million, an increase of $18.0 million, or 31%, from the quarter ended December 31, 2012. The increase in net sales was primarily the result of an increase in unit volume and a favorable gross-to-net adjustment taken by Astellas of $4.4 million, relating to prior quarters. XTANDI first became available for shipment on September 13, 2012, and therefore there was no collaboration revenue attributable to U.S. XTANDI sales for the three months ended March 31, 2012.

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

                                                             Three Months Ended
                                                              March  31, 2013
 Net U.S. sales (as reported by Astellas)                   $             75,378
 Shared U.S. development and commercialization costs                     (57,670 )

 Pre-tax U.S. profit                                        $             17,708

 Medivation's share of pre-tax U.S. profit                  $              8,854
 Reimbursement of Medivation's share of shared U.S. costs                 28,835

 Collaboration revenue attributable to U.S. XTANDI sales    $             37,689

Collaboration Revenue Attributable to Ex-U.S. XTANDI Sales

Under the Astellas Collaboration Agreement, Astellas records all ex-U.S. XTANDI sales. Astellas is responsible for all development and commercialization costs for XTANDI outside the U.S., including cost of goods sold and the royalty on net sales payable to UCLA under our license agreement with UCLA, and pays us a tiered royalty ranging from the low teens to the low twenties on net ex-U.S. XTANDI sales. We will recognize collaboration revenue attributable to ex-U.S. XTANDI sales in the period in which such sales occur. Collaboration revenue attributable to ex-U.S. XTANDI sales consists of royalty payments from Astellas on those sales.

Because XTANDI has not yet been approved for sale outside of the United States, there have been no collaboration revenues attributable to ex-U.S. XTANDI sales to date.

Collaboration Revenue Attributable to Up-front and Milestone Payments

We record non-refundable, up-front payments under our current and former collaboration agreements as deferred revenue and recognize these payments as collaboration revenue on a straight-line basis over the applicable estimated performance period. We recognize as revenue milestone payments earned by us under the Astellas Collaboration Agreement in their entirety in the period in which the underlying milestone event is achieved, except that any milestone payments that (a) are related to the performance of our deliverables under the applicable collaboration agreement, (b) are triggered by events that occur during the performance period under the applicable collaboration agreement, and
(c) do not constitute substantive milestones, which we record as deferred revenue and recognize as collaboration revenue on a straight-line basis over the expected performance period.

Collaboration revenue attributable to up-front and milestone payments was as follows (in thousands):

                                                                    Three Months Ended
                                                                         March 31,
                                                                   2013             2012
Collaboration revenue attributable to up-front and milestone
payments:
From Astellas                                                    $   8,465        $  5,937
From Pfizer                                                             -           30,888

Total                                                            $   8,465        $ 36,825

Collaboration revenue attributable to up-front and milestone payments from Astellas for the three months ended March 31, 2013 was $8.5 million, an increase of $2.5 million, or 43% from the prior year period. The increase was primarily attributable to a reduction in the estimated performance period from the fourth quarter of 2014 at March 31, 2012 to the first quarter of 2014 at March 31, 2013.


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Collaboration revenue attributable to the up-front payment from Pfizer for the three months ended March 31, 2012 was $30.9 million. Amortization of the entire Pfizer up-front payment was completed upon completion of our performance obligations in the third quarter of 2012.

Deferred revenue under the Astellas Collaboration Agreement consisted of the following (in thousands):

                                   March 31,       December 31,
                                     2013              2012
                      Current     $    33,862     $       33,862
                      Long-term            -               8,465

                      Total       $    33,862     $       42,327

Research and Development Expenses

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



                                                   Three Months Ended
                                                        March 31,
                                                   2013           2012
             Research and development expenses   $  24,908      $ 20,030
             Percentage change                          24 %

R&D expenses increased by $4.9 million, or 24%, to $24.9 million for the three months ended March 31, 2013 from $20.0 million for the prior year period. The increase was primarily due to increased personnel costs of $4.3 million due to higher staffing levels and payroll taxes, and increased clinical and preclinical development costs of $0.6 million.

R&D represented 36% and 56% of total operating expenses for the three months ended March 31, 2013 and 2012, respectively. R&D headcount increased to 111 full-time employees at March 31, 2013 from 85 full-time employees at March 31, 2012.

Under both the Astellas Collaboration Agreement and our former collaboration agreement with Pfizer, we and our collaboration partners share certain development costs in the United States. The parties make quarterly cost-sharing payments to one another in amounts necessary to ensure that each party bears its contractual share of the shared U.S. development costs incurred. We recorded development cost-sharing payments from Astellas and Pfizer, and corresponding reductions in R&D, as follows (in thousands):

                                                          Three Months Ended
                                                               March 31,
                                                          2013           2012
      Development cost-sharing payments from Astellas   $   7,238      $ 14,115
      Development cost-sharing payments from Pfizer            -          1,327

      Total                                             $   7,238      $ 15,442

We have been engaged in two major R&D programs: the development of XTANDI for the treatment of prostate and breast cancer and the development of dimebon for the treatment of Alzheimer's disease and Huntington disease. Other R&D programs consist of earlier stage programs. R&D costs are identified as either directly allocable to one of our R&D programs or an indirect cost, with only direct costs being tracked by specific program. Direct costs consist primarily of clinical and preclinical study costs, cost of supplying drug substance and drug product for use in clinical and preclinical studies, milestone-related payments to the licensor of our enzalutamide technology, personnel costs (including both cash costs and non-cash stock-based compensation costs), contract research organization fees, and other contracted services pertaining to specific clinical and preclinical studies. Indirect costs consist of corporate overhead costs and other administrative and support costs. The following table summarizes the direct costs attributable to each program and total indirect costs (in thousands):

                                             Three Months Ended
                                                  March 31,
                                              2013          2012
                   Direct costs:
                   XTANDI (enzalutamide)   $   17,170     $ 13,515
                   Other                        5,851        3,660
                   Dimebon (1)                     25        1,015

                   Total direct costs          23,046       18,190
                   Indirect costs               1,862        1,840

                   Total                   $   24,908     $ 20,030


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(1) We and Pfizer discontinued development of dimebon for all indications in January 2012, and completed the wind-down of each of our respective remaining collaboration activities in the third quarter of 2012.

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

To obtain the necessary regulatory approvals, we will need to establish to the satisfaction of the applicable regulatory authorities in the United States, Europe and other relevant regions that the applicable product candidate is both safe and effective for each of its intended indications. The process of conducting the preclinical and clinical testing required to establish safety and efficacy and obtain regulatory approvals is expensive, uncertain and takes many years. We are not able to reasonably estimate the time or cost required in obtaining such regulatory approvals, and failure to receive the necessary regulatory approvals would prevent us from commercializing the product candidates affected, for either some or all of the indications for which they are being developed. The length of time required for clinical development of a particular product candidate and our development costs for that product candidate may be impacted by the scope and timing of enrollment in clinical trials for the product candidate, unanticipated additional clinical trials that may be required, future decisions to develop a product candidate for subsequent indications, and whether in the future we decide to pursue development of the product candidate with a corporate partner or independently. For example, XTANDI may have the potential to be approved for multiple indications, and we do not yet know how many of those indications we and our partner, Astellas, will pursue. The decision to pursue regulatory approval for subsequent indications will depend on several variables outside of our control, including the strength . . .

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