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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

(Mark one)
ý	Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2013
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: 001-13111

DEPOMED, INC.
(Exact Name of Registrant as Specified in its Charter)

California (State or other jurisdiction of incorporation or organization)	94-3229046 (I.R.S. Employer Identification No.)
7999 Gateway Boulevard, Suite 300, Newark, California (Address of principal executive offices)	94560 (Zip Code)

Registrant's telephone number, including area code: (510) 744-8000

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Name of each exchange on which registered
Common Stock, no par value	The NASDAQ Stock Market LLC

Securities registered pursuant to Section 12(g) of the Act: None

         Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o    No ý

         Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes o    No ý

         Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act 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 ý    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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý    No o

         Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý

         Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer, as defined in Rule 12b-2 of the Exchange Act.

Large accelerated filer o Accelerated filer ý 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 ý

         The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant based upon the closing price of Common Stock on the Nasdaq Stock Market on June 30, 2013 was approximately $327,084,838. Shares of Common Stock held by each officer and director and by each person who owned 10% or more of the outstanding Common Stock as of June 30, 2013 have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

         The number of shares outstanding of the registrant's Common Stock, no par value, as of March 14, 2014 was 56,594,409.

Documents Incorporated by Reference

         Portions of the registrant's Proxy Statement, which will be filed with the Securities and Exchange Commission (SEC) pursuant to Regulation 14A in connection with the registrant's 2014 Annual Meeting of Shareholders, expected to be held on or about May 20, 2014, are incorporated by reference in Part III of this Form 10-K.

DEPOMED, INC.

2013 ANNUAL FORM 10-K REPORT

TABLE OF CONTENTS

		PAGE
	PART I
Item 1.	Business		5
Item 1A.	Risk Factors		18
Item 1B.	Unresolved Staff Comments		33
Item 2.	Properties		33
Item 3.	Legal Proceedings		34
Item 4.	Mine Safety Disclosures		35
	PART II
Item 5.	Market for the Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities		36
Item 6.	Selected Financial Data		38
Item 7.	Management's Discussion and Analysis of Financial Condition and Results of Operations		39
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk		57
Item 8.	Financial Statements and Supplementary Data		58
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		58
Item 9A.	Controls and Procedures		58
Item 9B.	Other Information		60
	PART III
Item 10.	Directors, Executive Officers and Corporate Governance		60
Item 11.	Executive Compensation		60
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters		60
Item 13.	Certain Relationships and Related Transactions, and Director's Independence		60
Item 14.	Principal Accountant Fees and Services		60
	PART IV
Item 15.	Exhibits and Financial Statement Schedules		61
	Signatures		67

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NOTE REGARDING FORWARD-LOOKING STATEMENTS

        Statements made in this Annual Report on Form 10-K that are not statements of historical fact are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act). We have based these forward-looking statements on our current expectations and projections about future events. Our actual results could differ materially from those discussed in, or implied by, these forward-looking statements. Forward-looking statements are identified by words such as "believe," "anticipate," "expect," "intend," "plan," "will," "may" and other similar expressions. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements. Forward-looking statements include, but are not necessarily limited to, those relating to:

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the commercial success and market acceptance of Gralise® (gabapentin), our once-daily product for the management of postherpetic neuralgia, Zipsor® (diclofenac potassium) liquid filled capsules, our non-steroidal anti-inflammatory drug for the treatment of mild to moderate pain in adults, CAMBIA® (diclofenac potassium for oral solution), our non-steroidal anti-inflammatory drug for the acute treatment of migraine attacks, Lazanda® (fentanyl) nasal spray, our product for the management of breakthrough cancer pain in adult, opioid-tolerant cancer patients;

•

the results of our ongoing litigation against filers of Abbreviated New Drug Applications (each, an ANDA) to market generic Gralise and Zipsor in the United States;

•

the results of our ongoing litigation with the U.S. Food and Drug Administration (FDA) to obtain orphan drug exclusivity for Gralise in the United States;

•

the outcome of our ongoing patent infringement litigation against Purdue Pharma L.P. (Purdue) and Endo Pharmaceuticals Inc. (Endo);

•

any additional patent infringement or other litigation that may be instituted related to Gralise, Zipsor, CAMBIA, Lazanda or any other of our products or product candidates;

•

our and our collaborative partners' compliance or non-compliance with legal and regulatory requirements related to the promotion of pharmaceutical products in the United States;

•

our plans to acquire, in-license or co-promote other products;

•

the results of our research and development efforts;

•

submission, acceptance and approval of regulatory filings;

•

our ability to raise additional capital; and

•

our collaborative partners' compliance or non-compliance with obligations under our collaboration agreements.

        Factors that could cause actual results or conditions to differ from those anticipated by these and other forward-looking statements include those more fully described in the "ITEM 1A. RISK FACTORS" section and elsewhere in this Annual Report on Form 10-K. Except as required by law, we assume no obligation to update any forward- looking statement publicly, or to revise any forward-looking statement to reflect events or developments occurring after the date of this Annual Report on Form 10-K, even if new information becomes available in the future. Thus, you should not assume that our silence over time means that actual events are bearing out as expressed or implied in any such forward-looking statement.

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CORPORATE INFORMATION

        The address of our Internet website is http://www.depomed.com. We make available, free of charge through our website or upon written request, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and other periodic SEC reports, along with amendments to all of those reports, as soon as reasonably practicable after we file the reports with the SEC.

        Unless the context indicates otherwise, "Depomed," "the Company," "we," "our" and "us" refer to Depomed, Inc. Depomed was incorporated in the State of California on August 7, 1995. Our principal executive offices are located at 7999 Gateway Boulevard, Suite 300, Newark, California, 94560 and our telephone number is (510) 744-8000.

        Depomed®, Gralise®, Zipsor®, CAMBIA®, Lazanda® and Acuform® are registered trademarks of Depomed. Glumetza® is a registered trademark of Valeant International (Barbados) SRL exclusively licensed in the United States to Depomed. All other trademarks and trade names referenced in this Annual Report on Form 10-K are the property of their respective owners.

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PART I

ITEM 1.    BUSINESS

COMPANY OVERVIEW

        Depomed is a specialty pharmaceutical company focused on pain and other conditions and diseases of the central nervous system. The products that comprise our current specialty pharmaceutical business are Gralise® (gabapentin), a once-daily product for the management of postherpetic neuralgia (PHN) that we launched in October 2011, Zipsor® (diclofenac potassium) liquid filled capsules, our non-steriodal anti-inflammatory drug for the treatment of mild to moderate acute pain that we acquired in June 2012, CAMBIA® (diclofenac potassium for oral solution), our non-steriodal anti-inflammatory drug for the acute treatment of migraine attacks that we acquired in December 2013, and Lazanda® (fentanyl) nasal spray, our product for the management of breakthrough pain in cancer patients 18 years of age and older who are already receiving and who are tolerant to opioid therapy for their underlying persistent cancer pain that we acquired in July 2013.We actively seek to expand our product portfolio through in-licensing, acquiring or obtaining co-promotion rights to commercially available products or late-stage product candidates that could be marketed and sold effectively with our existing products through our sales and marketing capability.

        We also have a portfolio of royalty and milestone producing license agreements based on our proprietary Acuform® gastroretentive drug delivery technology with Mallinckrodt Inc. (Mallinckrodt), Ironwood Pharmaceuticals, Inc. (Ironwood) and Janssen Pharmaceuticals, Inc.

        In October 2013, we sold our interests in royalty and milestone payments under our license agreements in the Type 2 diabetes therapeutic area to PDL BioPharma, Inc. (PDL) for $240.5 million. The interests sold include royalty and milestone payments accruing from and after October 1, 2013: (a) from Santarus Inc. (Santarus) with respect to sales of Glumetza® (metformin HCL extended-release tablets) in the United States; (b) from Merck & Co., Inc. (Merck) with respect to sales of Janumet XR® (sitagliptin and metformin HCL extended-release); (c) from Janssen Pharmaceutica N.V. and Janssen Pharmaceuticals, Inc. (collectively, Janssen) with respect to potential future development milestones and sales of Janssen's investigational fixed-dose combination of Invokana® (canagliflozin) and extended-release metformin; (d) from Boehringer Ingelheim International GMBH (Boehringer Ingelheim) with respect to potential future development milestones and sales of the investigational fixed-dose combinations of drugs and extended-release metformin subject to our license agreement with Boehringer Ingelheim; and (e) from LG Life Sciences Ltd. (LG) and Valeant International Bermuda SRL (Valeant) for sales of extended-release metformin in Korea and Canada, respectively.

        As of December 31, 2013, we have one product candidate under clinical development, DM-1992 for Parkinson's disease. DM-1992 completed a Phase 2 trial for Parkinson's disease, and we announced a summary of the results of that trial in November 2012. We continue to evaluate partnering opportunities for DM-1992 and monitor competitive developments.

SIGNIFICANT DEVELOPMENTS DURING 2013

        Among the significant developments in our business during 2013 were the following:

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In July 2013, we acquired Lazanda from Archimedes Pharma US Inc. (Archimedes) for $4 million in cash. Our sales force began promoting Lazanda in August 2013.

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In July 2013, the FDA accepted for filing a NDA from Mallinckrodt for XARTEMIS™ XR (oxycodone hydrochloride and acetaminophen) Extended-Release Tablets (CII), previously known as MNK-795, which is formulated with our Acuform® drug delivery technology. The NDA acceptance triggered a $5 million milestone payment to us which we received and recognized in the third quarter of 2013.

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•

In October 2013, we sold our interests in royalty and milestone payments under license agreements in the Type 2 diabetes therapeutic area to PDL for $240.5 million.

•

In December 2013, we acquired CAMBIA from Nautilus Neurosciences, Inc. (Nautilus) for $48.7 million in cash.

•

Total revenues for the year ended December 31, 2013 were $134.2 million, including product revenues of $58.3 million.

•

Cash, cash equivalents and marketable securities were $276.0 million as of December 31, 2013, prior to the payment of our taxes on the PDL transaction.

Commercialized Products and Product Candidate Development Pipeline

        The following table summarizes our and our partners' commercialized products and product candidate development pipeline:

Depomed Commercialized Products

Product	Indication	Status
Gralise®	Management of postherpetic neuralgia	Currently sold in the United States Launched in October 2011
Zipsor®	Mild to moderate acute pain in adults 18 years of age or older	Currently sold in the United States Acquired in June 2012
CAMBIA®	Acute treatment of migraine attacks in adults 18 years of age or older	Currently sold in the United States Acquired in December 2013
Lazanda®	Breakthrough pain in cancer patients 18 years of age and older who are already receiving and who are tolerant to continuous opioid therapy for their underlying persistent cancer pain	Currently sold in the United States Acquired in July 2013

Partner Commercialized Products and Product Candidates

Product / Product Candidate	Indication	Partner	Status
XARTEMIS™ XR (oxycodone hydrochloride and acetaminophen)	Management of acute pain severe enough to require opioid treatment and in patients for whom alternative treatment options are ineffective, not tolerated or would otherwise be inadequate	Mallinckrodt	Approved by the FDA in March 2014
MNK-155	Pain	Mallinckrodt	Completed Phase 3 clinical trials

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Product / Product Candidate	Indication	Partner	Status
NUCYNTA® ER	Moderate to severe chronic pain; neuropathic pain associated with diabetic peripheral neuropathy (DPN)	Janssen	Currently sold in the United States and Canada; License covers sales of NUCYNTA® ER in the United States, Canada and Japan;
IW-3718 Refractory GERD program using Acuform®	Refractory GERD	Ironwood	In clinical development

Depomed Product Pipeline

Product	Indication	Status
DM-1992	Parkinson's disease	Top-line results of Phase 2 study reported in November 2012

OUR BUSINESS OPERATIONS

        As of December 31, 2013, our revenues are generated primarily from commercialized products and license and development arrangements.

Commercialized Products

Gralise® (Gabapentin) Tablets for the Management of PHN

        Gralise is our proprietary, once-daily formulation of gabapentin for the management of PHN. We made Gralise commercially available in October 2011, following its FDA approval in January 2011 and our reacquisition of the product in March 2011 from Abbott Products, Inc. (Abbott Products), our former licensee. We received a $48 million approval milestone from Abbott in February 2011, and a settlement payment of $40 million in March 2011 in connection with the termination of our Gralise license agreement with Abbott.

        Gralise product sales were $36.2 million for the year ended December 31, 2013, $17.3 million for the year ended December 31, 2012 and $0.5 million for the year ended December 31, 2011.

        Postherpetic Neuralgia.    PHN is a persistent pain condition caused by nerve damage during a shingles, or herpes zoster, viral infection. PHN afflicts approximately one in five patients diagnosed with shingles in the United States. The incidence of PHN increases in elderly patients. Three out of four shingles patients over 70 years old develop PHN. Approximately 200,000 Americans are affected by PHN each year. The pain associated with PHN can interfere with daily activities such as sleep and recreational activities for months, and can be associated with clinical depression.

        The Centers for Disease Control and Prevention Advisory Committee on Immunization Practices recommends that adults 60 years of age and older be vaccinated with a shingles vaccine. While the shingles vaccine is not a treatment for PHN, it could impact the future market for therapies for PHN.

        Orphan Drug Designation.    In November 2010, the FDA granted Gralise Orphan Drug designation for the management of PHN based on a plausible hypothesis that Gralise is "clinically superior" to immediate release gabapentin due to the incidence of adverse events observed in Gralise clinical trials relative to the incidence of adverse events reported in the package insert for immediate release gabapentin. Generally, an Orphan-designated drug approved for marketing is eligible for seven years of regulatory exclusivity for the Orphan-designated indication. If granted, Orphan Drug exclusivity for Gralise will run for seven years from January 28, 2011. However, the FDA has not granted Orphan Drug exclusivity for Gralise on the basis of FDA's interpretation of the statute and regulations

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governing Orphan Drug exclusivity. In September 2012, we filed an action in federal district court for the District of Columbia against the FDA seeking an order requiring the FDA to grant Gralise Orphan Drug exclusivity for the management of PHN. We believe Gralise is entitled to Orphan Drug exclusivity as a matter of law, and the FDA's action is not consistent with the statute or the FDA's regulations related to Orphan Drugs. The lawsuit seeks a determination by the court that Gralise is protected by Orphan Drug exclusivity, and an order that the FDA act accordingly. Briefing in the case was completed in March 2013. A hearing on our summary judgment motion was held in August 2013 and we are awaiting a decision.

Zipsor® (Diclofenac Potassium) Liquid-Filled Capsules for Treatment of Mild to Moderate Acute Pain

        Zipsor is a non-steroidal anti-inflammatory drug (NSAID) indicated for relief of mild to moderate acute pain in adults. Zipsor uses proprietary ProSorb® delivery technology to deliver a finely dispersed, rapidly absorbed formulation of diclofenac. We acquired Zipsor in June 2012 from Xanodyne Pharmaceuticals, Inc. (Xanodyne) for $25.9 million in cash and the assumption of certain product-related liabilities.

        We began promotion of Zipsor in July 2012. Our Zipsor product sales were $20.3 million for the year ended December 31, 2013 and $9.8 million for the year ended December 31, 2012.

Lazanda® (Fentanyl) Nasal Spray for the Management of Breakthrough Pain in Cancer Patients, 18 Years of Age and Older, who are already receiving and who are tolerant to opioid therapy for their underlying persistent cancer pain

        Lazanda nasal spray is an intranasal fentanyl drug used to manage breakthrough pain in adults (18 years of age or older) who are already routinely taking other opioid pain medicines around-the-clock for cancer pain. We acquired Lazanda and certain related product inventory on July 29, 2013 from Archimedes Pharma US Inc., a Delaware corporation, Archimedes Pharma Ltd., a corporation registered under the laws of England and Wales, and Archimedes Development Ltd., a Company registered under the laws of England and Wales (collectively, Archimedes) for $4 million in cash and the assumption of certain product-related liabilities.

        We began promotion of Lazanda in August 2013. Our Lazanda product sales were $1.2 million for the year ended December 31, 2013.

CAMBIA® (Diclofenac Potassium for Oral Solution) for the Acute Treatment of Migraine Attacks in Adults 18 Years of Age or Older

        CAMBIA is a NSAID indicated for the acute treatment of migraine attacks with or without aura in adults 18 years of age or older. We acquired CAMBIA and related product inventory on December 17, 2013 from Nautilus Neurosciences, Inc., a Delaware corporation (Nautilus), for $48.7 million and the assumption of certain product-related liabilities. We also assumed certain annual third party royalty obligations totaling not more than 11% of CAMBIA net sales.

        We began promotion of CAMBIA in late December 2013. Our CAMBIA product sales were $0.6 million for the year ended December 31, 2013, which includes approximately two weeks of sales.

License and Development Arrangements

Janssen—NUCYNTA® ER

        In August 2012, we entered into a license agreement with Janssen that grants Janssen a non-exclusive license to certain patents and other intellectual property rights to our Acuform drug delivery technology for the development and commercialization of tapentadol extended release products, including NUCYNTA ER (tapentadol extended-release tablets). We received a $10 million upfront license fee and receive low single digit royalties on net sales of NUCYNTA ER in the U.S., Canada and Japan from and after July 2, 2012 through December 31, 2021.

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Mallinckrodt (Formerly Covidien)—Acetaminophen/Opiate Combination Products

        In November 2008, we entered into a license agreement related to two acetaminophen/opiate combination products with Mallinckrodt. The license agreement grants Mallinckrodt worldwide rights to utilize our Acuform technology for the exclusive development of up to four products containing acetaminophen in combination with opiates, two of which Mallinckrodt has elected to develop.

        We have received $12.5 million in upfront fees and milestones under the agreement. The upfront fees included a $4.0 million upfront license fee and a $1.5 million advance payment for formulation work we performed under the agreement. The milestone payments include four $0.5 million clinical development milestones and $5 million following the FDA's July 2013 acceptance for filing of the NDA for XARTEMIS XR (oxycodone hydrochloride and acetaminophen) Extended-Release Tablets (CII), previously known as MNK-795. On March 12, 2014, the FDA approved XARTEMIS XR for the management of acute pain severe enough to require opioid treatment and in patients for whom alternative treatment options (e.g., non-opioid analgesics) are ineffective, not tolerated or would otherwise be inadequate. The approval of the NDA triggers a $10.0 million milestone payment to us, which is payable within 30 days. We will receive high single digit royalties on net sales of XARTEMIS XR.

Ironwood Pharmaceuticals, Inc.—IW-3718 for Refractory GERD

        In July 2011, we entered into a collaboration and license agreement with Ironwood granting Ironwood a license for worldwide rights to certain patents and other intellectual property rights to our Acuform drug delivery technology for an IW-3718, an Ironwood product candidate under evaluation for refractory GERD. We have received $2.4 million under the agreement, which include an upfront payment, reimbursement for initial product formulation work, and two milestone payments.

Licensing and Development Agreements Sold to PDL in October 2013

        In October 2013, we sold to PDL our milestone and royalty interests in our license agreements in the type 2 diabetes therapeutic area (and any replacements for the agreements) for $240.5 million. The material agreements included in the sale are described below. From and after October 1, 2013, PDL will receive all royalty and milestone payments due under the agreements until PDL has received payments equal to $481 million, after which we and PDL will share evenly all net payments received.

Santarus—Glumetza®

        Glumetza is a once-daily extended release metformin product approved in the United States for type 2 diabetes that we have licensed to Santarus. We developed the 500mg Glumetza and licensed it to Biovail Laboratories, Inc. (now Valeant Pharmaceuticals International, Inc.) (Valeant) in 2002. In December 2005, we reacquired the U.S. rights to Glumetza from Valeant, including an exclusive U.S. license to the 1000mg strength of Glumetza, which was developed by Valeant utilizing proprietary Valeant drug delivery technology. The FDA approved Glumetza for marketing in the United States in 2005, and we began selling the 500mg Glumetza in 2006. In December 2007, the FDA approved the currently marketed 1000mg Glumetza, and we began selling it in June 2008. In July 2008, we entered into a promotion agreement with Santarus, granting Santarus exclusive right to promote Glumetza in the United States. Santarus began promoting Glumetza in October 2008. In August 2011, we restructured our agreement with Santarus and entered into a commercialization agreement that superseded the July 2008 promotion agreement. Under the commercialization agreement, we granted Santarus exclusive rights to manufacture and commercialize Glumetza in the United States in return for a royalty on Glumetza net sales.

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        During 2011, we distributed and sold Glumetza for the first eight months of the year, recognized Glumetza product sales and paid Santarus a promotion fee equal to 75% of Glumetza gross margin. In the final four months of the year, Santarus was responsible for Glumetza distribution and sales, recognized Glumetza product sales and paid us a royalty on net sales. During the first 8 months of 2011, we recognized $40.7 million in product sales of Glumetza, $3.8 million in cost of sales of Glumetza, and $27.3 million in promotion fee expense to Santarus. We recognized $9.6 million in royalty revenue during the final four months of 2011 under the commercialization agreement. Royalty revenue from Santarus for the year ended December 31, 2013 was $42.1 million, which includes royalties we received for the nine months ended September 30, 2013, and does not include royalties we sold to PDL.

        Santarus pays royalties on Glumetza net product sales in the United States as follows: 26.5% in 2011; 29.5% in 2012; 32.0% in 2013 and 2014; and 34.5% in 2015 and beyond, prior to generic entry of a Glumetza product. In the event of generic entry of a Glumetza product in the United States, the parties will thereafter equally share Glumetza proceeds based on a gross margin split.

Merck—Janumet® XR

        We have received $12.5 million in upfront and milestone payments and we receive royalties on Merck's net sales of Janumet® XR in the United States and other licensed territories through the expiration of the licensed patents under a July 2009 license agreement with Merck. The non-exclusive license agreement grants Merck a license as well as other rights to certain of our patents directed to metformin extended release technology for Janumet XR, Merck's fixed-dose combination product for type 2 diabetes containing sitagliptin and extended release metformin that was approved by the FDA in February 2012. Merck began selling Janumet XR during the first quarter of 2012.

Janssen—Canaglifozin/Metformin XR Combination Products

        We have received $10 million in upfront and milestone payments, and are eligible for additional milestone payments and royalties under an August 2010 non-exclusive license agreement between us and Janssen related to fixed dose combinations of extended release metformin and Janssen's type 2 diabetes product candidate canagliflozin.

        Under the agreement, we granted Janssen a license to certain patents related to our Acuform drug delivery technology to be used in developing the combination products. We also granted Janssen a right to reference the Glumetza NDA in Janssen's regulatory filings covering the products.

Boehringer Ingelheim—Undisclosed Compounds/Metformin XR Combination Products

        We have received $12.5 million in upfront and milestone payments and may receive additional development milestones, as well as royalties, pursuant to a March 2011 license and service agreement with Boehringer Ingelheim related to fixed dose combinations of extended release metformin and proprietary Boehringer Ingelheim compounds in development for type 2 diabetes. Under the agreement, we granted Boehringer Ingelheim a license to certain patents related to our Acuform drug delivery technology to be used in developing the combination products. Boehringer Ingelheim was also granted a right to reference the Glumetza NDA in regulatory submissions for the products.

        We received a $10.0 million upfront license payment and, in March 2012, we received an additional $2.5 million milestone payment upon delivery of experimental batches of prototype formulations that met agreed-upon specifications. The agreement provides for additional milestone payments based on regulatory filings and approval events, as well as royalties on worldwide net sales of products.

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PRODUCT CANDIDATE

DM-1992 for Parkinson's Disease

        In January 2012, we initiated a Phase 2 study to evaluate DM-1992 for the treatment of motor symptoms associated with Parkinson's disease. The trial was a randomized, active-controlled, open-label, crossover study testing DM-1992 dosed twice daily against a generic version of immediate-release carbidopa-levodopa dosed as needed. The trial enrolled 34 patients at 8 U.S. centers. The study assessed efficacy, safety and pharmacokinetic variables. The primary endpoint for the study was change in off time as measured by patient self-assessment and clinician assessment.

        Enrollment was completed in July 2012 and the study was completed in September 2012. In November 2012, we reported top-line results of the Phase 2 study, which we continue to evaluate as we consider partnering opportunities for DM-1992 and monitor competitive developments.

OUR DRUG DELIVERY TECHNOLOGIES

        The Acuform technology is based on our proprietary oral drug delivery technologies and is designed to include formulations of drug-containing polymeric tablets that allow multi-hour delivery of an incorporated drug. Although our formulations are proprietary, the polymers utilized in the Acuform technology are commonly used in the food and drug industries and are included in the list of inert substances approved by the FDA for use in oral pharmaceuticals. By using different formulations of the polymers, we believe that the Acuform technology is able to provide continuous, controlled delivery of drugs of varying molecular complexity and solubility. With the use of different polymers and polymers of varying molecular weight, our Acuform tablet technology can deliver drugs by diffusion, tablet erosion, or from a bi-layer matrix. In addition, our technology allows for the delivery of more than one drug from a single tablet. If taken with a meal, these polymeric tablets remain in the stomach for an extended period of time to provide continuous, controlled delivery of an incorporated drug.

        The Acuform technology's design is based in part on principles of human gastric emptying and gastrointestinal transit. Following a meal, liquids and small particles flow continuously from the stomach into the intestine, leaving behind the larger undigested particles until the digestive process is complete. As a result, drugs in liquid or dissolved form or those consisting of small particles tend to empty rapidly from the stomach and continue into the small intestine and on into the large intestine, often before the drug has time to act locally or to be absorbed in the stomach and/or upper small intestine. The drug-containing polymeric tablets of the Acuform technology are formulated into easily swallowed shapes and are designed to swell upon ingestion. The tablets attain a size after ingestion sufficient to be retained in the stomach for multiple hours during the digestive process while delivering the drug content at a controlled rate. After drug delivery is complete, the polymeric tablet dissolves and becomes a watery gel, which is safely eliminated through the intestine sight unseen.

        The Acuform technology is designed to address certain limitations of drug delivery and to provide for orally-administered, conveniently-dosed, cost-effective drug therapy that provides continuous, controlled-delivery of a drug over a multi-hour period. We believe that the Acuform technology can provide one or more of the following advantages over conventional methods of drug administration:

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Greater Patient and Caregiver Convenience.  We believe that the Acuform technology may offer once-daily or reduced frequency dosing for certain drugs that are currently required to be administered several times daily.

•

Enhanced Safety and Efficacy through Controlled Delivery.  We believe that the Acuform technology may improve the ratio of therapeutic effect to toxicity by decreasing the initial peak concentrations of a drug associated with toxicity, while maintaining levels of the drug at therapeutic, subtoxic concentrations for an extended period of time.

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•

More Efficient Gastrointestinal Drug Absorption.  We believe that the Acuform technology can be used for improved oral administration of drugs that are inadequately absorbed when delivered as conventional tablets or capsules. Many drugs are primarily absorbed in the stomach, duodenum or upper small intestine regions, through which drugs administered in conventional oral dosage forms transit quickly. In contrast, the Acuform technology is designed to be retained in the stomach, allowing for multi-hour flow of drugs to these regions of the gastrointestinal tract.

•

Rational Drug Combinations.  We believe that the Acuform technology may allow for rational combinations of drugs with different biological half-lives. Physicians frequently prescribe multiple drugs for treatment of a single medical condition. By appropriately incorporating different drugs into an Acuform technology we believe that we can provide for the release of each incorporated drug continuously at a rate and duration (dose) appropriately adjusted for the specific biological half-lives of the drugs.

RESEARCH AND DEVELOPMENT EXPENSES

        Our research and development expenses were $8.1 million in 2013, $15.5 million in 2012 and $15.2 million in 2011. We expect research and development expense in 2014 to increase from 2013 levels, primarily as a result of pediatric studies relating to Zipsor and CAMBIA that we intend to undertake in 2014.

PATENTS AND PROPRIETARY RIGHTS

        The material issued United States patents we own or have licensed, and the products they cover, are as follows:

Product	U.S. Patent Nos. (Exp. Dates)
Gralise	7,438,927 (February 26, 2024)
	7,731,989 (October 25, 2022)
	8,192,756 (October 25, 2022)
	8,252,332(October 25, 2022)
	8,333,992 (October 25, 2022)
	6,723,340 (October 25, 2021)
	6,488,962 (June 20, 2020)
	6,340,475 and 6,635,280 (September 19, 2016)
Zipsor	7,662,858 (February 24, 2029)
	7,884,095 (February 24, 2029)
	7,939,518 (February 24, 2029)
	8,110,606 (February 24, 2029)
	8,623,920 (February 24, 2029)
	6,365,180 (July 15, 2019)
CAMBIA	7,759,394* and 8,097,651* (June 16, 2026)
	6,974,595* and 7,482,377* (May 15, 2017)
Lazanda	8,216,604 (October 3, 2024)
	6,432,440 (April 20, 2018)

*

Patent rights are exclusively in-licensed by Depomed.

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        Our success will depend in part on our ability to obtain and maintain patent protection for our products and technologies. Our policy is to seek to protect our proprietary rights, by among other methods, filing patent applications in the United States and foreign jurisdictions to cover certain aspects of our technology. In addition to those patents noted on the above table, we have 19 patent applications pending in the United States. Our pending patent applications may lack priority over other applications or may not result in the issuance of patents. Even if issued, our patents may not be sufficiently broad to provide protection against competitors with similar technologies and may be challenged, invalidated or circumvented, which could limit our ability to stop competitors from marketing related products or may not provide us with competitive advantages against competing products. We also rely on trade secrets and proprietary know-how, which are difficult to protect. We seek to protect such information, in part, through entering into confidentiality agreements with employees, consultants, collaborative partners and others before such persons or entities have access to our proprietary trade secrets and know-how. These confidentiality agreements may not be effective in certain cases. In addition, our trade secrets may otherwise become known or be independently developed by competitors.

        Our ability to develop our technologies and to make commercial sales of products using our technologies also depends on not infringing other patents or intellectual property rights. We are not aware of any intellectual property claims against us. However, the pharmaceutical industry has experienced extensive litigation regarding patents and other intellectual property rights. If claims concerning any of our products were to arise and it is determined that these products infringe a third party's proprietary rights, we could be subject to substantial damages for past infringement or be forced to stop or delay our activities with respect to any infringing product, unless we can obtain a license, or we may have to redesign our product so that it does not infringe upon such third party's patent rights, which may not be possible or could require substantial funds or time. Such a license may not be available on acceptable terms, or at all. Even if we, our collaborators or our licensors were able to obtain a license, the rights may be nonexclusive, which would give our competitors access to the same intellectual property.

        From time to time, we may become aware of activities by third parties that may infringe our patents. We may need to engage in litigation to enforce any patents issued or licensed to us or to determine the scope and validity of third-party proprietary rights, such as litigation described in "Legal Proceedings". Our issued or licensed patents may not be held valid by a court of competent jurisdiction. Whether or not the outcome of litigation is favorable to us, defending a lawsuit takes significant time, may be expensive and may divert management attention from other business concerns. Adverse determinations in litigation or interference proceedings could require us to seek licenses which may not be available on commercially reasonable terms, or at all, or subject us to significant liabilities to third parties. If we need but cannot obtain a license, we may be prevented from marketing the affected product.

MARKETING AND SALES

        We have developed capabilities in various aspects of our commercial organization through our commercialization of Gralise, Zipsor, CAMBIA and Lazanda, including sales, marketing, manufacturing, quality assurance, wholesale distribution, medical affairs, managed market contracting, government price reporting, compliance, maintenance of the product NDA and review and submission of promotional materials. Members of our commercial organization are also engaged in the commercial and marketing assessments of our other potential product candidates.

        Our sales organization includes 180 full-time sales representatives. Our sales force primarily calls on pain specialists, neurologists and primary care physicians throughout most of the United States. Our marketing organization is comprised of professionals who have developed a variety of marketing

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techniques and programs to promote our products, including promotional materials, speaker programs, industry publications, advertising and other media.

MANUFACTURING

        Our facility is used for office and research and development (R&D) purposes. No commercial manufacturing takes place at our facility. The R&D work includes preclinical development of pharmaceutical formulations, their characterization, and the development of pharmaceutical processes for external commercial manufacturing. The total laboratory area includes the following individual labs: Analytical Development Lab, Formulation Dry Lab, Process Lab and Quality Lab.

        We are responsible for the supply and distribution of our marketed products. For Gralise, we have entered into a manufacturing agreement with Patheon, as our sole commercial supplier. Accucaps Industries Limited (Accucaps) is our sole supplier for Zipsor pursuant to a manufacturing agreement we assumed in connection with our acquisition of Zipsor from Xanodyne in June 2012. DPT Lakewood, Inc. (DPT) is our sole supplier for Lazanda pursuant to a manufacturing and supply agreement that we assumed in connection with our July 2013 acquisition of Lazanda. MiPharm, S.p.A. (MiPharm) is our sole supplier for CAMBIA pursuant to a manufacturing and supply agreement that we assumed in connection with our December 2013 acquisition of CAMBIA.

        We have two qualified suppliers for the active pharmaceutical ingredient in Gralise. We have a supply agreement with one of the suppliers, and obtain the active pharmaceutical ingredient from the other supplier on a purchase order basis only. We also obtain polyethylene oxide, one of the excipients common to Gralise and products under development by our partners, on a purchase order basis from Dow Chemical, our sole source for polyethylene oxide. We currently have no long-term supply arrangement with respect to polyethylene oxide.

        Applicable current Good Manufacturing Practices (cGMP) requirements and other rules and regulations prescribed by foreign regulatory authorities apply to the manufacture of our products, including products using the Acuform technology. We depend on the manufacturers of our products to comply with cGMP and applicable foreign standards. Any failure by a manufacturer to maintain cGMP or comply with applicable foreign standards could delay or prevent the initial or continued commercial sale of our products and the products being sold or developed by parties with whom we have license or development agreements.

COMPETITION

        General.    We believe that we compete favorably in the markets described above on the basis of the safety and efficacy of our products and product candidates, and in some cases on the basis of the price of our products. However, competition in pharmaceutical products and drug delivery technologies is intense, and we expect competition to increase. There may be other companies developing products competitive with ours of which we are unaware. Competing product or technologies developed in the future may prove superior to our products or technologies, either generally or in particular market segments. These developments could make our products or technologies noncompetitive or obsolete.

        Most of our principal competitors have substantially greater financial, sales, marketing, personnel and research and development resources than we do. In addition, many of our potential collaborative partners have devoted, and continue to devote, significant resources to the development of their own products and drug delivery technologies.

        Gralise for Postherpetic Neuralgia.    Gabapentin is currently marketed by Pfizer Inc. (Pfizer) as Neurontin and by several generic manufacturers for adjunctive therapy for epileptic seizures and for postherpetic pain. In addition, Pfizer's product Lyrica ® (pregabalin) has been approved for marketing in the United States and the European Union for the management of PHN, diabetic nerve pain, spinal

14

cord injury nerve pain, fibromyalgia, and for therapy in partial onset seizures. Gralise competes against these products and other neuropathic pain treatments, such as anti-depressants, anti-convulsants, local anesthetics used as regional nerve blockers, anti-arrythmics and opioids.

        Zipsor for Mild to Moderate Pain.    Diclofenac, the active pharmaceutical ingredient in Zipsor, is a NSAID that is approved in the United States for the treatment of mild to moderate pain and inflammation, including the symptoms of arthritis. Both branded and generic versions of diclofenac are marketed in the United States. Zipsor competes against other drugs that are widely used to treat mild to moderate pain in the acute setting. In addition, a number of other companies are developing NSAIDs in a variety of dosage forms for the treatment of mild to moderate pain and related indications. Other drugs are in clinical development to treat acute pain.

        Lazanda for the Management of Breakthrough Pain in Cancer Patients.    Lazanda (fentanyl) nasal spray is an intranasal fentanyl drug used to manage breakthrough pain in adults (18 years of age or older) who are already routinely taking other opioid pain medicines around-the-clock for cancer pain. Fentanyl, an opioid analgesic, is currently sold by a number of companies for the treatment of breakthrough pain in opioid-tolerant cancer patients. Branded fentanyl products against which Lazanda currently competes include Subsys®, which is sold by Insys Therapeutics, Inc. (Insys), Fentora® and Actiq®, which are sold by Cephalon, Inc. (Cephalon), Abstral®, which is sold by Galena Biopharma, Inc. (Galena) and Onsolis®, which is sold by BioDelivery Sciences International, Inc. (BDSI). Generic fentanyl products against which Lazanda currently competes are sold by Mallinckrodt, Par Pharmaceutical Companies, Inc. (Par) and Actavis, Inc. (Actavis).

        CAMBIA for the Acute Treatment of Migraine Attacks.    Diclofenac, the active pharmaceutical ingredient in CAMBIA, is a NSAID approved in the United States for the acute treatment of migraine in adults. CAMBIA competes with a number of triptans which are used to treat migraine and certain other headaches. Currently, seven triptans are available and sold in the United States (almotriptan, eletriptan, frovatriptan, naratriptan, rizatriptan, sumatriptan and zolmitriptan), as well as a fixed-dose combination product containing sumatriptan plus naproxen. There are other products prescribed for or under development for the treatment of migraines which are now or may become competitive with CAMBIA.

        Drug Delivery Technologies.    Other companies that have oral drug delivery technologies competitive with the Acuform technology include Elan Corporation, Bristol-Myers Squibb, Teva Pharmaceutical Industries Ltd., Johnson & Johnson, SkyePharma plc, Valeant, Flamel Technologies S.A., Ranbaxy Laboratories, Ltd. and Intec Pharma, all of which develop oral tablet products designed to release the incorporated drugs over time. Each of these companies has patented technologies with attributes different from ours, and in some cases with different sites of delivery to the gastrointestinal tract.

GOVERNMENT REGULATION

Product Development

        Numerous governmental authorities in the United States and other countries regulate our research and development activities and those of our collaborative partners. Governmental approval is required of all potential pharmaceutical products using the Acuform technology and the manufacture and marketing of products using the Acuform technology prior to the commercial use of those products. The regulatory process takes several years and requires substantial funds. If new products using the Acuform technology do not receive the required regulatory approvals or if such approvals are delayed, our business would be materially adversely affected. We cannot be certain that the requisite regulatory approvals will be obtained without lengthy delays, if at all.

        In the United States, the FDA rigorously regulates pharmaceutical products, including any drugs using the Acuform technology. If a company fails to comply with applicable requirements, the FDA or

15

the courts may impose sanctions. These sanctions may include civil penalties, criminal prosecution of the company or its officers and employees, injunctions, product seizure or detention, product recalls and total or partial suspension of production. The FDA may withdraw approved applications or refuse to approve pending new drug applications, premarket approval applications, or supplements to approved applications.

        We may be required to conduct preclinical testing on laboratory animals of new pharmaceutical products prior to commencement of clinical studies involving human beings. These studies evaluate the potential efficacy and safety of the product. If preclinical testing is required, we must submit the results of the studies to the FDA as part of an Investigational New Drug Application, which must become effective before beginning clinical testing in humans.

        The products we develop generally are or will be submitted for approval under Section 505(b)(2) of the FDCA which was enacted as part of the Drug Price Competition and Patent Term Restoration Act of 1984, otherwise known as the Hatch-Waxman Act. Section 505(b)(2) permits the submission of a NDA where at least some of the information required for approval comes from studies not conducted by or for the applicant and for which the applicant has not obtained a right of reference. For instance, the NDA for Gralise relies on the FDA's prior approval of Neurontin® (gabapentin), the immediate release formulation of gabapentin initially approved by the FDA.

        Typically, human clinical evaluation involves a time-consuming and costly three-phase process:

•

In Phase 1, we conduct clinical trials with a small number of subjects to determine a drug's early safety profile and its pharmacokinetic pattern.

•

In Phase 2, we conduct limited clinical trials with groups of patients afflicted with a specific disease in order to determine preliminary efficacy, optimal dosages and further evidence of safety.

•

In Phase 3, we conduct large-scale, multi-center, comparative trials with patients afflicted with a target disease in order to provide enough data to statistically evaluate the efficacy and safety of the product candidate, as required by the FDA.

        The FDA closely monitors the progress of each phase of clinical testing. The FDA may, at its discretion, re-evaluate, alter, suspend or terminate testing based upon the data accumulated to that point and the FDA's assessment of the risk/benefit ratio to patients. The FDA may also require additional clinical trials after approvals, which are known as Phase 4 trials. We expect to conduct Phase 4 trials for Lazanda and CAMBIA during 2014.

        The results of preclinical and clinical testing are submitted to the FDA in the form of a NDA, for approval prior to commercialization. A NDA requires that our products are compliant with cGMP. Failure to achieve or maintain cGMP standards for our products would adversely impact their marketability. In responding to a NDA, the FDA may grant marketing approval, request additional information or deny the application. Failure to receive approval for any products using the Acuform technology would have a material adverse effect on us.

        Foreign regulatory approval of a product must also be obtained prior to marketing the product internationally. Foreign approval procedures vary from country to country. The time required for approval may delay or prevent marketing in certain countries. In certain instances we or our collaborative partners may seek approval to market and sell certain products outside of the United States before submitting an application for United States approval to the FDA. The clinical testing requirements and the time required to obtain foreign regulatory approvals may differ from that required for FDA approval. Although there is now a centralized European Union (EU) approval mechanism in place, each EU country may nonetheless impose its own procedures and requirements. Many of these procedures and requirements are time-consuming and expensive. Some EU countries

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require price approval as part of the regulatory process. These constraints can cause substantial delays in obtaining required approval from both the FDA and foreign regulatory authorities after the relevant applications are filed, and approval in any single country may not meaningfully indicate that another country will approve the product.

Reimbursement

        Sales of pharmaceutical products in the United States depend in significant part on the extent of coverage and reimbursement from government programs, including Medicare and Medicaid, as well as other third party payers. Third party payers are undertaking efforts to control the cost of pharmaceutical products, including by implementing cost containment measures to control, restrict access to, or influence the purchase of drugs and other health care products and services.

        Government programs may regulate reimbursement, pricing, and coverage of products in order to control costs or to affect levels of use of certain products. Private health insurance plans may restrict coverage of some products, such as by using payer formularies under which only selected drugs are covered, variable co-payments that make drugs that are not preferred by the payer more expensive for patients, and by employing utilization management controls, such as requirements for prior authorization or prior failure on another type of treatment.

Fraud and Abuse

        Pharmaceutical companies that participate in federal healthcare programs are subject to various U.S. federal and state laws pertaining to healthcare "fraud and abuse," including anti-kickback and false claims laws. Violations of U.S. federal and state fraud and abuse laws may be punishable by criminal or civil sanctions, including fines, civil monetary penalties and exclusion from federal healthcare programs (including Medicare and Medicaid).

        Federal statutes that apply to us include the federal Anti-Kickback Statute, which prohibits persons from knowingly and willfully soliciting, offering, receiving, or providing remuneration in exchange for or to generate business, including the purchase or prescription of a drug, that is reimbursable by a federal healthcare program such as Medicare and Medicaid, and the Federal False Claims Act (FCA), which generally prohibits knowingly and willingly presenting, or causing to be presented, for payment to the federal government any false, fraudulent or medically unnecessary claims for reimbursed drugs or services. Government enforcement agencies and private whistleblowers have asserted liability under the FCA for claims submitted involving inadequate care, kickbacks, improper promotion of off-label uses and misreporting of drug prices to federal agencies.

        Similar state laws and regulations, such as state anti-kickback and false claims laws, may apply to sales or marketing arrangements and claims involving healthcare items or services reimbursed by non-governmental payers, including private insurers. These state laws may be broader in scope than their federal analogues, such as state false claims laws that apply where a claim is submitted to any third-party payer, regardless of whether the payer is a private health insurer or a government healthcare program, and state laws that require pharmaceutical companies to certify compliance with the pharmaceutical industry's voluntary compliance guidelines.

        Federal and state authorities have increased enforcement of fraud and abuse laws within the pharmaceutical industry, and private individuals have been active in alleging violations of the law and bringing suits on behalf of the government under the FCA. These laws are broad in scope and there may not be regulations, guidance, or court decisions that definitively interpret these laws and apply them to particular industry practices. In addition, these laws and their interpretations are subject to change.

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Other U.S. Healthcare Laws

        The Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010 (collectively, the ACA) contains provisions that have or could potentially impact our business, including (a) an increase in the minimum Medicaid rebate to states participating in the Medicaid program on branded prescription drugs; (b) the extension of the Medicaid rebate to managed care organizations that dispense drugs to Medicaid beneficiaries; and (c) the expansion of the 340B Public Health Service Act drug pricing program, which provides outpatient drugs at reduced rates, to include certain children's hospitals, free standing cancer hospitals, critical access hospitals and rural referral centers.

        Additionally, the federal "sunshine" provisions, enacted in 2010 as part of ACA, require pharmaceutical manufacturers, among others, to disclose annually to the federal government (for re-disclosure to the public) certain payments made to physicians and certain other healthcare practitioners or to teaching hospitals. State laws may also require disclosure of pharmaceutical pricing information and marketing expenditures and impose penalties for failures to disclose. Many of these laws and regulations contain ambiguous requirements. As a result of the ambiguity in certain of these laws and their implementation, our reporting actions could be subject to the penalty provisions of the pertinent federal and state laws and regulations.

        Our operations and business are subject to a number of other laws and regulations, including those relating to the workplace, privacy, laboratory practices and the purchase, storage, movement, import and export and use and disposal of hazardous or potentially hazardous substances as well as controlled substances. In addition, state laws may also govern the privacy and security of health information in some circumstances and may contain different or broader privacy protections than the federal provisions.

EMPLOYEES

        As of March 14, 2014, we had 308 full-time employees. At December 31, 2013, we had 291 full-time employees. None of our employees are represented by a collective bargaining agreement, nor have we experienced any work stoppage. We believe that our relations with our employees are good.

ITEM 1A.    RISK FACTORS

        In addition to other information in this report, the following factors should be considered carefully in evaluating an investment in our securities. If any of the risks or uncertainties described in this Form 10-K actually occurs, our business, results of operations or financial condition could be materially adversely affected. The risks and uncertainties described in this Form 10-K are not the only ones facing us. Additional risks and uncertainties of which we are unaware or that we currently deem immaterial may also become important factors that may harm our business, results of operations and financial condition.

If we do not successfully commercialize Gralise, Zipsor, Lazanda and CAMBIA, our business will suffer.

        In October 2011, we began commercial sales of Gralise. In June 2012, we acquired Zipsor, and we began commercial promotion of Zipsor in late July 2012. In July 2013, we acquired and began commercial promotion of Lazanda. In December 2013, we acquired and began commercial promotion of CAMBIA. As a company, we have limited experience selling and marketing pharmaceutical products. In addition to the risks discussed elsewhere in this section, our ability to successfully

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commercialize and generate revenues from Gralise, Zipsor, Lazanda and CAMBIA depend on a number of factors, including, but not limited to our ability to:

•

develop and execute our sales and marketing strategies for our products;

•

achieve market acceptance of our products;

•

obtain and maintain adequate coverage, reimbursement and pricing from managed care, government and other third-party payers;

•

to maintain, manage or scale the necessary sales, marketing, manufacturing, managed markets and other capabilities and infrastructure that are required to successfully commercialize our products;

•

to maintain intellectual property protection for our products; and

•

to comply with applicable regulatory requirements.

If we are unable to successfully achieve or perform these functions, we will not be able to maintain or increase our revenues from Gralise, Zipsor, Lazanda and CAMBIA and our business will suffer.

If generic manufacturers use litigation and regulatory means to obtain approval for generic versions of our products, our business will suffer.

        Under the Federal Food, Drug and Cosmetics Act (FDCA), the FDA can approve an Abbreviated New Drug Application (ANDA) for a generic version of a branded drug without the ANDA applicant undertaking the clinical testing necessary to obtain approval to market a new drug. In place of such clinical studies, an ANDA applicant usually needs only to submit data demonstrating that its product has the same active ingredient(s) and is bioequivalent to the branded product, in addition to any data necessary to establish that any difference in strength, dosage form, inactive ingredients, or delivery mechanism does not result in different safety or efficacy profiles, as compared to the reference drug.

        The FDCA requires an applicant for a drug that relies, at least in part, on the patent of one of our branded drugs to notify us of their application and potential infringement of our patent rights. Upon receipt of this notice we have 45 days to bring a patent infringement suit in federal district court against the company seeking approval of a product covered by one of our patents. The discovery, trial and appeals process in such suits can take several years. If such a suit is commenced, the FDCA provides a 30-month stay on the FDA's approval of the competitor's application. Such litigation is often time-consuming and quite costly and may result in generic competition if the patents at issue are not upheld or if the generic competitor is found not to infringe such patents. If the litigation is resolved in favor of the applicant or the challenged patent expires during the 30-month stay period, the stay is lifted and the FDA may thereafter approve the application based on the standards for approval of ANDAs.

        We are currently involved in patent infringement litigation against filers of three ANDAs to Gralise in connection with lawsuits consolidated in the United States District Court for the District of New Jersey, as described in greater detail under "LEGAL PROCEEDINGS" below. The lawsuits were filed in March 2012 and May 2012 against ANDA filers Actavis Elizabeth LLC (Actavis), Incepta Pharmaceuticals (Incepta), and Zydus Pharmaceuticals USA and Cadila Healthcare Limited (collectively, Zydus) for infringement of nine U.S. patents listed in the Patent and Exclusivity Information Addendum of FDA's publication, Approved Drug Products with Therapeutic Equivalence Evaluations (commonly known as the "Orange Book") for Gralise. We commenced the lawsuits within the 45 days required to automatically stay, or bar, the FDA from approving the ANDAs for 30 months or until a district court decision that is adverse to the asserted patents, whichever may occur earlier. The 30-month stays expire between July 2014 and October 2014. If the litigation is still ongoing after expiration of the applicable 30-month stay, the termination of the stay could result in the introduction

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of one or more products generic to Gralise prior to resolution of the litigation. Any introduction of one or more products generic to Gralise would harm our business, financial condition and results of operations.

        On June 28, 2013, we received from Banner Pharmacaps Inc. (Banner) a Notice of Certification for U.S. Patent Nos. 6,365,180; 7,662,858; 7,884,095; 7,939,518 and 8,110,606 under 21 U.S.C. § 355 (j)(2)(A)(vii)(IV) (Zipsor Paragraph IV Letter) certifying that Banner has submitted and the FDA has accepted for filing an ANDA for diclofenac potassium capsules, 25 mg (Banner ANDA Product). The letter states that the Banner ANDA Product contains the required bioavailability or bioequivalence data to Zipsor and certifies that Banner intends to obtain FDA approval to engage in commercial manufacture, use or sale of Banner's ANDA product before the expiration of the above identified patents, which are listed for Zipsor in the Orange Book. We commenced the lawsuit within the 45 days required to automatically bar the FDA from approving the Banner ANDA Product for 30 months or until a district court decision that is adverse to the asserted patents, whichever may occur earlier. Absent a court order, the 30-month stay is expected to expire in December 2015.

        Any introduction of one or more products generic to Gralise, Zipsor, Lazanda or CAMBIA would harm our business, financial condition and results of operations. The filing of the ANDAs described above, or any other ANDA or similar application in respect to any of our products could have an adverse impact on our stock price. Moreover, if the patents covering our products were not upheld in litigation or if a generic competitor is found not to infringe these patents, the resulting generic competition would have a material adverse effect on our business, results of operations and financial condition.

We may be unable to compete successfully in the pharmaceutical industry.

        Gabapentin is currently sold by Pfizer as Neurontin® for adjunctive therapy for epileptic seizures and for PHN. Pfizer's basic U.S. patents relating to Neurontin have expired, and numerous companies have received approval to market generic versions of the immediate release product. Pfizer has also developed Lyrica® (pregabalin), which has been approved for marketing in the United States for post herpetic pain, fibromyalgia, diabetic nerve pain, adjunctive therapy, epileptic seizures and nerve pain associated with spinal cord injury. In June 2012, GlaxoSmithKline and Xenoport, Inc. received approval to market Horizant™ (gabapentin enacarbil extended-release tablets) for the management of PHN. There are other products prescribed for or under development for PHN which are now or may become competitive with Gralise.

        Diclofenac, the active pharmaceutical ingredient in Zipsor, is a NSAID that is approved in the United States for the treatment of mild to moderate pain in adults, including the symptoms of arthritis. Both branded and generic versions of diclofenac are marketed in the U.S. Zipsor competes against other drugs that are widely used to treat mild to moderate pain in the acute setting. In addition, a number of other companies are developing NSAIDs in a variety of dosage forms for the treatment of mild to moderate pain and related indications. Other drugs are in clinical development to treat acute pain.

        An alternate formulation of diclofenac is the active ingredient in CAMBIA that is approved in the United States for the acute treatment of migraine in adults. CAMBIA competes with a number of triptans which are used to treat migraine and certain other headaches. Currently, seven triptans are available and sold in the United States (almotriptan, eletriptan, frovatriptan, naratriptan, rizatriptan, sumatriptan and zolmitriptan), as well as a fixed-dose combination product containing sumatriptan plus naproxen. There are other products prescribed for or under development for the treatment of migraines which are now or may become competitive with CAMBIA.

        Fentanyl, an opioid analgesic, is currently sold by a number of companies for the treatment of breakthrough pain in opioid-tolerant cancer patients. Branded fentanyl products against which Lazanda

20

currently competes include Subsys®, which is sold by Insys, Fentora® and Actiq®, which are sold by Cephalon, Abstral®, which is sold by Galena and Onsolis®, which is sold by BDSI. Generic fentanyl products against which Lazanda currently competes are sold by Mallinckrodt, Par and Actavis.

        Competition in the pharmaceutical industry is intense. We expect competition to increase. Competing products developed in the future may prove superior to our products. Most of our principal competitors have substantially greater financial, sales, marketing, personnel and research and development resources than we do.

If we are unable to negotiate acceptable pricing or obtain adequate reimbursement for our products from third-party payers, our business will suffer.

        Sales of our products will depend in part on the availability of acceptable pricing and adequate reimbursement from third-party payers such as:

•

government health administration authorities;

•

private health insurers;

•

health maintenance organizations;

•

managed care organizations;

•

pharmacy benefit management companies; and

•

other healthcare-related organizations.

        If reimbursement is not available for our products or product candidates, demand for these products may be limited. Further, any delay in receiving approval for reimbursement from third-party payers could have an adverse effect on our future revenues. Third-party payers are increasingly challenging the price and cost-effectiveness of medical products and services. Significant uncertainty exists as to the reimbursement status of newly approved healthcare products, including pharmaceuticals. Our products may not be considered cost effective, and adequate third-party reimbursement may be unavailable to enable us to maintain price levels sufficient to realize an acceptable return on our investment.

        Federal and state governments in the United States continue to propose and pass new legislation, such as the ACA, that is designed to contain or reduce the cost of healthcare. Cost control initiatives could decrease the price that we receive for our products and any product that we may develop or acquire.

If we do not obtain Orphan Drug exclusivity for Gralise in PHN, our business could suffer.

        In November 2010, the FDA granted Gralise Orphan Drug designation for the management of PHN based on a plausible hypothesis that Gralise is "clinically superior" to immediate release gabapentin due to the incidence of adverse events observed in Gralise clinical trials relative to the incidence of adverse events reported in the package insert for immediate release gabapentin. Generally, an Orphan-designated drug approved for marketing is eligible for seven years of regulatory exclusivity for the Orphan-designated indication. If granted, Orphan Drug exclusivity for Gralise will run for seven years from January 28, 2011. However, the FDA has not granted Orphan Drug exclusivity based on the FDA's interpretation of the statute and regulations governing Orphan Drug exclusivity. In September 2012, we filed an action in federal district court for the District of Columbia against the FDA seeking an order requiring the FDA to grant Gralise Orphan Drug exclusivity for the management of PHN. We believe Gralise is entitled to Orphan Drug exclusivity as a matter of law, and the FDA's action is not consistent with the statute or the FDA's regulations related to Orphan Drugs. The lawsuit seeks a

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determination by the court that Gralise is protected by Orphan Drug exclusivity, and an order that the FDA act accordingly.

        If we do not secure Orphan Drug exclusivity in PHN for Gralise, the period of market exclusivity in the United States for Gralise may be reduced, which would adversely affect our business, results of operations and financial condition.

Health care reform could increase our expenses and adversely affect the commercial success of our products.

        The ACA includes numerous provisions that affect pharmaceutical companies, some of which became effective immediately upon President Obama signing the law, and others of which will take effect over the next several years. For example, the ACA seeks to expand healthcare coverage to the uninsured through private health insurance reforms and an expansion of Medicaid. The ACA also imposes substantial costs on pharmaceutical manufacturers, such as an increase in liability for rebates paid to Medicaid, new drug discounts that must be offered to certain enrollees in the Medicare prescription drug benefit and an annual fee imposed on all manufacturers of brand prescription drugs in the U.S. The ACA also requires increased disclosure obligations and an expansion of an existing program requiring pharmaceutical discounts to certain types of hospitals and federally subsidized clinics and contains cost-containment measures that could reduce reimbursement levels for pharmaceutical products. The ACA also includes provisions known as the Physician Payments Sunshine Act, which require manufacturers of drugs, biologics, devices and medical supplies covered under Medicare and Medicaid starting in 2013 to record any transfers of value to physicians and teaching hospitals and to report this data beginning in 2014 to the Centers for Medicare and Medicaid Services for subsequent public disclosure. Similar reporting requirements have also been enacted on the state level domestically, and an increasing number of countries worldwide either have adopted or are considering similar laws requiring transparency of interactions with health care professionals. Failure to report appropriate data may result in civil or criminal fines and/or penalties. These and other aspects of the ACA, including the regulations that may be imposed in connection with the implementation of the ACA, could increase our expenses and adversely affect our ability to successfully commercialize our products and product candidates.

Acquisition of new and complementary businesses, products and technologies is a key element of our corporate strategy. If we are unable to successfully identify and acquire such businesses, products or technologies, our business and prospects will be limited.

        Since June 2012, we have acquired Zipsor, Lazanda and CAMBIA. An important element of our business strategy is to actively seek to acquire products or companies and to in-license or seek co-promotion rights to products that could be sold by our sales force. We cannot be certain that we will be able to successfully pursue and complete any further acquisitions, or whether we would be able to successfully integrate any acquired business, product or technology or retain any key employees. Integrating any business, product or technology we may acquire could be expensive and time consuming, disrupt our ongoing business and distract our management. If we are unable to enhance and broaden our product offerings, unable to effectively integrate any acquired businesses, products or technologies, or achieve the anticipated benefits of any acquired business, product or technology, our business and prospects will be limited. In addition, any amortization or charges resulting from the costs of such acquisitions will adversely affect our operating results.

If we engage in strategic transactions that fail to achieve the anticipated results and synergies, our business will suffer.

        We may seek to engage in strategic transactions with third parties, such as company acquisitions, strategic partnerships, joint ventures, divestitures or business combinations. We may face significant competition in seeking potential strategic partners and transactions, and the negotiation process for

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acquiring any product or engaging in strategic transactions can be time-consuming and complex. Engaging in strategic transactions may require us to incur non-recurring and other charges, increase our near and long-term expenditures, pose integration challenges and fail to achieve the anticipated results or synergies or distract our management and business, which may harm our business.

Pharmaceutical marketing is subject to substantial regulation in the United States and any failure by us or our collaborative partners to comply with applicable statutes or regulations could adversely affect our business.

        All marketing activities associated with Gralise, Zipsor, Lazanda and CAMBIA, as well as marketing activities related to any other products which we acquire or for which we obtain regulatory approval, will be subject to numerous federal and state laws governing the marketing and promotion of pharmaceutical products. The FDA regulates post-approval promotional labeling and advertising to ensure that they conform to statutory and regulatory requirements. In addition to FDA restrictions, the marketing of prescription drugs is subject to laws and regulations prohibiting fraud and abuse under government healthcare programs. For example, the federal healthcare program anti-kickback statute prohibits giving things of value to induce the prescribing or purchase of products that are reimbursed by federal healthcare programs, such as Medicare and Medicaid. In addition, federal false claims laws prohibit any person from knowingly presenting, or causing to be presented, a false claim for payment to the federal government. Under this law, the federal government in recent years has brought claims against drug manufacturers alleging that certain marketing activities caused false claims for prescription drugs to be submitted to federal programs. Many states have similar statutes or regulations that, apply to items and services reimbursed under Medicaid and other state programs, or, in some states, regardless of the payer. If we, or our collaborative partners, fail to comply with applicable FDA regulations or other laws or regulations relating to the marketing of our products, we could be subject to criminal prosecution, civil penalties, seizure of products, injunctions, and exclusion of our products from reimbursement under government programs, as well as other regulatory actions against our product candidates, our collaborative partners or us.

We may incur significant liability if it is determined that we are promoting or have in the past promoted the "off-label" use of drugs.

        Companies may not promote drugs for "off-label" uses—that is, uses that are not described in the product's labeling and that differ from those approved by the FDA. Physicians may prescribe drug products for off-label uses, and such off-label uses are common across some medical specialties. Although the FDA and other regulatory agencies do not regulate a physician's choice of treatments, the FDCA and FDA regulations restrict communications on the subject of off-label uses of drug products by pharmaceutical companies. The Office of Inspector General of the Department of Health and Human Services (OIG), the FDA and the Department of Justice (DOJ) all actively enforce laws and regulations prohibiting promotion of off-label uses and the promotion of products for which marketing clearance has not been obtained. If the OIG or the FDA takes the position that we are or may be out of compliance with the requirements and restrictions described above, and we are investigated for or found to have improperly promoted off-label uses, we may be subject to significant liability, including civil and administrative remedies as well as criminal sanctions. In addition, management's attention could be diverted from our business operations and our reputation could be damaged.

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We depend on third parties that are single source suppliers to manufacture Gralise, Zipsor, Lazanda and CAMBIA. If these suppliers are unable to manufacture and supply Gralise, Zipsor, Lazanda or CAMBIA or our product candidates, our business will suffer.

        Patheon is our sole supplier for Gralise pursuant to a manufacturing and supply agreement we entered into with Patheon in September 2011. Accucaps is our sole supplier for Zipsor pursuant to a manufacturing agreement we assumed in connection with our acquisition of Zipsor from Xanodyne in June 2012. DPT is our sole supplier for Lazanda pursuant to a manufacturing and supply agreement that we assumed in connection with our July 2013 acquisition of Lazanda. MiPharm is our sole supplier for CAMBIA pursuant to a manufacturing and supply agreement that we assumed in connection with our December 2013 acquisition of CAMBIA. We do not have, and we do not intend to establish in the foreseeable future, internal commercial scale manufacturing capabilities. Rather, we intend to use the facilities of third parties to manufacture products for clinical trials and commercialization. Our dependence on third parties for the manufacture of our products and our product candidates may adversely affect our ability to deliver such products on a timely or competitive basis, if at all. Any failure to obtain Gralise, Zipsor, Lazanda or CAMBIA, or active pharmaceutical ingredients, excipients or components from our suppliers could adversely affect our business, results of operations and financial condition.

        The manufacturing process for pharmaceutical products is highly regulated and regulators may shut down manufacturing facilities that they believe do not comply with regulations. We, our third-party manufacturers and our suppliers are subject to numerous regulations, including current FDA regulations governing manufacturing processes, stability testing, record keeping and quality standards. Similar regulations are in effect in other countries. Our third-party manufacturers and suppliers are independent entities who are subject to their own unique operational and financial risks which are out of our control. If we or any of these third-party manufacturers or suppliers fail to perform as required or fail to comply with the regulations of the FDA and other applicable governmental authorities, our ability to deliver our products on a timely basis or receive royalties or continue our clinical trials would be adversely affected. The manufacturing processes of our third party manufacturers and suppliers may also be found to violate the proprietary rights of others. To the extent these risks materialize and adversely affect their performance obligations to us, and we are unable to contract for a sufficient supply of required products on acceptable terms, or if we encounter delays and difficulties in our relationships with manufacturers or suppliers, our business, results of operation and financial condition would be adversely affected.

We may be unable to protect our intellectual property and may be liable for infringing the intellectual property of others.

        Our success will depend in part on our ability to obtain and maintain patent protection for our products and technologies, and to preserve our trade secrets. Our policy is to seek to protect our proprietary rights, by, among other methods, filing patent applications in the United States and foreign jurisdictions to cover certain aspects of our technology. We hold issued United States patents and have patent applications pending in the United States. In addition, we are preparing patent applications relating to our expanding technology for filing in the United States and abroad. We have also applied for patents in numerous foreign countries. Some of those countries have granted our applications and other applications are still pending. Our pending patent applications may lack priority over other applications or may not result in the issuance of patents. Even if issued, our patents may not be sufficiently broad to provide protection against competitors with similar technologies and may be challenged, invalidated or circumvented, which could limit our ability to stop competitors from marketing related products or may not provide us with competitive advantages against competing products. We also rely on trade secrets and proprietary know-how, which are difficult to protect. We seek to protect such information, in part, through entering into confidentiality agreements with

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employees, consultants, collaborative partners and others before such persons or entities have access to our proprietary trade secrets and know-how. These confidentiality agreements may not be effective in certain cases, due to, among other things, the lack of an adequate remedy for breach of an agreement or a finding that an agreement is unenforceable. In addition, our trade secrets may otherwise become known or be independently developed by competitors.

        Our ability to develop our technologies and to make commercial sales of products using our technologies also depends on not infringing other patents or intellectual property rights. We are not aware of any intellectual property claims against us. However, the pharmaceutical industry has experienced extensive litigation regarding patents and other intellectual property rights. Patents issued to third parties relating to sustained release drug formulations or particular pharmaceutical compounds could in the future be asserted against us, although we believe that we do not infringe any valid claim of any patents. If claims concerning any of our products were to arise and it was determined that these products infringe a third party's proprietary rights, we could be subject to substantial damages for past infringement or be forced to stop or delay our activities with respect to any infringing product, unless we can obtain a license, or we may have to redesign our product so that it does not infringe upon such third party's patent rights, which may not be possible or could require substantial funds or time. Such a license may not be available on acceptable terms, or at all. Even if we, our collaborators or our licensors were able to obtain a license, the rights may be nonexclusive, which could give our competitors access to the same intellectual property. In addition, any public announcements related to litigation or interference proceedings initiated or threatened against us, even if such claims are without merit, could cause our stock price to decline.

        From time to time, we may become aware of activities by third parties that may infringe our patents. Infringement by others of our patents may reduce our market shares (if a related product is approved) and, consequently, our potential future revenues and adversely affect our patent rights if we do not take appropriate enforcement action. We may need to engage in litigation in the future to enforce any patents issued or licensed to us or to determine the scope and validity of third-party proprietary rights. For instance, in January 2013 and April 2013, we filed lawsuits against Purdue and Endo, respectively, for infringement of certain of our Acuform drug delivery technology patents. We are also engaged in litigation against Gralise ANDA filers. In these or other litigation matters, our issued or licensed patents may not be held valid by a court of competent jurisdiction. Whether or not the outcome of litigation is favorable to us, defending a lawsuit takes significant time, may be expensive, and may divert management attention from other business concerns. We may also be required to participate in interference proceedings declared by the United States Patent and Trademark Office for the purpose of determining the priority of inventions in connection with our patent applications or other parties' patent applications. Adverse determinations in litigation or interference proceedings could require us to seek licenses which may not be available on commercially reasonable terms, or at all, or subject us to significant liabilities to third parties. If we need but cannot obtain a license, we may be prevented from marketing the affected product.

Our collaborative arrangements may give rise to disputes over commercial terms, contract interpretation and ownership or protection of our intellectual property and may adversely affect the commercial success of our products.

        We currently have collaboration or license arrangements with a number of companies, including Mallinckrodt, Janssen and Ironwood. In addition, we have in the past and may in the future enter into other collaborative arrangements, some of which have been based on less definitive agreements, such as memoranda of understanding, material transfer agreements, options or feasibility agreements. We may not execute definitive agreements formalizing these arrangements.

        Collaborative relationships are generally complex and may give rise to disputes regarding the relative rights, obligations and revenues of the parties, including the ownership of intellectual property

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and associated rights and obligations, especially when the applicable collaborative provisions have not been fully negotiated and documented. Such disputes can delay collaborative research, development or commercialization of potential products, and can lead to lengthy, expensive litigation or arbitration. The terms of collaborative arrangements may also limit or preclude us from developing products or technologies developed pursuant to such collaborations. Additionally, the collaborators under these arrangements might breach the terms of their respective agreements or fail to maintain, protect or prevent infringement of the licensed patents or our other intellectual property rights by third parties. Moreover, negotiating collaborative arrangements often takes considerably longer to conclude than the parties initially anticipate, which could cause us to enter into less favorable agreement terms that delay or defer recovery of our development costs and reduce the funding available to support key programs.

        We may be unable to enter into future collaborative arrangements on acceptable terms, which could harm our ability to develop and commercialize our current and potential future products and technologies. Other factors relating to collaborations that may adversely affect the commercial success of our products include:

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any parallel development by a collaborative partner of competitive technologies or products;

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arrangements with collaborative partners that limit or preclude us from developing products or technologies;

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premature termination of a collaboration agreement; or

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failure by a collaborative partner to devote sufficient resources to the development and commercial sales of products using our current and potential future products and technologies.

        Our collaborative arrangements do not necessarily restrict our collaborative partners from competing with us or restrict their ability to market or sell competitive products. Our current and any future collaborative partners may pursue existing or other development-stage products or alternative technologies in preference to those being developed in collaboration with us. Our collaborative partners may also terminate their collaborative relationships with us or otherwise decide not to proceed with development and commercialization of our products.

If we are unable to obtain or maintain regulatory approval, we will be limited in our ability to commercialize our products, and our business will suffer.

        The regulatory process is expensive and time consuming. Even after investing significant time and expenditures on clinical trials, we may not obtain regulatory approval of our product candidates. Data obtained from clinical trials are susceptible to varying interpretations, which could delay, limit or prevent regulatory approval, and the FDA may not agree with our methods of clinical data analysis or our conclusions regarding safety and/or efficacy. Significant clinical trial delays could impair our ability to commercialize our products and could allow our competitors to bring products to market before we do. In addition, changes in regulatory policy for product approval during the period of product development and regulatory agency review of each submitted new application may cause delays or rejections. Even if we receive regulatory approval, this approval may entail limitations on the indicated uses for which we can market a product.

        For example, the active ingredients in the products utilizing our Acuform delivery technology that are being developed pursuant to our collaboration with Mallinckrodt include acetaminophen in combination with opiates. In connection with concerns that consumers may inadvertently take more than the recommended daily dose of acetaminophen, potentially causing liver damage, an FDA advisory committee has recommended that prescription products containing acetaminophen in combination with prescription analgesics (including opiates) should include black box warnings and/or be removed from the market. The FDA is evaluating the recommendations and has indicated that such an evaluation will take some time. The FDA is not required to accept advisory committee recommendations.

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Mallinckrodt's ability or willingness to develop and market the products subject to our collaboration may be adversely affected by actions of the FDA in response to the advisory committee recommendations.

        Further, with respect to our approved products, once regulatory approval is obtained, a marketed product and its manufacturer are subject to continual review. The discovery of previously unknown problems with a product or manufacturer may result in restrictions on the product, manufacturer or manufacturing facility, including withdrawal of the product from the market. Manufacturers of approved products are also subject to ongoing regulation and inspection, including compliance with FDA regulations governing current Good Manufacturing Practices (cGMP) or Quality System Regulation (QSR). The FDCA, the CSA and other federal and foreign statutes and regulations govern and influence the testing, manufacturing, packing, labeling, storing, record keeping, safety, approval, advertising, promotion, sale and distribution of our products. In addition, with respect to Lazanda, we and our partners are also subject to ongoing United States Drug Enforcement Agency (DEA) regulatory obligations, including annual registration renewal, security, recordkeeping, theft and loss reporting, periodic inspection and annual quota allotments for the raw material for commercial production of our products. The failure to comply with these regulations could result in, among other things, warning letters, fines, injunctions, civil penalties, recall or seizure of products, total or partial suspension of production, non-renewal of marketing applications or authorizations or criminal prosecution, which could adversely affect our business, results of operations and financial condition.

        We are also required to report adverse events associated with our products to the FDA and other regulatory authorities. Unexpected or serious health or safety concerns could result in labeling changes, recalls, market withdrawals or other regulatory actions. Recalls may be issued at our discretion or at the discretion of the FDA or other empowered regulatory agencies. For example, in June 2010, we instituted a voluntary class 2 recall of 52 lots of our 500mg Glumetza product after chemical traces of 2,4,6-tribromoanisole (TBA) were found in the product bottle.

We are subject to risks associated with NDAs submitted under Section 505(b)(2) of the Food, Drug and Cosmetic Act.

        The products we develop generally are or will be submitted for approval under Section 505(b)(2) of the FDCA, which was enacted as part of the Drug Price Competition and Patent Term Restoration Act of 1984, otherwise known as the Hatch-Waxman Act. Section 505(b)(2) permits the submission of a NDA where at least some of the information required for approval comes from studies not conducted by or for the applicant and for which the applicant has not obtained a right of reference. For instance, the NDA for Gralise relies on the FDA's prior approval of Neurontin (gabapentin), the immediate release formulation of gabapentin initially approved by the FDA.

        For NDAs submitted under Section 505(b)(2) of the FDCA, the patent certification and related provisions of the Hatch-Waxman Act apply. In accordance with the Hatch-Waxman Act, such NDAs may be required to include certifications, known as "Paragraph IV certifications," that certify any patents listed in the FDA's Orange Book publication in respect to any product referenced in the 505(b)(2) application are invalid, unenforceable, and/or will not be infringed by the manufacture, use, or sale of the product that is the subject of the 505(b)(2) application. Under the Hatch-Waxman Act, the holder of the NDA which the 505(b)(2) application references may file a patent infringement lawsuit after receiving notice of the Paragraph IV certification. Filing of a patent infringement lawsuit triggers a one-time automatic 30-month stay of the FDA's ability to approve the 505(b)(2) application. Accordingly, we may invest a significant amount of time and expense in the development of one or more products only to be subject to significant delay and patent litigation before such products may be commercialized, if at all. A Section 505(b)(2) application may also not be approved until any non-patent exclusivity, such as exclusivity for obtaining approval of a new chemical entity, listed in the Orange Book for the referenced product has expired. The FDA may also require us to perform one or

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more additional clinical studies or measurements to support the change from the approved product. The FDA may then approve the new formulation for all or only some of the indications sought by us. The FDA may also reject our future Section 505(b)(2) submissions and require us to file such submissions under Section 501(b)(1) of the FDCA, which could be considerably more expensive and time consuming. These factors, among others, may limit our ability to successfully commercialize our product candidates.

If a product liability claim against us is successful, our business will suffer.

        Our business involves exposure to potential product liability risks that are inherent in the development production and commercialization of pharmaceutical products. Side effects, manufacturing defects, misuse or abuse of our products could result in patient injury or death. For instance, Lazanda is a self-administered, opioid analgesic that contains fentanyl, a Schedule II "controlled substance" under the CSA. A patient's failure to follow instructions on the use and administration of Lazanda or the abuse of Lazanda could result in injury or death. In addition, patients using Lazanda have been diagnosed with cancer, an often fatal disease. Patient injury or death can result in product liability claims being brought against us, even if our products did not cause an injury or death. Product liability claims may be brought against us by consumers, health care providers, pharmaceutical companies or others who come into contact with our products.

        We have obtained product liability insurance for clinical trials currently underway and forecasted 2014 sales of our products, but:

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we may be unable to maintain product liability insurance on acceptable terms;

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we may be unable to obtain product liability insurance for future trials;

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we may be unable to obtain product liability insurance for future products;

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we may be unable to secure increased coverage as the commercialization of our Acuform gastric retentive technology expands; or

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our insurance may not provide adequate protection against potential liabilities.

        Our inability to obtain or maintain adequate insurance coverage at an acceptable cost could prevent or inhibit the commercialization of our products. Defending a lawsuit could be costly and significantly divert management's attention from conducting our business. If third parties were to bring a successful product liability claim or series of claims against us for uninsured liabilities or in excess of insured liability limits, our business, results of operations and financial condition could be materially and adversely affected.

Lazanda is a controlled substance and any failure by us or our partners to comply with applicable statutes or regulations could adversely affect our business.

        Lazanda is an opioid analgesic that contains fentanyl, a regulated "controlled substance" under the Controlled Substances Act of 1970 (CSA). The CSA establishes, among other things, certain registration, production quotas, security, recordkeeping, reporting, import, export and other requirements administered by the DEA. The DEA regulates controlled substances as Schedule I, II, III, IV or V substances, with Schedule II substances being those that present the highest risk of abuse. Fentanyl is listed by the DEA as a Schedule II substance under the CSA. The manufacture, shipment, storage, sale and use, among other things, of controlled substances that are pharmaceutical products are subject to a high degree of regulation. For example, generally all Schedule II substance prescriptions, such as prescriptions for fentanyl, must be written and signed by a physician, physically presented to a pharmacist and may not be refilled without a new prescription.

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        The DEA also conducts periodic inspections of certain registered establishments that handle controlled substances. Facilities that conduct research, manufacture, distribute, import or export controlled substances must be registered to perform these activities and have the security, control and inventory mechanisms required by the DEA to prevent drug loss and diversion. Failure to maintain compliance, particularly non-compliance resulting in loss or diversion, can result in regulatory action that could adversely affect our business, results of operations and financial condition. The DEA may seek civil penalties, refuse to renew necessary registrations, or initiate proceedings to restrict, suspend or revoke those registrations and in certain circumstances, violations could lead to criminal proceedings against us or our manufacturing and distribution partners, and our respective employees, officers and directors.

        In addition to federal regulations, many individual states also have controlled substances laws. Although state controlled substances laws generally mirror federal law, because the states are separate jurisdictions they may separately schedule our products. Any failure by us or our partners to obtain separate state registrations, permits, or licenses in order to be able to obtain, handle, and distribute fentanyl or to meet applicable regulatory requirements could lead to enforcement and sanctions by the states in addition to those from the DEA or otherwise arising under federal law and would adversely affect our business, results of operations and financial condition.

Limitations on fentanyl production in the United States could limit our ability to successfully commercialize Lazanda.

        The availability and production of all Schedule II substances, including fentanyl, in the United States is limited by the DEA through a quota system that includes a national aggregate quota and individual company quotas. The DEA annually establishes an aggregate quota for total fentanyl production in the United States based on the DEA's estimate of the quantity needed to meet commercial and scientific need. The aggregate quota of fentanyl that the DEA allows to be produced in the United States annually is allocated among individual companies, which must submit applications annually to the DEA for individual production and procurement quotas. The DEA requires substantial evidence and documentation of expected legitimate medical and scientific needs before assigning quotas to individual companies. The DEA may adjust aggregate production quotas and individual production and procurement quotas from time to time during the year, although the DEA has substantial discretion in whether or not to make such adjustments. Based on a variety of factors, including public policy considerations, the DEA may set the aggregate fentanyl quota lower than the total amount requested by individual companies. Although through our manufacturing partner we are permitted to ask the DEA to increase the annual aggregate quota after it is initially established, we cannot be certain that the DEA would act favorably upon such a request. If our allocated quota of fentanyl is insufficient to meet our commercial demand or clinical needs, our business, results of operations and financial condition could be adversely affected. In addition, any delay or refusal by the DEA in establishing the production or procurement quota or any reduction by the DEA in our allocated quota for fentanyl could adversely affect our business, results of operations and financial condition.

The FDA-mandated Risk Evaluation and Mitigation Strategy (REMS) program may limit the commercial success of Lazanda.

        Lazanda is subject to a FDA-mandated Risk Evaluation and Mitigation Strategy (REMS) protocol that requires enrollment and participation in the REMS program to prescribe, dispense or distribute Transmucosal Immediate Release Fentanyl (TIRF) medicines, including Lazanda, for outpatient use. Many physicians, health care practitioners and pharmacies are unwilling to enroll and participate in the TIRF REMS program. As a result, there are relatively few prescribers and dispensers of TIRF products. If we are not able to successfully promote Lazanda to participants in the TIRF REMS program, our business, results of operations and financial condition could be adversely affected.

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The development of drug candidates is inherently difficult and uncertain and we cannot be certain that any of our product candidates or those of our collaborative partners will be approved for marketing or, if approved, will achieve market acceptance.

        Clinical development is a long, expensive and uncertain process and is subject to delays and failures. Our own product candidates and those of our collaborative partners are subject to the risk that any or all of them may be found to be ineffective or unsafe, or otherwise may fail to receive necessary regulatory clearances. Positive or encouraging results of prior clinical trials are not necessarily indicative of the results obtained in later clinical trials, as was the case with the Phase 3 trial for Gralise for the management of PHN that we completed in 2007, and with the Phase 3 trials evaluating Sefelsa for menopausal hot flashes, the last of which we completed in October 2011. In addition, data obtained from pivotal clinical trials are susceptible to varying interpretations, which could delay, limit or prevent regulatory approval.

        Other factors could delay or result in termination of our clinical trials, including:

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negative or inconclusive results;

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patient noncompliance with the protocol;

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adverse medical events or side effects among patients during the clinical trials;

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FDA inspections of our clinical operations; and

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actual or perceived lack of efficacy or safety of the product candidate.

        We are unable to predict whether any of our product candidates or those of our collaborative partners will receive regulatory clearances or be successfully manufactured or marketed. Further, due to the extended testing and regulatory review process required before marketing clearance can be obtained, the time frame for commercializing a product is long and uncertain. Even if these other product candidates receive regulatory clearance, our products may not achieve or maintain market acceptance. Also, DM-1992 uses the Acuform technology. If it is discovered that the Acuform technology could have adverse effects or other characteristics that indicate it is unlikely to be effective as a delivery system for drugs or therapeutics, our product development efforts and our business could be significantly harmed.

        Even when or if our products obtain regulatory approval, successful commercialization requires:

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market acceptance;

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cost-effective commercial scale production; and

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reimbursement under private or governmental health plans.

        Any material delay or failure in the governmental approval process and/or the successful commercialization of our potential products or those of our collaborative partners could adversely impact our financial position and liquidity.

We depend on clinical investigators and clinical sites to enroll patients in our clinical trials and other third parties to manage the trials and to perform related data collection and analysis, and, as a result, we may face costs and delays outside of our control.

        We rely on clinical investigators and clinical sites to enroll patients and other third parties to manage our trials and to perform related data collection and analysis. However, we may be unable to control the amount and timing of resources that the clinical sites that conduct the clinical testing may devote to our clinical trials. If our clinical investigators and clinical sites fail to enroll a sufficient number of patients in our clinical trials or fail to enroll them on our planned schedule, we will be

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unable to complete these trials or to complete them as planned, which could delay or prevent us from obtaining regulatory approvals for our product candidates.

        Our agreements with clinical investigators and clinical sites for clinical testing and for trial management services place substantial responsibilities on these parties, which could result in delays in, or termination of, our clinical trials if these parties fail to perform as expected. For example, if any of our clinical trial sites fail to comply with FDA-approved good clinical practices, we may be unable to use the data gathered at those sites. If these clinical investigators, clinical sites or other third parties do not carry out their contractual duties or obligations or fail to meet expected deadlines, or if the quality or accuracy of the clinical data they obtain is compromised due to their failure to adhere to our clinical protocols or for other reasons, our clinical trials may be extended, delayed or terminated, and we may be unable to obtain regulatory approval for, or successfully commercialize, our product candidates.

Our success is dependent in large part upon the continued services of our Chief Executive Officer and senior management with whom we do not have employment agreements.

        Our success is dependent in large part upon the continued services of our President and Chief Executive Officer, James A. Schoeneck, and other members of our executive management team, and on our ability to attract and retain key management and operating personnel. We do not have agreements with Mr. Schoeneck or any of our other executive officers that provide for their continued employment with us. We may have difficulty filling open senior commercial, scientific and financial positions. Management, scientific and operating personnel are in high demand in our industry and are often subject to competing offers. The loss of the services of one or more members of management or key employees or the inability to hire additional personnel as needed could result in delays in the research, development and commercialization of our products and potential product candidates.

Our operating results may fluctuate and affect our stock price.

        The following factors will affect our operating results and may result in a material adverse effect on our stock price:

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the degree of commercial success of Gralise, Zipsor, Lazanda and CAMBIA;

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filings and other regulatory actions related to our product candidates and those of our collaborative partners;

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the outcome of our patent infringement litigation against filers of ANDAs for Gralise and Zipsor;

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the outcome of our patent infringement litigation against Purdue and Endo;

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the outcome of our litigation against the FDA;

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developments concerning proprietary rights, including patents, infringement allegations and litigation matters;

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decisions by collaborative partners to proceed or not to proceed with subsequent phases of a collaboration or program;

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adverse events related to our products, including recalls;

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interruptions of manufacturing or supply, or other manufacture or supply difficulties;

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variations in revenues obtained from collaborative agreements, including milestone payments, royalties, license fees and other contract revenues; and

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adoption of new technologies by us or our competitors.

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        As a result of these factors, our stock price may continue to be volatile and investors may be unable to sell their shares at a price equal to, or above, the price paid. Additionally, any significant drops in our stock price, such as the ones we experienced following the announcement of our Sefelsa Phase 3 trial results in October 2009 and October 2011 the announcement of the vote by the Reproductive Health Drugs Advisory Committee of the FDA against the approval of Sefelsa in March 2013 and the FDA's issuance of a CRL to the NDA for Sefelsa, could give rise to shareholder lawsuits, which are costly and time consuming to defend against and which may adversely affect our ability to raise capital while the suits are pending, even if the suits are ultimately resolved in our favor.

We have incurred operating losses in the past and may incur operating losses in the future.

        To date, we have recorded revenues from license fees, product sales, royalties, collaborative research and development arrangements and feasibility studies. For the year ended December 31, 2013, we recognized net income of $43.3 million. For the year ended December 31, 2012, we incurred a net loss of $29.8 million. Collaborative milestones and settlement fees received from Abbott Products, Janssen and Merck resulted in our reaching profitability of $70.7 million and $3.9 million in 2011 and 2010, respectively. Although we have achieved profitability for certain prior periods, we may incur operating losses in 2014 and in future years. Any such losses may have an adverse impact on our total assets, shareholders' equity and working capital.

Our existing capital resources may not be sufficient to fund our future operations or product acquisitions and strategic transactions which we may pursue.

        We fund our operations primarily through revenues from product sales and do not have any committed sources of capital. To the extent that our existing capital resources and revenues from ongoing operations are insufficient to fund our future operations, or product acquisitions and strategic transactions which we may pursue, we will have to raise additional funds through the sale of our equity securities, through debt financing or from development and licensing arrangements. We may be unable to raise such additional capital on favorable terms, or at all. If we raise additional capital by selling our equity or convertible debt securities, the issuance of such securities could result in dilution of our shareholders' equity positions.

We have implemented certain anti-takeover provisions.

        Certain provisions of our articles of incorporation and the California General Corporation Law could discourage a third party from acquiring, or make it more difficult for a third party to acquire, control of our company without approval of our board of directors. These provisions could also limit the price that certain investors might be willing to pay in the future for shares of our common stock. Certain provisions allow the board of directors to authorize the issuance of preferred stock with rights superior to those of the common stock. We are also subject to the provisions of Section 1203 of the California General Corporation Law which requires a fairness opinion to be provided to our shareholders in connection with their consideration of any proposed "interested party" reorganization transaction.

        We have adopted a shareholder rights plan, commonly known as a "poison pill." The provisions described above, our poison pill and provisions of the California General Corporation Law may discourage, delay or prevent a third party from acquiring us.

If we are unable to satisfy regulatory requirements relating to internal controls, our stock price could suffer.

        Section 404 of the Sarbanes-Oxley Act of 2002 requires companies to conduct a comprehensive evaluation of their internal control over financial reporting. At the end of each fiscal year, we must perform an evaluation of our internal control over financial reporting, include in our annual report the

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results of the evaluation and have our external auditors publicly attest to such evaluation. If material weaknesses are found in our internal controls in the future, if we fail to complete future evaluations on time or if our external auditors cannot attest to our future evaluations, we could fail to meet our regulatory reporting requirements and be subject to regulatory scrutiny and a loss of public confidence in our internal controls, which could have an adverse effect on our stock price.

The value of our deferred tax assets could become impaired, which could adversely affect our operating results.

        As of December 31, 2013, we had approximately $103.2 million in net deferred tax assets. These deferred tax assets are principally comprised of a temporary difference related to the income tax recognition effect of the PDL transaction and other temporary differences that are expected to reverse in the future. We assess on a quarterly basis the probability of the realization of deferred tax assets, using significant judgments and estimates with respect to, among other things, historical operating results, expectations of future earnings and significant risks and uncertainties related to our business. If we determine in the future that there is not sufficient positive evidence to support the valuation of these assets, due to the risk factors described herein or other factors, we may be required to further adjust the valuation allowance to reduce our deferred tax assets. Such a reduction could result in material non-cash expenses in the period in which the valuation allowance is adjusted and could have an adverse effect on our results of operations.

Business interruptions could limit our ability to operate our business.

        Our operations are vulnerable to damage or interruption from computer viruses, human error, natural disasters, telecommunications failures, intentional acts of vandalism and similar events. In particular, our corporate headquarters are located in the San Francisco Bay area, which has a history of seismic activity. We have not established a formal disaster recovery plan, and our back-up operations and our business interruption insurance may not be adequate to compensate us for losses that occur. A significant business interruption could result in losses or damages incurred by us and require us to cease or curtail our operations.

ITEM 1B.    UNRESOLVED STAFF COMMENTS

        None.

ITEM 2.    PROPERTIES

        In April 2012, we entered into an office and laboratory lease agreement with BMR-Pacific Research Center LP (BMR) to lease approximately 52,500 rentable square feet in Newark, California commencing on December 1, 2012. The initial term of the lease is approximately ten years, and we relocated our corporate headquarters and research activities from premises located at 1330 and 1360 O'Brien Drive, Menlo Park, California, to this facility in December 2012. The lease for the Menlo Park facility expired on January 31, 2013. We will pay approximately $12.2 million in aggregate as rent over the term of the lease to the landlord. As part of the lease, BMR agreed to provide various financial allowances so that we can build initial and future laboratories, offices and other improvements, subject to customary terms and conditions relating to landlord-funded tenant improvements. As part of the lease, we are obligated to lease approximately 8,000 additional rentable square feet commencing no later than December 1, 2015. The lease will expire on November 30, 2022. However, we have the right to renew the lease for one additional five year term, provided that written notice is made to BMR no later than 12 months prior to the lease expiration. We will have the one-time right to terminate the lease in its entirety effective as of November 30, 2017 by delivering written notice to the landlord on or before December 1, 2016. In the event of such termination, we will

33

pay BMR the unamortized portion of the tenant improvement allowance, specified additional allowances, waived base rent and leasing commissions, in each case amortized at 8% interest.

        The property subject to the office and laboratory lease is the only property utilized by us. We believe our office and laboratory space is adequate to meet our current and future needs.

ITEM 3.    LEGAL PROCEEDINGS

Depomed v. Gralise ANDA Filers

        Between March 2012 and May 2012, we filed lawsuits in the United States District Court for the District of New Jersey in response to six ANDAs filed by companies seeking to market generic versions of 300mg and 600mg dosage strengths of Gralise prior to the expiration of our patents listed in the Orange Book for Gralise. The lawsuits have been consolidated for purposes of all pretrial proceedings. Our lawsuits against two of the six Gralise ANDA filers, Impax Laboratories and Watson Laboratories, have been dismissed as a result of the withdrawal of the ANDAs from consideration by the FDA. Our lawsuit against a third ANDA filer, Par Pharmaceuticals Inc., has been dismissed because the ANDA filer no longer seeks approval of its Gralise ANDA prior to the expiration of our Gralise Orange Book-listed patents. As of March 14, 2014, the defendants in the consolidated lawsuit include: Actavis Elizabeth LLC and Actavis Inc. (collectively, Actavis); Incepta Pharmaceuticals and Abon Pharmaceuticals LLC (collectively Incepta); and Zydus Pharmaceuticals USA Inc. and Cadila Healthcare Limited (collectively, Zydus). The patents asserted in the lawsuits include U.S. Patent Nos. 6,340,475; 6,635,280; 6,488,962; 6,723,340; 7,438,927; 7,731,989; 8,192,756; 8,252,332; and 8,333,992. The asserted patents expire between September 2016 and February 2024, as set forth above under "PATENTS AND PROPRIETARY RIGHTS".

        We commenced the lawsuits within the 45 days required to automatically stay, or bar, the FDA from approving the ANDAs for 30 months or until a district court decision that is adverse to the asserted patents, whichever may occur earlier. Absent a court order, the 30-month stays are expected to expire in July 2014 (against Actavis), August 2014 (against Incepta) and October 2014 (against Zydus).

        Fact discovery closed in August 2013. The court issued a Markman claim construction ruling on January 28, 2014. Expert discovery is ongoing and a trial date has been scheduled for May 2014.

Depomed v. FDA

        In November 2010, the FDA granted Gralise Orphan Drug designation for the management of PHN based on a plausible hypothesis that Gralise is "clinically superior" to immediate release gabapentin due to the incidence of adverse events observed in Gralise clinical trials relative to the incidence of adverse events reported in the package insert for immediate release gabapentin. Generally, an Orphan-designated drug approved for marketing is eligible for seven years of regulatory exclusivity for the Orphan-designated indication. If granted, Orphan Drug exclusivity for Gralise will run for seven years from January 28, 2011. However, the FDA has not granted Orphan Drug exclusivity for Gralise based on the FDA's interpretation of the law and regulations governing Orphan Drug exclusivity. In September 2012, we filed an action in federal district court for the District of Columbia against the FDA seeking an order requiring the FDA to grant Gralise Orphan Drug exclusivity for the management of PHN. We believe Gralise is entitled to Orphan Drug exclusivity as a matter of law, and the FDA's action is not consistent with the statute or the FDA's regulations governing Orphan Drugs. The lawsuit seeks a determination by the court that Gralise is protected by Orphan Drug exclusivity, and an order that the FDA act accordingly. Briefing in the case was completed in March 2013 and a hearing on our summary judgment motion was held in August 2013, and we are awaiting a decision.

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Depomed v. Purdue

        In January 2013, we filed a complaint in the United States District Court for the District of New Jersey against Purdue for patent infringement arising from Purdue's commercialization of reformulated OxyContin® (oxycodone hydrochloride controlled-release) in the United States. The patents we asserted in the lawsuit include U.S. Patent Nos. 6,340,475 and 6,635,280, both of which expire in September 2016. Fact discovery in the case is ongoing and no trial date has been set.

Depomed v. Endo Pharmaceuticals

        In April 2013, we filed a complaint in the United States District Court for the District of New Jersey against Endo , a wholly-owned subsidiary of Endo Health Solutions Inc., for infringement of U.S. Patent Nos. 6,340,475; 6,635,280; and 6,723,340 arising from Endo's commercialization of OPANA® ER (oxymorphone hydrochloride extended-release) in the United States. Fact discovery in the case is ongoing and no trial date has been set.

Depomed v. Banner Pharmacaps

        On June 28, 2013, we received from Banner a Notice of Certification for U.S. Patent Nos. 6,365,180; 7,662,858; 7,884,095; 7,939,518; and 8,110,606 under 21 U.S.C. § 355 (j)(2)(A)(vii)(IV) (Zipsor Paragraph IV Letter) certifying that Banner has submitted and the FDA has accepted for filing an ANDA for diclofenac potassium capsules, 25mg. The letter states that the Banner ANDA product contains the required bioavailability or bioequivalence data to Zipsor and certifies that Banner intends to obtain FDA approval to engage in commercial manufacture, use or sale of Banner's ANDA product before the expiration of the above identified patents, which are listed for Zipsor in the Orange Book. U.S. Patent No. 6,365,180 expires in 2019 and U.S. Patent Nos. 7,662,858; 7,884,095; 7,939,518; and 8,110,606 expire in 2029. The Zipsor Paragraph IV letter indicates Banner has granted to Watson Laboratories Inc. (Watson) exclusive rights to Banner's proposed generic Zipsor product.

        On July 26, 2013, we filed a lawsuit in the United States District Court for District of New Jersey against Banner and Watson for infringement of the patents identified above. The lawsuit was commenced within the 45 days required to automatically stay, or bar, the FDA from approving Banner's ANDA for Zipsor for 30 months or until a district court decision that is adverse to Depomed, whichever may occur earlier. Absent a court order, the 30-month stay would be expected to expire in December 2015. Fact discovery in the case is ongoing and no trial date has been set.

General

        We cannot reasonably predict the outcome of the legal proceedings described above, nor can we estimate the amount of loss, range of loss or other adverse consequence, if any, that may result from these proceedings. As such, we are not currently able to estimate the impact of the above litigation on our financial position or results of operations.

        We may from time to time become party to actions, claims, suits, investigations or proceedings arising from the ordinary course of our business, including actions with respect to intellectual property claims, breach of contract claims, labor and employment claims and other matters. Although actions, claims, suits, investigations and proceedings are inherently uncertain and their results cannot be predicted with certainty, other than the matters set forth above, we are not currently involved in any matters that we believe may have a material adverse effect on our business, results of operations or financial condition. However, regardless of the outcome, litigation can have an adverse impact on us because of associated cost and diversion of management time.

ITEM 4.    MINE SAFETY DISCLOSURES

        Not applicable.

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PART II

ITEM 5.    MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

        Our common stock trades on the NASDAQ Global Market (NASDAQ) under the symbol "DEPO". The following table sets forth, for the periods indicated, the intraday high and low prices of our common stock as reported by the NASDAQ from January 1, 2012 to December 31, 2013.

	High		Low
2013
First Quarter	$	7.15	$	5.12
Second Quarter	$	6.19	$	4.99
Third Quarter	$	7.75	$	5.63
Fourth Quarter	$	10.77	$	6.95
2012
First Quarter	$	7.06	$	5.30
Second Quarter	$	6.48	$	4.99
Third Quarter	$	5.91	$	4.97
Fourth Quarter	$	6.45	$	5.41

        On March 14, 2014, the closing price of our common stock was $14.65. As of March 14, 2014, there were approximately 25 shareholders of record of our common stock, one of which is Cede & Co., a nominee for Depository Trust Company, or DTC. All of the shares of common stock held by brokerage firms, banks and other financial institutions as nominees for beneficial owners are deposited into participant accounts at DTC, and are therefore considered to be held of record by Cede & Co. as one shareholder.

Dividends

        We have never declared or paid any cash dividends on our common stock. We currently intend to retain any future earnings to finance the growth and development of our business.

Issuer Purchases of Securities

        We did not repurchase any of our equity securities during the fourth quarter of the year ended December 31, 2013.

Unregistered Sales of Securities

        During the fiscal years ended December 31, 2013, 2012, and 2011, we did not sell any equity securities that were not registered under the Securities Act of 1933, as amended.

Equity Compensation Plan Information

        The information under the principal heading "Equity Compensation Plan Information" in our definitive Proxy Statement for the Annual Meeting of Stockholders to be held on or about May 20, 2014, to be filed with the SEC, is incorporated herein by reference.

Stock Price Performance Graph

        The following graph compares total shareholder returns of Depomed for the past five years to two indices: the NASDAQ Composite Index and the NASDAQ Pharmaceutical Index. The total return for

36

Depomed's common stock and for each index assumes the reinvestment of all dividends, although cash dividends have never been declared on Depomed's common stock.

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Depomed, Inc., The NASDAQ Composite Index
And The NASDAQ Pharmaceutical Index

*

$100 invested on 12/31/08 in stock or index, including reinvestment of dividends.
Fiscal year ending December 31.

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ITEM 6.    SELECTED FINANCIAL DATA

        The data set forth below is not necessarily indicative of the results of future operations and should be read in conjunction with the financial statements and the notes included elsewhere in this annual report on Form 10-K and also with "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."

	Year Ended December 31,
	2013		2012			2011(1)			2010		2009
Consolidated Statement of Operations Data (in thousands):
Revenues:
Product sales	$	58,302	$	27,483		$	41,178		$	45,637	$	35,094
Royalties		45,003		44,535			9,997			306		1,533
License and other revenue		12,796		18,798			81,798			34,821		21,101
Non-cash royalty revenue related to sale of future royalties to PDL		18,104		—			—			—		—
Total revenues		134,205		90,816			132,973			80,764		57,728
Total costs and expenses		124,888		121,169			102,275			77,139		79,800
Gain on termination of Abbott agreement		—		—			40,000			—		—
Income (loss) from operations		9,317		(30,353	)		70,698			3,625		(22,072	)
Net income (loss) before income taxes		4,580		(29,872	)		71,122			3,892		(22,023	)
Benefit from (provision for) income taxes		38,733		91			(396	)		4		15
Net income (loss)	$	43,313	$	(29,781	)	$	70,726		$	3,896	$	(22,008	)
Basic net income (loss) per share	$	0.76	$	(0.53	)	$	1.30		$	0.07	$	(0.43	)
Diluted net income (loss) per share	$	0.75	$	(0.53	)	$	1.26		$	0.07	$	(0.43	)
Shares used in computing basic net income (loss) per share		56,736,009		55,892,563			54,562,820			52,533,256		51,519,912
Shares used in computing diluted net income (loss) per share		57,543,979		55,892,563			56,089,796			53,463,749		51,519,912

	Year Ended December 31,
	2013			2012			2011			2010			2009
Consolidated Balance Sheet Data
Cash, cash equivalents and marketable securities	$	276,017		$	77,892		$	139,793		$	76,888		$	81,759
Total assets		508,653			141,653			164,372			87,031			91,581
Deferred revenue, non-current portion		12,475			15,516			17,932			30,926			41,306
Liability related to the sale of future royalties, less current portion		177,624			—			—			—			—
Long-term debt, non-current portion		—			—			—			—			2,170
Other long-term liabilities		13,017			5,520			—			15			177
Accumulated deficit		(84,048	)		(127,361	)		(97,580	)		(168,306	)		(172,202	)
Total shareholders' equity		137,416			83,936			105,918			23,106			15,726

(1)

Total revenues, income from operations, net income before income taxes, net income and net income per share in 2011 include a one-time $48.0 million milestone received from Abbott Laboratories for the FDA approval of Gralise.

Income from operations, net income before income taxes, net income and net income per share in 2011 include a $40.0 million gain on termination of our agreement with Abbott related to Gralise.

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ITEM 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

        Depomed is a specialty pharmaceutical company focused on pain and other conditions and diseases of the central nervous system. The products that comprise our current specialty pharmaceutical business are Gralise® (gabapentin), a once-daily product for the management of postherpetic neuralgia that we launched in October 2011, Zipsor® (diclofenac potassium) liquid filled capsules, our non-steroidal anti-inflammatory drug for the treatment of mild to moderate acute pain that we acquired in June 2012, Lazanda® (fentanyl) nasal spray, our product for the management of breakthrough pain in cancer patients 18 years of age and older who are already receiving and who are tolerant to opioid therapy for their underlying persistent cancer pain that we acquired in July 2013, and CAMBIA® (diclofenac potassium for oral solution), our non-steroidal anti-inflammatory drug for the acute treatment of migraine attacks that we acquired in December 2013. We actively seek to expand our product portfolio through in-licensing, acquiring or obtaining co-promotion rights to commercially available products or late-stage product candidates that could be marketed and sold effectively with our existing products through our sales and marketing capability.

        We also have a portfolio of royalty and milestone producing assets based on our proprietary Acuform® gastroretentive drug delivery technology with Mallinckrodt Pharmaceuticals (Mallinckrodt), Ironwood Pharmaceuticals, Inc. (Ironwood) and Janssen Pharmaceuticals, Inc.

        On October 18, 2013, we sold our interests in royalty and milestone payments under our license agreements in the Type 2 diabetes therapeutic area to PDL BioPharma, Inc. (PDL) for $240.5 million. The interests sold include royalty and milestone payments accruing from and after October 1, 2013: (a) from Santarus with respect to sales of Glumetza® (metformin HCL extended-release tablets) in the United States; (b) from Merck & Co., Inc. (Merck) with respect to sales of Janumet XR® (sitagliptin and metformin HCL extended-release); (c) from Janssen Pharmaceutica N.V. and Janssen Pharmaceuticals, Inc. (collectively, Janssen) with respect to potential future development milestones and sales of its investigational fixed-dose combination of Invokana® (canagliflozin) and extended-release metformin; (d) from Boehringer Ingelheim International GMBH (Boehringer Ingelheim) with respect to potential future development milestones and sales of the investigational fixed-dose combinations of drugs and extended-release metformin subject to our license agreement with Boehringer Ingelheim; and (e) from LG Life Sciences Ltd. (LG) and Valeant International Bermuda SRL (Valeant) for sales of extended-release metformin in Korea and Canada, respectively.

        As of December 31, 2013, we have one product candidate under clinical development, DM-1992 for Parkinson's disease. DM-1992 completed a Phase 2 trial for Parkinson's disease, and we announced a summary of the results of that trial in November 2012. We continue to evaluate partnering opportunities for DM-1992 and monitor competitive developments.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

        A detailed discussion of our significant accounting policies can be found in Note 1 of the Notes to Financial Statements, and the impact and risks associated with our accounting policies are discussed throughout this Annual Report on Form 10-K and in the footnotes to the financial statements. Critical accounting policies are those that require significant judgment and/or estimates by management at the time that financial statements are prepared such that materially different results might have been reported if other assumptions had been made. We consider certain accounting policies related to revenue recognition, accrued liabilities, and use of estimates to be critical policies. These estimates form the basis for making judgments about the carrying values of assets and liabilities. We base our estimates and judgments on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ materially from these estimates.

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        We believe the following policies to be the most critical to an understanding of our financial condition and results of operations because they require us to make estimates, assumptions and judgments about matters that are inherently uncertain.

Revenue Recognition

        We recognize revenue from the sale of our products, and from license fees, milestones and royalties earned on license agreements and collaborative arrangements. Revenue is recognized when there is persuasive evidence that an arrangement exists, delivery has occurred and title has passed, the price is fixed or determinable and we are reasonably assured of collecting the resulting receivable. Revenue arrangements with multiple elements are divided into separate units of accounting if certain criteria are met, including whether the delivered element has stand-alone value to the customer and whether there is objective and reliable evidence of the fair value of the undelivered items.

Product Sales

        We sell our commercial products to wholesale distributors and retail pharmacies. Products sales revenue is recognized when title has transferred to the customer and the customer has assumed the risks and rewards of ownership, which typically occurs on delivery to the customer.

Product Sales Allowances

        We recognize product sales allowances as a reduction of product sales in the same period the related revenue is recognized. Product sales allowances are based on amounts owed or to be claimed on the related sales. These estimates take into consideration the terms of our agreements with customers, historical product returns, rebates or discounts taken, estimated levels of inventory in the distribution channel, the shelf life of the product, and specific known market events, such as competitive pricing and new product introductions. If actual future results vary from our estimates, we may need to adjust these estimates, which could have an effect on product sales and earnings in the period of adjustment. Our product sales allowances include:

•

Product Returns—We allow customers to return product for credit on returned product that is within six months before and up to 12 months after its product expiration date. We estimate product returns on Gralise, Zipsor, CAMBIA and Lazanda. We also estimate returns on sales of Glumetza made by us through August 2011, as we are financially responsible for return credits on Glumetza product we shipped as part of the our commercialization with Santarus in August 2011. Under the terms of the Zipsor Asset Purchase Agreement, we also assumed financial responsibility for returns of Zipsor product previously sold by Xanodyne. Under the terms of the CAMBIA Asset Purchase Agreement, we also assumed financial responsibility for returns of CAMBIA product previously sold by Nautilus. We did not assume financial responsibility for returns of Lazanda product previously sold by Archimedes. See Note 15 of the Notes to Financial Information for further information on the acquisition of Zipsor, CAMBIA and Lazanda.

The shelf life of Gralise is 24 to 36 months from the date of tablet manufacture. The shelf life of Zipsor is 36 months from the date of tablet manufacture. The shelf life of CAMBIA is 24 to 48 months from the manufacture date. The shelf life of Lazanda is 24 to 36 months from the manufacture date. The shelf life of the 500mg Glumetza is 48 months from the date of tablet manufacture and the shelf life of the 1000mg Glumetza is 24 to 36 months from the date of tablet manufacture. We monitor actual return history on an individual product lot basis since product launch, which provides us with a basis to reasonably estimate future product returns, taking into consideration the shelf life of product at the time of shipment, shipment and

40

prescription trends, estimated distribution channel inventory levels and consideration of the introduction of competitive products.

Because of the shelf life of our products and our return policy of issuing credits on returned product that is within six months before and up to 12 months after its product expiration date, there may be a significant period of time between when the product is shipped and when we issue credits on returned product. Accordingly, we may have to adjust these estimates, which could have an effect on product sales and earnings in the period of adjustments.

•

Wholesaler and Retail Pharmacy Discounts—We offer contractually determined discounts to certain wholesale distributors and retail pharmacies that purchase directly from us. These discounts are either taken off-invoice at the time of shipment or paid to the customer on a quarterly basis one to two months after the quarter in which product was shipped to the customer.

•

Prompt Pay Discounts—We offer cash discounts to our customers, generally 2% of the sales price, as an incentive for prompt payment. Based on our experience, we expect our customers to comply with the payment terms to earn the cash discount.

•

Patient Discount Programs—We offer patient discount co-pay assistance programs in which patients receive certain discounts off their prescription at participating retail pharmacies. The discounts are reimbursed by us approximately one month after the prescriptions subject to the discount are filled.

•

Medicaid Rebates—We participate in Medicaid rebate programs, which provide assistance to certain low-income patients based on each individual state's guidelines regarding eligibility and services. Under the Medicaid rebate programs, we pay a rebate to each participating state, generally two to three months after the quarter in which prescriptions subject to the rebate are filled.

•

Chargebacks—We provide discounts to authorized users of the Federal Supply Schedule (FSS) of the General Services Administration under an FSS contract with the Department of Veterans Affairs. These federal entities purchase products from the wholesale distributors at a discounted price, and the wholesale distributors then charge back to us the difference between the current retail price and the price the federal entity paid for the product.

•

Managed Care Rebates—We offer discounts under contracts with certain managed care providers who do not purchase directly from us. We generally pay managed care rebates one to two months after the quarter in which prescriptions subject to the rebate are filled.

•

Medicare Part D Coverage Gap Rebates—We participate in the Medicare Part D Coverage Gap Discount Program under which we provide rebates on prescriptions that fall within the "donut hole" coverage gap. We generally pay Medicare Part D Coverage Gap rebates two to three months after the quarter in which prescriptions subject to the rebate are filled.

•

Launch Discounts—We offered certain discounts in connection with the launch and commercial availability of Gralise in October 2011. These launch discounts include off-invoice discounts to wholesalers and stocking rebates to pharmacies for stocking Gralise that were paid in November 2011.

        We believe our estimates related to gross-to-net sales adjustments for wholesaler and retail pharmacy fees and discounts, prompt payment discounts, patient discount programs, launch discounts, managed care rebates and other government chargebacks do not have a high degree of estimation complexity or uncertainty as the related amounts are settled within a relatively short period of time. We believe that our estimated product return allowances require a high degree of judgment and are subject to change based on our experience and certain quantitative and qualitative factors.

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        Our product sales allowances and related accruals are evaluated each reporting period and adjusted when trends or significant events indicate that a change in estimate is appropriate. Such changes in estimate could affect our results of operations of financial position.

        A rollforward of our product sales allowances for the three years ended December, 31, 2013 is as follows:

(in thousands)	Contract Discounts(1)			Product Returns(2)			Cash Discounts			Total
Balance at December 31, 2010		2,626			5,354			112			8,092
Revenue Allowances:
Provision related to current period sales(2)		5,654			6,377			1,077			13,108
Provision related to sales made in prior years		—			(148	)		—			(148	)
Recorded to balance sheet(2)		392			—			124			516
Payments and credits related to sales made in current period		(3,421	)		—			(1,110	)		(4,531	)
Payments and credits related to sales made in prior periods		(2,625	)		(1,741	)		(113	)		(4,479	)
Balance at December 31, 2011	$	2,626		$	9,842		$	90		$	12,558
Revenue Allowances:
Acquisition of Zipsor		—			1,812			—			1,812
Provision related to current period sales(2)		7,624			3,506			784			11,914
Provision related to sales made in prior years		—			(853	)		—			(853	)
Recorded to balance sheet(2)		(464	)		—			(147	)		(611	)
Payments and credits related to sales made in current period		(2,910	)		—			(558	)		(3,468	)
Payments and credits related to sales made in prior periods		(2,626	)		(3,476	)		(91	)		(6,193	)
Balance at December 31, 2012	$	4,250		$	10,831		$	78		$	15,159
Revenue Allowances:
Acquisition of CAMBIA		—			930			—			930
Provision related to current period sales(2)		20,419			5,709			1,719			27,847
Provision related to sales made in prior years		—			(34	)		—			(34	)
Payments and credits related to sales made in current period		(12,132	)		—			(1,484	)		(13,616	)
Payments and credits related to sales made in prior periods		(4,250	)		(6,227	)		(79	)		(10,556	)
Balance at December 31, 2013	$	8,287		$	11,209		$	234		$	19,730

(1)

Includes wholesaler fees and retail discounts, launch discounts, patient support programs, managed care rebates and government chargebacks and rebates.

(2)

Beginning in the fourth quarter of 2012, we began recognizing Gralise product sales at the time title transfers to our customer, and began providing for an estimate of future product returns at that time. In June 2012, we acquired Zipsor and assumed financial responsibility on returns of Zipsor previously sold by Xanodyne. In December 2013, we acquired CAMBIA and assumed financial responsibility on returns of CAMBIA previously sold by Nautilus.

License and Collaborative Arrangements

        Revenue from license and collaborative arrangements, including license fees creditable against future royalty obligations (if any), of the licensee, is recognized when an arrangement is entered into if we have substantially completed our obligations under the terms of the arrangement and our remaining involvement is inconsequential and perfunctory. If we have significant continuing involvement under such an arrangement, license fees are deferred and recognized over the estimated performance period. License fee and collaborative payments received in excess of amounts earned are classified as deferred revenue until earned.

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        We recognize milestone payments upon the achievement of specified milestones if (1) the milestone is substantive in nature, and the achievement of the milestone was not reasonably assured at the inception of the agreement, (2) the achievement relates to past performance and (3) the fees are nonrefundable. Milestone payments received in excess of amounts earned are classified as deferred revenue until earned.

Non-Cash Interest Expense on Liability Related to Sale of Future Royalties

        In October 2013, we sold our interests in royalty and milestone payments under our license agreements in the Type 2 diabetes therapeutic area to PDL for $240.5 million. We continue to have significant continuing involvement in the PDL transaction primarily due to our obligation to act as the intermediary for the supply of 1,000 mg Glumetza to Santarus, the licensee of Glumetza. Under the relevant accounting guidance, because of our significant continuing involvement, the $240.5 million payment received from PDL has been accounted for as debt that will be amortized using the interest method over the life of the arrangement. In order to determine the amortization of this debt, we are required to estimate the total amount of future royalty payments to be received by PDL and payments we are required to make to PDL, if any, over the life of the agreement. The sum of these amounts less the $240.5 million proceeds we receive will be recorded as interest expense over the life of the royalty obligation. Consequently, we impute interest on the transaction and record interest expense using an estimated interest rate to reflect an arms-length debt transaction. Our estimate of the interest rate under the agreement is based on the amount of royalty and milestone payments expected to be received by PDL over the life of the arrangement. Our estimate of this total interest expense resulted in an effective annual interest rate of approximately 10%. We will periodically assess the expected royalty and milestone payments using a combination of historical results, internal projections and forecasts from external sources. To the extent such payments are greater or less than our initial estimates or the timing of such payments is materially different than our original estimates, we will prospectively adjust the amortization of the debt and the interest rate. If we had determined that the interest rate used in 2013 should have been one percentage point higher than our current estimate, the non-cash interest expense recognized in the year ended December 31, 2013 would have increased by $0.4 million.

        We will record non-cash royalty revenues and non-cash interest expense within our consolidated statement of operations over the term of the PDL agreement.

Research and Development Expense and Accruals

        Research and development expenses include related salaries, clinical trial costs, consultant fees, supplies, manufacturing costs for research and development programs and allocations of corporate costs. All such costs are charged to research and development expense as incurred. These expenses result from our independent research and development efforts as well as efforts associated with collaborations. Our expense accruals for clinical trials are based on estimates of the services received from clinical trial centers and clinical research organizations. If possible, we obtain information regarding unbilled services directly from service providers. However, we may be required to estimate these services based on information available to our product development or administrative staff. If we underestimate or overestimate the activity associated with a study or service at a given point in time, adjustments to research and development expenses may be necessary in future periods. Historically, our estimated accrued liabilities have approximated actual expense incurred.

Stock-Based Compensation

        We estimate the fair value of stock options and Employee Stock Purchase Plan (ESPP) shares using the Black-Scholes valuation model. The Black-Scholes model requires the input of highly

43

subjective assumptions. The most significant assumptions are our estimates of the expected volatility and the expected term of the award.

        Risk-Free Interest Rate.    The risk-free interest rate is based on the implied yield available on U.S. Treasury zero-coupon issues with a remaining term equal to the expected term of the option.

        Expected Volatility.    The volatility assumption is based on the historical volatility of our common stock over the expected term of the options.

        Expected Life of Options.    We use historical option exercise data to estimate the expected life of the options.

        Expected Dividend Yield.    We have never paid any dividends and do not intend to in the near future.

        As required, we review our valuation assumptions at each grant date and, as a result, we are likely to change our valuation assumptions used to value employee stock-based awards granted in future periods. Employee and director stock-based compensation costs are to be recognized over the vesting period of the award, and we have elected to use the straight-line attribution method. Forfeitures are to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. We estimate forfeitures based on historical experience.

        Restricted stock units (RSUs) are measured at the fair value of our common stock on the date of grant and expensed over the period of vesting using the straight-line attribution approach.

Recognizing and Measuring Assets Acquired and Liabilities Assumed in Business Combinations at Fair Value

        We account for acquired businesses using the acquisition method of accounting, which requires that assets acquired and liabilities assumed be recorded at date of acquisition at their respective fair values. The fair value of the consideration paid, including contingent consideration, is assigned to the underlying net assets of the acquired business based on their respective fair values. Any excess of the purchase price over the estimated fair values of the net assets acquired is recorded as goodwill or bargain purchase, as applicable.

        Significant judgments are used in determining the estimated fair values assigned to the assets acquired and liabilities assumed and in determining estimates of useful lives of long-lived assets. Fair value determinations and useful life estimates are based on, among other factors, estimates of expected future net cash flows, estimates of appropriate discount rates used to present value expected future net cash flow streams, the assessment of each asset's life cycle, the impact of competitive trends on each asset's life cycle and other factors. These judgments can materially impact the estimates used to allocate acquisition date fair values to assets acquired and liabilities assumed and the resulting timing and amounts charged to, or recognized in current and future operating results. For these and other reasons, actual results may vary significantly from estimated results.

        We determined the acquisition date fair value of the contingent consideration obligation with respect to the CAMBIA, Zipsor and Lazanda acquisitions based on an income approach derived from revenue estimates and a probability assessment with respect to the likelihood of achieving the level of net sales that would trigger the contingent payment. The fair value measurement is based on significant inputs not observable in the market and thus represents a Level 3 measurement as defined in fair value measurement accounting. The key assumptions in determining the fair value are the discount rate and the probability assigned to the potential milestones being achieved. At each reporting date, we will re-measure the contingent consideration obligation to estimated fair value. Any changes in the fair value of contingent consideration will be recognized in operating expenses until the contingent consideration arrangement is settled.

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Intangible Assets

        Intangible assets consist of purchased developed technology and trademarks. We determine the fair values of acquired intangible assets as of the acquisition date. Discounted cash flow models are typically used in these valuations, which require the use of significant estimates and assumptions, including but not limited to, developing appropriate discount rates and estimating future cash flows from product sales and related expenses. We evaluate purchased intangibles for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. An impairment loss would be recognized when estimated undiscounted future cash flows expected to result from the use of the asset and its eventual disposition are less than its carrying amount. Estimating future cash flows related to an intangible asset involves significant estimates and assumptions. If our assumptions are not correct, there could be an impairment loss or, in the case of a change in the estimated useful life of the asset, a change in amortization expense.

        Our intangible assets relate to CAMBIA, Zipsor and Lazanda product rights of $51.4 million, $27.3 million and $10.5 million, respectively, and have been recorded as intangible assets on the accompanying balance sheet, and are being amortized ratably over the estimated useful life of the asset through December 2023, July 2019 and August 2022, respectively. As of December 31, 2013 the carrying values of the intangible assets for CAMBIA, Zipsor and Lazanda, were $51.1 million, $21.4 million and $10 million, respectively.

Income Tax Provision (Benefit)

        During 2013, we recognized an income tax benefit of approximately $38.7 million which resulted primarily from our reversal of a valuation allowance on all of our U.S. federal deferred tax assets and most of our state deferred tax assets as more fully described in Note 14 to our Financial Statements. Our 2013 effective tax rate from continuing operations was (846)%. The tax benefit represents a reversal of a valuation allowance on a significant portion of our U.S. federal and state deferred assets resulting in a deferred tax benefit of $103.2 million, offset by a current income tax provision of $64.4 million. The net income tax benefit of $38.7 million was primarily attributable to the release of a valuation allowance against a significant portion of our U.S. federal and state deferred tax assets. Management determined that it was more likely than not that these deferred tax assets would be recoverable and the related valuation allowance was no longer needed based on an assessment of the relative impact of all positive and negative evidence that existed at December 31, 2013, including an evaluation of whether there was cumulative income in recent years, future sources of taxable income including the impact of the PDL transaction, significant risks, uncertainties related to our business and the impact of the PDL transaction.

        Our tax benefit for the year ended December 31, 2012 was due to Federal and state refundable credits offset by foreign taxes withheld on royalty revenue related to the Company's agreement with LG by the Republic of Korea. During 2011, we recognized an income tax expense of $0.4 million which was due to state taxes and foreign taxes withheld on royalty revenue related to our agreement with LG by the Republic of Korea, offset by federal and state refundable credits.

RESULTS OF OPERATIONS

        Our results of operations in 2013 differ significantly from our reported results for 2012 and 2011. For example, in 2011 we recognized $48.0 million in milestone revenue and a $40.0 million gain on settlement with regard to termination of our agreement with Abbott relating to Gralise. These were one-time payments and did not recur in 2012 or 2013. In 2011, we reflect eight months of Glumetza product revenue, cost of sales and corresponding promotion expense to Santarus and four months of Glumetza royalty revenue from Santarus. As a result of the restructuring of our agreement with Santarus in August 2011, we recognized royalty revenue from Santarus in 2012 and 2013 but no

45

product revenue or promotion expense for Glumetza. In October 2013, we sold our interests in royalties and milestone payments related to certain license agreements in the Type 2 diabetes area to PDL for $240.5 million. In 2013, we reflect nine months of royalty revenue for Glumetza and Janumet XR and three months of non-cash royalty revenue related to the sale of future royalties to PDL. In 2013, we also recognized $4.5 million in non-cash interest expense associated with the PDL transaction.

        We launched and began selling Gralise in October 2011. Accordingly, Gralise product sales and selling, general and administrative expense are substantially higher in 2012 and 2013 than in 2011.

        In addition, we acquired Zipsor in June 2012, Lazanda in June 2013 and CAMBIA in December 2013. Zipsor revenue and expense is reflected in our results of operations for an entire year in 2013 but only in the second half of 2012. Lazanda revenue and expense is reflected in our results of operations for the second half of 2013. CAMBIA was acquired in late December 2013, and revenue and expense is reflected in our results of operations for that period.

Revenues

        Total revenues are summarized in the following table (in thousands):

	2013		2012		2011
Product sales:
Gralise	$	36,188	$	17,288	$	508
Zipsor		20,341		9,835		—
Cambia		555		—		—
Lazanda		1,218		—		—
Glumetza		—		—		40,657
Proquin XR		—		360		13
Total product sales		58,302		27,483		41,178
Royalties:
Glumetza US		42,060		42,792		9,600
Others		2,943		1,743		397
Total royalty revenue		45,003		44,535		9,997
Non-cash royalty revenue related to sale of future royalties to PDL	$	18,104	$	—	$	—
License and Other revenue:
Gralise	$	—	$	—	$	60,592
Glumetza		3,041		4,926		6,609
Boehringer Ingelheim		—		2,617		10,889
Mallinckrodt		5,000		—		500
Janssen		3,554		10,005		2,250
Other		1,201		1,250		958
Total license and other revenue:		12,796		18,798		81,798
Total revenues	$	134,205	$	90,816	$	132,973

Product sales

        Gralise.    In October 2011, we announced the commercial availability of Gralise and began distributing Gralise to wholesalers and retail pharmacies. Until the fourth quarter of 2012, we deferred recognition of revenue on product shipments of Gralise until the right of return no longer existed,

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which occurred at the earlier of (a) the time Gralise units were dispensed through patient prescriptions or (b) expiration of the right of return. In the fourth quarter of 2012, we changed our revenue recognition policy for Gralise and began recognizing revenue upon delivery to our customers. The increase in Gralise product sales in 2013 is primarily a result of higher prescription demand and, to a lesser extent, price increases. We expect Gralise product sales and prescriptions to increase in 2014.

        Zipsor.    We acquired Zipsor and began recognizing sales on Zipsor at the end of June 2012. The increase in Zipsor product sales for the year ended December 31, 2013 compared to the year ended December 31, 2012 is primarily the result of a full year of sales in 2013 and a price increase effective April 2013. We expect Zipsor product sales to increase in 2014.

        Lazanda.    We began shipping and recognizing product sales on Lazanda in August 2013. We expect Lazanda product sales and prescriptions to increase in 2014.

        CAMBIA.    We began shipping and recognizing product sales on CAMBIA in December 2013. We expect CAMBIA product sales and prescriptions to increase in 2014.

        Glumetza.    In August 2011, we restructured our agreement with Santarus and entered into a commercialization agreement that superseded the July 2008 promotion agreement. Under the commercialization agreement, we granted Santarus exclusive rights to manufacture and commercialize Glumetza in the United States in return for a royalty on Glumetza net sales. We ceased shipments of Glumetza in August 2011, and Santarus began selling Glumetza in September 2011. We did not recognize any Glumetza product sales in subsequent periods.

Royalties

        Santarus.    Santarus royalties relate to royalties we received from Santarus based on net sales of Glumetza in the United States. Royalty revenue from Santarus for the year ended December 31, 2013 was $42.1 million which represents a 32.0% royalty on net sales of Glumetza for the nine months ended September 30, 2013. Royalty revenue from Santarus for the year ended December 31, 2012 was $42.8 million which represents a 29.5% royalty on net sales of Glumetza. In October 2013, we sold our interest in the Glumetza royalties to PDL, as discussed below.

        Other Royalties.    In January 2012, Merck received FDA approval to market Janumet XR in the United States, and Merck began selling Janumet XR during the first quarter of 2012. We received very low single digit royalties on net product sales of Janumet XR. As such, we began recognizing royalty revenue in the first quarter of 2012. Other royalties also include royalties we received from Valeant on net sales of Glumetza in Canada and from LG Life Sciences on net sales of LG's version of Glumetza, Novamet GR, in Korea. In October 2013, we sold our interest in Janumet XR, Valeant and LG Life Sciences royalties to PDL as discussed below. In August 2012, we entered into a license agreement with Janssen relating to NUCYNTA ER and currently receive a low single digit royalty on net sales of NUCYNTA ER, which began in the third quarter of 2012.

        Non-Cash Royalty Revenue Related to the Sale of Future Royalties to PDL.    In October 2013, as noted above, we sold our interests in royalty and milestone payments under our license agreements in the Type 2 diabetes therapeutic area to PDL for $240.5 million. This transaction was accounted for as debt that will be amortized using the interest method over the life of the arrangement. As a result of the debt accounting, even though we did not retain the related royalties and milestones under the transaction as the amounts are remitted to PDL, we will continue to record revenue related to these royalties and milestones until the amount of the associated debt and related interest is fully amortized.

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License and other revenue

        Gralise.    In January 2011, Abbott Products received FDA approval of Gralise for the management of PHN, which triggered a $48.0 million development milestone from Abbott Products to us, which we received in February 2011. Because the milestone both was substantive in nature and based on past performance, and was achieved, the entire $48.0 million was recognized as license revenue in the first quarter of 2011.

        Pursuant to the exclusive license agreement originally entered into in November 2008, Solvay Pharmaceuticals, Inc. (subsequently acquired by Abbott) paid us a $25.0 million upfront fee in February 2009. The upfront payment received was originally scheduled to be recognized as revenue ratably until January 2013, which represented the estimated length of time our development and supply obligations existed under the agreement. In connection with the termination of the license agreement with Abbott Products, we no longer have continuing obligations to Abbott Products. Accordingly, all remaining deferred revenue related to the $25.0 million upfront license fee previously received from Abbott Products was fully recognized as revenue in March 2011, resulting in immediate recognition of approximately $11.3 million of license revenue.

        Glumetza.    Glumetza license revenue for 2013, 2012 and 2011 consisted of license revenue recognized from the $25.0 million upfront license fee received from Valeant in July 2005 and the $12.0 million upfront fee received from Santarus in July 2008.

        We are recognizing the $25.0 million upfront license fee payment from Valeant as revenue ratably until October 2021, which represents the estimated length of time our obligations exist under the arrangement related to royalties we are obligated to pay Valeant on net sales of Glumetza in the United States and for our obligation to use Valeant as the sole supplier of the 1000mg Glumetza.

        Pursuant to the promotion agreement originally entered into in July 2008, Santarus paid us a $12.0 million upfront fee. The upfront payment received was originally being amortized as revenue ratably until October 2021, which represented the estimated length of time our obligations existed under the promotion agreement related to manufacturing Glumetza and paying Santarus promotion fees on gross margin of Glumetza. The commercialization agreement in August 2011 superseded the promotion agreement and removed our promotion fee obligations and contemplated removal of our manufacturing obligations. The commercialization agreement included obligations with respect to manufacturing and regulatory transition to Santarus and managing the patent infringement lawsuits against Sun and Lupin. At the time of the commercialization agreement, all of these obligations were estimated to be completed in December 2013. During the fourth quarter of 2012, events occurred related to the transfer of manufacturing with one of the contract manufacturers of Glumetza that extended the estimated completion date of our manufacturing obligations to February 2016, which is now the estimated length of time we expect our obligations will completed under the commercialization agreement.

        On the effective date of the commercialization agreement, the amortization period related to remaining deferred revenue on the $12.0 million upfront fee was adjusted, and the remaining deferred revenue of $9.2 million was changed to be recognized ratably until December 2013. During the fourth quarter of 2012, the amortization period related to remaining deferred revenue on the $12.0 million upfront fee was adjusted again, and the remaining deferred revenue of $4.8 million was changed to be recognized ratably until February 2016.

        We recognized approximately $1.4 million, $3.3 million and $2.0 million of revenue associated with this upfront license fee during 2013, 2012 and 2011, respectively. The remaining deferred revenue balance is $3.0 million at December 31, 2013, and we anticipate that we will recognize this entire amount as revenue ratably until February 2016.

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        Mallinckrodt (formerly Covidien).    In November 2008, we entered into a license agreement with Mallinckrodt granting Mallinckrodt worldwide rights to utilize our Acuform technology for the exclusive development of four products containing acetaminophen in combination with opiates. In 2008, Mallinckrodt paid us a total of $5.5 million in upfront fees, representing a $4.0 million upfront license fee and a $1.5 million upfront payment for formulation work to be performed by us under the agreement. The entire $5.5 million was initially accounted for as a single unit of accounting and was amortized ratably through November 2011, which was initially the estimated length of time we were obligated to perform formulation work under the agreement.

        In July 2013, the FDA accepted for filing a NDA from Mallinckrodt for XARTEMIS XR (oxycodone hydrochloride and acetaminophen) Extended-Release Tablets (CII), which is formulated with our Acuform drug delivery technology. The NDA acceptance triggered a $5 million milestone payment to us which we received and recognized as revenue in the third quarter of 2013. As the non-refundable milestone was both substantive in nature and related to past performance, and achievement was not reasonably assured at the inception of the agreement, the milestone was recognized as revenue in its entirety upon achievement.

        On March 12, 2014, the FDA approved Mallinckrodt's NDA for XARTEMIS XR. The approval of the NDA triggers a $10.0 million milestone payment to us under our license agreement with Mallinckrodt, which is payable within 30 days. We will recognize the entire milestone payment in the first quarter of 2014. We will also receive high single digit royalties on net sales of XARTEMIS XR.

        Boehringer Ingelheim.    Under our license and services agreement with Boehringer Ingelheim entered into in March 2011, Boehringer Ingelheim paid us a $10.0 million upfront license fee which we received in April 2011, less applicable withholding taxes of approximately $1.5 million, for a net receipt of approximately $8.5 million. We received the remaining $1.5 million of taxes previously withheld directly from German tax authorities in June 2011.

        The $10.0 million was amortized ratably through November 2011, which was the estimated length of time we were obligated to perform formulation work under the agreements. As such the entire amount was recognized as license revenue in 2011.

        Under the terms of the agreement, we received an additional nonrefundable $2.5 million payment in March 2012 upon delivery of experimental batches of prototype formulations that meet required specifications. As the milestone event was both substantive in nature and related to past performance, and achievement was not reasonably assured at the inception of the agreement, we recognized the entire amount of this payment as revenue during the first quarter of 2012.

        We also provided certain initial formulation work associated with the fixed dose combination products. Work performed by us under the service agreement was reimbursed by Boehringer Ingelheim on an agreed-upon FTE rate per hour plus out-of-pocket expenses. We have completed all formulation work required under the agreement. In October 2013, we sold our interest in milestones and royalties pursuant to this agreement to PDL.

        Janssen.    We have received $10 million in upfront and milestone payments, and are eligible for additional milestone payments and royalties under an August 2010 non-exclusive license agreement between us and Janssen related to fixed dose combinations of extended release metformin and Janssen's type 2 diabetes product candidate canagliflozin. We also entered into a service agreement with Janssen under which we provided formulation work associated with the products. The formulation work under the agreement was completed in March 2011.

        Under the agreement, we granted Janssen a license to certain patents related to our Acuform drug delivery technology to be used in developing the combination products. We also granted Janssen a right to reference the Glumetza NDA in Janssen's regulatory filings covering the products. In August 2010, Janssen paid us a $5.0 million upfront license fee. In September 2010, we achieved the first

49

development milestone under the agreement related to formulation work, which triggered a $5.0 milestone payment that we received in October 2010. In February and December 2013, we completed two projects for Janssen related to this program and recognized $2.2 million in revenue during the first quarter of 2013 and $1.4 million in revenue during the fourth quarter of 2013.In October 2013, we sold our interest in milestones and royalties pursuant to this agreement to PDL.

        In August 2012, we entered into a license agreement with Janssen that grants Janssen a non-exclusive license to certain patents and other intellectual property rights to our Acuform drug delivery technology for the development and commercialization of tapentadol extended release products, including NUCYNTA ER (tapentadol extended-release tablets). We received a $10 million upfront license fee and receive low single digit royalties on net sales of NUCYNTA ER in the U.S., Canada and Japan from and after July 2, 2012 through December 31, 2021.

        Ironwood Pharmaceuticals, Inc.    In July 2011, we entered into a collaboration and license agreement with Ironwood granting Ironwood a license for worldwide rights to our Acuform drug delivery technology for an Ironwood early stage development program addressing refractory GERD. In connection with the research collaboration and license agreement, we received an upfront payment of $0.9 million which was amortized ratably through June 2012, which was the estimated length of time we were obligated to perform formulation work under the agreement. We recognized $0.5 million and $0.4 million of revenue associated with this upfront license fee in 2012 and 2011.

        In March 2012, we achieved a milestone under the agreement with respect to delivery of experimental batches of prototype formulations that meet required specifications. The associated $1.0 million milestone payment is nonrefundable and was received in May 2012. As the nonrefundable milestone was both substantive in nature and related to past performance, achievement of the milestone was not reasonably assured at the inception of the agreement and the collectability of the milestone was reasonably assured, we recognized the $1.0 million as revenue during 2012.

        In December 2013, we achieved another milestone under the agreement with respect to the acceptance of experimental batches of prototype formulations that meet required specifications. The associated $0.5 million milestone payment is nonrefundable, which we expect to receive in 2014. As the nonrefundable milestone was both substantive in nature and related to past performance, achievement was not reasonably assured at the inception of the agreement and the collectability of the milestone was reasonably assured, we recognized the $0.5 million as revenue during 2013.

Cost of Sales

        Cost of sales consists of costs of the active pharmaceutical ingredient, contract manufacturing and packaging costs, inventory write-downs, product quality testing, internal employee costs related to the manufacturing process, distribution costs and shipping costs related to our product sales. Total cost of sales for 2013, 2012 and 2011 was as follows (in thousands):

	2013		2012		2011
Cost of sales	$	7,091	$	6,039	$	5,544

        We expect cost of sales to increase in 2014 as we expect product sales to increase from current levels.

        We began selling CAMBIA in December 2013. The fair value of inventories acquired included a step-up in the value of CAMBIA inventories of $3.7 million which is being amortized to cost of sales as the acquired inventories are sold. The cost of sales related to the step-up value of CAMBIA was in $0.2 million in 2013. We began selling Lazanda in August 2013. The fair value of inventories acquired included a step-up in the value of Lazanda inventories of $0.6 million which is being amortized to cost of sales as the acquired inventories are sold. The cost of sales related to the step-up value of Lazanda

50

was $0.1 million in 2013. The fair value of inventories acquired included a step-up in the value of Zipsor inventories of $1.9 million, of which $0.7 million was amortized to cost of sales in 2013 and $1.2 million was amortized to cost of sales in 2012.

        Cost of sales for 2012 includes a $0.7 million charge related to slow-moving Gralise starter pack inventory that is not expected to be sold prior to expiry. Cost of sales increased in 2013 as compared to 2012 as a result of increased product sales. Cost of sales increased in 2012 as compared to 2011 as a result of a full year of Gralise sales in 2012 and commencement of Zipsor sales after the acquisition of Zipsor in June 2012.

Research and Development Expense

        Our research and development expenses currently include salaries, clinical trial costs, consultant fees, supplies, manufacturing costs for research and development programs and allocations of corporate costs. The scope and magnitude of future research and development expenses cannot be predicted at this time for our product candidate in research and development, as it is not possible to determine the nature, timing and extent of clinical trials and studies, the FDA's requirements for a particular drug and the requirements and level of participation, if any, by potential partners. As potential products proceed through the development process, each step is typically more extensive, and therefore more expensive, than the previous step. Therefore, success in development generally results in increasing expenditures until actual product approval. Total research and development expense for 2013, 2012 and 2011 was as follows (in thousands):

	2013			2012			2011
Research and development expense	$	8,073		$	15,462		$	15,187
Dollar change from prior year		(7,389	)		275
Percentage change from prior year		-47.8	%		1.8	%

        We categorize our research and development expense by project. The table below shows research and development costs for our major clinical development programs, as well as other expenses associated with our research and development activities including product formulation, label expansion and other similar activities.

(In thousands)	2013		2012		2011
Sefelsa	$	1,989	$	9,189	$	8,064
DM-1992		319		1,873		1,668
Other projects		5,765		4,400		5,455
Total research and development expense	$	8,073	$	15,462	$	15,187

        The decrease in research and development expense in 2013 as compared to 2012 was primarily due to reduced costs related to Sefelsa and the Phase 2 clinical trial for our DM-1992 program, which was completed in 2012. We expect research and development expense in 2014 to increase from 2013 levels, primarily as a result of pediatric studies relating to Zipsor and CAMBIA that we intend to undertake in 2014.

        The slight increase in research and development expense for 2012, as compared to 2011, was primarily due to increased costs related to Sefelsa and the Phase 2 clinical trial for DM-1992 offset by reduced costs related to other research and development projects. We incurred a filing fee of $1.8 million and a $0.6 million milestone payment to PharmaNova, under our sublicense agreement for Sefelsa, on submission of a New Drug Application filing to the FDA. These amounts were recorded as research and development expenses in 2012.

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Selling, General and Administrative Expense

        Selling, general and administrative expenses primarily consist of personnel, contract personnel, marketing and promotion expenses associated with our commercial products, personnel expenses to support our administrative and operating activities, facility costs and professional expenses, such as legal fees. Total selling, general and administrative expense were as follows (in thousands):

	2013			2012			2011
Selling, general and administrative expense:
Promotion fee expense	$	—		$	—		$	27,339
Other selling, general and administrative expense		105,176			97,646			54,205
Total selling, general and administrative expense	$	105,176		$	97,646		$	81,544
Dollar change from prior year		7,530			16,102
Percentage change from prior year		7.7	%		19.7	%

        The increase in selling, general and administrative expense in 2013 as compared to 2012 was primarily due to the build out of our commercial infrastructure related to Gralise and sales and marketing expense related to Zipsor and Lazanda, which we acquired in June 2012 and July 2013 respectively. However, we expect selling, general and administrative expense to increase in 2014 as a result of a full year of commercial expenses for CAMBIA and Lazanda.

        The increase in selling, general and administrative expense in 2012 as compared to 2011 was primarily due to (a) a full year of sales and marketing costs related to the launch of Gralise, including marketing activities, costs associated with our contract sales organization and conversion of those sales representatives to our full-time employees, and (b) marketing costs associated with the re-launch of Zipsor following our acquisition of the product in June 2012. 2011 represented only a partial year of sales and marketing costs associated with Gralise as we initiated commercial sales of Gralise in October 2011.

Amortization of Intangible Assets

(In thousands)	2013		2012		2011
Amortization of intangible assets—Zipsor	$	3,853	$	2,022	$	—
Amortization of intangible assets—Lazanda		484		—		—
Amortization of intangible assets—CAMBIA		218		—		—
	$	4,555	$	2,022	$	—

        The Zipsor product rights of $27.1 million have been recorded as intangible assets on the accompanying consolidated balance sheet and are being amortized over the estimated useful life of the asset on a straight-line basis through July 2019. Total amortization expense for 2013 was approximately $3.9 million. The estimated amortization expense for each of the five succeeding fiscal years is expected to be $3.9 million.

        The Lazanda product rights of $10.5 million have been recorded as intangible assets on the accompanying consolidated balance sheet and are being amortized over the estimated useful life of the asset on a straight-line basis through August 2022. Amortization commenced on July 29, 2013, the date we acquired Lazanda. Total amortization expense for 2013 was approximately $0.5 million. The estimated amortization expense for each of the five succeeding fiscal years is expected to be $1.2 million.

52

        The CAMBIA product rights of $51.4 million have been recorded as intangible assets on the accompanying consolidated balance sheet and are being amortized over the estimated useful life of the asset on a straight-line basis through December 2023. Amortization commenced on December 17, 2013, the date we acquired CAMBIA. Total amortization expense for 2013 was approximately $0.2 million. The estimated amortization expense for each of the five succeeding fiscal years is expected to be $5.1 million.

Gain on Settlement with Abbott Products

        In March 2011, we entered into a settlement agreement with Abbott Products which provided for (i) the immediate termination of the parties' license agreement, (ii) the transition of Gralise back to us and (iii) a $40.0 million payment from Abbott to us made in March 2011. The $40.0 million payment was recognized as a gain within operating income in the first quarter of 2011.

Interest Income and Expense

(In thousands)	2013			2012			2011
Interest and other income	$	662		$	520		$	557
Non-cash interest expense on liability related to sale of future royalties		(4,488	)		—			—
Interest expense		(911	)		(39	)		(133	)
Net interest income (expense)	$	(4,737	)	$	481		$	424

        Interest and other income for 2013 includes $0.5 million in respect of the gain from a bargain purchase relating to the CAMBIA acquisition and interest income received from investment balances held in 2013. Interest and other income for 2012 includes $0.1 million in respect of the gain from a bargain purchase relating to the Zipsor acquisition. The interest income earned in 2012 and 2011 was higher than that earned in 2013 given the higher investment balances in those respective years.

        The increase in non-cash interest expense on liability related to sale of future royalties for the year ended December 31, 2013 compared to the year ended December 31, 2012 is attributable to the royalty sale transaction that we completed in 2013. On October 18, 2013, we sold all of our interests in royalty and milestone payments to PDL for $240.5 million. As described above, this transaction has been recorded as debt under the applicable accounting guidance. We impute interest on the transaction and record interest expense using an estimated interest rate to reflect an arms-length debt transaction. Our estimate of the interest rate under the agreement is based on the amount of royalty and milestone payments to be received by PDL over the life of the arrangement. There are a number of factors that could materially affect the estimated interest rate and we will assess this estimate on a periodic basis. As a result, future interest rates could differ significantly and any such change in interest rate will be adjusted prospectively.

        Interest expense includes the change in the fair value of the contingent liability relating to both the Zipsor and Lazanda acquisitions.

Income Tax Provision (Benefit)

        During 2013, we recognized an income tax benefit of approximately $38.7 million which resulted primarily from our reversal of a valuation allowance on all of our U.S. federal deferred tax assets and most of our state deferred tax assets as more fully described in Note 14. Our 2013 effective tax rate from continuing operations was (846)%. The tax benefit represents a reversal of a valuation allowance on a significant portion of our U.S. federal and state deferred assets included a deferred tax benefit of $103.2 million, offset by a current income tax provision of $64.4 million. The income tax benefit of

53

$38.7 million was primarily attributable to the release of a valuation allowance against a significant portion of our U.S. federal and state deferred tax assets. Management determined that it was more likely than not that these deferred tax assets would be recoverable and the related valuation allowance was no longer needed based on an assessment of the relative impact of all positive and negative evidence that existed at December 31, 2013, including an evaluation of whether there was cumulative income in recent years, future sources of taxable income including the impact of the PDL transaction, significant risks, uncertainties related to our business, and the impact of the PDL transaction.

        Our tax benefits for the years ended December 31, 2012 was due to Federal and state refundable credits offset by foreign taxes withheld on royalty revenue related to the Company's agreement with LG by the Republic of Korea. During 2011, we recognized an income tax expense of $0.4 million which was due to state taxes and foreign taxes withheld on royalty revenue related to our agreement with LG by the Republic of Korea, offset by federal and state refundable credits.

LIQUIDITY AND CAPITAL RESOURCES

	As of December 31,
(In thousands)	2013		2012
Cash, cash equivalents and marketable securities	$	276,017	$	77,892

        The increase in cash, cash equivalents and marketable securities during 2013 is primarily attributable to the sale of our interests in royalty and milestone payments to PDL for $240.5 million, partially offset by the $48.7 million that we paid for the CAMBIA acquisition in December 2013.

        Since inception through December 31, 2013, we have financed our operations and product development efforts primarily from private and public sales of equity securities; the sale of future royalty and milestone interests, upfront license, milestone and termination fees from collaborative and license partners; and product sales.

        As of December 31, 2013, we have accumulated net losses of $84.0 million. We may incur operating losses in future years. We anticipate that our existing capital resources will permit us to meet our capital and operational requirements for at least the next two years. We base this expectation on our current operating plan, which may change as a result of many factors.

        Our cash needs may also vary materially from our current expectations because of numerous factors, including:

•

sales of our marketed products;

•

expenditures related to our commercialization of Gralise, Zipsor, CAMBIA and Lazanda;

•

milestone and royalty revenue we receive under our collaborative development and commercialization arrangements;

•

acquisitions or licenses of complementary businesses, products or technologies;

•

financial terms of definitive license agreements or other commercial agreements we may enter into;

•

results of research and development efforts;

•

changes in the focus and direction of our business strategy and/or research and development programs; and

•

results of clinical testing requirements of the FDA and comparable foreign regulatory agencies.

        We will need substantial funds to commercialize any products we market and acquire or license complementary businesses or products.

54

        We fund our operations primarily through revenues from product sales and do not have any committed sources of capital. To the extent that our existing capital resources and revenues from ongoing operations are insufficient to fund our future operations, or product acquisitions and strategic transactions which we may pursue, we will have to raise additional funds through the sale of our equity securities, through debt financing, or from development and licensing arrangements. We may be unable to raise such additional capital on favorable terms, or at all. If we raise additional capital by selling our equity or convertible debt securities, the issuance of such securities could result in dilution of our shareholders' equity positions.

        The inability to raise any additional capital required to fund our operations could have a material adverse effect on our company.

        The following table summarizes our cash flow activities (in thousands):

	As of December 31,
(In thousands)	2013			2012			2011
Cash provided by (used in) operating activities	$	9,754		$	(30,985	)	$	57,651
Cash (used in) provided by investing activities		(38,036	)		33,332			(62,188	)
Cash provided by (used in) financing activities		243,880			2,686			6,054

Cash Flows from Operating Activities

        Cash provided by operating activities during 2013 was approximately $9.8 million, compared to cash used in operating activities of $31.0 million during 2012. The difference was primarily due to net income/loss for each respective period adjusted for movements in working capital, stock-based compensation, depreciation expense and income tax benefit. Cash used in operating activities during 2012 was approximately $31.0 million, compared to cash provided by operating activities of approximately $57.7 million during 2011. Cash used in operating activities during 2012 was primarily due to our net loss adjusted for movements in working capital, stock-based compensation and depreciation expense. Cash provided by operating activities during 2011 was primarily a result of the $48.0 million milestone payment and $40.0 million termination fee received from Abbott Products during the first quarter of 2011.

Cash Flows from Investing Activities

        Net cash used in investing activities during 2013 was approximately $38.0 million, which was primarily due to cash used in the Lazanda and CAMBIA acquisitions offset by higher proceeds from maturities of marketable securities relative to purchases of marketable securities. Net cash provided by investing activities during 2012 was approximately $33.3 million and consisted of sales and maturities of marketable securities offset by purchases of marketable securities and approximately $26.4 million in cash paid for the acquisition of Zipsor in June 2012. Net cash used in investing activities during 2011 was approximately $62.2 million and consisted primarily of a net increase in marketable securities resulting from a partial investment of the milestone payment and settlement fee received from Abbott Products during the first quarter of 2011.

Cash Flows from Financing Activities

        Cash provided by financing activities during 2013 was approximately $243.9 million, which was primarily due to the sale of our interests in royalty and milestone payments to PDL for $240.5 million, with the remaining $3.7 million consisting of proceeds from employee option exercises. Cash provided by financing activities during 2012 was approximately $2.7 million and consisted of proceeds from employee option exercises. Cash provided by financing activities during 2011 was approximately

55

$6.1 million and consisted of proceeds from employee and consultant option exercises offset by repayments of principal on our credit facility.

Contractual Obligations

        As of December 31, 2013, our contractual obligations are shown in the following table (in thousands):

	1 Year		2 - 3 Years		4 - 5 Years		More than 5 Years		Total
Operating leases	$	1,178	$	2,673	$	3,016	$	6,441	$	13,308
Contract sales organization		1,083		—		—		—		1,083
Purchase commitments		708		—		—		—		708
	$	2,969	$	2,673	$	3,016	$	6,441	$	15,099

        At December 31, 2013, we had non-cancelable purchase orders and minimum purchase obligations of approximately $0.7 million under our manufacturing agreements related to Gralise, Zipsor, Lazanda and CAMBIA. The amounts disclosed only represent minimum purchase requirements. Actual purchases are expected to exceed these amounts.

        In May 2012, we entered into a service agreement with Ventiv which initially provided for a sales force of 78 part-time sales representatives employed by Ventiv but dedicated to Depomed. Under the agreement, we paid Ventiv a monthly fixed fee of $0.5 million during the initial term of the agreement, which expired in June 2013. In June 2013, Depomed and Ventiv amended the agreement to reduce the contract sales force to 27 part-time and two full-time sales representatives. Under the terms of the amended agreement, we are required to pay Ventiv a monthly fixed fee of $0.2 million during the term of the agreement, which expires in June 2014.

        In April 2012, we entered into an office and laboratory lease agreement to lease approximately 52,500 rentable square feet in Newark, California commencing on December 1, 2012 and an additional 8,000 rentable square feet commencing no later than December 1, 2015. The Newark lease included free rent for the first five months of the lease. Lease payments began in May 2013. We will have the one-time right to terminate the lease in its entirety effective as of November 30, 2017 by delivering written notice to the landlord on or before December 1, 2016. In the event of such termination, we will pay the landlord the unamortized portion of the tenant improvement allowance, specified additional allowances made by the landlord, waived base rent and leasing commissions, in each case amortized at 8% interest. Depomed's Menlo Park lease ended in January 2013.

        The contractual obligations reflected in the above table exclude up to $5 million, $15 million and $10 million in contingent sales and other milestones we may be obligated to pay in the future under our asset purchase agreements with Xanodyne for Zipsor, Archimedes for Lazanda and Nautilus and other third parties for CAMBIA, respectively. The fair values of these obligations are included within the contingent consideration liability in the accompanying consolidated balance sheet.

        The table above also excludes non-cancelable purchase orders and minimum purchase obligations of approximately $0.8 million under our supply agreement with Valeant for the supply of 1000mg Glumetza, as these obligations will be fully reimbursed by Santarus.

OFF-BALANCE SHEET ARRANGEMENTS

        We do not have any off-balance sheet arrangements that are reasonably likely to have a current or future material effect on our financial condition, results of operations, liquidity, capital expenditures or capital resources.

56

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

        In July 2013, the Financial Accounting Standards Board issued a new accounting standard that will require the presentation of certain unrecognized tax benefits as a reduction to deferred tax assets rather than as a liability when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. This guidance is effective for our interim and annual periods beginning January 1, 2014. We do not believe the adoption of this guidance will have a material impact on our consolidated financial statements.

        In February 2013, the FASB issued Accounting Standards Update No. 2013-02, Comprehensive Income (Topic 220)—Reporting of Amounts Reclassified out of Accumulated Other Comprehensive Income (ASU 2013-02), to improve the reporting of reclassifications out of accumulated other comprehensive income. ASU 2013-02 requires an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under U.S. GAAP to be reclassified in its entirety to net income. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety from accumulated other comprehensive income to net income in the same reporting period, an entity is required to cross-reference other disclosures required under U.S. GAAP that provide additional detail about those amounts. ASU 2013-02 is effective for us during the first quarter of fiscal 2014 with earlier adoption permitted, which should be applied prospectively. The adoption of this standard did not have a material impact on our consolidated financial statements.

        In December 2011, the FASB issued ASU 2011-11, "Balance Sheet: Disclosures about Offsetting Assets and Liabilities." ASU 2011-11 enhances disclosures regarding financial instruments and derivative instruments. Entities are required to provide both net information and gross information for these assets and liabilities in order to enhance comparability between those entities that prepare their financial statements on the basis of U.S. GAAP and those entities that prepare their financial statements on the basis of IFRS. The requirements of ASU 2011-11 are effective for interim and annual periods beginning on or after January 1, 2013 and are to be applied retrospectively. The adoption of this standard did not have a material impact on our consolidated financial statements.

ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk

        We consider all highly liquid investments with an original maturity (at date of purchase) of three months or less to be cash equivalents. At December 31, 2013, our marketable securities available for sale consisted of U.S. Treasury bills, U.S. government agency debt securities and U.S. corporate debt with maturity dates of less than two years. Our investments in U.S. corporate debt securities consist primarily of investments in investment grade corporate bonds and notes. Our investments in U.S. Treasury and government debt securities consist of low risk government agency bonds typically with a rating of A or higher. Our operating results have not been sensitive to changes in the general level of interest rates in the United States, particularly because most of our marketable securities are invested in short-term debt instruments.

Foreign Currency Risk

        We have not had any significant transactions in foreign currencies, nor did we have any significant balances that were due or payable in foreign currencies at December 31, 2013. Accordingly, significant changes in foreign currency rates would not have a material impact on our financial position and results of operations.

57

ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

        The financial statements required by this item are set forth beginning on page 70 of this report and are incorporated herein by reference.

ITEM 9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

        None.

ITEM 9A.    CONTROLS AND PROCEDURES

(a)

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

        At the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our principal executive officer, principal financial officer and principal accounting officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the Exchange Act). Based on this evaluation, our principal executive officer, our principal financial officer and principal accounting officer concluded that our disclosure controls and procedures were effective as of December 31, 2013 to ensure that information to be disclosed by us in this Annual Report on Form 10-K was recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and Form 10-K.

        We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms and that such information is accumulated and communicated to our management, including our chief executive officer, principal financial officer and principal accounting officer, as appropriate, to allow for timely decisions regarding required disclosure.

        We intend to review and evaluate the design and effectiveness of our disclosure controls and procedures on an ongoing basis and to correct any material deficiencies that we may discover. Our goal is to ensure that our management has timely access to material information that could affect our business. While we believe the present design of our disclosure controls and procedures is effective to achieve our goal, future events affecting our business may cause us to modify our disclosure controls and procedures. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

(b)

Management's Report on Internal Control Over Financial Reporting

        Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f). Under the supervision and with the participation of our management, including our principal executive officer, principal financial officer and principal accounting officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 Framework). Based on our evaluation under the framework in Internal Control—Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2013. Ernst & Young LLP, our independent registered public accounting firm, has attested to and issued a report on the effectiveness of our internal control over financial reporting, which is included herein.

58

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders of
Depomed, Inc.

        We have audited Depomed, Inc.'s internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 framework) (the COSO criteria). Depomed, Inc.'s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company's internal control over financial reporting based on our audit.

        We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

        A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

        Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

        In our opinion, Depomed, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2013, based on the COSO criteria.

        We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Depomed, Inc. as of December 31, 2013 and 2012, and the related consolidated statements of operations, comprehensive income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2013 of Depomed, Inc. and our report dated March 17, 2014 expressed an unqualified opinion thereon.

/s/Ernst & Young LLP

Redwood City, California
March 17, 2014

59

ITEM 9B.    OTHER INFORMATION

        None

PART III

ITEM 10.    DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

        The information required by this Item with respect to executive officers, directors and corporate governance matters is incorporated by reference to the information set forth under the captions "Executive Officers and Senior Management" and "Election of Directors" in the company's Proxy Statement for the 2014 Annual Meeting of Shareholders.

        The section entitled "Compliance Under Section 16(a) of the Securities Exchange Act of 1934" appearing in the Proxy Statement for the 2014 Annual Meeting of Shareholders sets forth the information concerning compliance by officers, directors and 10% shareholders of the company with Section 16 of the Exchange Act of 1934 and is incorporated herein by reference.

        The Board has adopted a Code of Business Conduct and Ethics that applies to all of the Company's employees, officers and directors, including its principal executive officer and its principal financial officer. A copy of the code is available on the Company's website at: http://www.depomed.com.

ITEM 11.    EXECUTIVE COMPENSATION

        The information required by this Item is incorporated herein by reference to the information set forth under the caption "Executive Compensation" in the Proxy Statement for the 2014 Annual Meeting of Shareholders.

ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS

        The information required by this Item is incorporated herein by reference to the information set forth under the caption "Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters" in the Proxy Statement for the 2014 Annual Meeting of Shareholders.

ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

        The information required by this Item is incorporated herein by reference to the information set forth under the captions "Directors" and "Certain Relationships and Related Transactions" in the Proxy Statement for the 2014 Annual Meeting of Shareholders.

ITEM 14.    PRINCIPAL ACCOUNTANT FEES AND SERVICES

        The information required by this Item is incorporated herein by reference to the information set forth under the caption "Principal Accountant Fees and Services" in the Proxy Statement for the 2014 Annual Meeting of Shareholders.

60

PART IV

ITEM 15.    EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a)

1.     Financial Statements

Report of Independent Registered Public Accounting Firm	70
Consolidated Balance Sheets	71
Consolidated Statements of Operations	72
Consolidated Statements of Comprehensive Income (Loss)	73
Consolidated Statement of Shareholders' Equity	74
Consolidated Statements of Cash Flows	75
Notes to Consolidated Financial Statements	76

2.     Financial Statement Schedules

        Schedule II is included on page 118 of this report. All other schedules are omitted because they are not required or the required information is included in the financial statements or notes thereto.

61

3.     Exhibits:

Exhibit		Footnote			Description of Document
	3.1		(1	)	Amended and Restated Articles of Incorporation
	3.2		(2	)	Certificate of Amendment to Amended and Restated Articles of Incorporation
	3.3		(3	)	Certificate of Determination of Series RP Preferred Stock of the Company
	3.4		(4	)	Bylaws, as amended
	4.1		(5	)	Rights Agreement, dated as of April 21, 2005, between the Company and Continental Stock Transfer and Trust Company as Rights Agent
	10.1		(6	)	1995 Stock Option Plan, as amended
	10.2		(7	)	Form of Incentive Stock Option Agreement under 1995 Stock Option Plan
	10.3		(7	)	Form of Nonstatutory Stock Option Agreement under 1995 Stock Option Plan
	10.4		(7	)	Form of Exercise Notice under 1995 Stock Option Plan
	10.5		(1	)	Agreement re: Settlement of Lawsuit, Conveyance of Assets and Assumption of Liabilities dated August 28, 1995 by and among Depomed Systems, Inc., Dr. John W. Shell and M6 Pharmaceuticals,  Inc.
	10.6		(8	)	Form of Indemnification Agreement between the Company and its directors and executive officers
	10.7		(9	)	Settlement and Release Agreement, dated as of November 22, 2002, between the Company and Bristol-Myers Squibb Company
	10.8		(10	)	Lease extension agreement dated April 30, 2003 between the Company and Menlo Business Park LLC
	10.9		(10	)	Lease agreement dated April 30, 2003 between the Company and Menlo Park Business Park LLC
	10.10		(22	)	2004 Equity Incentive Plan, as amended
	10.11		(22	)	Form of Restricted Stock Unit Award Agreement
	10.12		(*	)	2004 Employee Stock Purchase Plan, as amended
	10.13		(13	)	Agreement dated as of December 10, 2004, between the Company and Kings Road Investments, Ltd.
	†10.14		(14	)	Technology Transfer and Commercial Manufacturing Agreement dated October 18, 2005 between the Company and MOVA Pharmaceutical Corporation
	†10.15		(14	)	Amended and Restated License Agreement dated December 13, 2005 between the Company and Biovail Laboratories International SRL
	†10.16		(14	)	Supply Agreement dated December 13, 2005 between the Company and Biovail Laboratories International SRL
	†10.17		(14	)	Manufacturing Transfer Agreement dated December 13, 2005 between the Company and Biovail Laboratories International SRL
	10.18		(15	)	Description of Non-employee Director Compensation Policy, as amended
	10.19		(25	)	Bonus Plan of the Company, as amended
	10.20		(26	)	Form of Management Continuity Agreement between the Company and certain officers of the Company

62

Exhibit		Footnote			Description of Document
	10.21		(16	)	Offer Letter dated June 14, 2006, between the Company and Matthew Gosling
	10.22		(8	)	Lease Agreement dated July 28, 2006 between the Company and Menlo Business Park, LLC
	10.23		(8	)	Lease Extension Agreement dated July 28, 2006 between the Company and Menlo Business Park, LLC
	10.24		(8	)	Second Lease Extension Agreement dated July 28, 2006 between the Company and Menlo Business Park, LLC
	†10.25		(7	)	Sublicense Agreement dated October 13, 2006 between the Company and PharmaNova, Inc.
	†10.27		(7	)	Commercial Manufacturing Agreement dated December 19, 2006 between the Company and MOVA Pharmaceutical Corporation
	10.28		(11	)	Amendment to Supply Agreement dated June 30, 2007 between the Company and Valeant Laboratories International SRL
	10.29		(18	)	Offer Letter, dated November 19, 2007, between the Company and Michael Sweeney, M.D.
	†10.30		(12	)	Settlement and License Agreement dated April 4, 2008 between the Company and Teva Pharmaceuticals USA, Inc.
	10.31		(12	)	Lease Extension Agreement dated March 18, 2008 between the Company and Menlo Business Park, LLC
	10.32		(12	)	Second Lease Extension Agreement dated March 18, 2008 between the Company and Menlo Business Park, LLC
	10.33		(12	)	Third Lease Extension Agreement dated March 18, 2008 between the Company and Menlo Business Park, LLC
	10.34		(12	)	Loan and Security Agreement dated June 27, 2008 between the Company, General Electric Capital Corporation and Oxford Finance Corporation
	†10.35		(12	)	Promotion Agreement dated July 21, 2008 between the Company and Santarus, Inc.
	†10.36		(17	)	Exclusive License Agreement between the Company and Solvay Pharmaceuticals, Inc., dated as of November 19, 2008
	10.37		(19	)	Offer Letter dated April 3, 2011 between the Company and James A. Schoeneck
	10.38		(19	)	Separation Agreement and Release dated April 1, 2011, between the Company and Carl A. Pelzel
	10.39		(19	)	Management Continuity Agreement dated April 3, 2011, between the Company and James A. Schoeneck
	10.40		(20	)	Third Lease Extension Agreement dated June 20, 2011 between the Company and Menlo Business Park, LLC
	10.41		(20	)	Fourth Lease Extension Agreement dated June 20, 2011 between the Company and Menlo Business Park, LLC
	†10.42		(20	)	Service Agreement, dated June 20, 2011 between the Company and Ventiv Commercial Services, LLC

63

Exhibit		Footnote			Description of Document
	†10.43		(21	)	Commercial Manufacturing Services Agreement dated June 1, 2011 between the Company and Patheon Puerto Rico, Inc.
	†10.44		(21	)	Commercialization Agreement dated August 22, 2011 between the Company and Santarus, Inc.
	†10.45		(23	)	Offer Letter dated January 13, 2012 between the Company and August J. Moretti
	†10.46		(24	)	Settlement and License Agreement dated February 22, 2012 between the Company and each of Lupin Pharmaceuticals, Inc. and Lupin Limited
	10.47		(24	)	Lease dated April 4, 2012 between the Company and BMR-Pacific Research Center LP
	10.48		(26	)	Asset Purchase Agreement dated June 21, 2012 between the Company and Xanodyne Pharmaceuticals, Inc.
	†10.49		(27	)	Asset Purchase Agreement dated July 29, 2013, among the Company, Archimedes Pharma US Inc., Archimedes Pharma Ltd. and Archimedes Development Ltd.
	+10.50		(*	)	Royalty Purchase and Sale Agreement dated October 18, 2013, among the Company, Depo DR Sub, LLC and PDL BioPharma, Inc.
	+10.51		(*	)	Asset Purchase Agreement dated December 17, 2013 between the Company and Nautilus Pharmaceuticals, Inc.
	21		(*	)	List of Subsidiaries
	23.1		(*	)	Consent of Independent Registered Public Accounting Firm
	24.1		(*	)	Power of Attorney (included on signature page hereto)
	31.1		(*	)	Certification pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934 of James A. Schoeneck
	31.2		(*	)	Certification pursuant to Rule 13a-14(a) under the Securities Exchange Act of August J. Moretti
	32.1		(*	)	Certification pursuant to 18 U.S.C. Section 1350 of James A. Schoeneck
	32.2		(*	)	Certification pursuant to 18 U.S.C. Section 1350 of August J. Moretti
	101.INS		(*	)	XBRL Instance Document
	101.SCH		(*	)	XBRL Taxonomy Extension Schema Document
	101.CAL		(*	)	XBRL Taxonomy Extension Calculation Linkbase Document
	101.DEF		(*	)	XBRL Taxonomy Extension Definition Linkbase Document
	101.LAB		(*	)	XBRL Taxonomy Extension Labels Linkbase Document
	101.PRE		(*	)	XBRL Taxonomy Extension Presentation Linkbase Document

(1)

Incorporated by reference to the Company's registration statement on Form SB-2 (File No. 333-25445)

(2)

Incorporated by reference to the Company's Form 10-K filed on March 31, 2003 (File No. 001-13111)

64

(3)

Incorporated by reference to the Company's Form 10-Q filed on May 10, 2005 (File No. 001-13111)

(4)

Incorporated by reference to the Company's Form 8-K filed on April 19, 2005 (File No. 001-13111)

(5)

Incorporated by reference to the Company's Form 8-A filed on April 22, 2005 (File No. 000-23267)

(6)

Incorporated by reference to the Company's registration statement on Form S-8 filed on December 12, 2002 (File No. 333-101796)

(7)

Incorporated by reference to the Company's Form 10-K filed on March 16, 2007 (File No. 001-13111)

(8)

Incorporated by reference to the Company's Form 10-Q filed on November 9, 2006 (File No. 001-13111)

(9)

Incorporated by reference to the Company's Form 8-K/A dated November 22, 2002 and filed on December 23, 2002 (File No. 001-13111)

(10)

Incorporated by reference to the Company's Form 10-Q filed on August 14, 2003 (File No. 001-13111)

(11)

Incorporated by reference to the Company's Form 10-Q filed on August 7, 2007 (File No. 001-13111)

(12)

Incorporated by reference to the Company's Form 10-Q filed on August 8, 2008 (File No. 001-13111)

(13)

Incorporated by reference to the Company's Form 8-K filed on December 14, 2004 (File No. 001-13111)

(14)

Incorporated by reference to the Company's Form 10-K filed on March 16, 2006 (File No. 001-13111)

(15)

Incorporated by reference to the Company's Form 8-K filed on March 29, 2006 (File No. 001-13111) and the Company's Form 8-K filed on December 12, 2006 (File No. 001-13111)

(16)

Incorporated by reference to the Company's Form 8-K filed on June 30, 2006 (File No. 001-13111)

(17)

Incorporated by reference to the Company's Form 10-K filed on March 6, 2009 (File No. 001-13111)

(18)

Incorporated by reference to the Company's Form 10-Q filed on May 7, 2008 (File No. 001-13111)

(19)

Incorporated by reference to the Company's Form 10-Q filed on May 6, 2011 (File No. 001-13111)

(20)

Incorporated by reference to the Company's Form 10-Q filed on August 2, 2011 (File No. 001-13111)

(21)

Incorporated by reference to the Company's Form 10-Q filed on November 7, 2011 (File No. 001-13111)

(22)

Incorporated by reference to the Company's Form 8-K filed on January 17, 2012 (File No. 001-13111)

(23)

Incorporated by reference to the Company's Form 10-K filed on March 8, 2012 (File No. 001-13111)

65

(24)

Incorporated by reference to the Company's Form 10-Q filed on May 8, 2012 (File No. 001-13111)

(25)

Incorporated by reference to the Company's Form 8-K filed on May 18, 2012 (File No. 001-13111)

(26)

Incorporated by reference to the Company's Form 10-Q filed on August 3, 2012 (File No. 001-13111)

(27)

Incorporated by reference to the Company's Form 10-Q filed on November 7, 2013 (File No. 001-13111)

†

Confidential treatment granted

+

Confidential treatment requested

*

Filed herewith

66

SIGNATURES

        Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the issuer, a corporation organized and existing under the laws of the State of California, has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized, in the City of Newark, State of California, on the 17^th day of March 2014.

Depomed, Inc.
By	/s/ JAMES A. SCHOENECK James A. Schoeneck President and Chief Executive Officer

POWER OF ATTORNEY

        KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints James A. Schoeneck and August J. Moretti, and each of them acting individually, as his true and lawful attorneys-in-fact and agents, each with full power of substitution, for him in any and all capacities, to sign any and all amendments to this report on Form 10-K and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, with full power of each to act alone, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully for all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or his or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has been signed by the following persons in the capacities and on the dates indicated.

Signature
/s/ JAMES A. SCHOENECK James A. Schoeneck	President and Chief Executive Officer (Principal Executive Officer)	March 17, 2014
/s/ AUGUST J. MORETTI August J. Moretti	Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)	March 17, 2014
/s/ PETER D. STAPLE Peter D. Staple	Chairman of the Board of Directors	March 17, 2014
/s/ VICENTE ANIDO, JR. Vicente Anido, Jr., Ph.D.	Director	March 17, 2014

67

Signature
/s/ G. STEVEN BURRILL G. Steven Burrill	Director	March 17, 2014
/s/ KAREN A. DAWES Karen A. Dawes	Director	March 17, 2014
/s/ LOUIS J. LAVIGNE JR. Louis J. Lavigne Jr.	Director	March 17, 2014
/s/ SAMUEL R. SAKS Samuel R. Saks, M.D.	Director	March 17, 2014
/s/ DAVID B. ZENOFF, D.B.A. David B. Zenoff, D.B.A.	Director	March 17, 2014

68

DEPOMED, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

DEPOMED, INC. CONSOLIDATED FINANCIAL STATEMENTS

Report of Independent Registered Public Accounting Firm	70
Consolidated Balance Sheets	71
Consolidated Statements of Operations	72
Consolidated Statements of Comprehensive Income (Loss)	73
Consolidated Statement of Shareholders' Equity	74
Consolidated Statements of Cash Flows	75
Notes to Consolidated Financial Statements	76

69

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders of
Depomed, Inc.

        We have audited the accompanying consolidated balance sheets of Depomed, Inc. as of December 31, 2013 and 2012, and the related consolidated statements of operations, comprehensive income (loss), shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2013. Our audits also included the financial statement schedule listed in the Index at Item 15(a)(2). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

        We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

        In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Depomed, Inc. at December 31, 2013 and 2012, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2013, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

        We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Depomed, Inc.'s internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 Framework) and our report dated March 17, 2014 expressed an unqualified opinion thereon.

	/s/ Ernst & Young LLP
Redwood City California March 17, 2014

70

DEPOMED, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share amounts)

	December 31, 2013			December 31, 2012
ASSETS
Current assets:
Cash and cash equivalents	$	244,674		$	29,076
Marketable securities		27,263			37,737
Accounts receivable		11,451			3,614
Receivables from collaborative partners		10,824			10,078
Inventories		10,145			9,587
Deferred tax assets, net		26,860			—
Prepaid and other current assets		5,828			5,175
Total current assets		337,045			95,267
Marketable securities, long-term		4,080			11,079
Property and equipment, net		8,340			8,237
Intangible assets, net		82,521			25,078
Deferred tax assets, net, non-current		76,342			—
Other assets		325			1,992
	$	508,653		$	141,653
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities	$	41,837		$	32,578
Income taxes payable		61,875			—
Deferred license revenue		3,041			3,273
Liability related to the sale of future royalties		49,455			—
Other current liabilities		649			830
Total current liabilities		156,857			36,681
Deferred license revenue, non-current portion		12,475			15,516
Contingent consideration liability		11,264			1,342
Liability related to the sale of future royalties, less current portion		177,624			—
Other long-term liabilities		13,017			4,178
Commitments
Shareholders' equity:
Preferred stock, no par value, 5,000,000 shares authorized; Series A convertible preferred stock, 25,000 shares designated, 18,158 shares issued and surrendered, and zero shares outstanding at December 31, 2013 and December 31, 2012		—			—
Common stock, no par value, 100,000,000 shares authorized; 57,369,683 and 56,383,713 shares issued and outstanding at December 31, 2013 and December 31, 2012, respectively		221,124			211,266
Additional paid-in capital		347			—
Accumulated deficit		(84,048	)		(127,361	)
Accumulated other comprehensive Income (loss), net of tax		(7	)		31
Total shareholders' equity		137,416			83,936
	$	508,653		$	141,653

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

71

DEPOMED, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except share and per share amounts)

	Year Ended December 31,
	2013			2012			2011
Revenues:
Product sales	$	58,302		$	27,483		$	41,178
Royalties		45,003			44,535			9,997
License and other revenue		12,796			18,798			81,798
Non-cash royalty revenue related to sale of future royalties to PDL		18,104			—			—
Total revenues		134,205			90,816			132,973
Costs and expenses:
Cost of sales		7,091			6,039			5,544
Research and development expense		8,073			15,462			15,187
Selling, general and administrative expense:
Promotion fee expense		—			—			27,339
Other selling, general and administrative expense		105,176			97,646			54,205
Total selling, general and administrative expense		105,176			97,646			81,544
Amortization of intangible assets		4,548			2,022			—
Gain on settlement agreement		—			—			(40,000	)
Total costs and expenses		124,888			121,169			62,275
Income (loss) from operations		9,317			(30,353	)		70,698
Other income (expense):
Interest and other income		662			520			557
Interest expense		(911	)		(39	)		(133	)
Non-cash interest expense on liability related to sale of future royalties to PDL		(4,488	)		—			—
Total other income		(4,737	)		481			424
Net income (loss) before income taxes		4,580			(29,872	)		71,122
Benefit from (provision for) income taxes		38,733			91			(396	)
Net income (loss)	$	43,313		$	(29,781	)	$	70,726
Basic net income (loss) per share	$	0.76		$	(0.53	)	$	1.30
Diluted net income (loss) per share	$	0.75		$	(0.53	)	$	1.26
Shares used in computing basic net income (loss) per share		56,736,009			55,892,563			54,562,820
Shares used in computing diluted net income (loss) per share		57,543,979			55,892,563			56,089,796

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

72

DEPOMED, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands)

	2013			2012			2011
Net income (loss)	$	43,313		$	(29,781	)	$	70,726
Unrealized gains (losses) on available-for-sale securities:
Unrealized gains (losses) during period prior to reclassification adjustments, net of taxes		(37	)		58			(2	)
Less: Reclassification adjustments for gains included to net income (loss), net of taxes		1			14			80
Net unrealized gains (losses) on available-for-sale securities		(38	)		44			(82	)
Comprehensive income (loss)	$	43,275		$	(29,737	)	$	70,644

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

73

DEPOMED, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

(in thousands, except share amounts)

	Common Stock						Accumulated Other Comprehensive Income
					Additional Paid-In Capital					Accumulated Deficit			Shareholders' Equity
	Shares		Amount
Balances at Dec. 31, 2010		52,957,787	$	191,343	$	—	$	69		$	(168,306	)	$	23,106
Issuance of common stock upon exercise of options		2,379,116		7,588		—		—			—			7,588
Issuance of common stock under employee stock purchase plan		169,217		711		—		—			—			711
Stock-based compensation		—		3,869		—		—			—			3,869
Net income (loss)		—		—		—		—			70,726			70,726
Unrealized gain (loss) on available-for-sale securities		—		—		—		(82	)		—			(82	)
Balances at Dec. 31, 2011		55,506,120	$	203,511	$	—	$	(13	)	$	(97,580	)	$	105,918
Issuance of common stock upon exercise of options		628,394		1,835		—		—			—			1,835
Issuance of common stock under employee stock purchase plan		203,389		851		—		—			—			851
Issuance of common stock in conjunction with vesting of restricted stock units		45,810		278		—		—			—			278
Stock-based compensation		—		4,791		—		—			—			4,791
Net income (loss)		—		—		—		—			(29,781	)		(29,781	)
Unrealized gain (loss) on available-for-sale securities		—		—		—		44			—			44
Balances at Dec. 31, 2012		56,383,713	$	211,266	$	—	$	31		$	(127,361	)	$	83,936
Issuance of common stock upon exercise of options		621,090		2,782		—		—			—			2,782
Issuance of common stock under employee stock purchase plan		222,062		966		—		—			—			966
Issuance of common stock in conjunction with vesting of restricted stock units		142,818		765		—		—			—			765
Stock-based compensation		—		5,345		—		—			—			5,345
Windfall tax benefit		—		—		347		—			—			347
Net income (loss)		—		—		—		—			43,313			43,313
Unrealized gain (loss) on available-for-sale securities		—		—		—		(38	)		—			(38	)
Balances at Dec. 31, 2013		57,369,683	$	221,124	$	347	$	(7	)	$	(84,048	)	$	137,416

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

74

DEPOMED, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

	Year Ended December 31,
	2013			2012			2011
Operating Activities
Net income (loss)	$	43,313		$	(29,781	)	$	70,726
Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities:
Non-cash interest expense on liability related to PDL Transaction		4,488			—			—
Non-cash royalty revenue related to PDL Transaction		(18,104	)		—			—
Depreciation and amortization		6,161			2,561			399
Amortization of investments		783			331			21
Gain on bargain purchase		(484	)		(92	)		—
Allowance for inventory obsolescence		347			584			(809	)
Loss on disposal of property and equipment		—			28			—
Stock-based compensation		6,109			5,070			3,869
Contingent consideration fair value adjustment		909			—			—
Deferred income tax benefit		(103,202	)		—			—
Excess tax benefit from stock-based compensation		347			—			—
Changes in assets and liabilities:
Accounts receivable		(7,838	)		807			1,673
Receivables from collaborative partners		(726	)		(1,943	)		(7,881	)
Inventories		4,266			(2,346	)		(3,016	)
Prepaid and other assets		1,540			(1,509	)		(4,031	)
Accounts payable and other accrued liabilities		10,833			5,661			7,811
Accrued compensation		2,063			1,780			597
Income taxes payable		62,222			—			—
Deferred revenue		(3,273	)		(12,136	)		(11,708	)
Net cash provided by (used in) operating activities		9,754			(30,985	)		57,651
Investing Activities
Purchases of property and equipment		(1,812	)		(6,880	)		(698	)
Acquisition of business		(52,725	)		(26,435	)		—
Acquisition of patents		(150	)
Purchases of marketable securities		(37,746	)		(38,462	)		(195,162	)
Maturities of marketable securities		53,056			61,405			58,495
Sales of marketable securities		1,341			43,704			75,177
Net cash (used in) provided by investing activities		(38,036	)		33,332			(62,188	)
Financing Activities
Proceeds from sale of future royalties to PDL		240,500			—			—
Principal payments on long-term debt		—			—			(2,244	)
Proceeds from issuance of common stock		3,727			2,686			8,298
Excess tax benefit from stock-based compensation		(347	)		—			—
Net cash provided by financing activities		243,880			2,686			6,054
Net increase (decrease) in cash and cash equivalents		215,598			5,033			1,517
Cash and cash equivalents at beginning of year		29,076			24,043			22,526
Cash and cash equivalents at end of year	$	244,674		$	29,076		$	24,043
Supplemental Disclosure of Cash Flow Information
Cash paid during the period for:
Interest	$	—		$	—		$	133
Taxes	$	45		$	144		$	—

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

75

DEPOMED, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization

        Depomed, Inc. (Depomed or the Company) is a specialty pharmaceutical company focused on pain and other conditions and diseases of the central nervous system. The products that comprise our current specialty pharmaceutical business are Gralise® (gabapentin), a once-daily product for the management of postherpetic neuralgia (PHN) that we launched in October 2011, Zipsor® (diclofenac potassium) liquid filled capsules, a product for the treatment of mild to moderate acute pain that we acquired in June 2012, Lazanda® (fentanyl) nasal spray, a product for the management of breakthrough pain in cancer patients that we acquired in July 2013, and CAMBIA® (diclofenac potassium for oral solution), a product for the acute treatment of migraine attacks that we acquired in late December 2013.

        The Company also has a portfolio of royalty and milestone producing license agreements based on our proprietary Acuform® gastroretentive drug delivery technology with Mallinckrodt Inc. (Mallinckrodt), Ironwood Pharmaceuticals, Inc. (Ironwood) and Janssen Pharmaceuticals, Inc.

        On October 18, 2013, the Company sold its interests in royalty and milestone payments under its license agreements in the Type 2 diabetes therapeutic area to PDL BioPharma, Inc. (PDL) for $240.5 million (PDL transaction). The interests sold include royalty and milestone payments accruing from and after October 1, 2013: (a) from Santarus with respect to sales of Glumetza® (metformin HCL extended-release tablets) in the United States; (b) from Merck & Co., Inc. (Merck) with respect to sales of Janumet XR® (sitagliptin and metformin HCL extended-release); (c) from Janssen Pharmaceutica N.V. and Janssen Pharmaceuticals, Inc. (collectively, Janssen) with respect to potential future development milestones and sales of Janssen's investigational fixed-dose combination of Invokana® (canagliflozin) and extended-release metformin; (d) from Boehringer Ingelheim International GMBH (Boehringer Ingelheim) with respect to potential future development milestones and sales of the investigational fixed-dose combinations of drugs and extended-release metformin subject to Depomed's license agreement with Boehringer Ingelheim; and (e) from LG Life Sciences Ltd. (LG) and Valeant International Bermuda SRL (Valeant) for sales of extended-release metformin in Korea and Canada, respectively.

        The Company has one product candidate under clinical development, DM-1992 for Parkinson's disease. DM-1992 completed a Phase 2 trial for Parkinson's disease, and the Company announced a summary of the results of that trial in November 2012. The Company continues to evaluate partnering opportunities and monitor competitive developments.

Basis of Preparation

        The Company's consolidated financial statements are prepared in accordance with the Financial Accounting Standards Board Accounting Standards Codification, or the Codification, which is the single source for all authoritative U.S. generally accepted accounting principles, or U.S. GAAP.

Principles of Consolidation

        The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Depo DR Sub LLC (Depo DR Sub) which was formed to facilitate the PDL transaction in the third quarter of 2013. All intercompany accounts and transactions have been eliminated in consolidation.

76

DEPOMED, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

        Depo DR Sub was formed in October 2013 for the sole purpose of facilitating the sale of the Company's interests in the royalty and milestone payments under its license agreements in the Type 2 diabetes therapeutic area to PDL. The Company contributed to Depo DR Sub all of its right, title and interest in each of the license agreements to receive royalty payments. Immediately following the transaction, Depo DR Sub sold to PDL, among other things, such right to receive royalty payments, for an upfront cash purchase price of $240.5 million,

        The Company and Depo DR Sub continue to retain the duties and obligations under the specified license agreements. These include the collection of the royalty and milestones amounts due and enforcement of related provisions under the specified license agreements, among others. In addition, the Company and Depo DR Sub must prepare a quarterly distribution report relating to the specified license agreements, containing among other items, the amount of royalty payments received by the Company, reimbursable expenses and set-offs. The Company and Depo DR Sub must also provide PDL with notice of certain communications, events or actions with respect to the specified license agreements and infringement of any underlying intellectual property.

Use of Estimates

        The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Although management believes these estimates are based upon reasonable assumptions within the bounds of its knowledge of the Company's business and operations, actual results could differ materially from those estimates.

Revenue Recognition

        The Company recognizes revenue from the sale of its products, royalties earned, and on payments received and services performed under contractual arrangements.

        Revenue is recognized when there is persuasive evidence that an arrangement exists, delivery has occurred and title has passed, the price is fixed or determinable and the Company is reasonably assured of collecting the resulting receivable. Revenue arrangements with multiple elements are evaluated to determine whether the multiple elements met certain criteria for dividing the arrangement into separate units of accounting, including whether the delivered element(s) have stand-alone value to the Company's customer or licensee. Where there are multiple deliverables combined as a single unit of accounting, revenues are deferred and recognized over the period that we remain obligated to perform services.

•

Product Sales—The Company sells commercial products to wholesale distributors and retail pharmacies. Products sales revenue is recognized when title has transferred to the customer and the customer has assumed the risks and rewards of ownership, which typically occurs on delivery to the customer.

•

Product Sales Allowances—The Company recognizes product sales allowances as a reduction of product sales in the same period the related revenue is recognized. Product sales allowances are based on amounts owed or to be claimed on the related sales. These estimates take into consideration the terms of our agreements with customers, historical product returns, rebates or

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discounts taken, estimated levels of inventory in the distribution channel, the shelf life of the product and specific known market events, such as competitive pricing and new product introductions. If actual future results vary from our estimates, the Company may need to adjust these estimates, which could have an effect on product sales and earnings in the period of adjustment. The Company's sales allowances include:

•

Product Returns—The Company allows customers to return product for credit on returned product that is within six months before and up to 12 months after its product expiration date. The Company estimate product returns on Gralise, Zipsor, CAMBIA and Lazanda. The Company also estimate returns on sales of Glumetza made by the Company through August 2011, as we are financially responsible for return credits on Glumetza product we shipped as part of the Company's commercialization with Santarus in August 2011. Under the terms of the Zipsor Asset Purchase Agreement, the Company also assumed financial responsibility for returns of Zipsor product previously sold by Xanodyne. Under the terms of the CAMBIA Asset Purchase Agreement, the Company also assumed financial responsibility for returns of CAMBIA product previously sold by Nautilus. The Company did not assume financial responsibility for returns of Lazanda product previously sold by Archimedes. See Note 16 of the Notes to Financial Information for further information on the acquisition of Zipsor, CAMBIA and Lazanda.


The shelf life of Gralise is 24 to 36 months from the date of tablet manufacture. The shelf life of Zipsor is 36 months from the date of tablet manufacture. The shelf life of CAMBIA is 24 to 48 months from the manufacture date. The shelf life of Lazanda is 24 to 36 months from the manufacture date. The shelf life of the 500mg Glumetza is 48 months from the date of tablet manufacture and the shelf life of the 1000mg Glumetza is 24 to 36 months from the date of tablet manufacture. The Company monitors actual return history on an individual product lot basis since product launch, which provide it with a basis to reasonably estimate future product returns, taking into consideration the shelf life of product at the time of shipment, shipment and prescription trends, estimated distribution channel inventory levels and consideration of the introduction of competitive products.

Because of the shelf life of our products and our return policy of issuing credits on returned product that is within six months before and up to 12 months after its product expiration date, there may be a significant period of time between when the product is shipped and when the Company issues credit on a returned product. Accordingly, the Company may have to adjust these estimates, which could have an effect on product sales and earnings in the period of adjustments.

•

Wholesaler and Retail Pharmacy Discounts—The Company offers contractually determined discounts to certain wholesale distributors and retail pharmacies that purchase directly from it. These discounts are either taken off-invoice at the time of shipment or paid to the customer on a quarterly basis one to two months after the quarter in which product was shipped to the customer.

•

Prompt Pay Discounts—The Company offers cash discounts to its customers, generally 2% of the sales price, as an incentive for prompt payment. Based on the Company's experience,

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the Company expects its customers to comply with the payment terms to earn the cash discount.

•

Patient Discount Programs—The Company offers patient discount co-pay assistance programs in which patients receive certain discounts off their prescriptions at participating retail pharmacies. The discounts are reimbursed by the Company approximately one month after the prescriptions subject to the discount are filled.

•

Medicaid Rebates—The Company participates in Medicaid rebate programs, which provide assistance to certain low-income patients based on each individual state's guidelines regarding eligibility and services. Under the Medicaid rebate programs, the Company pays a rebate to each participating state, generally two to three months after the quarter in which prescriptions subject to the rebate are filled.

•

Chargebacks—The Company provides discounts to authorized users of the Federal Supply Schedule (FSS) of the General Services Administration under an FSS contract with the Department of Veterans Affairs. These federal entities purchase products from the wholesale distributors at a discounted price, and the wholesale distributors then charge back to the Company the difference between the current retail price and the price the federal entity paid for the product.

•

Managed Care Rebates—The Company offers discounts under contracts with certain managed care providers who do not purchase directly from it. The Company generally pays managed care rebates one to two months after the quarter in which prescriptions subject to the rebate are filled.

•

Medicare Part D Coverage Gap Rebates—The Company participates in the Medicare Part D Coverage Gap Discount Program under which it provides rebates on prescriptions that fall within the "donut hole" coverage gap. The Company generally pays Medicare Part D Coverage Gap rebates two to three months after the quarter in which prescriptions subject to the rebate are filled.

•

Launch Discounts—The Company offered certain discounts in connection with the launch and commercial availability of Gralise in October 2011. These launch discounts include off-invoice discounts to wholesalers and stocking rebates to pharmacies for stocking Gralise that were paid in November 2011.

•

Royalties—Royalties are recognized as earned in accordance with the contract terms when royalties from licensees can be reliably measured and collectability is reasonably assured.

Under the commercialization agreement between the Company and Santarus, the Company receives royalties on net sales of Glumetza distributed by Santarus in the United States. Santarus commenced distributing and recording product sales on shipments of Glumetza in September 2011. See Note 2 for further information on the Santarus commercialization agreement.

Royalties received from Santarus on sales of Glumetza, from Merck on sales of Janumet XR and from Janssen on sales of NUCYNTA ER are recognized in the period earned as the royalty amounts can be estimated and collectability is reasonably assured.

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NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

In October 2013, the Company sold its interests in royalty and milestone payments under our license agreements in the Type 2 diabetes therapeutic area to PDL for $240.5 million. This transaction was accounted for as a liability that will be amortized using the interest method over the life of the agreement. As a result of this liability accounting, even though the Company does not retain the related royalties and milestones under the transaction as the amounts are remitted to PDL, the Company will continue to record revenue related to these royalties and milestones.

•

License and Collaborative Arrangements—Revenue from license and collaborative arrangements is recognized when the Company has substantially completed its obligations under the terms of the arrangement and the Company's remaining involvement is inconsequential and perfunctory. If the Company has significant continuing involvement under such an arrangement, license and collaborative fees are recognized over the estimated performance period. The Company recognizes milestone payments for its research and development collaborations upon the achievement of specified milestones if (1) the milestone is substantive in nature, and the achievement of the milestone was not reasonably assured at the inception of the agreement; (2) consideration earned relates to past performance and (3) the milestone payment is nonrefundable. A milestone is considered substantive if the consideration earned from the achievement of the milestone is consistent with the Company's performance required to achieve the milestone or consistent with the increase in value to the collaboration resulting from the Company's performance, the consideration earned relates solely to past performance, and the consideration earned is reasonable relative to all of the other deliverables and payments within the arrangement. License, milestones and collaborative fee payments received in excess of amounts earned are classified as deferred revenue until earned.

Stock-Based Compensation

        Compensation expense for stock-based compensation is based on the single-option approach, includes an estimate for forfeitures and is recognized over the vesting term of the options using the straight-line method. Depomed estimates forfeitures based on historical experience. Depomed uses historical option exercise data to estimate the expected life of the options.

Research and Development Expense and Accruals

        Research and development expenses include salaries, clinical trial costs, consultant fees, supplies, manufacturing costs for research and development programs and allocations of corporate costs. All such costs are charged to research and development expense as incurred. These expenses result from the Company's independent research and development efforts as well as efforts associated with collaborations. The Company reviews and accrues clinical trial expenses based on work performed, which relies on estimates of total costs incurred based on patient enrollment, completion of patient studies and other events. The Company follows this method since reasonably dependable estimates of the costs applicable to various stages of a research agreement or clinical trial can be made. Accrued clinical costs are subject to revisions as trials progress to completion. Revisions are charged to expense in the period in which the facts that give rise to the revision become known.

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Shipping and Handling Costs

        Shipping and handling costs incurred for inventory purchases and product shipments are recorded in cost of sales in the Statements of Operations.

Advertising Costs

        Costs associated with advertising are expensed on first showing. Advertising expense for the years ended December 31, 2013, 2012 and 2011 were $1.3 million, $1.7 million and $2.1 million, respectively.

Comprehensive Income (Loss)

        Comprehensive income (loss) is comprised of net income (loss) and other comprehensive income (loss). Other comprehensive income (loss) includes certain changes in equity of the Company that are excluded from net income (loss). Unrealized gains and losses on the Company's available-for-sale securities are reported separately in shareholders' equity and included in accumulated other comprehensive income (loss). Comprehensive income (loss) for the years ended December 31, 2013, 2012 and 2011 has been reflected in the Consolidated Statements of Comprehensive Income (loss).

Cash, Cash Equivalents and Marketable Securities

        The Company considers all highly liquid investments with an original maturity (at date of purchase) of three months or less to be cash equivalents. Cash and cash equivalents consist of cash on deposit with banks, money market instruments and commercial paper. The Company places its cash, cash equivalents and marketable securities with high quality U.S. government and financial institutions and to date has not experienced material losses on any of its balances. The Company records cash and cash equivalents at amortized cost, which approximates the fair value. All marketable securities are classified as available-for-sale since these instruments are readily marketable. These securities are carried at fair value, which is based on readily available market information, with unrealized gains and losses included in accumulated other comprehensive income (loss) within shareholders' equity. The Company uses the specific identification method to determine the amount of realized gains or losses on sales of marketable securities. We regularly review all of our investments for other-than-temporary declines in fair value. Our review includes the consideration of the cause of the impairment including the creditworthiness of the security issuers, the number of securities in an unrealized loss position and the severity and duration of the unrealized losses. When we determine that the decline in fair value of an investment is below our accounting basis and this decline is other-than-temporary, we reduce the carrying value of the security we hold and record a loss in the amount of such decline. Realized gains or losses have been insignificant and are included in interest and other income in the Consolidated Statements of Operations.

Accounts Receivable

        Trade accounts receivable are recorded net of allowances for cash discounts for prompt payment. To date the Company has not recorded a bad debt allowance due to the fact that the majority of its product revenue comes from sales to a limited number of financially sound companies who have historically paid their balances timely. The need for bad debt allowance is evaluated each reporting

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period based on our assessment of the credit worthiness of our customers or any other potential circumstances that could result in bad debt.

        Receivables from collaborative partners represent amounts due from Santarus, Merck and Janssen.

Inventories

        Inventories are stated at the lower of cost or market with cost determined by specific manufactured lot. Inventories consist of costs of the active pharmaceutical ingredient, contract manufacturing and packaging costs. The Company writes-off the value of inventory for potentially excess, dated or obsolete inventories based on an analysis of inventory on hand and projected demand.

Property and Equipment

        Property and equipment are stated at cost, less accumulated depreciation and amortization (See Note 5 of the Notes to the Consolidated Financial Statements). Depreciation is calculated using the straight-line method over the estimated useful lives of the respective assets, as follows:

Furniture and office equipment	3 - 5 years
Laboratory equipment	3 - 5 years
Leasehold improvements	Shorter of estimated useful life or lease term

Intangible Assets

        Intangible assets consist of purchased developed technology and trademarks. We determine the fair values of acquired intangible assets as of the acquisition date. Discounted cash flow models are typically used in these valuations, which require the use of significant estimates and assumptions, including but not limited to, developing appropriate discount rates and estimating future cash flows from product sales and related expenses. We evaluate purchased intangibles for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. An impairment loss would be recognized when estimated undiscounted future cash flows expected to result from the use of the asset and its eventual disposition are less than its carrying amount. Estimating future cash flows related to an intangible asset involves significant estimates and assumptions. If our assumptions are not correct, there could be an impairment loss or, in the case of a change in the estimated useful life of the asset, a change in amortization expense.

Net Income (Loss) Per Share

        Basic net income (loss) per share is calculated by dividing the net income (loss) by the weighted-average number of shares of common stock outstanding during the period. Diluted net income per share is calculated by dividing the net income by the weighted-average number of shares of common stock outstanding during the period, plus dilutive common shares for the period determined using the treasury stock method. Diluted net loss per share is calculated by dividing the net loss by the weighted-average number of shares of common stock outstanding during the period. For purposes of this calculation, options to purchase stock are considered to be potential common shares and are only

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included in the calculation of diluted net income (loss) per share when their effect is dilutive. Basic and diluted earnings per share are calculated as follows:

(in thousands, except for per share amounts)	2013		2012			2011
Numerator:
Net income (loss)	$	43,313	$	(29,781	)	$	70,726
Denominator for basic net income (loss) per share		56,736		55,893			54,563
Net effect of dilutive common shares		—		—			1,527
Denominator for diluted net income (loss) per share:		57,544		55,893			56,090
Basic net income (loss) per share	$	0.76	$	(0.53	)	$	1.30
Diluted net income (loss) per share	$	0.75	$	(0.53	)	$	1.26

        For the years ended December 31, 2013, 2012 and 2011, 4.8 million, 6.0 million and 1.5 million dilutive common shares, respectively, were not included in dilutive net income (loss) per share because their effect was anti-dilutive.

Income Taxes

        The Company's income tax policy is to record the estimated future tax effects of temporary differences between the tax bases of assets and liabilities and amounts reported in the Company's accompanying Consolidated Balance Sheets, as well as operating loss and tax credit carryforwards. The Company follows the guidelines set forth in the applicable accounting guidance regarding the recoverability of any tax assets recorded on the Consolidated Balance Sheet and provides any necessary allowances as required. Determining necessary allowances requires the Company to make assessments about the timing of future events, including the probability of expected future taxable income and available tax planning opportunities.

        The Company is subject to examination of its income tax returns by various tax authorities on a periodic basis. The Company regularly assesses the likelihood of adverse outcomes resulting from such examinations to determine the adequacy of its provision for income taxes. The Company has applied the provisions of the applicable accounting guidance on accounting for uncertainty in income taxes, which requires application of a more-likely-than-not threshold to the recognition and de-recognition of uncertain tax positions. If the recognition threshold is met, the applicable accounting guidance permits the Company to recognize a tax benefit measured at the largest amount of tax benefit that, in the Company's judgment, is more than 50 percent likely to be realized upon settlement. It further requires that a change in judgment related to the expected ultimate resolution of uncertain tax positions be recognized in earnings in the period of such change.

Segment Information

        The Company operates in one operating segment and has operations solely in the United States. To date, all of the Company's revenues from product sales are related to sales of Glumetza, Gralise,

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Zipsor, Lazanda and CAMBIA in the United States. The Company has recognized license and royalty revenue from license agreements in the territories of the United States, Canada and Korea.

Concentration of Risk

        The Company invests cash that is currently not being used for operational purposes in accordance with its investment policy in low-risk debt securities of the U.S. Treasury, U.S. government sponsored agencies and very highly rated banks and corporations. The Company is exposed to credit risk in the event of a default by the institutions holding the cash equivalents and available-for sale securities to the extent recorded on the balance sheet.

        The Company is subject to credit risk from its accounts receivable related to product sales and royalties. The majority of the Company's trade accounts receivable arises from product sales in the United States. Three wholesale distributors represented 35%, 37% and 21% of product shipments for the year ended December 31, 2013. These three customers individually comprised 23%, 35% and 34%, respectively, of product sales-related accounts receivable as of December 31, 2013. Three wholesale distributors represented 39%, 40% and 14% of product shipments for the year ended December 31, 2012. These three customers individually comprised 46%, 42% and 5%, respectively, of product sales-related accounts receivable as of December 31, 2012. Three wholesale distributors represented 46%, 32% and 17% of product shipments for the year ended December 31, 2011. These three customers individually comprised 54%, 29% and 9%, respectively, of product sales-related accounts receivable as of December 31, 2011.Accounts receivable balances related to product sales were $11.4 million, $3.6 million and $4.4 million for the years ended December 31, 2013, 2012 and 2011, respectively. The Company relies on a single third-party contract manufacturer organization in Puerto Rico to manufacture Gralise and two third-party suppliers for the supply of gabapentin, the active pharmaceutical ingredient in Gralise. The Company also relies on single third-party contract suppliers: Accucaps, DPT Lakewood, Inc., and MiPharm, S.p.A. for supply of Zipsor, Lazanda and CAMBIA respectively.

        Accounts receivable related to royalties was $7.2 million for the year ended December 31, 2013, of which $6.4 million related to Santarus. Accounts receivable related to royalties were $5.1 million for the year ended December 31, 2012, of which $4.4 million related to Santarus.

        To date, the Company has not experienced any losses with respect to the collection of its accounts receivable and believes that its entire accounts receivable balances are collectible.

Recent Accounting Pronouncements

        In July 2013, the Financial Accounting Standards Board issued a new accounting standard that will require the presentation of certain unrecognized tax benefits as a reduction to deferred tax assets rather than as a liability when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. This guidance is effective for our interim and annual periods beginning January 1, 2014. We do not believe the adoption of this guidance will have a material impact on our consolidated financial statements.

        In February 2013, the FASB issued Accounting Standards Update No. 2013-02, Comprehensive Income (Topic 220)—Reporting of Amounts Reclassified out of Accumulated Other Comprehensive Income

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(ASU 2013-02), to improve the reporting of reclassifications out of accumulated other comprehensive income. ASU 2013-02 requires an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under U.S. GAAP to be reclassified in its entirety to net income. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety from accumulated other comprehensive income to net income in the same reporting period, an entity is required to cross-reference other disclosures required under U.S. GAAP that provide additional detail about those amounts. ASU 2013-02 is effective for us during the first quarter of fiscal 2014 with earlier adoption permitted, which should be applied prospectively. The adoption of this standard did not have a material impact on our consolidated financial statements.

        In December 2011, the FASB issued ASU 2011-11, "Balance Sheet: Disclosures about Offsetting Assets and Liabilities." ASU 2011-11 enhances disclosures regarding financial instruments and derivative instruments. Entities are required to provide both net information and gross information for these assets and liabilities in order to enhance comparability between those entities that prepare their financial statements on the basis of U.S. GAAP and those entities that prepare their financial statements on the basis of IFRS. The requirements of ASU 2011-11 are effective for interim and annual periods beginning on or after January 1, 2013 and are to be applied retrospectively. The adoption of this standard did not have a material impact on our consolidated financial statements.

NOTE 2. LICENSE AND COLLABORATIVE ARRANGEMENTS

Abbott Products Inc. (formerly Solvay Pharmaceuticals, Inc.)

        In January 2011, Abbott Products received FDA approval of Gralise for the management of PHN, which triggered a $48.0 million development milestone from Abbott Products to us, which the Company received in February 2011. Because the milestone was both substantive in nature and based on past performance, and was achieved, the entire $48.0 million was recognized as license revenue in the first quarter of 2011.

        Pursuant to the exclusive license agreement originally entered into in November 2008, Solvay Pharmaceuticals, Inc. (subsequently acquired by Abbott) paid us a $25.0 million upfront fee in February 2009. The upfront payment received was originally scheduled to be recognized as revenue ratably until January 2013, which represented the estimated length of time our development and supply obligations existed under the agreement. In connection with the termination of the license agreement with Abbott Products, the Company no longer has continuing obligations to Abbott Products. Accordingly, all remaining deferred revenue related to the $25.0 million upfront license fee previously received from Abbott Products was fully recognized as revenue in March 2011, resulting in immediate recognition of approximately $11.3 million of license revenue. The Company recognized $12.6 million of license revenue related to this upfront fee for the year ended December 31, 2011.

Santarus, Inc.

        In August 2011, the Company entered into a commercialization agreement with Santarus granting Santarus exclusive rights to manufacture and commercialize Glumetza in the United States. The commercialization agreement supersedes the promotion agreement between the parties previously entered into in July 2008.

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NOTE 2. LICENSE AND COLLABORATIVE ARRANGEMENTS (Continued)

        Under the commercialization agreement, the Company transitioned to Santarus responsibility for manufacturing, distribution, pharmacovigilance and regulatory affairs. The Company ceased shipments of Glumetza in August 2011, and Santarus began distributing and recording product sales on shipments of Glumetza in September 2011. Santarus will continue to be responsible at its expense for advertising and promotional marketing activities for Glumetza.

        Under the commercialization agreement, Santarus was also required to pay the Company royalties on net product sales of Glumetza in the United States of 26.5% in 2011; 29.5% in 2012; 32.0% in 2013 and 2014; and 34.5% in 2015 and beyond, prior to generic entry of a Glumetza product. In the event of generic entry of a Glumetza product in the United States, the parties were to share proceeds equally based on a gross margin split. Royalty revenue from Santarus for the years ended December 31, 2013, 2012 and 2011 was $42.1 million, $42.8 million and $9.6 million, respectively. Royalty revenue from Santarus for the year ended 2011 represented four months of Santarus distributing Glumetza under the commercialization agreement.

        The Company is financially responsible for returns of Glumetza distributed by the Company, up to the amount of the product returns reserve account for Glumetza product returns on the date immediately before Santarus began distributing Glumetza. The Company is financially responsible for Glumetza rebates and chargebacks up to the amount of its reserve accounts for those items. Santarus is responsible for all other Glumetza returns, rebates and chargebacks.

        Under the commercialization agreement, the Company is responsible for managing any patent infringement lawsuits with respect to Glumetza-related patents, subject to certain consent rights in favor of Santarus, including with regard to any proposed settlements. Santarus reimburses the Company for 70% of its out-of-pocket costs, and the Company reimburses Santarus for 30% of its out-of-pocket costs, related to such lawsuits. The Company was previously responsible for managing the patent infringement lawsuit against Lupin Limited (Lupin), which was settled in February 2012, and against Sun Pharmaceutical Industries, Inc. (Sun), which was settled in January 2013.

        Pursuant to the original promotion agreement, Santarus paid the Company a $12.0 million upfront fee in July 2008. The upfront payment received was originally being amortized as revenue ratably until October 2021, which represented the estimated length of time the Company's obligations existed under the promotion agreement related to manufacturing Glumetza and paying Santarus promotion fees on gross margin of Glumetza. The commercialization agreement in August 2011 superseded the promotion agreement and removed our promotion fee obligations and contemplated removal of our manufacturing obligations. The commercialization agreement included obligations with respect to manufacturing and regulatory transition to Santarus and managing the patent infringement lawsuits against Sun and Lupin. At the time of the commercialization agreement, all of these obligations were estimated to be completed in December 2013. During the fourth quarter of 2012, events occurred related to the transfer of manufacturing with one of the contract manufacturers of Glumetza that extended the estimated completion date of Depomed's manufacturing obligations to February 2016, which is now the estimated date the Company expects its obligations will be completed under the commercialization agreement.

        The Company recognized approximately $1.4 million, $3.3 million and $2.0 million of revenue associated with this upfront license fee during 2013, 2012 and 2011, respectively. The remaining deferred revenue balance is $3 million at December 31, 2013.

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NOTE 2. LICENSE AND COLLABORATIVE ARRANGEMENTS (Continued)

Boehringer Ingelheim International GMBH

        In March 2011, the Company entered into a license and service agreement with Boehringer Ingelheim granting Boehringer Ingelheim a license to use certain patents related to the Company's Acuform drug delivery technology in development of fixed dose combinations of extended release metformin and proprietary Boehringer Ingelheim compounds in development for type 2 diabetes. Under the terms of the agreement, Boehringer Ingelheim was also granted a right of reference to the New Drug Application covering Glumetza and associated data for use in potential regulatory submission processes.

        In March 2012, the Company achieved the first milestone under the agreement with respect to delivery of experimental batches of prototype formulations that meet required specifications, and received a nonrefundable $2.5 million milestone payment. As the milestone event was both substantive in nature and related to past performance, and achievement was not reasonably assured at the inception of the agreement, the Company recognized the entire amount of this payment as revenue in the first quarter of 2012. In October 2013, the Company sold its interest in milestones and royalties pursuant to this agreement to PDL

Ironwood Pharmaceuticals, Inc.

        In July 2011, the Company entered into a collaboration and license agreement with Ironwood Pharmaceuticals, Inc. (Ironwood) granting Ironwood a license for worldwide rights to the Company's Acuform drug delivery technology for an Ironwood early stage development program addressing refractory GERD. In connection with the research collaboration and license agreement, the Company received an upfront payment of $0.9 million and was reimbursed for initial product formulation work.

        In March 2012, the Company achieved the first milestone under the agreement upon delivery of experimental batches of prototype formulations that met agreed-upon specifications. This triggered a nonrefundable $1.0 million milestone payment which the Company received in May 2012. In December 2013, the Company achieved another milestone in the amount of $0.5 million upon acceptance by Ironwood of product for use in clinical trials.

Janssen Pharmaceutica N.V.

        In August 2010, the Company entered into a non-exclusive license agreement with Janssen granting Janssen a license to use certain patents related to our Acuform drug delivery technology in developing fixed dose combinations of canagliflozin and extended release metformin. The Company also granted Janssen a right to reference the New Drug Application covering Glumetza in Janssen's regulatory filings covering the products. In August 2010, Janssen paid the Company a $5.0 million upfront license fee. In September 2010, the Company achieved the first development milestone under the agreement related to formulation work, which triggered a $5.0 million milestone payment, which the Company received in October 2010.

        The Company also entered into a service agreement with Janssen under which it provided formulation work associated with the products. The formulation work under the agreement was completed in March 2011.

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NOTE 2. LICENSE AND COLLABORATIVE ARRANGEMENTS (Continued)

        In February and December 2013, the Company completed two projects for Janssen related to this program and recognized $2.2 million in revenue during the first quarter of 2013 and $1.4 million in revenue during the fourth quarter of 2013.

Janssen Pharmaceuticals, Inc.

        In August 2012, the Company entered into a license agreement with Janssen that grants Janssen a non-exclusive license to certain patents and other intellectual property rights to our Acuform drug delivery technology for the development and commercialization of tapentadol extended release products, including NUCYNTA ER (tapentadol extended-release tablets). The Company received a $10 million upfront license fee and receives low single digit royalties on net sales of NUCYNTA ER in the U.S., Canada and Japan from and after July 2, 2012 through December 31, 2021.

Mallinckrodt (formerly Covidien)

        In November 2008, the Company entered into a license agreement with Covidien (Mallinckrodt) granting Covidien (Mallinckrodt) worldwide rights to utilize the Company's Acuform technology for the exclusive development of four products containing acetaminophen in combination with opiates. In 2008, Covidien (Mallinckrodt) paid the Company a total of $5.5 million in upfront fees, representing a $4.0 million upfront license fee and a $1.5 million upfront payment for formulation work to be performed by the Company under the agreement. The entire $5.5 million was initially accounted for as a single unit of accounting and was being amortized ratably through November 2011, which was initially the estimated length of time the Company was obligated to perform formulation work under the agreement.

        In July 2013, the FDA accepted for filing a NDA from Mallinckrodt for Xartemis XR which is formulated with the Company's Acuform® drug delivery technology. The NDA acceptance triggered a $5 million milestone payment to the Company which was received and recognized in the third quarter of 2013. As the non-refundable milestone event was both substantive in nature and related to past performance, and achievement was not reasonably assured at the inception of the agreement, the milestone was recognized as revenue in its entirety upon achievement.

Patheon Puerto Rico, Inc.

        In September 2011, the Company entered into a manufacturing agreement with Patheon Puerto Rico, Inc. (Patheon), pursuant to which Patheon will manufacture, package and supply commercial quantities of Gralise.

        Under the agreement, the Company will provide rolling forecasts to Patheon of its requirements for the product, a portion of which will be considered a firm purchase order. At December 31, 2013, the Company had non-cancelable purchase orders and minimum purchase obligations of approximately $0.5 million under the manufacturing agreement with Patheon for the manufacture of Gralise. The Company may obtain a portion of its product requirements from a second manufacturing source. The Company will be responsible for providing Patheon with the active pharmaceutical ingredient in Gralise.

        The agreement will expire on May 31, 2016, subject to early termination under certain circumstances.

88

DEPOMED, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 2. LICENSE AND COLLABORATIVE ARRANGEMENTS (Continued)

Valeant Pharmaceuticals International, Inc. (Formerly Biovail Laboratories, Inc.)

        In May 2002, the Company entered into a development and license agreement granting Valeant Laboratories Incorporated (Valeant) an exclusive license in the United States and Canada to manufacture and market Glumetza. Under the terms of the agreement, the Company was responsible for completing the clinical development program in support of the 500mg Glumetza. In July 2005, Valeant received FDA approval to market Glumetza in the United States. In accordance with the license agreement, Valeant paid a $25.0 million license fee payment to the Company.

        The Company will recognize the $25.0 million license fee payment as revenue ratably until October 2021, which represents the estimated length of time the Company's obligations exist under the arrangement related to royalties it is obligated to pay Valeant on net sales of the 500mg Glumetza in the United States and to use Valeant as the sole supplier of the 1000mg Glumetza. The Company recognized $1.6 million of license revenue related to the amortization of this upfront fee for each of the years ended December 31, 2012, 2011 and 2010. The remaining deferred revenue balance related to the $25.0 million upfront payment was $12.5 million as of December 31, 2013.

        Under the agreement, Valeant is obligated to pay the Company royalties of six percent on Canadian net sales of the 500mg Glumetza and one percent on Canadian net sales of the 1000mg Glumetza. The Company recognized royalty revenue under the agreement of $0.4 million, $0.4 million and $0.4 million for the years ended December 31, 2013, 2012 and 2011, respectively.

        The Company is obligated to pay Valeant royalties of one percent on net sales of the 500mg Glumetza in the United States. The Company recognized royalty expense under the agreement of $0.4 million, $0.5 million and $0.2 million for the years ended December 31, 2013, 2012 and 2011, respectively.

Ventiv Commercial Services, LLC

        In May 2012, the Company entered into a service agreement with Ventiv Commercial Services, LLC (Ventiv), which initially provided for a sales force of 78 part-time sales representatives employed by Ventiv but dedicated to the Company. Under the agreement, the Company paid Ventiv a monthly fixed fee of $0.5 million during the initial term of the agreement, which expired in June 2013. In June 2013, the Company and Ventiv amended the agreement to reduce the contract sales force to 27 part-time and 2 full-time sales representatives. Under the terms of the amended agreement, we were required to pay Ventiv a monthly fixed fee of $0.2 million during the term of the agreement, which was terminated in December 2013.

89

DEPOMED, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 3. MARKETABLE SECURITIES

        Securities classified as cash and cash equivalents and available-for-sale marketable securities as of December 31, 2013 and 2012 are summarized below (in thousands). Estimated fair value is based on quoted market prices for these investments.

December 31, 2013	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Cash and cash equivalents:
Cash	$	26,728	$	—	$	—		$	26,728
Money market funds		217,946		—		—			217,946
Total cash and cash equivalents	$	244,674	$	—	$	—		$	244,674
Available-for-sale securities:
Total maturing within 1 year and included in marketable securities:
Corporate debt securities	$	12,440	$	8	$	(2	)	$	12,446
Government agency debt securities		14,814		3		—			14,817
Total maturing between 1 and 2 years and included in marketable securities:
Corporate debt securities		4,075		5		—			4,080
Total available-for-sale securities	$	31,329	$	16	$	(2	)	$	31,343
Total cash, cash equivalents and marketable securities	$	276,003	$	16	$	(2	)	$	276,017

December 31, 2012	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Cash and cash equivalents:
Cash	$	11,769	$	—	$	—		$	11,769
Money market funds		11,268		—		—			11,268
U.S. corporate debt securities		6,039		—		—			6,039
Total cash and cash equivalents	$	29,076	$	—	$	—		$	29,076
Available-for-sale securities:
Total maturing within 1 year and included in marketable securities:
Corporate debt securities	$	21,662	$	31	$	—		$	21,693
U.S. government agency debt securities		14,027		8		—			14,035
U.S. Treasury securities		2,008		1		—			2,009
Total maturing between 1 and 2 years and included in marketable securities:
Corporate debt securities		7,858		7		(2	)		7,863
U.S. government agency debt securities		3,208		8		—			3,216
Total available-for-sale securities	$	48,763	$	55	$	(2	)	$	48,816
Total cash, cash equivalents and marketable securities	$	77,839	$	55	$	(2	)	$	77,892

90

DEPOMED, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 3. MARKETABLE SECURITIES (Continued)

        The Company considers all highly liquid investments with a maturity at date of purchase of three months or less to be cash equivalents. Cash and cash equivalents consist of cash on deposit with banks, money market instruments and commercial paper. The Company places its cash, cash equivalents and marketable securities with U.S. Treasury and government agency securities, and high quality securities of U.S. and international financial and commercial institutions and, to date, has not experienced material losses on any of its balances. All marketable securities are classified as available-for-sale since these instruments are readily marketable. These securities are carried at fair value, which is based on readily available market information, with unrealized gains and losses included in accumulated other comprehensive gain (loss) within shareholders' equity. The Company uses the specific identification method to determine the amount of realized gains or losses on sales of marketable securities. Realized gains or losses have been insignificant and are included in "interest and other income" in the consolidated statement of operations.

        At December 31, 2013, the Company had 7 securities in an unrealized loss position. The following table shows the gross unrealized losses and fair value of the Company's investments with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at December 31, 2013 (in thousands):

	Less Than 12 Months					12 Months or Greater				Total
	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses
Corporate debt securities	$	3,438	$	(2	)	$	—	$	—	$	3,438	$	(2	)
Total available-for-sale	$	3,438	$	(2	)	$	—	$	—	$	3,438	$	(2	)

        The gross unrealized losses above were caused by interest rate increases. No significant facts or circumstances have arisen to indicate that there has been any deterioration in the creditworthiness of the issuers of the securities held by the Company. Based on the Company's review of these securities, including the assessment of the duration and severity of the unrealized losses and the Company's ability and intent to hold the investments until maturity, there were no other-than-temporary impairments for these securities at December 31, 2013.

        Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs.

•

Level 1: Quoted prices in active markets for identical assets or liabilities.

•

Level 2: Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

•

Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

91

DEPOMED, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 3. MARKETABLE SECURITIES (Continued)

        The following table represents the Company's fair value hierarchy for its financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2013 (in thousands):

	Level 1		Level 2		Level 3		Total
Money market funds	$	217,946	$	—	$	—	$	217,946
Corporate debt securities		—		16,526		—		16,526
Government agency debt securities		—		14,817		—		14,817
Total	$	217,946	$	31,343	$	—	$	249,289
Liabilities:
Contingent consideration—Zipsor	$	—	$	—	$	1,638	$	1,638
Contingent consideration—Lazanda		—		—		8,616		8,616
Contingent consideration—CAMBIA		—		—		1,010		1,010
Unfavorable contract assumed		—		—		3,540		3,540
	$	—	$	—	$	14,804	$	14,804

        The fair value measurement of the contingent consideration obligations arises from the Zipsor, CAMBIA and Lazanda acquisitions and relates to the potential future milestone payments and royalties under the respective agreements which are determined using Level 3 inputs. The key assumptions in determining the fair value are the discount rate and the probability assigned to the potential milestones and royalties being achieved. At each reporting date, the Company will re-measure the contingent consideration obligation arising from both acquisitions to its estimated fair value. Changes in the fair value of the contingent consideration obligations are recorded as a component of operating income in our consolidated statement of operations. Changes in fair value included within interest and other expense in the accompanying condensed statement of operations was $0.9 and $0.1 million for the years ended December 31, 2013 and 2012.

        The liability for the unfavorable contract assumed represents an obligation for the Company to make certain payments to a vendor upon the achievement of certain milestones by such vendor. This contract was entered into by Nautilus as part of a legal settlement unrelated to the CAMBIA acquisition. The liability of $3.5 million recorded above represents the fair value of the amounts by which the contract terms are unfavorable compared to the current market pricing and a probability weighted assessment of the likelihood that the stipulated milestones will be achieved by the third party within a specified time frame. The contract may be terminated if the third party fails to achieve these milestones in which case the fair value of the liability as of the date of the termination will be reversed on the balance sheet and reflected in the statement of operations as a credit within interest and other income. The Company will determine the fair value of this liability at each reporting period and record any changes within the consolidated statement of operations.

92

DEPOMED, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 3. MARKETABLE SECURITIES (Continued)

        The table below provides a summary of the changes in fair value of all financial liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the year ended December 31, 2013 (in thousands):

	Balance at December 31, 2012		Acquisitions 2013		Changes in Fair Value		Balance at December 31, 2013
Liabilities:
Contingent consideration obligations—Zipsor	$	1,342	$	—	$	296	$	1,638
Contingent consideration obligations—Lazanda		—		8,004		612		8,616
Contingent consideration obligations—CAMBIA		—		1,010		—		1,010
Unfavorable contract assumed		—		3,540		—		3,540
Total	$	1,342	$	12,554	$	908	$	14,804

        The following table represents the Company's fair value hierarchy for its financial assets measured at fair value on a recurring basis as of December 31, 2012 (in thousands):

	Level 1		Level 2		Level 3		Total
Money market funds	$	11,268	$	—	$	—	$	11,268
Corporate debt securities		6,039		29,556		—		35,595
Government agency debt securities		—		17,251		—		17,251
U.S. Treasury securities		—		2,009		—		2,009
Total	$	17,307	$	48,816	$	—	$	66,123
Liabilities:
Contingent consideration—Zipsor	$	—	$	—	$	1,342	$	1,342
	$	—	$	—	$	1,342	$	1,342

93

DEPOMED, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 4. INVENTORIES

        Inventories consist of finished goods, raw materials and work in process and are stated at the lower of cost or market and consist of the following (in thousands):

	December 31, 2013			December 31, 2012
Raw materials	$	1,951		$	1,927
Work-in-process		181			1,569
Finished goods		9,056			6,787
Less: allowance for obsolescence		(1,043	)		(696	)
Total	$	10,145		$	9,587

        Inventories relate to the manufacturing costs of the Company's Gralise, Zipsor, Lazanda and CAMBIA products at December 31, 2013.

        The fair value of inventories acquired included a step-up in the value of CAMBIA inventories of $3.7 million which is being amortized to cost of sales as the acquired inventories are sold. The cost of sales related to the step-up value of CAMBIA was $0.2 million in 2013. The fair value of inventories acquired included a step-up in the value of Lazanda inventories of $0.6 million which will be amortized to cost of sales as the acquired inventories are sold. The cost of sales related to the step-up value of Lazanda was $0.1 million in 2013. At December 31, 2012, the fair value of inventories acquired related to the Zipsor acquisition in June 2012 included a step-up in the value of Zipsor inventories of $1.2 million, which was amortized to cost of sales through April 2013 as the acquired inventories were sold.

NOTE 5. PROPERTY AND EQUIPMENT

        Property and equipment consists of the following (in thousands):

	December 31, 2013			December 31, 2012
Furniture and office equipment	$	3,547		$	2,169
Laboratory equipment		5,151			4,623
Leasehold improvements		6,045			9,325
Construction in progress		—			196
		14,743			16,313
Less: Accumulated depreciation and amortization		(6,403	)		(8,076	)
Property and equipment, net	$	8,340		$	8,237

        There was no property and equipment included under capitalized leases as of December 31, 2013 or December 31, 2012. Depreciation and amortization expense was $1.6 million, $2.6 million and $0.3 million for the years ended December 31, 2013, 2012 and 2011, respectively.

94

DEPOMED, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 6. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

        Accounts payable and accrued liabilities consist of the following (in thousands):

	December 31, 2013		December 31, 2012
Accounts payable	$	2,232	$	2,360
Accrued compensation		7,077		5,015
Accrued rebates and sales discounts		8,594		4,250
Allowance for product returns		10,278		10,831
Accrued contract sales organization fees		962		420
Accruals for Inventory		87		2,990
Royalty payable to PDL		6,902		—
Other accrued liabilities		5,705		6,712
Total accounts payable and accrued liabilities	$	41,837	$	32,578

NOTE 7. DEFERRED REVENUE

        Deferred revenue consists of the following (in thousands):

	December 31, 2013		December 31, 2012
Deferred revenue, current portion:
Deferred license revenue, current portion:
Valeant	$	1,598	$	1,598
Santarus		1,443		1,444
Janssen		—		231
Deferred license revenue, current portion		3,041		3,273
Deferred revenue, current portion	$	3,041	$	3,273
Deferred license revenue, non-current portion:
Valeant		10,905		12,503
Santarus		1,570		3,013
Deferred license revenue, non-current portion		12,475		15,516
Total deferred revenue	$	15,516	$	18,789

        Deferred license revenue relates to upfront payments received by the Company under license and collaborative agreements with its partners. At December 31, 2013 and 2012, deferred license revenue consisted primarily of upfront license fee payments received from Santarus and Valeant.

        In December 2004, the Company received a $25.0 million license fee payment under its agreements with Valeant. The $25.0 million license fee is being recognized as revenue ratably until October 2021, which represents the estimated length of time our obligations exist under the arrangement related to royalties we are obligated to pay Valeant on net sales of Glumetza in the United States and for our obligation and our licensee's (Santarus) obligation to use Valeant as the sole supplier of the 1000mg Glumetza.

95

DEPOMED, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 7. DEFERRED REVENUE (Continued)

        In July 2008, the Company received a $12.0 million upfront payment under its promotion agreement with Santarus. The upfront payment received was originally being amortized as revenue ratably until October 2021, which represented the estimated length of time the Company's obligations existed under the promotion agreement related to manufacturing Glumetza and paying Santarus promotion fees on gross margin of Glumetza. The commercialization agreement in August 2011 superseded the promotion agreement and removed our promotion fee obligations and contemplated removal of our manufacturing obligations. The commercialization agreement included obligations with respect to manufacturing and regulatory transition to Santarus and managing the patent infringement lawsuits against Sun and Lupin. At the time of the commercialization agreement, all of these obligations were estimated to be completed in December 2013. During the fourth quarter of 2012, events occurred relating to the transfer of manufacturing with one of the contract manufacturers of Glumetza that pushed the estimated completion date of the Company's manufacturing obligations to February 2016, which is now the estimated length of time the Company expects it will take to complete its obligations under the commercialization agreement. On the effective date of the commercialization agreement, the amortization period related to remaining deferred revenue on the $12.0 million upfront fee was adjusted, and the remaining deferred revenue of $9.2 million was changed to be recognized ratably until December 2013. During the fourth quarter of 2012, the amortization period related to the remaining deferred revenue on the $12.0 million upfront fee was adjusted again, and the remaining deferred revenue of $4.8 million was changed to be recognized ratably until February 2016.

        In July 2011, Ironwood paid the Company a $0.9 million upfront license fee associated with the collaboration and license agreement. The $0.9 million was amortized ratably through June 2012, which is the estimated length of time Depomed was obligated to perform formulation work under the agreement.

NOTE 8. LONG-TERM DEBT

        In June 2008, the Company entered into a loan and security agreement with General Electric Capital Corporation, as agent (GECC), and Oxford Finance Corporation (Oxford) that provided the Company with a $15.0 million credit facility. The credit facility was available in up to three tranches. The first tranche of $3.8 million was advanced to the Company upon the closing of the loan agreement. The second tranche of $5.6 million was advanced to the Company in July 2008. The third tranche of $5.6 million was not drawn and is no longer available to the Company, and GECC and Oxford waived the 2% unused line fee related to the unused portion of the credit facility.

        The Company paid interest on the first tranche for the first six months at an interest rate of 11.59%. Thereafter we were required to pay principal on the first tranche, plus interest at such rate, in 30 equal monthly installments. The second tranche was interest-only through December 31, 2008, with principal and interest payable thereafter in 30 equal monthly installments at an interest rate of 11.59%. Interest expense, which includes amortization of the debt issuance costs, was $0.1 million for the year ended December 31, 2011. The credit facility was fully repaid in July 2011.

NOTE 9. LIABILITY RELATED TO SALE OF FUTURE ROYALTIES

        In October 2013, the Company sold our interests in royalty and milestone payments under our license agreements in the Type 2 diabetes therapeutic area to PDL for $240.5 million. The Company has significant continuing involvement in the PDL transaction primarily due to an obligation to act as

96

DEPOMED, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 9. LIABILITY RELATED TO SALE OF FUTURE ROYALTIES (Continued)

the intermediary for the supply of 1,000 mg Glumetza to Santarus, the licensee of Glumetza. Under the relevant accounting guidance, because of its significant continuing involvement, the PDL transaction has been accounted for as debt that will be amortized using the interest method over the life of the arrangement. In order to determine the amortization of the debt, the Company is required to estimate the total amount of future royalty payments to be received by PDL and payments the Company is required to make to PDL, if any, over the life of the arrangement. The sum of these amounts less the $240.5 million proceeds the Company received will be recorded as interest expense over the life of the debt. Consequently, the Company imputes interest on the unamortized portion of the debt and records interest expense using an estimated interest rate for an arms-length debt transaction. Our estimate of the interest rate under the arrangement is based on the amount of royalty and milestone payments expected to be received by PDL over the life of the arrangement. Our estimate of this total interest expense resulted in an effective annual interest rate of approximately 10%.

        The Company will periodically assess the expected royalty and milestone payments using a combination of historical results, internal projections and forecasts from external sources. To the extent such payments are greater or less than our initial estimates or the timing of such payments is materially different than our original estimates, the Company will prospectively adjust the amortization of the debt and the interest rate.

        The following table shows the activity within the liability account during the year ended December 31, 2013 (in thousands):

Liability related to sale of future royalties—beginning balance	$	—
Proceeds from sale of future royalties		240,500
Non-cash interest expense recognized		4,488
Payments from Depomed to PDL		(17,909	)
Total liability related to sale of future royalties as of December 31, 2013		227,079
Less: current portion		(49,455	)
Liability related to sale of future royalties, less current portion	$	177,624

        As royalties are remitted to PDL from Depo DR Sub as described at Note 1 above, the balance of the debt will be effectively repaid over the life of the agreement. The Company will record non-cash royalty revenues and non-cash interest expense within its consolidated statement of operations over the term of the PDL agreement.

NOTE 10. COMMITMENTS AND CONTINGENCIES

Leases

        In June 2011, the Company entered into amendments to its existing leases for the Company's premises located at 1330 and 1360 O'Brien Drive, Menlo Park, California, consisting of approximately 46,000 rentable square feet. The lease amendments extended the term of the existing leases for 12 months, from February 1, 2012 through January 31, 2013. These leases were not renewed and terminated on January 31, 2013. The lease for the Company's premises located at 1430 O'Brien Drive, consisting of approximately 9,000 rentable square feet terminated on January 31, 2012.

97

DEPOMED, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 10. COMMITMENTS AND CONTINGENCIES (Continued)

        In April 2012, the Company entered into an office and laboratory lease agreement to lease approximately 52,500 rentable square feet in Newark, California commencing on December 1, 2012. The Company was obligated to lease approximately 8,000 additional rentable square feet commencing no later than December 1, 2015. The Lease will expire on November 30, 2022. However, the Company has the right to renew the lease for one additional five year term, provided that written notice is made to the landlord no later than 12 months prior to the lease expiration. The Company will have the one-time right to terminate the lease in its entirety effective as of November 30, 2017 by delivering written notice to the landlord on or before December 1, 2016. In the event of such termination, the Company will pay the landlord the unamortized portion of the tenant improvement allowance, specified additional allowances made by the landlord, waived base rent and leasing commissions, in each case amortized at 8% interest.

        The Company was allowed to control physical access to the premises upon signing the lease. Therefore, in accordance with the applicable accounting guidance, the lease term was deemed to have commenced in April 2012. Accordingly, the rent free periods and the escalating rent payments contained within the lease are being recognized on a straight-line basis from April 2012. The Company will pay approximately $13.3 million in aggregate rent over the remaining term of the lease for the above premises. Deferred rent for the years ended December 31, 2013 and 2012 was approximately $1.5 million and $0.9 million, respectively.

        Rent expense for the years ended December 31, 2013, 2012, and 2011 was $1.0 million, 2.3 million and $1.5 million, respectively.

        As of December 31, 2013 future minimum payments under operating leases for facilities were as follows (in thousands):

2014	$	1,178
2015		1,233
2016		1,440
2017		1,485
Thereafter		7,972
Total	$	13,308

Landlord Contributions to Leasehold Improvements

        In conjunction with entering into leases for office space, the Company receives contributions from landlords toward leasehold improvements which are included in the Deferred Rent and Other Non-Current Liabilities line item of the Company's consolidated statements of financial condition. These contributions are amortized as a reduction to rent expense over the non-cancelable lease terms to which they pertain. For the years ended December 31, 2013 and 2012, cash contributions from landlords were $5.0 million and $1.3 million.

98

DEPOMED, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 10. COMMITMENTS AND CONTINGENCIES (Continued)

Legal matters

Depomed v. Gralise ANDA Filers

        Between March 2012 and May 2012, we filed lawsuits in the United States District Court for the District of New Jersey in response to six ANDAs filed by companies seeking to market generic versions of 300mg and 600mg dosage strengths of Gralise prior to the expiration of our patents listed in the Orange Book for Gralise. The lawsuits have been consolidated for purposes of all pretrial proceedings. Our lawsuits against two of the six Gralise ANDA filers, Impax Laboratories and Watson Laboratories, have been dismissed as a result of the withdrawal of the ANDAs from consideration by the FDA. Our lawsuit against a third ANDA filer, Par Pharmaceutical, has been dismissed because the ANDA filer no longer seeks approval of its Gralise ANDA prior to the expiration of our Gralise Orange Book-listed patents. As of March 17, 2014, the defendants in the consolidated lawsuit include: Actavis Elizabeth LLC and Actavis Inc. (collectively, Actavis); Incepta Pharmaceuticals and Abon Pharmaceuticals LLC (collectively, Incepta); and Zydus Pharmaceuticals USA Inc. and Cadila Healthcare Limited (collectively, Zydus). The patents asserted in the lawsuits include U.S. Patent Nos. 6,340,475; 6,635,280; 6,488,962; 6,723,340; 7,438,927; 7,731,989; 8,192,756; 8,252,332; and 8,333,992. The asserted patents expire between September 2016 and February 2024, as set forth above under "PATENTS AND PROPRIETARY RIGHTS".

        We commenced the lawsuits within the 45 days required to automatically stay, or bar, the FDA from approving the ANDAs for 30 months or until a district court decision that is adverse to the asserted patents, whichever may occur earlier. Absent a court order, the 30-month stays are expected to expire in July 2014 (against Actavis), August 2014 (against Incepta) and October 2014 (against Zydus).

        Fact discovery closed in August 2013. The court issued a Markman claim construction ruling on January 28, 2014. Expert discovery is ongoing and the trial has been scheduled for May 2014.

Depomed v. FDA

        In November 2010, the FDA granted Gralise Orphan Drug designation for the management of PHN based on a plausible hypothesis that Gralise is "clinically superior" to immediate release gabapentin due to the incidence of adverse events observed in Gralise clinical trials relative to the incidence of adverse events reported in the package insert for immediate release gabapentin. Generally, an Orphan-designated drug approved for marketing is eligible for seven years of regulatory exclusivity for the Orphan-designated indication. If granted, Orphan Drug exclusivity for Gralise will run for seven years from January 28, 2011. However, the FDA has not granted Orphan Drug exclusivity for Gralise based on the FDA's interpretation of the law and regulations governing Orphan Drug exclusivity. In September 2012, we filed an action in federal district court for the District of Columbia against the FDA seeking an order requiring the FDA to grant Gralise Orphan Drug exclusivity for the management of PHN. We believe Gralise is entitled to Orphan Drug exclusivity as a matter of law, and the FDA's action is not consistent with the statute or the FDA's regulations governing Orphan Drugs. The lawsuit seeks a determination by the court that Gralise is protected by Orphan Drug exclusivity, and an order that the FDA act accordingly. Briefing in the case was completed in March 2013. A hearing on our summary judgment motion was held in August 2013 and we are awaiting a decision.

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NOTE 10. COMMITMENTS AND CONTINGENCIES (Continued)

Depomed v. Purdue

        In January 2013, we filed a complaint in the United States District Court for the District of New Jersey against Purdue Pharma L.P. and affiliated companies (collectively, Purdue) for patent infringement arising from Purdue's commercialization of reformulated OxyContin® (oxycodone hydrochloride controlled-release) in the United States. The patents we asserted in the lawsuit include U.S. Patent Nos. 6,340,475 and 6,635,280, both of which expire in September 2016. Fact discovery in the case is ongoing and no trial date has been set.

Depomed v. Endo Pharmaceuticals

        In April 2013, we filed a complaint in the United States District Court for the District of New Jersey against Endo Pharmaceuticals Inc. (Endo) , a wholly-owned subsidiary of Endo Health Solutions Inc., for infringement of U.S. Patent Nos. 6,340,475; 6,635,280; and 6,723,340 arising from Endo's commercialization of OPANA® ER (oxymorphone hydrochloride extended-release) in the United States. Fact discovery in the case is ongoing and no trial date has been set.

Depomed v. Banner Pharmacaps

        On June 28, 2013, we received from Banner Pharmacaps Inc. (Banner) a Notice of Certification for U.S. Patents Nos. 6,365,180; 7,662,858; 7,884,095; 7,939,518 and 8,110,606 under 21 U.S.C. § 355 (j)(2)(A)(vii)(IV) (Zipsor® Paragraph IV Letter) certifying that Banner has submitted and the FDA has accepted for filing an ANDA for diclofenac potassium capsules, 25mg. The letter states that the Banner ANDA product contains the required bioavailability or bioequivalence data to Zipsor and certifies that Banner intends to obtain FDA approval to engage in commercial manufacture, use or sale of Banner's ANDA product before the expiration of the above identified patents, which are listed for Zipsor in the Orange Book. U.S. Patent No. 6,365,180 expires in 2019 and U.S. Patent Nos. 7,662,858; 7,884,095; 7,939,518; and 8,110,606 expire in 2029. The Zipsor Paragraph IV letter indicates Banner has granted to Watson Laboratories Inc. ("Watson") exclusive rights to Banner's proposed generic Zipsor product.

        On July 26, 2013, we filed a lawsuit in the United States District Court for District of New Jersey against Banner and Watson for infringement of the patents identified above. The lawsuit was commenced within the 45 days required to automatically stay, or bar, the FDA from approving Banner's ANDA for Zipsor for 30 months or until a district court decision that is adverse to Depomed, whichever may occur earlier. Absent a court order, the 30-month stay would be expected to expire in December 2015. Fact discovery in the case is ongoing and no trial date has been set.

        The Company cannot reasonably predict the outcome of these legal proceedings, nor can it estimate the amount of loss, range of loss or other adverse consequence, if any, that may result from these proceedings. As such, the Company is not currently able to estimate the impact of the above litigations on its financial position or results of operations.

NOTE 11. STOCK-BASED COMPENSATION

        The Company uses the Black-Scholes option valuation model to determine the fair value of stock options and employee stock purchase plan (ESPP) shares. The determination of the fair value of stock-based payment awards on the date of grant using an option valuation model is affected by the Company's stock price as well as assumptions, which include the Company's expected term of the

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NOTE 11. STOCK-BASED COMPENSATION (Continued)

award, the expected stock price volatility, risk-free interest rate and expected dividends over the expected term of the award.

        The Company uses historical option exercise data to estimate the expected life of the options. The Company estimates the volatility of its common stock price by using the historical volatility over the expected term of the options. The Company bases the risk-free interest rate on U.S. Treasury zero-coupon issues with terms similar to the expected term of the options as of the date of grant. The Company does not anticipate paying any cash dividends in the foreseeable future and therefore uses an expected dividend yield of zero in the option valuation model.

        The Company used the following assumptions to calculate the fair value of option grants for the years ended December 31, 2013, 2012 and 2011:

	2013	2012	2011
Employee and Director Stock Options
Risk-free interest rate	0.67 - 1.38%	0.51 - 0.78%	0.77 - 1.99%
Dividend yield	None	None	None
Expected option term (in years)	4.48 - 4.51	4.50 - 4.54	4.54 - 4.84
Expected stock price volatility	49.2 - 63.5%	64.1 - 67.5%	73.9 - 76.4%

        The Company used the following assumptions to calculate the fair value of stock purchase rights granted under the ESPP for the years ended December 31, 2013, 2012 and 2011:

	2013	2012	2011
Employee and Director Stock Purchase Rights
Risk-free interest rate	0.08 - 0.10%	0.12 - 0.16%	0.05 - 0.44%
Dividend yield	None	None	None
Expected option term (in years)	0.5	0.5	0.5 - 2.0
Expected stock price volatility	28.8 - 35%	35.6 - 44.3%	60.1 - 76.6%

        The following table presents stock-based compensation expense recognized for stock options, restricted stock units and the ESPP in the Company's Statements of Operations (in thousands):

	2013		2012		2011
Cost of sales	$	42	$	41	$	68
Research and development expense		364		568		668
Selling, general and administrative expense		5,702		4,461		3,133
Total	$	6,108	$	5,070	$	3,869

        Stock-based compensation in 2011 includes approximately $0.4 million in expense associated with the accelerated vesting of stock options in connection with a separation agreement and release with Carl A. Pelzel, the Company's former President and Chief Executive Officer. See Note 13 for further information with regards to the separation agreement and release.

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NOTE 11. STOCK-BASED COMPENSATION (Continued)

        The weighted-average grant date fair value of options granted during the years ended December 31, 2013, 2012 and 2011 was $3.35, $3.09 and $4.38, respectively. The weighted-average grant date fair value of stock purchase rights granted under the ESPP during the years ended December 31, 2013, 2012 and 2011 was $1.87, $1.44 and $2.67, respectively. The total intrinsic value of options exercised during the years ended December 31, 2013, 2012 and 2011 was $1.7 million, $1.8 million and $12.2 million, respectively. The total fair value of options that vested during the years ended December 31, 2013, 2012 and 2011 was $5.1 million, $4.1 million and $2.4 million, respectively. At December 31, 2013, the Company had $7.9 million of total unrecognized compensation expense, net of estimated forfeitures, related to stock option plans that will be recognized over an average vesting period of 2 years. Cash received from stock option exercises was $2.8 million, $1.8 million and $7.6 million for the years ended December 31, 2013, 2012 and 2011, respectively. There is no stock-based compensation recorded within inventory in any of the years presented.

1995 Stock Option Plan

        The Company's 1995 Stock Option Plan (the 1995 Plan) was adopted by the Board of Directors and approved by the shareholders in September 1995, and has been subsequently amended. The 1995 Plan provided for the grant to employees of the Company, including officers, of incentive stock options, and for the grant of nonstatutory stock options to employees, directors and consultants of the Company. The number of shares authorized under the 1995 Plan is 4,700,000 shares, of which zero are available for future issuance at December 31, 2013. In May 2004, the 1995 Plan was terminated with respect to grants of new stock options and all options which expire or are forfeited will be retired from the pool.

        Generally, the exercise price of all incentive stock options and nonstatutory stock options granted under the 1995 Plan must be at least 100% and 85%, respectively, of the fair value of the common stock of the Company on the grant date. The term of incentive and nonstatutory stock options may not exceed 10 years from the date of grant. An option shall be exercisable on or after each vesting date in accordance with the terms set forth in the option agreement. The right to exercise an option generally vests over four years at the rate of at least 25% by the end of the first year and then ratably in monthly installments over the remaining vesting period of the option.

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NOTE 11. STOCK-BASED COMPENSATION (Continued)

        The following table summarizes the activity for the three years ended December 31, 2013 under the 1995 Plan:

	Shares			Weighted- Average Exercise Price
Options outstanding at December 31, 2010		341,600		$	4.83
Options exercised		(215,850	)		4.68
Options forfeited		—			—
Options expired		(10,800	)		5.31
Options outstanding at December 31, 2011		114,950		$	5.05
Options exercised		(40,800	)		2.50
Options forfeited		—			—
Options expired		(13,600	)		5.83
Options outstanding at December 31, 2012		60,550		$	6.59
Options exercised		(37,800	)		6.73
Options forfeited		—			—
Options expired		(22,750	)		6.37
Options outstanding at December 31, 2013		—		$	—
Options exercisable and expected to become exercisable at December 31, 2013		—		$	—
Options exercisable at December 31, 2013		—		$	—

2004 Equity Incentive Plan

        The Company's 2004 Equity Incentive Plan (the 2004 Plan) was adopted by the Board of Directors and approved by the shareholders in May 2004. The 2004 Plan provides for the grant to employees of the Company, including officers, of incentive stock options, and for the grant of nonstatutory stock options to employees, directors and consultants of the Company. The number of shares authorized under the 2004 Plan is 14,450,000 shares, of which 3,199,468 were available for future issuance at December 31, 2013.

        Generally, the exercise price of all incentive stock options and nonstatutory stock options granted under the 2004 Plan must be at least 100% and 85%, respectively, of the fair value of the common stock of the Company on the grant date. The term of incentive and nonstatutory stock options may not exceed 10 years from the date of grant. An option shall be exercisable on or after each vesting date in accordance with the terms set forth in the option agreement. The right to exercise an option generally vests over four years at the rate of at least 25% by the end of the first year and then ratably in monthly installments over the remaining vesting period of the option.

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NOTE 11. STOCK-BASED COMPENSATION (Continued)

        The following tables summarize the activity for the three years ended December 31, 2013 under the 2004 Plan:

	Shares			Weighted- Average Exercise Price
Options outstanding at December 31, 2010		4,940,345		$	3.21
Options granted		2,762,181			7.35
Options exercised		(2,163,266	)		3.04
Options forfeited		(639,043	)		4.51
Options expired		—			—
Options outstanding at December 31, 2011		4,900,217		$	5.44
Options granted		2,006,950			5.86
Options exercised		(587,594	)		2.95
Options forfeited		—			—
Options expired		(557,551	)		6.26
Options outstanding at December 31, 2012		5,762,022		$	5.76
Options granted		1,769,363			6.86
Options exercised		(583,290	)		4.33
Options forfeited		—			—
Options expired		(429,124	)		6.46
Options outstanding at December 31, 2013		6,518,971		$	6.14
Options exercisable and expected to become exercisable at December 31, 2013		5,999,687		$	6.10
Options exercisable at December 31, 2013		3,448,487		$	5.66

	Weighted- Average Remaining Contractual Term (Years)		Aggregate Intrinsic Value (in thousands)
Options outstanding at December 31, 2013		7.47	$	28,933
Options exercisable and expected to become exercisable at December 31, 2013		7.36	$	26,863
Options exercisable at December 31, 2013		6.55	$	16,974

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 11. STOCK-BASED COMPENSATION (Continued)

        Information regarding the stock options outstanding at December 31, 2013 under the 2004 Plan is summarized below:

Range of Exercise Prices	Number Outstanding		Weighted- Average Remaining Contractual Term (Years)		Weighted- Average Exercise Price (Outstanding)		Number Exercisable		Weighted- Average Exercise Price (Exercisable)
$1.49 - $3.27		701,650		5.02	$	2.62		692,367	$	2.61
$3.28 - $5.35		730,248		6.18	$	4.58		542,135	$	4.32
$5.56 - $5.91		1,019,548		8.23	$	5.78		454,094	$	5.74
$5.94 - $6.08		667,987		7.93	$	6.03		299,774	$	6.04
$6.11 - $6.29		587,060		6.46	$	6.15		336,790	$	6.17
$6.77 - $6.77		1,085,966		9.02	$	6.77		215,738	$	6.77
$7.02 - $8.36		992,512		7.62	$	7.76		539,862	$	7.88
$8.45 - $8.55		693,000		7.92	$	8.53		356,789	$	8.54
$8.71 - $8.71		26,000		9.17	$	8.71		—	$	0.00
$9.02 - $9.02		15,000		7.22	$	9.02		10,938	$	9.02
		6,518,971		7.47	$	6.14		3,448,487	$	5.66

        Restricted stock units generally vest over four years, with 25% of each award vesting annually.

	Number of Shares			Weighted Average Grant Date Fair Value Per Share		Weighted Average Remaining Contractual Term (In years)
Non-vested restricted stock units at December 31, 2012		137,430		$	6.11
Granted		394,587		$	6.77
Vested		(142,818	)	$	6.56
forfeited		(6,580	)	$	6.77
Non-vested restricted stock units at December 31, 2013		382,619		$	6.61		1.8

        The total fair value of restricted stock vested during 2013 was $0.9 million.

NOTE 12. SHAREHOLDERS' EQUITY

Employee Stock Purchase Plan

        In May 2004, the ESPP was approved by the shareholders. The ESPP is qualified under Section 423 of the Internal Revenue Code. The ESPP is designed to allow eligible employees to purchase shares of the Company's common stock through periodic payroll deductions. The price of the common stock purchased under the ESPP must be equal to at least 85% of the lower of the fair market value of the common stock on the commencement date of each offering period or the specified purchase date. The number of shares authorized for issuance under the ESPP as of December 31, 2013 was 2,500,000, of which 713,592 shares were available for future issuance.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 12. SHAREHOLDERS' EQUITY (Continued)

        In 2013, the Company sold 222,062 shares of its common stock under the ESPP. The shares were purchased at a weighted-average purchase price of $4.35 with proceeds of approximately $1 million. In 2012, the Company sold 203,389 shares of its common stock under the ESPP. The shares were purchased at a weighted-average purchase price of $4.19 with proceeds of approximately $0.9 million.

Option Exercises

        Employees exercised options to purchase 621,090 shares of the Company's common stock with net proceeds to the Company of approximately $2.8 million during the year ended December 31, 2013. Employees exercised options to purchase 628,394 shares of the Company's common stock with net proceeds to the Company of approximately $1.8 million during the year ended December 31, 2012.

Shareholder Rights Plan

        On April 21, 2005, the Company adopted a shareholder rights plan, (the Rights Plan). Under the Rights Plan, the Company distributed one preferred share purchase right for each share of common stock outstanding at the close of business on May 5, 2005. If a person or group acquires 20% or more of the Company's common stock in a transaction not pre-approved by the Company's Board of Directors, each right will entitle its holder, other than the acquirer, to buy additional shares of the Company's common stock at 50% of its market value, as defined in the Rights Plan. In addition, if an unapproved party acquires more than 20% of the Company's common stock, and the Company is later acquired by the unapproved party or in a transaction in which all shareholders are not treated alike, shareholders with unexercised rights, other than the unapproved party, will be entitled to receive upon exercise of the rights, common stock of the merger party or asset buyer with a value of twice the exercise price of the rights. Each right also becomes exercisable for one one-thousandth of a share of the Company's Series RP preferred stock at the right's then current exercise price ten days after an unapproved third party makes, or announces an intention to make, a tender offer or exchange offer that, if completed, would result in the unapproved party acquiring 20% or more of the Company's common stock. The Board of Directors may redeem the rights for a nominal amount before an event that causes the rights to become exercisable. The rights will expire on April 21, 2015.

NOTE 13. RELATED PARTY TRANSACTIONS

Carl A. Pelzel

        In April 2011, the Company entered into a separation agreement and release with Carl A. Pelzel, the Company's former President and Chief Executive Officer. Pursuant to the separation agreement, Mr. Pelzel was paid $520,000, which is equivalent to one year of his base salary. Payments were made over one year, and were reduced dollar-for-dollar by any compensation Mr. Pelzel received in connection with employment (or full-time consulting) by another employer (or third party). The Company also paid Mr. Pelzel's health and dental insurance COBRA premiums for 18 months following his separation from the Company. The separation agreement further provided for three months' accelerated vesting of Mr. Pelzel's options to purchase the Company's common stock, and a release of claims in favor of the Company. The Company incurred a one-time severance charge of approximately $1.0 million in the second quarter of 2011 with respect to this separation agreement, consisting of approximately $0.4 million in stock-based compensation related to the accelerated vesting

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NOTE 13. RELATED PARTY TRANSACTIONS (Continued)

of Mr. Pelzel's awards and approximately $0.6 million of severance expense related to future payments and health care benefits.

Burrill Securities

        Burrill Securities acted as a financial advisor to PDL in the PDL transaction. Burrill Securities is the merchant banking division of Burrill & Company. G. Steven Burrill, a member of the Company's Board of Directors (the "Board"), is the Chief Executive Officer and sole shareholder of Burrill & Company. The Board was aware of Burrill & Company's interest in the transaction and Mr. Burrill recused himself from all deliberations and actions taken by the Board with respect to the transaction. Burrill Securities' engagement with PDL in the transaction was led by Fredrick Frank, the Chairman of Burrill Securities and a former member of the Board of Directors of PDL. The Company has been informed that Burrill Securities will receive a fee of up to $500,000 from PDL in connection with the transaction.

NOTE 14. INCOME TAXES

        The (benefit from) provision for income taxes consists of the following (in thousands):

	Year Ended December 31,
	2013			2012			2011
Current:
Federal	$	60,874		$	(19	)	$	(466	)
State		3,593			(75	)		858
Foreign		3			3			4
		64,470			(91	)		396
Deferred:
Federal	$	(97,690	)	$	—		$	—
State		(5,512	)		—			—
Foreign		—			—			—
		(103,202	)		—			—
Total (benefit) provision for income taxes	$	(38,733	)	$	(91	)	$	396

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 14. INCOME TAXES (Continued)

        A reconciliation of income taxes at the statutory federal income tax rate to the actual tax rate included in the statements of operations is as follows (in thousands):

	Year Ended December 31,
	2013			2012			2011
Tax at federal statutory rate	$	1,603		$	(10,454	)	$	24,893
State tax, net of federal benefit		(3,177	)		(48	)		558
Foreign tax		3			3			4
Research Credit		(258	)		—			—
Net Operating Losses not benefited (benefited)		(17,510	)		9,094			(25,510	)
Federal—AMT		—			(19	)		(466	)
Stock Based Compensation		923			1,038			774
Non deductible meals and entertainment		442			131			17
Non-deductible other expense		(133	)		164			126
Change in Valuation Allowance		(20,626	)		—			—
Total	$	(38,733	)	$	(91	)	$	396

        During 2013, the Company recognized an income tax benefit of approximately $38.7 million which resulted primarily from our reversal of a valuation allowance on all of our U.S. federal deferred tax assets and most of our state deferred tax assets as more fully described below.

        The Company's tax benefits for the year ended December 31, 2012 was due to Federal and state refundable credits offset by foreign taxes withheld on royalty revenue related to the Company's agreement with LG by the Republic of Korea.

        On January 2, 2013, the enactment of the American Taxpayer Relief Act of 2013 extended retroactively through the end of calendar 2013 the U.S. federal research and development credit which had expired on December 31, 2011. As a result, an income tax benefit for the year ended December 2013 includes the tax benefit for the reinstatement of the 2012 federal research tax credit.

        The Company's tax provision for 2011 is due to state taxes and foreign taxes withheld on royalty revenue related to the Company's agreement with LG by the Republic of Korea, offset by federal and state refundable credits.

        As of December 31, 2013, the Company had net operating loss carry forwards for federal income tax purposes of approximately $11.0 million, which expire in the years 2021 through 2032. Net operating loss carryforwards for state income tax purposes were approximately $84.0 million, which expire in the years 2017 through 2032 and state research and development tax credits were approximately $1.2 million which have no expiration date. The Company has state alternative minimum tax credit carryforwards of approximately $0.1 million that have no expiration date.

        Utilization of the Company's net operating loss and credit carryforwards may be subject to a substantial annual limitation due to ownership change limitations provided by the Internal Revenue Code of 1986 and similar state provisions. The annual limitation may result in the expiration of net operating losses and credits before utilization.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 14. INCOME TAXES (Continued)

        Deferred income taxes reflect the net tax effects of net operating loss and tax credit carryovers and temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets are as follows (in thousands):

	Year Ended December 31,
	2013			2012
Deferred Tax Assets:
Net operating loss carryforwards	$	4,237		$	21,500
Tax carryforwards		133			4,700
In-process research and development		665			1,100
Deferred revenue		88,248			7,500
Intangibles		1,363			500
Other, net		11,226			7,200
Total deferred tax assets		105,872			42,500
Valuation allowance for deferred tax assets		(2,670	)		(42,500	)
Deferred tax assets, net	$	103,202		$	—

        Management regularly assesses the ability to realize deferred tax assets based on the weight of all available evidence, including such factors as the history of recent earnings and expected future taxable income on a jurisdiction by jurisdiction basis. Management determined that a valuation allowance was no longer needed for a substantial portion of the deferred tax assets based on an assessment of the relative impact of all positive and negative evidence as of December 31, 2013, including an evaluation of cumulative income in recent years, future sources of taxable income exclusive of reversing temporary differences, and significant risks and uncertainties related to our business. The valuation allowance decreased by $39.8 million, increased by $7.8 million and decreased by $27.6 million during the years ended December 31, 2013, 2012 and 2011 respectively.

        At December 31, 2013, the portion of the federal and state net operating loss carryforwards related to stock option deductions is approximately $11.0 million, which is not included in the Company's gross or net deferred tax assets. Pursuant to ASC 718-740-25-10, the tax effect of the stock option benefit of approximately $4.5 million will be recorded to equity when they reduce cash taxes payable in the future.

        The Company files income tax returns in the United States federal jurisdiction and in various states, and the tax returns filed for the years 1996 through 2013 and the applicable statutes of limitation have not expired with respect to those returns. Because of net operating loss carryovers, substantially all of the Company's tax years remain open to examination.

        Interest and penalties, if any, related to unrecognized tax benefits would be recognized as income tax expense by the Company. As of the date of adoption of authoritative guidance for Accounting for Uncertainty in Income Taxes, the Company did not have any accrued interest or penalties associated with any unrecognized tax benefits.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 14. INCOME TAXES (Continued)

        The following table summarizes the activity related to our unrecognized tax benefits for the 2 years ended December 31, 2013 (in thousands):

Unrecognized tax benefits—January 1, 2012	$	3,573
Gross increases—current year tax positions		21
Settlements with taxing authorities		—
Expiration of statute of limitations		—
Unrecognized tax benefits—December 31, 2012		3,594
Gross increases—current year tax positions		174
Gross increases—prior year tax positions		111
Unrecognized tax benefits—December 31, 2013	$	3,879

        Though our unrecognized tax benefits may change during the next year for items that arise in the ordinary course of business, we do not expect any such change to be significant.

NOTE 15. BUSINESS COMBINATIONS

The CAMBIA Acquisition

        On December 17, 2013, the Company entered into an Asset Purchase Agreement (Asset Purchase Agreement) with Nautilus Neurosciences, Inc., a Delaware corporation (Nautilus), pursuant to which the Company acquired from Nautilus all of the rights to CAMBIA® (diclofenac potassium for oral solution), including related product inventory, and assumed from Nautilus certain liabilities relating to CAMBIA, for an initial payment of $48.7 million in cash.

        Pursuant to the Asset Purchase Agreement, $7.5 million of the initial payment will be held in escrow for 24 months and applied towards the indemnification obligations of Nautilus as set forth in the Asset Purchase Agreement.

        In addition to the initial payment, the Company agreed to pay one-time, contingent cash payments upon the achievement of certain CAMBIA net sales milestones. Up to $5.0 million in sales milestones are payable to Nautilus, and up to $10.0 million in sales milestones are payable to third parties pursuant to contracts assigned to the Company. The net sales thresholds triggering such milestone payments to Nautilus range up to $100 million in calendar year net sales. The Company also assumed certain third party royalty obligations totaling not more than 11% of CAMBIA net sales.

        In accordance with the authoritative guidance for business combinations, the transaction with Nautilus was determined to be a business combination and was accounted for using the acquisition method of accounting.

        The following table presents a summary of the purchase price consideration for the CAMBIA acquisition (in thousands):

Cash for CAMBIA and related inventories	$	48,725
Fair value of contingent consideration		1,010
Purchase price	$	49,735

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 15. BUSINESS COMBINATIONS (Continued)

        The contingent consideration was recognized and measured at fair value as of the acquisition date. The Company determined the acquisition date fair value of the contingent consideration obligation based on an income approach derived from CAMBIA revenue estimates and a probability assessment with respect to the likelihood of achieving the level of net sales that would trigger the contingent payment. The fair value measurement is based on significant inputs not observable in the market and thus represents a Level 3 measurement as defined in fair value measurement accounting. The key assumptions in determining the fair value are the discount rate and the probability assigned to the potential milestones being achieved. At each reporting date, the Company will re-measure the contingent consideration obligation to estimated fair value. Any changes in the fair value of contingent consideration will be recognized in operating expenses until the contingent consideration arrangement is settled.

        The following table summarizes the fair values of the tangible and identifiable intangible assets acquired and liabilities assumed at the acquisition date (in thousands):

Intangible asset—CAMBIA product rights	$	51,360
Inventories		3,837
Other assets		409
Sales reserve liabilities		(1,847	)
Unfavorable contract assumed		(3,540	)
Bargain purchase		(484	)
	$	49,735

        The CAMBIA product rights of $51.4 million have been recorded as intangible assets on the accompanying consolidated balance sheet and are being amortized over the estimated useful life of the assets on a ratable basis through December 2023 as no other method could be reliably estimated. Total amortization expense for the year ended December 31, 2013 was approximately $0.2 million. For the year ended December 31, 2013, the Company incurred an aggregate of $0.1 million in acquisition-related costs. These expenses are included in selling, general and administrative expenses in the Company's consolidated statement of operations for the year ended December 31, 2013.

        The liability for the unfavorable contract assumed represents an obligation for the Company to make certain payments to a vendor upon the achievement of certain milestones by such vendor. This contract was entered into by Nautilus as part of a legal settlement unrelated to the CAMBIA acquisition. The liability of $3.5 million recorded above represents the fair value of the amounts by which the contract terms are unfavorable compared to the current market pricing and a probability weighted assessment of the likelihood that the stipulated milestones will be achieved by the third party within a specified time frame. The contract may be terminated if the third party fails to achieve these milestones in which case the fair value of the liability as of the date of the termination will be reversed on the balance sheet and reflected in the statement of operations as a credit within interest and other income. The Company will determine the fair value of this liability at each reporting period and record any changes within the consolidated statement of operations.

        The fair value of inventories acquired included a step-up in the value of CAMBIA inventories of $3.7 million that will be amortized to cost of sales as the acquired inventories are sold. The bargain

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 15. BUSINESS COMBINATIONS (Continued)

purchase amount has been recorded within interest and other income in the accompanying consolidated statement of operations.

Pro forma financial information (unaudited)

        The unaudited financial information in the table below summarizes the combined results of operations of the Company and Nautilus on a pro forma basis, as though the companies had been combined as of January 1, 2012. The pro forma financial information is presented for informational purposes only and is not indicative of the results of operations that would have been achieved if the CAMBIA acquisition had taken place at the beginning of the period presented.

        The pro forma financial information for all periods presented includes the business combination accounting effect on the amortization charges from acquired intangible assets, adjustments to certain acquired assets and liabilities and acquisition costs reflected in the Company's and Nautilus' historical statements of operations for periods prior to the acquisition.

        The unaudited pro forma financial information for the years ended December 31, 2013 and 2012 combines the historical results for the Company for those years, with the historical results for Nautilus as a separate entity, for the years ended December 31, 2013 and 2012.

	2013		2012
Net revenue	$	143,753	$	104,652
Net income (loss)	$	29,821	$	(47,717	)
Net income (loss) per share—basic	$	0.53	$	(0.85	)
Net income (loss) per share—diluted	$	0.52	$	(0.85	)

        The above table includes pro forma adjustments to:

•

adjust depreciation expense related to fixed assets not acquired by the Company in connection with the CAMBIA acquisition.

•

adjust amortization expense to eliminate Nautilus' historical intangible asset amortization expense and record amortization of the acquired intangible assets;

•

adjust interest interest expense related to a term loan payable by Nautilus. The Company did not acquire the cash held by Nautilus nor did they assume the Nautilus outstanding term loan in connection with the CAMBIA acquisition.

The Lazanda Acquisition

        On July 29, 2013, the Company entered into an Asset Purchase Agreement with each of Archimedes Pharma US Inc., a Delaware corporation, Archimedes Pharma Ltd., a corporation registered under the laws of England and Wales, and Archimedes Development Ltd., a company registered under the laws of England and Wales (collectively, Archimedes), pursuant to which the Company acquired all of the U.S. and Canadian rights to Archimedes' product Lazanda® (fentanyl) nasal spray and related inventory for an initial payment of $4.0 million in cash. The Company also assumed certain liabilities related to Lazanda.

112

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 15. BUSINESS COMBINATIONS (Continued)

        Pursuant to the Asset Purchase Agreement, $1.0 million of the initial payment will be held in escrow for 18 months and applied towards the indemnification obligations of Archimedes as set forth in the Asset Purchase Agreement.

        In addition to the initial payment, the Company will also pay royalties on its net sales of Lazanda. In 2013 and 2014, the Company will not pay royalties to Archimedes, and third party royalties assumed by the Company in connection with the acquisition will be less than 5% of the Company's net sales of Lazanda. Thereafter, the Company will pay royalties to Archimedes and third parties totaling 13% to 15% of the Company's net sales of Lazanda. In addition to the initial payment and royalties, the Company will pay to Archimedes the following one-time, contingent cash payments upon the achievement by the Company of net sales of Lazanda equal to or in excess of the following net sales milestones: (i) $1.0 million at the end of the first calendar year in which net sales of Lazanda are $20.0 million; (ii) $2.5 million at the end of the first calendar year in which net sales of Lazanda are $45.0 million; (iii) $5.0 million at the end of the first calendar year in which net sales of Lazanda are $75.0 million; and (iv) $7.5 million at the end of the first calendar year in which net sales of Lazanda are $100.0 million.

        In accordance with the authoritative guidance for business combinations, the Asset Purchase Agreement with Archimedes was determined to be a business combination and was accounted for using the acquisition method of accounting. Pursuant to a letter dated August 21, 2013 (Letter) from the staff of the Division of Corporate Finance (Division) of the Securities and Exchange Commission, the Division stated that it would waive the requirement to provide a pro forma statement of operations if the use of forward-looking information is necessary to meaningfully present the effects of the acquisition of Lazanda by the Company. The Company's expense structure and commercialization infrastructure related to Lazanda are anticipated to differ significantly from the expense structure and commercialization infrastructure maintained by Archimedes with regard to Lazanda. As a result, the Company has concluded that the use of forward-looking information is necessary to meaningfully present the effects of the acquisition. Based on the guidance provided by the Division in the Letter, the Company has not presented a pro forma statement of operations.

        The following table presents a summary of the purchase price consideration for the Lazanda acquisition (in thousands):

Cash for Lazanda, related property, inventories and other assets	$	4,000
Fair Value of contingent consideration		8,004
Purchase Price	$	12,004

        The contingent consideration was recognized and measured at fair value as of the acquisition date. The Company determined the acquisition date fair value of the contingent consideration obligation based on an income approach derived from Lazanda revenue estimates and a probability assessment with respect to the likelihood of achieving the level of net sales that would trigger the contingent payment. The contingent consideration also includes royalties payable to Archimedes based on net sales where increase in the royalty rate is tied to a reduction in cost of goods sold. The fair value measurement is based on significant inputs not observable in the market and thus represents a Level 3 measurement as defined in fair value measurement accounting. The key assumptions in determining the fair value are the discount rate and the probability assigned to the potential milestones being achieved.

113

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 15. BUSINESS COMBINATIONS (Continued)

At each reporting date, the Company will re-measure the contingent consideration obligation to estimated fair value. Any changes in the fair value of contingent consideration will be recognized in operating expenses until the contingent consideration arrangement is settled.

        The following table summarizes the fair values of the tangible and identifiable intangible assets acquired and liabilities assumed at the acquisition date (in thousands):

Intangible asset—Lazanda product rights	$	10,450
Inventories		1,334
Property, plant and equipment		356
Other assets		116
Current liabilities		(283	)
Goodwill		31
	$	12,004

        The Lazanda product rights of $10.5 million have been recorded as intangible assets on the accompanying condensed balance sheet and are being amortized over the estimated useful life of the asset on a ratable basis through August 2022. Total amortization expense for the year ended December 31, 2013 was approximately $0.5 million. For the year ended December 31, 2013, the Company incurred an aggregate of $0.1 million in acquisition-related costs. These expenses are included in selling, general and administrative expenses in the Company's consolidated statement of operations for the year ended December 31, 2013.

        The fair value of inventories acquired included a step-up in the value of Lazanda inventories of $0.6 million which will be amortized to cost of sales as the acquired inventories are sold.

The Zipsor Acquisition

        On June 21, 2012, the Company entered into an Asset Purchase Agreement with Xanodyne, pursuant to which the Company acquired Xanodyne's product Zipsor and related inventory for $26.4 million in cash, and assumed certain product related liabilities relating to Zipsor. In addition, the Company will make a one-time contingent payment to Xanodyne of $2.0 million in cash at the end of the first calendar year in which Depomed's net sales of Zipsor® products exceed $30.0 million and an additional, one-time contingent payment to Xanodyne of $3.0 million in cash at the end of the first year in which Depomed's net sales of Zipsor® products exceed $60.0 million.

        In accordance with the authoritative guidance for business combinations, the Asset Purchase Agreement with Xanodyne was determined to be a business combination and was accounted for using the acquisition method of accounting. Neither separate financial statements nor pro forma results of operations have been presented because the acquisition transaction does not meet the qualitative or quantitative materiality tests under SEC Regulation S-X.

        Pursuant to the Asset Purchase Agreement, $3.0 million of the initial payment will be held in escrow for 18 months and applied towards the indemnification obligations of Xanodyne as set forth in the Asset Purchase Agreement.

114

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 15. BUSINESS COMBINATIONS (Continued)

        The following table presents a summary of the purchase price consideration for the Zipsor acquisition (in thousands):

Cash for Zipsor and related inventories	$	26,436
Fair Value of contingent consideration		1,303
Purchase Price	$	27,739

        The contingent consideration was recognized and measured at fair value as of the acquisition date and is included within other long-term liabilities in the accompanying balance sheet. The Company determined the acquisition date fair value of the contingent consideration obligation based on an income approach derived from Zipsor revenue estimates and a probability assessment with respect to the likelihood of achieving the level of net sales that would trigger the contingent payment. The fair value measurement is based on significant inputs not observable in the market and thus represents a Level 3 measurement as defined in fair value measurement accounting. The key assumptions in determining the fair value are the discount rate and the probability assigned to the potential milestones being achieved. At each reporting date, the Company will re-measure the contingent consideration obligation to estimated fair value. Any changes in the fair value of contingent consideration will be recognized in operating expenses until the contingent consideration arrangement is settled.

        The following table summarizes the fair values of the tangible and identifiable intangible assets acquired and liabilities assumed at the acquisition date (in thousands):

Intangible asset—Zipsor product rights	$	27,100
Inventories		2,428
Other assets		100
Property, plant and equipment		43
Current liabilities		(1,840	)
Bargain purchase		(92	)
	$	27,739

        The Zipsor product rights of $27.1 million have been recorded as intangible assets on the accompanying condensed balance sheet and are being amortized over the estimated useful life of the asset on a ratable basis through July 2019. Total amortization expense for each of the years ended December 31, 2013 and December 31, 2012 was approximately $3.8 million and $2.0 million.

        The fair value of inventories acquired included a step-up in the value of Zipsor inventories of $1.9 million which is being amortized to cost of sales as the acquired inventories are sold. The cost of sales related to the step-up value of Zipsor for 2013 was $0.7 million. The bargain purchase amount has been recorded within Interest and other income in the accompanying consolidated statement of operations.

NOTE 16. SUBSEQUENT EVENTS

        On March 12, 2014, the FDA approved Mallinckrodt's NDA for XARTEMIS™ XR (oxycodone hydrochloride and acetaminophen) Extended-Release Tablets (CII). The approval of the NDA triggers a $10.0 million milestone payment to the Company under its license agreement with Mallinckrodt,

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 16. SUBSEQUENT EVENTS (Continued)

which is payable within 30 days. The Company will recognize the entire milestone payment in the first quarter of 2014. The Company will also receive high single digit royalties on net sales of XARTEMIS XR.

NOTE 17. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

        The following tables set forth certain unaudited quarterly financial data for each of the eight quarters beginning with the quarter ended March 31, 2012 through the quarter ended December 31, 2013 (in thousands). This quarterly financial data is unaudited, but has been prepared on the same basis as the annual financial statements and, in the opinion of management, reflects all adjustments, consisting only of normal recurring adjustments necessary for a fair representation of the information for the periods presented. Operating results for any quarter are not necessarily indicative of results for any future period.

	2013 Quarter Ended
(in thousands)	March 31			June 30		September 30		December 31
Product sales	$	9,129		$	14,106	$	16,278	$	18,789
Total revenues		26,174			29,963		37,460		40,608
Gross margin on product sales		7,645			12,418		14,527		16,621
Income (loss) from operations		(5,533	)		532		6,838		7,480
Net income (loss)		(5,480	)		478		6,514		41,801
Basic net income (loss) per share	$	(0.10	)	$	0.01	$	0.11	$	0.73
Diluted net income (loss) per share	$	(0.10	)	$	0.01	$	0.11	$	0.72

	2012 Quarter Ended
	March 31			June 30			September 30			December 31
Product sales	$	2,109		$	3,201		$	9,684		$	12,489
Total revenues		16,835			14,110			33,282			26,590
Gross margin on product sales		1,591			1,759			7,921			10,173
Income (loss) from operations		(8,938	)		(15,983	)		(1,541	)		(3,891	)
Net income (loss)		(8,804	)		(15,780	)		(1,495	)		(3,704	)
Basic net income (loss) per share	$	(0.16	)	$	(0.28	)	$	(0.03	)	$	(0.07	)
Diluted net income (loss) per share	$	(0.16	)	$	(0.28	)	$	(0.03	)	$	(0.07	)

116

SCHEDULE II: VALUATION AND QUALIFYING ACCOUNTS

(in thousands)

			Additions
Description	Balance at Beginning of Year		Charged as a Reduction to Revenue(1)		Change in Deferred Revenue(1)			Deductions(2)			Balance at End of Year
Sales and return allowances, discounts, chargebacks and rebates:
Year ended December 31, 2013	$	15,159	$	28,743	$	—		$	(24,172	)	$	19,730
Year ended December 31, 2012	$	12,559	$	12,872	$	(611	)	$	(9,661	)	$	15,159
Year ended December 31, 2011	$	8,092	$	12,960	$	516		$	(9,009	)	$	12,559

			Additions
	Balance at Beginning of Year		Additions charged to costs and expenses		Other Additions		Deductions			Balance at End of Year
Deferred tax asset valuation allowance:
Year ended December 31, 2013(3)	$	42,500	$	—	$	—	$	(39,830	)	$	2,670
Year ended December 31, 2012	$	34,700	$	7,800	$	—	$	—		$	42,500
Year ended December 31, 2011(4)	$	62,300	$	—	$	—	$	(27,600	)	$	34,700

(1)

Additions to sales discounts and allowances are recorded as a reduction of deferred revenue until such time revenue is recognized.

(2)

Deductions to sales discounts and allowances relate to discounts or allowances actually taken or paid.

(3)

The Company reversed a valuation allowance of $39.8 million.

(4)

Valuation allowance reduced by $27.6 million due to a reduction in the Company's deferred tax assets.

117

EX-10.12

Exhibit 10.12

DEPOMED, INC.
2004 EMPLOYEE STOCK PURCHASE PLAN

As Amended February 19, 2014

1.Establishment of Plan.

Depomed, Inc. (the “Company”) proposes to grant options for purchase of the Company’s common stock (the “Common Stock”) to eligible employees of the Company and its Participating Subsidiaries (as hereinafter defined) pursuant to this 2004 Employee Stock Purchase Plan (this “Plan”).  For the purposes of this Plan, “Parent Corporation” and “Subsidiary” shall have the same meanings as “parent corporation” and “subsidiary corporation” in Sections 424(e) and 424(f), respectively, of the Internal Revenue Code of 1986, as amended (the “Code”).  “Participating Subsidiaries” are Parent Corporations or Subsidiaries that the Board of Directors of the Company (the “Board”) designates from time to time as corporations that shall participate in this Plan.  The Company intends this Plan to qualify as an “employee stock purchase plan” under Section 423 of the Code (including any amendments to or replacements of such Section), and this Plan shall be so construed.  Any term not expressly defined in this Plan but defined for purposes of Section 423 of the Code shall have the same definition herein.

2.Number of Shares.

The total number of shares of Common Stock reserved and available for issuance pursuant to this Plan shall be 2,500,000 (the “Share Limit”), subject to adjustments effected in accordance with Section 15 of this Plan. Shares issued under this Plan may consist, in whole or in part, of authorized and unissued shares or treasury shares reacquired in private transactions or open market purchases, but all shares issued under this Plan shall be counted against the Share Limit.

3.Purpose.

The purpose of this Plan is to provide eligible employees of the Company and Participating Subsidiaries with a convenient means of acquiring an equity interest in the Company through payroll deductions, to enhance such employees’ sense of participation in the affairs of the Company and Participating Subsidiaries, and to provide an incentive for continued employment.  For the purposes of this Plan, “employee” shall mean any individual who is an employee of the Company or a Participating Subsidiary. Whether an individual qualifies as an employee shall be determined by the Committee (as hereinafter defined), in its sole discretion. The Committee shall be guided by the provisions of Treasury Regulation Section 1.421-7 and Section 3401(c) of the Code and the Treasury Regulations thereunder, with the intent that the Plan cover all “employees” within the meaning of those provisions other than those who are not eligible to participate in the Plan, provided, however, that any determinations regarding whether an individual is an “employee” shall be prospective only, unless otherwise determined by the Committee. Unless the Committee makes a contrary determination, the employees of the Company shall, for all purposes of this Plan, be those individuals who are carried as employees of the Company or a Participating Subsidiary for regular payroll purposes or are on a leave of absence for not more than 90 days. Any inquiries regarding eligibility to participate in the Plan shall be directed to the Committee, whose decision shall be final.

4.Administration.

This Plan shall be administered by the Compensation Committee of the Board (the “Committee”).  Subject to the provisions of this Plan and the limitations of Section 423 of the Code or any successor provision in the Code, all questions of interpretation or application of this Plan shall be determined by the

Committee and its decisions shall be final and binding upon all participants.  Members of the Committee shall receive no compensation for their services in connection with the administration of this Plan, other than standard fees as established from time to time by the Board for services rendered by Board members serving on Board committees.  All expenses incurred in connection with the administration of this Plan shall be paid by the Company.

5.Eligibility.

Any employee of the Company or the Participating Subsidiaries is eligible to participate in an Offering Period (as hereinafter defined) under this Plan except the following:

a)employees who are not employed by the Company or a Participating Subsidiary prior to the beginning of such Offering Period or prior to such other time period as specified by the Committee;

b)employees who are customarily employed for twenty (20) hours or less per week;

c)employees who are customarily employed for five (5) months or less in a calendar year;

d)employees who, together with any other person whose stock would be attributed to such employee pursuant to Section 424(d) of the Code, own stock or hold options to purchase stock possessing five percent (5%) or more of the total combined voting power or value of all classes of stock of the Company or any of its Participating Subsidiaries or who, as a result of being granted an option under this Plan with respect to such Offering Period, would own stock or hold options to purchase stock possessing five percent (5%) or more of the total combined voting power or value of all classes of stock of the Company or any of its Participating Subsidiaries;

e)individuals who provide services to the Company or any of its Participating Subsidiaries as independent contractors who are reclassified as common law employees for any reason except for federal income and employment tax purposes; and

f)employees who reside in countries for whom such employees’ participation in the Plan would result in a violation under any corporate or securities laws of such country of residence.

6.Offering Dates.

The offering periods of this Plan (each, an “Offering Period”) shall be of twenty-four (24) months duration commencing on December 1 and June 1 of each year (or at such time or times as may be determined by the Committee).  Each Offering Period shall consist of four (4) six (6) month purchase periods (individually, a “Purchase Period”) during which payroll deductions of the participants are accumulated under this Plan.  The first business day of each Offering Period is referred to as the “Offering Date.”  The last business day of each Purchase Period is referred to as the “Purchase Date.”

Notwithstanding the immediately preceding paragraph, beginning with the Offering Period commencing on June 1, 2012, each Offering Period shall be of six (6) months duration commencing on December 1 and June 1 of each year (or at such time or times as may be determined by the Committee).  Each Offering Period shall consist of a six (6) month Purchase Period during which payroll deductions of the participants are accumulated under this Plan.

For clarity, eligible employees who are participants under the Plan in any Offering Period that commenced on or before December 1, 2011, if the provisions of Section 12(c) regarding enrollment in a subsequent Offering Period apply, any eligible employee will be enrolled in a subsequent six (6) month Offering Period.

The Committee shall have the power to change the Offering Dates, the Purchase Dates and the duration of Offering Periods or Purchase Periods without shareholder approval if such change is announced prior to the relevant Offering Period or prior to such other time period as specified by the Committee.

7.Participation in this Plan.

Eligible employees may become participants in an Offering Period under this Plan on the Offering Date, after satisfying the eligibility requirements, by delivering a subscription agreement to the Company prior to such Offering Date, or such other time period as specified by the Committee.  An eligible employee who does not deliver a subscription agreement to the Company after becoming eligible to participate in an Offering Period shall not participate in that Offering Period or any subsequent Offering Period unless such employee enrolls in this Plan by filing a subscription agreement with the Company prior to such Offering Period, or such other time period as specified by the Committee.  Once an employee becomes a participant in an Offering Period by filing a subscription agreement, such employee shall automatically participate in the Offering Period commencing immediately following the last day of the prior Offering Period unless the employee withdraws or is deemed to withdraw from this Plan or terminates further participation in the Offering Period as set forth in Section 12 below.  Such participant is not required to file any additional subscription agreement in order to continue participation in this Plan.

8.Grant of Option on Enrollment.

Enrollment by an eligible employee in this Plan with respect to an Offering Period shall constitute the grant (as of the Offering Date) by the Company to such employee of an option to purchase on the Purchase Date up to that number of shares of Common Stock determined by a fraction, the numerator of which is the amount accumulated in such employee’s payroll deduction account during such Purchase Period and the denominator of which is the lower of (i) eighty-five percent (85%) of the fair market value of a share of Common Stock on the Offering Date (but in no event less than the par value of a share of Common Stock), or (ii) eighty-five percent (85%) of the fair market value of a share of Common Stock on the Purchase Date (but in no event less than the par value of a share of Common Stock), provided, however, that the number of shares of Common Stock subject to any option granted pursuant to this Plan shall not exceed the lesser of (x) the maximum number of shares set by the Committee pursuant to Section 11(c) below with respect to the applicable Purchase Date, or (y) the maximum number of shares which may be purchased pursuant to Section 11(b) below with respect to the applicable Purchase Date.  The fair market value of a share of Common Stock shall be determined as provided in Section 9 below.

9.Purchase Price.

The purchase price per share at which a share of Common Stock shall be sold in any Offering Period shall be eighty-five percent (85%) of the lesser of:

a)the fair market value on the Offering Date; or

b)the fair market value on the Purchase Date.

For the purposes of this Plan, the term “fair market value” means, as of any date, the value of a share of the Common Stock determined as follows:

a)If the Common Stock is traded on any established stock exchange or quoted on a national market system, fair market value shall be the closing sales price for the Common Stock as quoted on that stock exchange or system for the date the value is to be determined (the “Value Date”) as reported by such stock exchange or national market system, or, if not reported by such stock exchange or national market system, as reported in The Wall Street Journal or a similar publication.  If no sales are reported as having occurred on the

Value Date, fair market value shall be that closing sales price for the last preceding trading day on which sales of Common Stock are reported as having occurred.  If no sales are reported as having occurred during the five trading days before the Value Date, Fair Market Value shall be the closing bid for Common Stock on the Value Date.  If the Common Stock is listed on multiple exchanges or systems, fair market value shall be based on sales or bid prices on the primary exchange or system on which the Common Stock is traded or quoted;

b)If the Common Stock is regularly quoted by a recognized securities dealer but selling prices are not reported on any established stock exchange or quoted on a national market system, fair market value shall be the mean between the high bid and low asked prices on the Value Date.  If no prices are quoted for the Value Date, fair market value shall be the mean between the high bid and low asked prices on the last preceding trading day on which any bid and asked prices were quoted; or

c)If the Common Stock is not traded on any established stock exchange or quoted on a national market system and are not quoted by a recognized securities dealer, the Board or Committee will determine fair market value in good faith.  The Board or Committee will consider the following factors, and any others it considers significant, in determining fair market value: (i) the price at which other securities of the Company have been issued to purchasers other than employees, directors, or consultants, (ii) the Company’s shareholder’s equity, prospective earning power, dividend-paying capacity, and non-operating assets, if any, and (iii) any other relevant factors, including the economic outlook for the Company and the Company’s industry, the Company’s position in that industry, the Company’s goodwill and other intellectual property, and the values of securities of other businesses in the same industry.

10.Payment of Purchase Price; Changes in Payroll Deductions; Issuance of Shares.

a)The purchase price of the shares is accumulated by regular payroll deductions made during each Offering Period.  The deductions are made as a percentage of the participant’s compensation in one percent (1%) increments, not less than one percent (1%), nor greater than fifteen percent (15%), or such lower limit set by the Committee.  Compensation shall mean all regular straight-time gross earnings, and shall not include payments for overtime, shift premium, incentive compensation or payments, bonuses, commissions or other compensation.  Payroll deductions shall commence on the first payday of the Offering Period and shall continue to the end of the Offering Period unless sooner altered or terminated as provided in this Plan.

b)A participant may increase or decrease the rate of payroll deductions during an Offering Period by filing with the Company a new authorization for payroll deductions, in which case the new rate shall become effective for the next payroll period commencing after the Company’s timely receipt of the authorization and shall continue for the remainder of the Offering Period unless changed as described below.  Such change in the rate of payroll deductions may be made at any time during an Offering Period, but not more than one (1) change may be made effective during any Purchase Period.  A participant may increase or decrease the rate of payroll deductions for any subsequent Offering Period by filing with the Company a new authorization for payroll deductions prior to the beginning of such Offering Period, or such other time period as specified by the Committee.

c)A participant may reduce his or her payroll deduction percentage to zero during an Offering Period by filing with the Company a request for cessation of payroll deductions.  Such reduction shall be effective beginning with the next payroll period after the Company’s timely receipt of the request and no further payroll deductions shall be made for the duration of the Offering Period.  Payroll deductions credited to the participant’s

account prior to the effective date of the request shall be used to purchase shares of Common Stock of the Company in accordance with Section (e) below.  A participant may not resume making payroll deductions during the Offering Period in which he or she reduced his or her payroll deductions to zero.

d)All payroll deductions made for a participant are credited to his or her account under this Plan and are deposited with the general funds of the Company.  No interest accrues on the payroll deductions.  All payroll deductions received or held by the Company may be used by the Company for any corporate purpose, and the Company shall not be obligated to segregate such payroll deductions.

e)On each Purchase Date, for so long as this Plan remains in effect and provided that the participant has not submitted a signed and completed withdrawal form before that date, which notifies the Company that the participant wishes to withdraw from that Offering Period under this Plan and have all payroll deductions accumulated in the account maintained on behalf of the participant, as of that date returned to the participant, the Company shall apply the funds then in the participant’s account to the purchase of whole shares of Common Stock reserved under the option granted to such participant with respect to the Offering Period to the extent that such option is exercisable on the Purchase Date.  The purchase price per share shall be as specified in Section 9 of this Plan.  Any cash remaining in a participant’s account after such purchase of shares shall be refunded to such participant in cash, without interest, provided, however, that any amount remaining in such participant’s account on a Purchase Date which is less than the amount necessary to purchase a full share of Common Stock shall be carried forward, without interest, into the next Purchase Period or Offering Period, as the case may be.  In the event that this Plan has been oversubscribed, all funds not used to purchase shares on the Purchase Date shall be returned to the participant, without interest.  No Common Stock shall be purchased on a Purchase Date on behalf of any employee whose participation in this Plan has terminated prior to such Purchase Date.

f)As soon as practicable after the Purchase Date, the Company shall issue shares for the participant’s benefit representing the shares purchased upon exercise of his or her option.

g)During a participant’s lifetime, his or her option to purchase shares hereunder is exercisable only by him or her.  The participant shall have no interest or voting rights in shares covered by his or her option until such option has been exercised.

11.Limitations on Shares to be Purchased.

a)    No participant shall be entitled to purchase stock under this Plan at a rate which, when aggregated with his or her rights to purchase stock under all other employee stock purchase plans of the Company or any Subsidiary, exceeds $25,000 in fair market value, determined as of the Offering Date (or such other limit as may be imposed by the Code) for each calendar year in which the employee participates in this Plan.  The Company shall automatically suspend the payroll deductions of any participant as necessary to enforce such limit provided that when the Company automatically resumes such payroll deductions, the Company must apply the rate in effect immediately prior to such suspension.

b)No participant shall be entitled to purchase more than 3,000 shares of Common Stock (the “Maximum Share Amount”) on any single Purchase Date.  Prior to the commencement of any Offering Period or prior to such time period as specified by the Committee, the Committee may, in its sole discretion, set a new Maximum Share Amount.  If a new Maximum Share Amount is set, then all participants must be notified of such Maximum Share Amount prior to the commencement of the next Offering Period.

The Maximum Share Amount shall continue to apply with respect to all succeeding Purchase Dates and Offering Periods unless revised by the Committee as set forth above.

c)If the number of shares to be purchased on a Purchase Date by all employees participating in this Plan exceeds the number of shares then available for issuance under this Plan, then the Company shall make a pro rata allocation of the remaining shares in as uniform a manner as shall be reasonably practicable or as the Committee shall determine to be equitable.  In such event, the Company shall give written notice of such reduction of the number of shares to be purchased under a participant’s option to each participant affected.

d)Any payroll deductions accumulated in a participant’s account which are not used to purchase stock due to the limitations in this Section 11 shall be returned to the participant as soon as practicable after the end of the applicable Purchase Period, without interest.

12.Withdrawal.

a)Each participant may withdraw from an Offering Period under this Plan by signing and delivering to the Company a written notice to that effect on a form provided for such purpose.  Such withdrawal may be elected at any time prior to the end of an Offering Period, or such other time period as specified by the Committee.

b)Upon withdrawal from this Plan, the accumulated payroll deductions shall be returned to the withdrawn participant, without interest, and his or her interest in this Plan shall terminate.  In the event a participant voluntarily elects to withdraw from this Plan, he or she may not resume his or her participation in this Plan during the same Offering Period, but he or she may participate in any Offering Period under this Plan which commences on a date subsequent to such withdrawal by filing a new authorization for payroll deductions in the same manner as set forth in Section 7 above for initial participation in this Plan.

c)If the fair market value on the first day of the current Offering Period in which a participant is enrolled is higher than the fair market value on the first day of any subsequent Offering Period, the Company shall automatically enroll such participant in the subsequent Offering Period.  Any funds accumulated in a participant’s account prior to the first day of such subsequent Offering Period shall be applied to the purchase of shares on the Purchase Date immediately prior to the first day of such subsequent Offering Period, if any.

13.Termination of Employment.

Termination of a participant’s employment for any reason, including retirement, death or the failure of a participant to remain an eligible employee of the Company or of a Participating Subsidiary, shall immediately terminate his or her participation in this Plan.  In such event, the payroll deductions credited to the participant’s account shall be returned to him or her or, in the case of his or her death, to his or her legal representative, without interest.  For purposes of this Section 13, an employee shall not be deemed to have terminated employment or failed to remain in the continuous employ of the Company or of a Participating Subsidiary in the case of sick leave, military leave, or any other leave of absence approved by the Committee, provided, however that such leave is for a period of not more than ninety (90) days or reemployment upon the expiration of such leave is guaranteed by contract or statute.

14.Return of Payroll Deductions.

In the event a participant’s interest in this Plan is terminated by withdrawal, termination of employment or otherwise, or in the event this Plan is terminated by the Board, the Company shall deliver to

the participant all payroll deductions credited to such participant’s account.  No interest shall accrue on the payroll deductions of a participant in this Plan.

15.Capital Changes.

a)Subject to any required action by the shareholders of the Company, the number and type of shares of Common Stock covered by each option under this Plan which has not yet been exercised and the number and type of shares of Common Stock which have been authorized for issuance under this Plan but have not yet been placed under option (collectively, the “Reserves”), as well as the price per share of Common Stock covered by each option under this Plan which has not yet been exercised, shall be proportionately adjusted for any increase or decrease in the number of issued and outstanding shares of Common Stock resulting from a stock split, stock dividend, combination or reclassification of the Common Stock or any other increase or decrease in the number of issued and outstanding shares of Common Stock effected without receipt of any consideration by the Company, provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been “effected without receipt of consideration.”  Such adjustment shall be made by the Committee, whose determination shall be final, binding and conclusive.  Except as expressly provided herein, no issue by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to an option.

b)In the event of the proposed dissolution or liquidation of the Company, the Offering Period will terminate immediately prior to the consummation of such proposed action, unless otherwise provided by the Board.  In the event of (i) a merger or consolidation in which the Company is not the surviving corporation (other than a merger or consolidation with a wholly-owned subsidiary, a reincorporation of the Company in a different jurisdiction, or other transaction in which there is no substantial change in the shareholders of the Company or their relative stock holdings and the options under this Plan are assumed, converted or replaced by the successor corporation, which assumption shall be binding on all participants), (ii) a merger in which the Company is the surviving corporation but after which the shareholders of the Company immediately prior to such merger (other than any shareholder that merges, or which owns or controls another corporation that merges, with the Company in such merger) cease to own their shares or other equity interest in the Company, (iii) the sale of all or substantially all of the assets of the Company, or (iv) the acquisition, sale, or transfer of more than 50% of the outstanding shares of the Company by tender offer or similar transaction, each option under this Plan shall be assumed or an equivalent option shall be substituted by the successor corporation or a parent or subsidiary of the successor corporation, unless the successor corporation does not agree to assume the option or to substitute an equivalent option, in which case the Board may determine, in the exercise of its sole discretion and in lieu of such assumption or substitution, to shorten the Offering Period then in progress by setting a new Purchase Date (the “New Purchase Date”).  If the Board shortens the Offering Period then in progress, the Board shall notify each participant in writing, at least ten (10) days prior to the New Purchase Date, that the Purchase Date for his or her option has been changed to the New Purchase Date and that his or her option will be exercised automatically on the New Purchase Date, unless prior to such date he or she has withdrawn from the Offering Period as provided in Section 12.

c)The Committee may, if it so determines in the exercise of its sole discretion, also make provision for adjusting the Reserves, as well as the price per share of Common Stock covered by each outstanding option, in the event that the Company effects one or more reorganizations, recapitalizations, rights offerings or other increases or reductions of shares of its outstanding Common Stock, or in the event of the Company being

consolidated with or merged into any other corporation.

16.Nonassignability.

Neither payroll deductions credited to a participant’s account nor any rights with regard to the exercise of an option or to receive shares under this Plan may be assigned, transferred, pledged or otherwise disposed of in any way (other than by the laws of descent and distribution or as provided in Section 23 below) by the participant.  Any such attempt at assignment, transfer, pledge or other disposition shall be void and without effect.

17.Reports.

Individual accounts shall be maintained for each participant in this Plan.  Each participant shall receive, as soon as practicable after the end of each Purchase Period, a report of his or her account setting forth the total payroll deductions accumulated, the number of shares purchased, the per share price thereof and the remaining cash balance, if any, carried forward to the next Purchase Period or Offering Period, as the case may be.

18.Notice of Disposition.

Each participant shall notify the Company in writing if the participant disposes of any of the shares purchased in any Offering Period pursuant to this Plan if such disposition occurs within two (2) years from the Offering Date or within one (1) year from the Purchase Date on which such shares were purchased (the “Notice Period”).  The Company may, at any time during the Notice Period, place a legend or legends on any certificate representing shares acquired pursuant to this Plan requesting the Company’s transfer agent to notify the Company of any transfer of the shares.  The obligation of the participant to provide such notice shall continue notwithstanding the placement of any such legend on the certificates.

19.No Rights to Continued Employment.

Neither this Plan nor the grant of any option hereunder shall confer any right on any employee to remain in the employ of the Company or any Participating Subsidiary, or restrict the right of the Company or any Participating Subsidiary to terminate such employee’s employment.

20.Equal Rights and Privileges.

All eligible employees shall have equal rights and privileges with respect to this Plan so that this Plan qualifies as an “employee stock purchase plan” within the meaning of Section 423 or any successor provision of the Code and the related regulations.  Any provision of this Plan which is inconsistent with Section 423 or any successor provision of the Code shall, without further act or amendment by the Company, the Committee or the Board, be reformed to comply with the requirements of Section 423.  This Section 20 shall take precedence over all other provisions in this Plan.

21.Notices.

All notices or other communications by a participant to the Company under or in connection with this Plan shall be deemed to have been duly given when received in the form specified by the Company at the location, or by the person, designated by the Company for the receipt thereof.

22.Term; Shareholder Approval.

This Plan shall be approved by the shareholders of the Company, in any manner permitted by applicable corporate law, within twelve (12) months after the date this Plan is adopted by the Board.  No

purchase of shares pursuant to this Plan shall occur prior to such shareholder approval.  This Plan shall continue until the earliest to occur of (a) termination of this Plan by the Board (which termination may be effected by the Board at any time), or (b) issuance of all of the shares of Common Stock reserved for issuance under this Plan.

23.Designation of Beneficiary.

a)A participant may file a written designation of a beneficiary who is to receive any shares and cash, if any, from the participant’s account under this Plan in the event of such participant’s death subsequent to the end of a Purchase Period but prior to delivery to him of such shares and cash.  The participant shall deliver along with such designation a written acknowledgment of the participant’s spouse, if any, consenting to the designation.  In addition, a participant may file a written designation of a beneficiary who is to receive any cash from the participant’s account under this Plan in the event of such participant’s death prior to a Purchase Date.

b)Such designation of beneficiary may be changed by the participant at any time by written notice.  The participant shall deliver along with such designation a written acknowledgment of the participant’s spouse, if any, consenting to the designation.  In the event of the death of a participant and in the absence of a beneficiary validly designated under this Plan who is living at the time of such participant’s death, the Company shall deliver such shares or cash to the executor or administrator of the estate of the participant, or if no such executor or administrator has been appointed (to the knowledge of the Company), the Company, in its discretion, may deliver such shares or cash to the spouse or to any one or more dependents or relatives of the participant, or if no spouse, dependent or relative is known to the Company, then to such other person as the Company may designate.

24.Conditions upon Issuance of Shares.

Shares shall not be issued with respect to an option unless the exercise of such option and the issuance and delivery of such shares pursuant thereto shall comply with all applicable provisions of law, domestic or foreign, including, without limitation, the Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as amended, the rules and regulations promulgated thereunder, and the requirements of any stock exchange or automated quotation system upon which the shares may then be listed, and shall be further subject to the approval of counsel for the Company with respect to such compliance.

25.Applicable Law.

The Plan shall be governed by the substantive laws (excluding the conflict of laws rules) of the State of California.

26.Amendment or Termination.

The Board may at any time amend, terminate or extend the term of this Plan; provided, however, that:  (i) any such termination cannot affect options previously granted under this Plan; (ii) no amendment may make any change in an option previously granted which would adversely affect the right of any participant, nor may any amendment be made without approval of the shareholders of the Company obtained in accordance with Section 22 above within twelve (12) months of the adoption of such amendment if such amendment would:

a)increase the number of shares that may be issued under this Plan; or

b)change the designation of the employees (or class of employees) eligible for participation in this Plan.

Notwithstanding the foregoing, the Board may make such amendments to the Plan as the Board determines to be advisable, if the continuation of the Plan or any Offering Period would result in financial accounting treatment for the Plan that is different from the financial accounting treatment in effect on the date this Plan is adopted by the Board.

Adopted by the Board on:  March 19, 2004

Approved by the shareholders on:  May 27, 2004

Effective date of this Plan:  May 27, 2004

Amended by the Board on:  March 22, 2007, March 25, 2010, March 22, 2012, May 15, 2012 and February 19, 2014

EX-10.50

Exhibit 10.50

CERTAIN MATERIAL (INDICATED BY [***]) HAS BEEN OMITTED FROM THIS DOCUMENT PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT.  THE OMITTED MATERIAL HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.

ROYALTY PURCHASE AND SALE AGREEMENT

dated as of October 18, 2013

between

DEPOMED, INC.,

DEPO DR SUB, LLC, as Seller,

and

PDL BIOPHARMA, INC., as Purchaser

Confidential Information indicated by [***] has been omitted from this filing and filed separately with the Securities Exchange Commission.

TABLE OF CONTENTS

		Page
Article I DEFINED TERMS AND RULES OF CONSTRUCTION		1
Section 1.1	Defined Terms	1
Section 1.2	Rules of Construction	11
Article II CONTRIBUTION, PURCHASE AND SALE OF THE SUBJECT ASSETS		12
Section 2.1	Contribution, Purchase and Sale	12
Section 2.2	Purchase Price	14
Section 2.3	No Assumed Obligations	14
Section 2.4	Excluded Assets	14
Section 2.6	Payments	14
Article III REPRESENTATIONS AND WARRANTIES OF THE SELLER		14
Section 3.1	Organization; Operations of Seller	15
Section 3.2	No Conflicts	15
Section 3.3	Authorization	16
Section 3.4	Ownership	17
Section 3.5	Governmental and Third Party Authorizations	17
Section 3.6	No Litigation	17
Section 3.7	Solvency	18
Section 3.8	Tax Matters	18
Section 3.9	No Brokers’ Fees	18
Section 3.10	Compliance with Laws	18
Section 3.11	Intellectual Property Matters	19
Section 3.12	License Agreements	21
Section 3.13	UCC Matters	23
Section 3.14	Margin Stock	23
Article IV REPRESENTATIONS AND WARRANTIES OF THE PURCHASER		23
Section 4.1	Organization	23
Section 4.2	No Conflicts	24
Section 4.3	Authorization	24
Section 4.4	Governmental and Third Party Authorizations	24
Section 4.5	No Litigation	24
Section 4.6	Access to Information	24
Article V COVENANTS		25
Section 5.1	Notices; Books and Records; Audit Right	25
Section 5.2	Public Announcement; Confidentiality	27
Section 5.3	Commercially Reasonable Efforts; Further Assurances	28
Section 5.4	Royalty Payments on Account of the Subject Assets; Royalty Payment Instruction	29
Section 5.5	License Agreements	31
Section 5.6	Termination of a License Agreement	31
Section 5.7	Audits	31
Section 5.8	Reversionary Interest	32
Section 5.9	Tax Matters	32
Section 5.10	Existence	33

Confidential Information indicated by [***] has been omitted from this filing and filed separately with the Securities Exchange Commission.

TABLE OF CONTENTS
(continued)

		Page
Section 5.11	Seller Operations	33
Section 5.12	Enforcement of DM Portfolio Patents	34
Section 5.13	Compliance with Obligations under Certain Agreements	34
Section 5.14	Compliance with Terms of Certain Agreements	34
Section 5.15	Withdrawal of Certain Asserted Claims	34
Section 5.16	Enforcement of DM Portfolio Patents [***]	34
Article VI THE CLOSING		34
Section 6.1	Closing	34
Section 6.2	Closing Deliverables of the Selling Parties	34
Section 6.3	Closing Deliverables of the Purchaser	35
Section 6.4	Post-Closing Matter	35
Article VII INDEMNIFICATION		35
Section 7.1	Indemnification by the Seller	35
Section 7.2	Indemnification by the Purchaser	36
Section 7.3	Procedures	37
Section 7.4	Exclusive Remedy	38
Article VIII TERMINATION		38
Section 8.1	Termination Date	38
Section 8.2	Effect of Termination	38
Article IX MISCELLANEOUS		39
Section 9.1	Survival	39
Section 9.2	Performance; Equitable Relief	39
Section 9.3	Notices	39
Section 9.4	Successors and Assigns	40
Section 9.5	Nature of Relationship	41
Section 9.6	Entire Agreement	41
Section 9.7	Governing Law	41
Section 9.8	Waiver of Jury Trial	42
Section 9.9	Severability	42
Section 9.10	Counterparts	42
Section 9.11	Amendments; No Waivers	43
Section 9.12	Cumulative Remedies	43
Section 9.13	Table of Contents and Headings	43
Section 9.14	No Presumption Against Drafting Party	43

Confidential Information indicated by [***] has been omitted from this filing and filed separately with the Securities Exchange Commission.

ii

ROYALTY PURCHASE AND SALE AGREEMENT

This ROYALTY PURCHASE AND SALE AGREEMENT (this “Royalty Purchase and Sale Agreement”) dated as of October 18, 2013 is among Depomed, Inc., a California corporation (“Depomed”), Depo DR Sub, LLC, a Delaware limited liability company (the “Seller,” and together with Depomed, the “Selling Parties”) and PDL BioPharma, Inc., a Delaware corporation (the “Purchaser”).

W I T N E S S E T H :

WHEREAS, immediately prior to the Contribution (as defined below), Depomed had the right to receive certain royalty and other payments with respect to the DM Portfolio Products under each of the License Agreements (in each case, as defined below);

WHEREAS, prior to the Closing (as defined below), Depomed contributed and assigned to the Seller the Contributed Assets (as defined below); and

WHEREAS the Seller desires to sell, assign, transfer and convey to the Purchaser, free and clear of all Liens (as defined below), other than Permitted Liens (as defined below), and the Purchaser desires to purchase, acquire and accept from the Seller, the Subject Assets described herein, upon and subject to the terms and conditions set forth in this Royalty Purchase and Sale Agreement.

NOW, THEREFORE, in consideration of the premises and the mutual agreements, representations and warranties set forth herein and of other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto covenant and agree as follows:

ARTICLE I
DEFINED TERMS AND RULES OF CONSTRUCTION

Section 1.1Defined Terms. The following terms, as used herein, shall have the following respective meanings:

“Actual Knowledge” means the actual knowledge of [***]

“Adverse Change” means any event, circumstance or change that could reasonably be expected to result, individually in the aggregate, in (a) an adverse effect in any material respect on the legality, validity or enforceability of any of the Transaction Documents, any of the License Agreements or the back-up security interest granted pursuant to Section 2.1(e), (b) an adverse effect in any material respect on the right or ability of a Selling Party or any valid successor thereto to perform any of its obligations under any of the Transaction Documents to which it is a party, or the right or ability of a Selling Party or any valid successor thereto to perform any of its obligations under any of the License Agreements, or the right or ability of a Selling Party or any

Confidential Information indicated by [***] has been omitted from this filing and filed separately with the Securities Exchange Commission.

1

valid successor thereto to consummate the transactions contemplated hereunder or under any of the other Transaction Documents to which it is a party, (c) an adverse effect in any material respect on the rights or remedies of a Selling Party or any valid successor thereto or the Purchaser under any of the Transaction Documents or any of the License Agreements, (d) an adverse effect on the timing, amount or duration of the Royalty Payments or the right of the Purchaser to receive the Royalty Payments, or (e) an adverse effect on the Subject Assets.

“Affiliate” means, with respect to any Person, another Person that directly, or indirectly through one or more intermediaries, Controls or is Controlled by or is under common Control with the Person specified.  “Control” means the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of a Person, whether through the ability to exercise voting power, by contract or otherwise.  “Controlling” and “Controlled” have meanings correlative thereto.

“Applicable Law” means, with respect to any Person, all laws, rules, regulations and orders of Governmental Authorities applicable to such Person or any of its properties or assets.

“Assigned Rights” means, collectively, the rights of Depomed under or in respect of each of the License Agreements to the extent applicable with respect to, and solely to the extent that any required consent to assignment of such right has been obtained, (a) any right to receive royalty or audit reports, summaries or other information from a Licensee; (b) any right to audit, inspect or otherwise review any of the records of a Licensee or the right to receive any related audit reports; (c) any right to enforce the DM Portfolio Intellectual Property Rights against a breaching Licensee; (d) any right to make indemnification claims and receive indemnity and reimbursements in respect of infringement of DM Portfolio Intellectual Property Rights of Depomed; (e) any right to disapprove or consent to an assignment or transfer (by operation of law or otherwise) pursuant to a License Agreement; and (f) any right to bring any action, demand, proceeding or claim, in law or in equity, with respect to the enforcement of any rights under or relating to a License Agreement to receive Royalty Payments or any of the foregoing Assigned Rights.

“Bankruptcy Event” means the occurrence of any of the following in respect of a Person: (a) an admission in writing by such Person of its inability to pay its debts generally or a general assignment by such Person for the benefit of creditors; (b) the filing of any petition or answer by such Person seeking to adjudicate itself as bankrupt or insolvent, or seeking for itself any liquidation, winding-up, reorganization, arrangement, adjustment, protection, relief or composition of such Person or its debts under any Applicable Law relating to bankruptcy, insolvency, receivership, winding-up, liquidation, reorganization, examination, relief of debtors or other similar Applicable Law now or hereafter in effect, or seeking, consenting to or acquiescing in the entry of an order for relief in any case under any such Applicable Law, or the appointment of or taking possession by a receiver, trustee, custodian, liquidator, examiner, assignee, sequestrator or other similar official for such Person or for any substantial part of its property; (c) corporate or other entity action taken by such Person to authorize any of the actions set forth in clause (a) or clause (b) above; or (d) without the consent or acquiescence of such Person, the entering of an order for relief or approving a petition for relief or reorganization or any other petition seeking any reorganization, arrangement, composition, readjustment, liquidation, dissolution or other similar relief under any present or future bankruptcy, insolvency

Confidential Information indicated by [***] has been omitted from this filing and filed separately with the Securities Exchange Commission.

2

or similar Applicable Law, or the filing of any such petition against such Person, or, without the consent or acquiescence of such Person, the entering of an order appointing a trustee, custodian, receiver or liquidator of such Person or of all or any substantial part of the property of such Person, in each case where such petition or order shall remain unstayed or shall not have been stayed or dismissed within 90 days from entry thereof; provided that in the case of an involuntary petition, such Person has not challenged such petition within 90 days thereof.

“Bill of Sale” means that certain bill of sale dated as of the Closing Date executed by Depomed, the Seller and the Purchaser substantially in the form of Exhibit A to the Disclosure Letter.

“Biovail Manufacturing Transfer Agreement” means the Manufacturing Transfer Agreement (Controlled Release Metformin Formulations — USA) dated December 13, 2005, between Depomed and Biovail Laboratories International SRL.

“Biovail Supply Agreement” means the Supply Agreement (Extended Release Metformin Formulations — U.S.A.) dated December 13, 2005, between Depomed, Inc. and Biovail Laboratories International SRL.

“Business Day” means any day that is not a Saturday, Sunday or other day on which commercial banks in New York City are authorized or required by Applicable Law to remain closed.

“Closing” has the meaning set forth in Section 6.1.

“Closing Date” has the meaning set forth in Section 6.1.

“Collection Account” means a segregated account of the Seller, subject to the Control Agreement in favor of Purchaser, established for the benefit of the Seller and Purchaser and maintained at Wells Fargo Bank pursuant to the terms of the Control Agreement (or such other account as established pursuant to Section 5.4(a)).

“Confidential Information” shall mean, as it relates to any party hereto (or its Affiliates) who provides information (the “Disclosing Party”) to the other party hereto (the “Receiving Party”), all information (whether written or oral, or in electronic or other form) furnished before or after the date hereof by or on behalf of the Disclosing Party, including information that relates to the Contributed Assets or any part thereof, the License Agreements, the DM Portfolio Products and the DM Portfolio Intellectual Property Rights, including: (a) any reports, data, materials or other documents of any kind relating in any way, directly or indirectly, to this Disclosing Party or its Affiliates, the Contributed Assets or any part thereof or the circumstances giving rise to the Royalty Payments or any part thereof, and including reports, data, materials or other documents of any kind delivered pursuant to or under any of the License Agreements; and (b) any inventions, devices, improvements, formulations, discoveries, compositions, ingredients, patents, patent applications, know-how, processes, trial results, research, developments or any other intellectual property, trade secrets or information involving or relating in any way, directly or indirectly, to the DM Portfolio Intellectual Property Rights or any infringement thereof. Notwithstanding the foregoing definition, “Confidential Information” shall not include information that is (i) independently developed or discovered by a Receiving Party without use of any Confidential Information as demonstrated by the Receiving Party, (ii) already in the

Confidential Information indicated by [***] has been omitted from this filing and filed separately with the Securities Exchange Commission.

3

public domain at the time the information is disclosed by a Disclosing Party or has become part of the public domain after such disclosure through no breach by a Receiving Party of this Royalty Purchase and Sale Agreement, (iii) obtained by a Receiving Party from other sources not known to have an obligation of confidentiality to Disclosing Party, (iv) required to be disclosed in any document to be filed with any Governmental Authority or (v) required to be disclosed by court or administrative order, or under securities laws, rules and regulations applicable to any party hereto or pursuant to the rules and regulations of any stock exchange or stock market on which the securities of any party hereto (or its Affiliates) may be listed for trading.

“Contributed Assets” means, collectively, (a) the Subject Assets and (b) the Assigned Rights.

“Contribution” has the meaning set forth in Section 2.1(a).

“Contribution Agreement” means that certain contribution agreement to be entered into between Depomed and the Seller substantially in the form of Exhibit D to the Disclosure Letter, pursuant to which such parties shall effect the Contribution.

“Control Agreement” means the Control Agreement, dated as of the Closing Date, among Wells Fargo Bank, Seller and the Purchaser or, with respect to any Collection Account established after the Closing Date, an agreement, satisfactory in form and substance to the Purchaser and executed by the financial institution or securities intermediary at which such Collection Account is maintained, pursuant to which such financial institution or securities intermediary confirms and acknowledges the Purchaser’s security interest in such account, and agrees that the financial institution or securities intermediary, as the case may be, will comply with instructions originated by the Purchaser as to disposition of funds in such account, without further consent by the Seller.

“Depomed” has the meaning set forth in the preamble.

“Designated DM Portfolio Products” means (i) “Products” as defined as of the date of this Royalty Purchase and Sale Agreement in the Santarus Agreement; and (ii) the “500mg Product” and “1000mg Product” as defined as of the date of this Royalty Purchase and Sale Agreement in the Valeant Agreement.

“Disclosure Letter” means the disclosure letter dated as of the date hereof and delivered to the Purchaser by the Selling Parties in respect of this Royalty Purchase and Sale Agreement.

“Disputes” has the meaning set forth in Section 3.11(e).

“Distribution Report” means a report, prepared on a calendar quarter basis on behalf of the Seller and certified by an Executive Officer as to the accuracy of all amounts included in such report, setting forth, with respect to the applicable calendar quarter and in such form as mutually agreed as between the Selling Parties and the Purchaser, (a) the aggregate amount of payments received by the Selling Parties during such calendar quarter under or in respect of the License Agreements, (b) with respect to such aggregate amount, (i) the amounts thereof constituting Royalty Payments, (ii) the amount thereof constituting any indemnity payments and cost reimbursements that are expressly [***], (iii) the amount thereof allocable to Royalty Payables, and (iv) the amount of Reimbursable Expenses incurred during such calendar quarter, and, in

Confidential Information indicated by [***] has been omitted from this filing and filed separately with the Securities Exchange Commission.

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each case, the basis for such calculations; (c) the amount of any [***] with respect to payments made during such calendar quarter and the basis for such calculation; (d) the amount of any payments made [***] and that was not deposited into the Collection Account; (e) the gross amount of proceeds deposited into the Collection Account during such calendar quarter; (f) the gross amount of distributions made from the Collection Account during such calendar quarter; and (g) a reconciliation of amounts payable to, versus actually paid to, or swept or withheld by, each of the Selling Parties and the Purchaser with respect to payments received during such calendar quarter.

“Dollar” or the sign “$” means United States dollars.

“DM Portfolio Intellectual Property Rights” means, as the following relates to the DM Portfolio Products and solely to the extent owned or controlled by Depomed, all intellectual property rights arising from or associated with the following, whether protected, created or arising under the laws of the United States or any other jurisdiction:  (i) trade names, trademarks and service marks (registered and unregistered), domain names and other Internet addresses or identifiers, trade dress and similar rights, and applications (including intent to use applications and similar reservations of marks and all goodwill associated therewith) to register any of the foregoing (collectively, “Marks”); (ii) Patents; (iii) trade secrets, know-how, inventions, methods, processes and processing instructions, technical data, specifications, research and development information, technology including rights and licenses, product roadmaps, customer lists and any other information, in each case to the extent any of the foregoing derives economic value (actual or potential) from not being generally known to other persons who can obtain economic value from its disclosure or use, excluding any Patents that may cover or protect any of the foregoing (collectively, “Trade Secrets”); and (iv) moral rights, publicity rights, data base rights and any other proprietary or intellectual property rights of any kind or nature that do not comprise or are not protected by Marks, Patents or Trade Secrets.

“DM Portfolio Patents” has the meaning set forth in Section 3.11(a).

“DM Portfolio Product” means, collectively:  (i) “Products” as defined as of the date of this Royalty Purchase and Sale Agreement in the BII Agreement; (ii) “Licensed Product” as defined as of the date of this Royalty Purchase and Sale Agreement in the Janssen Agreement; (iii) “Products” as defined as of the date of this Royalty Purchase and Sale Agreement in the Merck Agreement; (iv) “Products” as defined as of the date of this Royalty Purchase and Sale Agreement in the Santarus Agreement; (v) “Licensed Product” as defined as of the date of this Royalty Purchase and Sale Agreement in the LG Agreement; (vi) “500mg Product” and “1000mg Product” as defined as of the date of this Royalty Purchase and Sale Agreement in the Valeant Agreement; and (vii) in the case a New Arrangement entered into by a Selling Party in accordance with the terms hereof, the analogous term for “product,” “licensed product,” or comparable concept as defined in the New License Agreement.

[***]

“Excluded Liabilities and Obligations” has the meaning set forth in Section 2.3.

Confidential Information indicated by [***] has been omitted from this filing and filed separately with the Securities Exchange Commission.

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“Executive Officer” means the chief executive officer, chief financial officer and the general counsel of Depomed.

“FDA” means the U.S. Food and Drug Administration and any successor agency thereto.

“GAAP” means generally accepted accounting principles in effect in the United States from time to time.

“Glumetza” means the extended-release formulation(s) of Metformin as the single active pharmaceutical ingredient covered or claimed by the DM Portfolio Patents, including without limitation the formulation that is the subject of Depomed’s NDA No. 21-748 and/or IND No. 60,747 and/or sNDAs thereof, and known under the brand name Glumetza®, as well as any currently marketed products of Santarus pursuant to the Santarus Agreement, as well as any 1000 mg Metformin extended-release monotherapy tablet formulation based on one or more of the DM Portfolio Patents for which regulatory approval may be obtained by or on behalf of Depomed during the term of this Royalty Purchase and Sale Agreement.

“Governmental Authority” means the government of the United States, any other nation or any political subdivision thereof, whether state or local, and any agency, authority (including supranational authority), commission, instrumentality, regulatory body, court, central bank or other Person exercising executive, legislative, judicial, taxing, regulatory or administrative powers or functions of or pertaining to government, including each Patent Office, the FDA and any other government authority in any jurisdiction.

[***]

“Knowledge” means, with respect to [***]

“License Agreements” means, collectively, the following license agreements:

(i) that certain License and Services Agreement, effective as of March 4, 2011, by and between Boehringer Ingelheim International GMBH and Depomed (as amended, extended, supplemented or otherwise modified from time to time, the “BII Agreement”);

(ii) that certain License Agreement, effective as of August 5, 2010, by and between Janssen Pharmaceutica N.V. and Depomed (as amended, extended, supplemented or otherwise modified from time to time, the “Janssen Agreement”);

(iii) that certain Non-Exclusive License, Covenant Not to Sue and Right of Reference Agreement, effective as of July 21, 2009, by and between Merck & Co., Inc. and Depomed (as amended, extended, supplemented or otherwise modified from time to time, the “Merck Agreement”);

(iv) that certain Commercialization Agreement, effective as of August 22, 2011, by and between Santarus, Inc. and Depomed (as amended, extended,

Confidential Information indicated by [***] has been omitted from this filing and filed separately with the Securities Exchange Commission.

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supplemented or otherwise modified from time to time, the “Santarus Agreement”);

(v) that certain Amended License Agreement, effective as of January 9, 2007, between LG Life Sciences Ltd. and Depomed (as amended, extended, supplemented or otherwise modified from time to time, the “LG Agreement”);

(vi) that certain Amended and Restated License Agreement (Extended Release Metformin Formulations—Canada), dated as of December 13, 2005, between Biovail Laboratories International SRL and Depomed (as amended, extended, supplemented or otherwise modified from time to time, the “Valeant Agreement”); and

(vii) any New License Agreement.

“Licensee” means:

(i) with respect to the BII Agreement, Boehringer Ingelheim International GMBH and any successor or assignee thereunder;

(ii) with respect to the Janssen Agreement, Janssen Pharmaceutica N.V. and any successor or assignee thereunder;

(iii) with respect to the Merck Agreement, Merck & Co., Inc. and any successor or assignee thereunder;

(iv) with respect to the Santarus Agreement, Santarus, Inc. and any successor or assignee thereunder;

(v) with respect to the LG Agreement, LG Life Sciences Ltd. and any successor or assignee thereunder;

(vi) with respect to the Valeant Agreement, Biovail Laboratories International SRL and any successor or assignee thereunder; and

(vii) with respect to any New License Agreement entered into by a Selling Party in accordance with the terms hereof, the licensee party to the New License Agreement.

“Lien” means any security interest, mortgage, pledge, hypothecation, assignment, deposit arrangement, encumbrance, lien (statutory or otherwise), charge against or interest in property or other priority or preferential arrangement in the nature of a security interest, in each case to secure payment of a debt or other liability or performance of an obligation, including any conditional sale or any sale with recourse.

“Loss” means any loss, assessment, award, cause of action, claim, charge, cost, expense (including reasonable expenses of investigation and reasonable attorneys’ fees and expenses), fine, judgment, liability, obligation, penalty or Set-off.

Confidential Information indicated by [***] has been omitted from this filing and filed separately with the Securities Exchange Commission.

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“Lupin Agreement” means the Settlement and License Agreement dated as of February 22, 2012, between Depomed, Santarus, Inc. and Lupin Limited.

“Metformin” means metformin, and any salts, esters, free acid forms, free base forms, racemates, enantiomers, solvates (including hydrates), polymorphic forms, complexes, crystal forms, and congeners thereof.

“New Arrangement” has the meaning set forth in Section 5.6.

“New License Agreement” has the meaning set forth in Section 5.6.

“Patent” means any patents, inventor certificates, patent applications (including provisionals, continuations, divisionals, and continuations in part), utility models and rights equivalent thereto, patents issuing from any applications, reissues, reexaminations, extensions (including patent term extension, supplemental protection certificates, and any extension of term by any appropriate Governmental Authority), and post-grant proceedings and all foreign equivalents thereof.

“Patent Office” means the applicable patent office, including the United States Patent and Trademark Office and any comparable foreign patent office or any other comparable Governmental Authority within or outside the U.S., for any DM Portfolio Intellectual Property Rights that are Patents.

“Permitted Liens” means any: (a) Liens in favor of Purchaser or its Affiliates; (b) Liens created, permitted or required by the Transaction Documents in favor of the Purchaser and its Affiliates; and (c) Liens incurred by the Purchaser.

“Person” means any natural person, firm, corporation, limited liability company, partnership, joint venture, association, joint-stock company, trust, unincorporated organization, Governmental Authority or any other legal entity, including public bodies, whether acting in an individual, fiduciary or other capacity.

“Purchase Price” has the meaning set forth in Section 2.2.

“Purchaser” has the meaning set forth in the preamble.

“Purchaser Account” means the account of the Purchaser for which the Purchaser has instructed the Selling Parties in writing to direct all payments owed the Purchaser under the Transaction Documents, which account the Purchaser may change from time-to-time by furnishing written notice to the Selling Parties.

“Purchaser Indemnified Party” has the meaning set forth in Section 7.1.

[***]

“Regulatory Agency” means a Governmental Authority with responsibility for the approval of the marketing and sale of pharmaceuticals or other regulation of pharmaceuticals in any jurisdiction.

Confidential Information indicated by [***] has been omitted from this filing and filed separately with the Securities Exchange Commission.

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“Regulatory Approvals” means, collectively, all regulatory approvals, registrations, certificates, authorizations, permits and supplements thereto, as well as associated materials (including the product dossier) pursuant to which any DM Portfolio Products may, subject to the applicable License Agreement, be marketed, sold and distributed in a jurisdiction, issued by the appropriate Regulatory Agency.

“Reimbursable Expenses” means, net of any recoveries or reimbursements paid to a Selling Party from a third party (other than the Purchaser), any documented, out-of-pocket costs and expenses of any Selling Party reasonably incurred in connection with (a) the maintenance and prosecution of any DM Intellectual Property Rights and any infringement relating thereto (but only to the extent such maintenance or prosecution is required under the terms of a License Agreement or is required pursuant to the terms hereof), (b) the enforcement of the License Agreement (except as provided in Section 5.5(d)), (c) the entering into any New License Agreements if incurred at the direction of Purchaser, and (d) any performance of any obligations, the cost of which are expressly borne by the Purchaser hereunder (including pursuant to Section 5.5(e)), in each case to the extent (i) such costs and expenses relate directly to the DM Portfolio Products (in other words, if any such costs and expenses relate only partially to the DM Portfolio Products, then in such proportion as such costs and expenses relate to the DM Portfolio Products) and (ii) not reimbursed by a Licensee in accordance with the applicable Licensee Agreement or otherwise reimbursed by the Purchaser hereunder.

“Reversionary Interest” has the meaning set forth in Section 5.8.

“Reversionary Interest Commencement Date” has the meaning set forth in Section 5.8.

“Reversionary Interest Threshold” means $481,000,000.

“Royalty Payables” means any payment obligations of a Selling Party under Article 4 of the Biovail Manufacturing Transfer Agreement and the related Biovail Supply Agreement that are based on either Net Sales or Depomed Revenues (each as defined in the Biovail Manufacturing Transfer Agreement) and result from the sale of DM Portfolio Products to which the Royalty Payments relate.

“Royalty Payment Instruction” means the irrevocable direction to each of the Licensees under the License Agreements substantially in the form set forth in Exhibit B to the Disclosure Letter.

“Royalty Payments” means:

(a)all royalties, milestone payments and other amounts paid, owed, accrued or otherwise required to be paid to a Selling Party, in each case accruing from and after the Royalty Payments Commencement Date, by the Licensees (and any Sublicensees thereof), pursuant to, and subject to the terms and conditions of the License Agreements, including any payments or consideration paid or payable to the Selling Parties in connection with any amendments, restatements, supplements, modifications, waiver or replacement of the License Agreements;

(b)all accounts (as defined under the UCC) evidencing the rights to the payments and amounts described in clause (a) above; and

Confidential Information indicated by [***] has been omitted from this filing and filed separately with the Securities Exchange Commission.

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(c)all proceeds (as defined under the UCC) of any of the foregoing;

provided that (A) Royalty Payments shall exclude (without duplication of any amounts deducted or reimbursed by the Purchaser as Reimbursable Expenses):

(i)[***]

(ii)[***]; and

(B) Royalty Payments shall be calculated net of Reimbursable Expenses and Royalty Payables.

“Royalty Payments Commencement Date” means October 1, 2013.

“Royalty Purchase and Sale Agreement” has the meaning set forth in the preamble.

“Royalty Reports” means reports provided by Licensees (including any certifications in respect thereof) to a Selling Party pursuant to and in accordance with the License Agreements setting forth calculations for royalty payments required under such License Agreement and such other information as specified in the applicable License Agreement with respect to the applicable DM Portfolio Product for the relevant period.

“SEC” means the U.S. Securities and Exchange Commission.

“Seller” has the meaning set forth in the preamble.

“Seller Account” means such account of the Seller as the Seller shall notify the Purchaser in writing from time to time.

“Seller Indemnified Party” has the meaning set forth in Section 7.2.

“Seller Organizational Documents” means the certificate of formation of the Seller dated as of October 16, 2013 and the limited liability company agreement of the Seller dated as of the date hereof.

“Selling Party” has the meaning set forth in the preamble.

“Set-off” means any [***]

“Subject Assets” means all of Depomed’s or the Seller’s, as applicable, right, title and interest in, to and under each of the License Agreements to receive the Royalty Payments, subject to the Reversionary Interest.

“Sublicensee” means any licensee of a Licensee under any of the License Agreements.

“Subsidiary” of a Person means a corporation, partnership, joint venture, limited liability company or other business entity of which a majority of the shares of securities or other interests having ordinary voting power for the election of directors or other governing body (other than securities or interests having such power only by reason of the happening of a contingency) are

Confidential Information indicated by [***] has been omitted from this filing and filed separately with the Securities Exchange Commission.

10

at the time beneficially owned, or the management of which is otherwise controlled, directly, or indirectly through one or more intermediaries, or both, by such Person.

“Transaction Documents” means this Royalty Purchase and Sale Agreement, the Bill of Sale, the Royalty Payment Instructions, the Control Agreement, the Disclosure Letter and the Contribution Agreement.

“UCC” means the Uniform Commercial Code as in effect from time to time in the State of Delaware; provided, that, if, with respect to any financing statement or by reason of any provisions of Applicable Law, the perfection or the effect of perfection or non-perfection of the back-up security interest or any portion thereof granted pursuant to Section 2.1(e) is governed by the Uniform Commercial Code as in effect in a jurisdiction of the United States other than the State of Delaware, then “UCC” means the Uniform Commercial Code as in effect from time to time in such other jurisdiction for purposes of the provisions of this Royalty Purchase and Sale Agreement and any financing statement relating to such perfection or effect of perfection or non-perfection.

“U.S.” or “United States” means the United States of America, its 50 states, each territory thereof and the District of Columbia.

Section 1.2Rules of Construction.

Unless the context otherwise requires, in this Royalty Purchase and Sale Agreement:

(a)A term has the meaning assigned to it and an accounting term not otherwise defined has the meaning assigned to it in accordance with GAAP.

(b)Unless otherwise defined, all terms that are defined in the UCC shall have the meanings stated in the UCC.

(c)Words of the masculine, feminine or neuter gender shall mean and include the correlative words of other genders.

(d)The definitions of terms shall apply equally to the singular and plural forms of the terms defined.

(e)The terms “include”, “including” and similar terms shall be construed as if followed by the phrase “without limitation”.

(f)Unless otherwise specified, references to an agreement or other document include references to such agreement or document as from time to time amended, restated, reformed, supplemented or otherwise modified in accordance with the terms thereof (subject to any restrictions on such amendments, restatements, reformations, supplements or modifications set forth herein or in any of the other Transaction Documents) and include any annexes, exhibits and schedules attached thereto.

Confidential Information indicated by [***] has been omitted from this filing and filed separately with the Securities Exchange Commission.

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(g)References to any Applicable Law shall include such Applicable Law as from time to time in effect, including any amendment, modification, codification, replacement or reenactment thereof or any substitution therefor.

(h)References to any Person shall be construed to include such Person’s successors and permitted assigns (subject to any restrictions on assignment, transfer or delegation set forth herein or in any of the other Transaction Documents), and any reference to a Person in a particular capacity excludes such Person in other capacities.

(i)The word “will” shall be construed to have the same meaning and effect as the word “shall”.

(j)The words “hereof”, “herein”, “hereunder” and similar terms when used in this Royalty Purchase and Sale Agreement shall refer to this Royalty Purchase and Sale Agreement as a whole and not to any particular provision hereof, and Article, Section and Exhibit references herein are references to Articles and Sections of, and Exhibits to, this Royalty Purchase and Sale Agreement unless otherwise specified.

(k)In the computation of a period of time from a specified date to a later specified date, the word “from” means “from and including” and each of the words “to” and “until” means “to but excluding”.

(l)Where any payment is to be made, any funds are to be applied or any calculation is to be made under this Royalty Purchase and Sale Agreement on a day that is not a Business Day, unless this Royalty Purchase and Sale Agreement otherwise provides, such payment shall be made, such funds shall be applied and such calculation shall be made on the succeeding Business Day, and payments shall be adjusted accordingly.

(m)Any reference herein to a term that is defined by reference to its meaning in any of the License Agreements shall refer to such term’s meaning in such License Agreement (including any other defined terms in such License Agreement that are included in such term’s meaning thereunder) as in existence on the date hereof.

ARTICLE II
CONTRIBUTION, PURCHASE AND SALE OF THE SUBJECT ASSETS

Section 2.1Contribution, Purchase and Sale.

(a)On or prior to the Closing Date, Depomed shall have contributed, assigned, transferred, conveyed and granted to the Seller, and the Seller shall have, pursuant to the terms of the Contribution Agreement, acquired and accepted from Depomed, all of Depomed’s rights, title and interest in and to the Contributed Assets, free and clear of any and all Liens, other than Permitted Liens (the “Contribution”).

Confidential Information indicated by [***] has been omitted from this filing and filed separately with the Securities Exchange Commission.

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(b)Subject to the terms and conditions of this Royalty Purchase and Sale Agreement, on the Closing Date, the Seller hereby sells, assigns, transfers, conveys and grants to the Purchaser, and the Purchaser hereby purchases, acquires and accepts from the Seller, all of the Seller’s rights, title and interest in and to the Subject Assets, free and clear of any and all Liens, other than Permitted Liens.

(c)The Selling Parties and the Purchaser intend and agree that the sale, assignment, transfer, conveyance and granting of the Subject Assets under this Royalty Purchase and Sale Agreement shall be, and are, a true, complete, absolute and irrevocable assignment and sale by the Seller to the Purchaser of the Subject Assets that is absolute and irrevocable and that such assignment and sale shall provide the Purchaser with the full benefits of ownership of the Subject Assets. Neither the Selling Parties, on the one hand, nor the Purchaser, on the other, intends the transactions contemplated hereby to be, or for any purpose characterized as, a loan from the Purchaser to the Seller or a pledge or assignment or a security agreement. Each Selling Party waives any right to contest or otherwise assert that this Royalty Purchase and Sale Agreement does not constitute a true, complete, absolute and irrevocable sale and assignment by the Seller to the Purchaser of the Subject Assets under Applicable Law, which waiver shall be enforceable against the Selling Parties in any Bankruptcy Event in respect of a Selling Party. The sale, contribution, assignment, transfer, conveyance and granting of the Subject Assets shall be reflected on the Selling Parties’ financial statements and other records as a sale of assets to the Purchaser (except to the extent GAAP or the rules of the SEC require otherwise with respect to Depomed’s consolidated financial statements).

(d)Each of the Selling Parties hereby authorizes the Purchaser or its designee to execute, record and file, and consents to the Purchaser or its designee executing, recording and filing, at the Purchaser’s sole cost and expense, financing statements in the appropriate filing offices under the UCC (and continuation statements with respect to such financing statements when applicable), and amendments thereto or assignments thereof, in such manner and in such jurisdictions as are necessary or appropriate (i) to evidence or perfect (x) the sale, contribution, assignment, transfer, conveyance and grant by Depomed to the Seller, and the acquisition and acceptance by the Seller from Depomed, of the Contributed Assets, and (y) the sale, assignment, transfer and conveyance by the Seller to the Purchaser, and the purchase, acquisition and acceptance by the Purchaser from the Seller, of the Subject Assets and (ii) to perfect the security interest in the Contributed Assets granted by the Selling Parties to the Purchaser pursuant to Section 2.1(e).

(e)Notwithstanding that the Selling Parties and the Purchaser expressly intend for the sale, contribution, assignment, transfer, conveyance and granting of the Subject Assets to be a true, complete, absolute and irrevocable sale and assignment, in the event that any transfer contemplated by this Royalty Purchase and Sale Agreement is held not to be a sale, each of the Selling Parties hereby assigns, conveys, grants and pledges to the Purchaser, as security for its obligations created hereunder, a security interest in and to all of such Selling Party’s right, title and interest in, to and under the Contributed Assets, whether now owned or hereafter

Confidential Information indicated by [***] has been omitted from this filing and filed separately with the Securities Exchange Commission.

13

acquired, and any proceeds (as such term is defined in the UCC) thereof and, solely in such event, this Royalty Purchase and Sale Agreement shall constitute a security agreement.

Section 2.2Purchase Price. In full consideration for the sale assignment, transfer, conveyance and granting of the Subject Assets to the Purchaser, and subject to the terms and conditions set forth herein, the Purchaser shall pay (or cause to be paid) to the Seller, or the Seller’s designee, on the Closing Date, the sum of $240,500,000, in immediately available funds by wire transfer to the Seller Account (the “Purchase Price”).

Section 2.3No Assumed Obligations. Notwithstanding any provision in this Royalty Purchase and Sale Agreement or any other writing to the contrary, the Purchaser is purchasing, acquiring and accepting only the Subject Assets and is not assuming any liability or obligation of the Seller or any of the Seller’s Affiliates of whatever nature, whether presently in existence or arising or asserted hereafter (including any liability or obligation of a Selling Party under any of the License Agreements). All such liabilities and obligations shall be retained by and remain liabilities and obligations of the Selling Parties or their Affiliates, as the case may be (the “Excluded Liabilities and Obligations”).

Section 2.4Excluded Assets. The Purchaser does not, by purchase, acquisition or acceptance of the Subject Assets, purchase, acquire or accept any of the DM Portfolio Intellectual Property Rights.  Notwithstanding anything to the contrary herein, Depomed may continue to license and sell the DM Portfolio Products (or products similar thereto) and otherwise license the DM Portfolio Intellectual Property without restriction (except as expressly set forth in Section 5.5(g) hereof or elsewhere herein) and no such sales or licenses shall give rise to any obligation to make payments in respect thereof to Purchaser, except to the extent of the Subject Assets.

Section 2.6Payments.

(a)Payments in Respect of Royalty Payments.  In connection with the purchase of the Subject Assets, the Purchaser shall be entitled to receive the Royalty Payments, subject to the Reversionary Interest.

(b)Payment Procedures.  Subject to the procedures set forth in Section 5.4, any payments to be made by a party to this Royalty Purchase and Sale Agreement or under any other Transaction Document shall be made by wire transfer of immediately available funds to such party.

ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE SELLER

Except as set forth in Exhibit C to the Disclosure Letter, each of the Selling Parties, on a joint and several basis, hereby represents and warrants to the Purchaser as of the date hereof and as of the Closing Date as follows:

Confidential Information indicated by [***] has been omitted from this filing and filed separately with the Securities Exchange Commission.

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Section 3.1Organization; Operations of Seller.

(a)Depomed is a corporation duly organized, validly existing and in good standing under the laws of the State of California and has all powers and authority, and all licenses, permits, franchises, authorizations, consents and approvals, required to own its property and conduct its business as now conducted (except where the failure to have such licenses, permits, franchises, authorizations, consents or approvals would not reasonably be expected to result in an Adverse Change) and to execute, deliver, and perform its obligations under the Transaction Documents and to exercise its rights and to perform its obligations under each of the License Agreements. Depomed is duly qualified to transact business and is in good standing in each jurisdiction in which such qualification or good standing is required by Applicable Law (except where the failure to be so qualified or in good standing could not reasonably be expected to result in an Adverse Change).

(b)The Seller is a limited liability company duly organized, validly existing and in good standing under the laws of the State of Delaware and has all powers and authority, and all licenses, permits, franchises, authorizations, consents and approvals, required to own its property and conduct its business as now conducted (except where the failure to have such licenses, permits, franchises, authorizations, consents or approvals would not reasonably be expected to result in an Adverse Change) and to execute, deliver, and perform its obligations under the Transaction Documents and to exercise its rights and to perform its obligations under each of the License Agreements. The Seller is duly qualified to transact business and is in good standing in every jurisdiction in which such qualification or good standing is required by Applicable Law (except where the failure to be so qualified or in good standing could not reasonably be expected to result in an Adverse Change).

(c)The Seller was formed on October 16, 2013 for the sole purpose of acquiring the Contributed Assets as contemplated by the Contribution, selling the Subject Assets to the Purchaser as contemplated hereby and otherwise performing its obligations under the Transaction Documents.  The Seller has not been, is not, and will not be engaged, in any business unrelated to the effecting the transactions contemplated by the Transaction Documents.  The sole assets of the Seller that it has owned or will own consist exclusively of the Contributed Assets and any rights arising under the Transaction Documents.  Since the date of the Seller’s formation, the Seller has not incurred any obligations or liabilities or engaged in any business activities of any type or kind whatsoever or entered into any agreements or arrangements with any Person, except as required to execute and deliver the Transaction Documents and to consummate the transactions contemplated thereby.  The Seller has no obligations or liabilities, except those incurred in connection with, and pursuant to the Transaction Documents and the transactions contemplated thereby.

Section 3.2No Conflicts.

(a)None of the execution and delivery by a Selling Party of any of the Transaction Documents, the performance by a Selling Party of the obligations contemplated hereby or thereby or the consummation of the transactions contemplated hereby or thereby will: (i) contravene, conflict with, result in a breach, violation,

Confidential Information indicated by [***] has been omitted from this filing and filed separately with the Securities Exchange Commission.

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cancellation or termination of, constitute a default (with or without notice or lapse of time, or both) under, require prepayment under, give any Person the right to exercise any remedy or obtain any additional rights under, or accelerate the maturity or performance of or payment under, in any respect, (A) any Applicable Law or any judgment, order, writ, decree, permit or license of any Governmental Authority, to which a Selling Party or any of its Subsidiaries or any of their respective assets or properties may be subject or bound, (B) any legally effective term or provision of any contract, agreement, indenture, lease, license, deed, commitment, obligation or instrument to which a Selling Party or any of its Subsidiaries is a party or by which a Selling Party or any of its Subsidiaries or any of their respective assets or properties is bound or committed (including the License Agreements) or (C) any term or provision of any of the organizational documents of a Selling Party or any of its Subsidiaries, except in the case of clauses (A) and (B) as would not, individually or in the aggregate, reasonably be expected to result in an Adverse Change; (ii) give rise to any additional right of termination, cancellation or acceleration of any right or obligation of a Licensee or any of its Sublicensees under a License Agreement, or (iii) except as provided in any of the Transaction Documents, result in or require the creation or imposition of any Lien on the Contributed Assets or the Subject Assets.

(b)Except for Permitted Liens and liens for taxes not yet due and payable or that are not delinquent or are being contested in good faith, neither Selling Party has granted, nor does there exist, any Lien on the Transaction Documents, the License Agreements or the Contributed Assets nor does there exist any Lien on the DM Portfolio Intellectual Property Rights.

Section 3.3Authorization.

(a)Each Selling Party has the legal right under the terms of each of the License Agreements after giving effect to, and under, Applicable Law to enter into this Royalty Purchase and Sale Agreement and each of the other Transaction Documents, including, without limitation, the right to sell, contribute, assign, transfer, convey and grant the Contributed Assets to the Seller and to sell, assign, transfer, convey and grant the Subject Assets to the Purchaser, as the case may be, in each case as contemplated hereby and the other Transaction Documents.

(b)Each Selling Party has all corporate or limited liability company, as applicable, power and authority to execute and deliver, and perform its obligations under, each of the Transaction Documents and to consummate the transactions contemplated hereby and thereby. The execution and delivery of each of the Transaction Documents and the performance by each Selling Party of its obligations hereunder and thereunder have been duly authorized by such Selling Party. Each of the Transaction Documents has been duly executed and delivered by each Selling Party. Each of the Transaction Documents constitutes the legal, valid and binding obligation of each Selling Party, enforceable against such Selling Party in accordance with its respective terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium or similar Applicable Laws affecting creditors’ rights generally and general equitable principles.

Confidential Information indicated by [***] has been omitted from this filing and filed separately with the Securities Exchange Commission.

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Section 3.4Ownership.

(a)The Seller is the exclusive owner of the entire right, title (legal and equitable) and interest in, to and under the Contributed Assets and has good and valid title thereto, free and clear of all Liens (other than Permitted Liens), and prior to the Contribution, Depomed was the exclusive owner of the entire right, title (legal and equitable) and interest in, to and under the Contributed Assets and had good and valid title thereto, free and clear of all Liens (other than Permitted Liens).  The Subject Assets sold, assigned, transferred, conveyed and granted to the Purchaser on the Closing Date have not been pledged, sold, contributed, assigned, transferred, conveyed or granted by either Selling Party to any other Person (other than the Contribution). At the time of the Contribution, Depomed had full right to contribute, assign, transfer, convey and grant the Contributed Assets to the Seller, and following the Contribution, the Seller has full right to sell, contribute, assign, transfer, convey and grant the Subject Assets to the Purchaser. Upon the sale, assignment, transfer, conveyance and granting by the Seller of the Subject Assets to the Purchaser, the Purchaser shall acquire good, valid and marketable title to the Subject Assets free and clear of all Liens, other than Permitted Liens, and shall be the exclusive owner of the Subject Assets.

(b)Subject to the Reversionary Interest as contemplated hereby, no Person other than the Purchaser has any right to receive the Royalty Payments payable under each of the License Agreements (other than to the extent the Purchaser assigns its right to receive the Royalty Payments payable under any of the License Agreements to any other Person).

Section 3.5Governmental and Third Party Authorizations. The execution and delivery by the Selling Parties of the Transaction Documents, the performance by each of the Selling Parties of its respective obligations hereunder and thereunder and the consummation of any of the transactions contemplated hereunder and thereunder (including the sale, contribution, assignment, transfer, conveyance and granting of the Contributed Assets to the Seller and sale, assignment, transfer, conveyance and granting of the Subject Assets to the Purchaser as contemplated hereby) do not require any consent, approval, license, order, authorization or declaration from, notice to, action or registration by or filing with any Governmental Authority or any other Person, except for the filing of UCC financing statements, the notice to each of the Licensees contained in the Royalty Payment Instructions and those previously obtained.

Section 3.6No Litigation. Except as disclosed under Part II, Item 1 of Depomed’s quarterly report on Form 10-Q filed with the SEC on August 8, 2013, there is no (a) action, suit, arbitration proceeding, claim, demand, citation, summons, subpoena, investigation or other proceeding (whether civil, criminal, administrative, regulatory, investigative or informal) pending or, to the Knowledge of the Selling Parties, threatened, against, relating to or affecting any DM Portfolio Product or the Subject Assets (including under the License Agreements), at law or in equity, or (b) inquiry or investigation (whether civil, criminal, administrative, regulatory, investigative or informal) by or before a Governmental Authority pending or, to the Knowledge of the Selling Parties, threatened in writing, against a Selling Party or any of its Subsidiaries against, relating to or affecting any DM Portfolio Product or the Subject Assets

Confidential Information indicated by [***] has been omitted from this filing and filed separately with the Securities Exchange Commission.

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(including under the License Agreements) that, in each case, (i) if adversely determined, could reasonably be expected to result in an Adverse Change, or (ii) challenges or seeks to prevent, enjoin, alter, delay, make illegal or otherwise interfere with the consummation of any of the transactions contemplated by any of the Transaction Documents.  To the Knowledge of the Selling Parties, no event has occurred or circumstance exists that may give rise to or serve as a basis for the commencement of any such action, suit, arbitration, claim, investigation, proceeding or inquiry.

Section 3.7Solvency. Upon consummation of the transactions contemplated by the Transaction Documents and the application of the proceeds therefrom, (a) the present fair saleable value of each of the Selling Parties’ property and assets will be greater than the sum of its debts and liabilities, including contingent liabilities, (b) the present fair saleable value of each of the Selling Parties’ property and assets will be greater than the amount that would be required to pay such Selling Party’s probable liabilities on its existing debts and other liabilities, including contingent liabilities, as they become absolute and matured, (c) neither of the Selling Parties will have unreasonably small capital with which to conduct its business in which it is engaged as such business is now conducted and is proposed to be conducted,  and (e) neither of the Selling Parties has incurred, intends to incur, or believes (nor should it reasonably believe) that it will incur, debts and liabilities, including contingent liabilities, beyond its ability to pay such debts and liabilities as they become absolute and matured. No step has been taken or is intended by either of the Selling Parties or, so far as each Selling Party is aware, any other Person to make either Selling Party subject to a Bankruptcy Event.

Section 3.8Tax Matters. Each of the Selling Parties has filed (or caused to be filed) all material tax returns required by Applicable Law to have been filed by such Selling Party and has paid or remitted all taxes required to be paid by it where the failure to pay would result in a Lien on any of the Subject Assets, except any such taxes that are not yet due or delinquent or are being diligently contested in good faith by appropriate proceedings and for which adequate reserves in accordance with GAAP have been set aside on its books.

Section 3.9No Brokers’ Fees. Neither Selling Party has taken any action that would entitle any person or entity to any commission or broker’s fee in connection with the transactions contemplated by the Transaction Documents.

Section 3.10Compliance with Laws. None of the Selling Parties or any of their Subsidiaries (a) has violated or is in violation of or has been given notice of any violation of, or, to the Knowledge of the Selling Parties, is under investigation with respect to or has been threatened to be charged with any violation of, any Applicable Law or any judgment, order, writ, decree, injunction, stipulation, consent order, permit or license granted, issued or entered by any Governmental Authority or (b) is subject to any judgment, order, writ, decree, injunction, stipulation, consent order, permit or license granted, issued or entered by any Governmental Authority, in each case with respect to clause (a) and (b) above, that could reasonably be expected to result in an Adverse Change.

Confidential Information indicated by [***] has been omitted from this filing and filed separately with the Securities Exchange Commission.

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Section 3.11Intellectual Property Matters.

(a)Exhibit C to the Disclosure Letter sets forth an accurate and complete list of each DM Portfolio Intellectual Property Right that is a Patent (the “DM Portfolio Patents”), including for each such Patent: (i) the jurisdictions in which such Patent is pending, allowed, granted or issued, (ii) the patent number or pending patent application serial number, (iii) the scheduled expiration date of such issued Patent, including extensions granted and applied for, (iv) the scheduled expiration date of each Patent issuing from such pending patent applications once issued and (v) the owner of such Patent.

(b)To the Knowledge of the Selling Parties, each DM Portfolio Patent issued in the United States or the European Patent Office includes at least one valid and enforceable claim that covers one or more of the DM Portfolio Products.  To the Knowledge of the Selling Parties, each DM Portfolio Patent set forth on Section 3.11(b) of Exhibit C to the Disclosure Letter includes at least one valid and enforceable claim covering the DM Portfolio Product identified as being covered by such DM Portfolio Patent.  [***]

(c)There are no unpaid maintenance or renewal fees payable by the Seller to any third party that currently are overdue for any of the DM Portfolio Patents. No DM Portfolio Patents have lapsed or been abandoned, cancelled or expired. Each individual associated with the filing and prosecution of the DM Portfolio Patents, including the named inventors of the DM Portfolio Patents, has complied in all material respects with all applicable duties of candor and good faith in dealing with any Patent Office, including any duty to disclose to any Patent Office all information known by such inventors to be material to the patentability of each of the DM Portfolio Patents (including any relevant prior art), in each case, in those jurisdictions where such duties exist.

(d)Subsequent to the issuance of the DM Portfolio Patents, neither Selling Party has filed any disclaimer or made or permitted any other voluntary reduction in the scope of the DM Portfolio Patents. Except as set forth on Exhibit C to the Disclosure Letter, neither Selling Party has been nor is currently involved in any interference, re-examination, opposition, derivation or other post-grant proceedings involving any of the DM Portfolio Patents and no allowable or allowed subject matter of the DM Portfolio Patents is subject to any competing conception claims of allowable or allowed subject matter of any Patents of any third party and have not been the subject of any interference, re-examination, opposition, derivation or other post-grant proceedings.

(e)Except as disclosed under Part II, Item 1 of Depomed’s quarterly report on Form 10-Q filed with the SEC on August 8, 2013 or set forth on Exhibit C to the Disclosure Letter, there is no opposition, interference, reexamination, derivation or other post-grant proceeding, injunction, claim, suit, action, citation, summon, subpoena, hearing, inquiry, investigation (by the International Trade Commission or otherwise), complaint, arbitration, mediation, demand, decree or other dispute, disagreement, proceeding or claim (collectively, “Disputes”) pending, or, to the Knowledge of the Selling Parties, threatened, involving a Selling Party, or, to the

Confidential Information indicated by [***] has been omitted from this filing and filed separately with the Securities Exchange Commission.

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Knowledge of the Selling Parties, pending or threatened against any other Person (including each of the Licensees) challenging the legality, validity, enforceability or ownership of or otherwise relating to any of the DM Portfolio Patents or that could give rise to any Set-off against the Royalty Payments. There are no Disputes pending, or to the Knowledge of the Selling Parties, threatened in writing, involving a Selling Party and any DM Portfolio Product, and, to the Knowledge of the Selling Parties, pending or threatened in writing against any other Person (including each of the Licensees) and relating to any DM Portfolio Product. To the Knowledge of the Selling Parties, none of the DM Portfolio Patents nor DM Portfolio Products is subject to any outstanding injunction, judgment, order, decree, ruling, settlement or other disposition of a Dispute.

(f)There is no pending or, to the Knowledge of the Selling Parties, threatened in writing, and no event has occurred or circumstance exists that (with or without notice or lapse of time, or both) could reasonably be expected to give rise to or serve as a basis for any, action, suit or proceeding, or any investigation or claim by any Person to which a Selling Party or, to the Knowledge of the Selling Parties, any of the Licensees or its Sublicensee is or could be a party, that claims that the manufacture, use, marketing, sale, offer for sale, importation or distribution of any Designated DM Portfolio Product by any of the Licensees, their Affiliate or their Sublicensees pursuant to the License Agreements does or could infringe on any patent or other intellectual property rights of any other Person or constitute misappropriation of any other Person’s trade secrets or other intellectual property rights. Neither Selling Party has received any written notice of any action, suit, proceeding or investigation or claim by any Person, and, to the Knowledge of the Selling Parties, neither the Licensees nor any Sublicensees have received any written notice of any action, suit, proceeding or investigation or claim by any Person that claims that the manufacture, use, marketing, sale, offer for sale, importation or distribution of any DM Portfolio Product by any of the Licensees, their Affiliate or their Sublicensees pursuant to the License Agreements does or could infringe on any patent or other intellectual property rights of any other Person or constitute misappropriation of any other Person’s trade secrets or other intellectual property rights. To the Knowledge of the Selling Parties, there are no issued Patents owned by any third party that limit or would be infringed by the manufacture, use, marketing, sale, offer for sale, importation or distribution of any Designated DM Portfolio Product in any country in which any Designated DM Portfolio Product is currently manufactured, used, marketed, sold, offered for sale or imported pursuant to the License Agreements and there are no pending patent applications owned by any third party containing claims that, if a Patent issues thereon, would limit or be infringed by the manufacture, use, marketing, sale, offer for sale, importation or distribution of any Designated DM Portfolio Product by a Selling Party, the Licensees or any of their respective licensees in any country in which any Designated DM Portfolio Product is currently manufactured, used, marketed, sold, offered for sale or imported pursuant to the License Agreements.  To the Knowledge of the Selling Parties, there are no issued Patents owned by any third party that limit or would be infringed [***] and there are no pending

Confidential Information indicated by [***] has been omitted from this filing and filed separately with the Securities Exchange Commission.

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patent applications owned by any third party containing claims that, if a Patent issues thereon, would limit or be infringed [***].

(g)Except as disclosed in Depomed’s reports and other information filed with, or furnished to, the SEC prior to the Closing Date, to the Knowledge of the Selling Parties, there is no third party infringing any DM Portfolio Patents to the extent relating to the DM Portfolio Products. Neither Selling Party has received any notice under any of the License Agreements of infringement of any of the DM Portfolio Patent.

(h)Each of the Selling Parties and, to the Knowledge of the Selling Parties, the Licensees has taken commercially reasonable precautions to protect the secrecy, confidentiality and/or value of any DM Portfolio Intellectual Property Rights that are know-how or other trade secrets of the Selling Parties licensed under the License Agreements, except where the failure to do so could not reasonably be expected to result in an Adverse Change.

(i)Except for the DM Portfolio Intellectual Property Rights, neither of Selling Parties nor any of Affiliates of either Selling Party controls any Patents that, absent a license, would be infringed by the manufacture, use, sale, offer for sale or importation of any DM Portfolio Product.

(j)Neither Selling Party has received nor is otherwise in possession of any written legal opinion with respect to any third party intellectual property rights relating to any DM Portfolio Patents or DM Portfolio Products, including any freedom-to-operate, product clearance, patentability or right-to-use opinion.

(k)[***]

(l)[***]

(m)The date of Regulatory Approval referred to in Section 24.2 of the Supply Agreement dated as of December 13, 2005, between Biovail Laboratories International SRL and Depomed is December 27, 2007.

(n)No claims of any DM Portfolio Patent are being asserted by Depomed or any other Person in any action, suit or proceeding of any kind other than as disclosed on Exhibit C to the Disclosure Letter.

Section 3.12License Agreements.

(a)Other than the Transaction Documents and the License Agreements, there is no contract, agreement or other arrangement (whether written or oral) to which a Selling Party or any of its Subsidiaries is a party or by which any of their respective assets or properties is bound or committed (i) that creates a Lien on, affects or otherwise relates to the Subject Assets or each of the License Agreements as it relates to the Subject Assets, or (ii) for which breach, nonperformance, termination,

Confidential Information indicated by [***] has been omitted from this filing and filed separately with the Securities Exchange Commission.

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cancellation or failure to renew could reasonably be expected to result in an Adverse Change.

(b)Each of the License Agreements is in full force and effect and is the legal, valid and binding obligation of Depomed and, to the Knowledge of the Selling Parties, the applicable Licensee, enforceable against Depomed and, to the Knowledge of the Selling Parties, the applicable Licensee in accordance with its terms, subject, as to enforcement of remedies, to bankruptcy, insolvency, reorganization, moratorium or similar Applicable Laws affecting creditors’ rights generally and general equitable principles. The execution and delivery of, and performance of obligations under, each of the License Agreements were and are within the powers of the Selling Parties [***]. Each of the License Agreements was duly authorized by all necessary action on the part of, and validly executed and delivered by, Depomed and, to the Knowledge of the Selling Parties, the applicable Licensee. [***] Following the execution and delivery of the Transaction Documents and the performance of the parties’ rights and obligations hereunder and thereunder, [***] in accordance with its terms, subject, as to enforcement of remedies, to bankruptcy, insolvency, reorganization, moratorium or similar Applicable Laws affecting creditors’ rights generally and general equitable principles. [***]

(c)Neither Selling Party has waived any rights or defaults under any of the License Agreements or released any of the Licensees, in whole or in part, from any of their obligations thereunder.  There are no pending requests for waivers or modifications in respect of the License Agreements.  Neither of the Selling Parties nor, to the Knowledge of the Selling Parties, any Licensee has agreed to amend or waive any provision of the License Agreements, and there is no current proposal to do so.

(d)[***]

(e)[***]

(f)Neither Selling Party has consented to any assignment, pledge, sale or other transfer (including licenses) by any Licensee of any of such Licensee’s rights or obligations under its Licensee Agreement, and neither Selling Party has any Knowledge of any such assignment, pledge, sale or other transfer (including licenses) by any Licensee. Except as contemplated by Section 2.1, neither Selling Party has assigned, sold or otherwise transferred any of its rights or obligations, in whole or in part, under the License Agreements nor has granted, incurred or suffered to exist any Liens (other than Permitted Liens and liens for taxes not yet due and payable or that are not delinquent or are being contested in good faith) on the License Agreements or any of its rights thereunder or on any of the Subject Assets, and neither Selling Party has received any notice from any Licensee of such Licensee’s intent to assign, pledge, sell or otherwise transfer (including license) any of such Licensee’s rights or obligations under its License Agreement.

(g)Neither of the Selling Parties nor any of the Licensees has made any claim of indemnification under any of the Licensee Agreements.

Confidential Information indicated by [***] has been omitted from this filing and filed separately with the Securities Exchange Commission.

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(h)Neither of the Selling Parties has exercised its rights to conduct an audit under any of the License Agreements.

(i)To the Knowledge of the Selling Parties, each of the Selling Parties has received all amounts due and payable to it under each of the License Agreements.

(j)To the Knowledge of the Selling Parties, each of the Licensees has complied in all material respects with its obligations to develop the DM Portfolio Products and seek and obtain Regulatory Approval for the DM Portfolio Products pursuant to its License Agreement.

Section 3.13UCC Matters.

(a)Depomed and the Seller’s exact legal names are, and since the date of their organization on August 7, 1995 and October 16, 2013, respectively, have been, “Depomed, Inc.” and “Depo DR Sub, LLC,” respectively. Depomed’s chief executive office is, and since such date of organization has been, located in, and its jurisdiction of organization is, and since such date of organization has been, the State of California.  Each of Depomed and the Seller is a registered organization under the laws of the State of Delaware. Since the applicable date of organization, neither Selling Party has been the subject of any merger or other corporate or other reorganization in which such Selling Party’s identity or status was materially changed, except in each case when it was the surviving or resulting Person.

(b)Assuming that the Purchaser has not agreed to subordinate any claims and rights created by any Transaction Documents in and to the Subject Assets, such claims and rights of the Purchaser are not subordinated to any creditor of either Selling Party or any other Person.

Section 3.14Margin Stock. Neither Selling Party is engaged in the business of extending credit for the purpose of buying or carrying margin stock, and no portion of the Purchase Price shall be used by either Selling Party for a purpose that violates Regulation T, U or X promulgated by the Board of Governors of the Federal Reserve System from time to time.

ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE PURCHASER

The Purchaser hereby represents and warrants to the Selling Parties as of the date hereof and as of the Closing Date as follows:

Section 4.1Organization. The Purchaser is a corporation, duly organized, validly existing and in good standing under the laws of the State of Delaware, and has all powers and authority, and all licenses, permits, franchises, authorizations, consents and approvals of all Governmental Authorities, required to own its property and conduct its business as now conducted.

Confidential Information indicated by [***] has been omitted from this filing and filed separately with the Securities Exchange Commission.

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Section 4.2No Conflicts. None of the execution and delivery by the Purchaser of any of the Transaction Documents to which the Purchaser is party, the performance by the Purchaser of the obligations contemplated hereby or thereby or the consummation of the transactions contemplated hereby or thereby will contravene, conflict with, result in a breach, violation, cancellation or termination of, constitute a default (with or without notice or lapse of time, or both) under, require prepayment under, give any Person the right to exercise any remedy or obtain any additional rights under, or accelerate the maturity or performance of or payment under, in any respect, (i) any Applicable Law or any judgment, order, writ, decree, permit or license of any Governmental Authority to which the Purchaser or any of its assets or properties may be subject or bound, (ii) any term or provision of any contract, agreement, indenture, lease, license, deed, commitment, obligation or instrument to which the Purchaser is a party or by which the Purchaser or any of its assets or properties is bound or committed or (iii) any term or provision of any of the organizational documents of the Purchaser.

Section 4.3Authorization. The Purchaser has all powers and authority to execute, deliver, and perform its obligations under, the Transaction Documents to which it is party and to consummate the transactions contemplated hereby and thereby. The execution and delivery of each of the Transaction Documents to which the Purchaser is party and the performance by the Purchaser of its obligations hereunder and thereunder have been duly authorized by the Purchaser. Each of the Transaction Documents to which the Purchaser is party has been duly executed and delivered by the Purchaser. Each of the Transaction Documents to which the Purchaser is party constitutes the legal, valid and binding obligation of the Purchaser, enforceable against the Purchaser in accordance with its respective terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium or similar Applicable Laws affecting creditors’ rights generally and general equitable principles.

Section 4.4Governmental and Third Party Authorizations. The execution and delivery by the Purchaser of the Transaction Documents to which the Purchaser is party, the performance by the Purchaser of its obligations hereunder and thereunder and the consummation of any of the transactions contemplated hereunder and thereunder do not require any consent, approval, license, order, authorization or declaration from, notice to, action or registration by or filing with any Governmental Authority or any other Person, except as described in Section 3.5.

Section 4.5No Litigation. There is no (a) action, suit, arbitration proceeding, claim, demand, citation, summons, subpoena, investigation or other proceeding (whether civil, criminal, administrative, regulatory, investigative or informal) pending or, to the knowledge of the Purchaser, threatened by or against the Purchaser, at law or in equity, or (b) inquiry or investigation (whether civil, criminal, administrative, regulatory, investigative or informal) by or before a Governmental Authority, to the knowledge of the Purchaser, pending or threatened against the Purchaser, that, in each case, challenges or seeks to prevent, enjoin, alter, delay, make illegal or otherwise interfere with the consummation of any of the transactions contemplated by any of the Transaction Documents to which the Purchaser is party.

Section 4.6Access to Information. The Purchaser acknowledges that it has (a) reviewed the License Agreements and such other documents and information relating to the DM Portfolio Intellectual Property Rights and the DM Portfolio Products and (b) had the opportunity to ask such questions of, and to receive answers from, representatives of the Seller concerning

Confidential Information indicated by [***] has been omitted from this filing and filed separately with the Securities Exchange Commission.

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the License Agreements, the DM Portfolio Intellectual Property Rights and the DM Portfolio Products, in each case, as it deemed necessary to make an informed decision to purchase, acquire and accept the Subject Assets in accordance with the terms of this Royalty Purchase and Sale Agreement. The Purchaser has such knowledge, sophistication and experience in financial and business matters that it is capable of evaluating the risks and merits of purchasing, acquiring and accepting the Subject Assets in accordance with the terms of this Royalty Purchase and Sale Agreement.

ARTICLE V
COVENANTS

The parties hereto covenant and agree as follows:

Section 5.1Notices; Books and Records; Audit Right.

(a)The Selling Parties shall provide to the Purchaser:

(i)[***] as promptly as practicable (but in no event more than five Business Days) following receipt by a Selling Party of written notice of [***], written notice thereof (including reasonable details to enable the Purchaser to understand the applicable matters involved including, as applicable, the events or circumstances that gave rise to such matters, the relief and/or remedies being sought, any proposed corrective action to be taken, relevant timelines involved with such matters and such other information to enable [***] together with a copy of such written notice received by a Selling Party along with any related materials with respect thereto;

(ii)[***] as promptly as practicable (but in no event more than five Business Days) following receipt by a Selling Party of any written notice, demand, certificate, correspondence, report or other communication relating [***] written notice thereof (including reasonable details to enable the Purchaser to understand the applicable matters involved and the relevant timeline involved with such matters, together with a copy of such written notice, demand, certificate, correspondence, report or other communication received by a Selling Party);

(iii)Within 30 days after the end of each calendar quarter, a Distribution Report, along with, [***] reasonable documentation relating to [***];

(iv)Subject to Section 5.1(e), concurrently with the delivery of the Distribution Report, a copy of each Royalty Report received and bank account statements for the Collection Account with respect to such calendar quarter;

(v)[***] as promptly as practicable (but in no event more than five Business Days) following receipt of any written notices given or received by Depomed under [***] copies of such notices;

(vi)[***] as promptly as practicable (but in no event more than five Business Days) after obtaining [***];

Confidential Information indicated by [***] has been omitted from this filing and filed separately with the Securities Exchange Commission.

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(vii)As promptly as practicable (and in any event within five Business Days) after obtaining Actual Knowledge of any of the following: (A) the occurrence of a Bankruptcy Event in respect of a Selling Party; (B) any breach or default by a Selling Party of or under any covenant, agreement or other provision of any Transaction Document; (C) any representation or warranty made by a Selling Party in any of the Transaction Documents or in any certificate delivered to the Purchaser pursuant to this Royalty Purchase and Sale Agreement shall prove to be untrue, inaccurate or incomplete in any significant respect on the date as of which made; or (D) any change, effect, event, occurrence, state of facts, development or condition that could reasonably be expected to result in an Adverse Change, written notice thereof; and

(viii)Not less than 30 days prior to (or such shorter period as may be reasonably acceptable to the Purchaser) any change in, or amendment or alteration of, Depomed’s (i) legal name, (ii) form or type of organizational structure or (iii) jurisdiction of organization, written notice thereof.

(b)Each party shall keep and maintain, or cause to be kept and maintained, proper books and records relating to Royalty Payments and other payments or reimbursements received or paid hereunder, and in the case of the Selling Parties, under each of the License Agreement, which books and records shall be maintained for three years following the last date in which the Purchaser is entitled to receive Royalty Payments hereunder or such longer period as required by Applicable Law. For so long as the Purchaser is entitled to receive Royalty Payments hereunder and for a period of three years thereafter, upon prior written notice to a Selling Party, the Purchaser has the right to require an audit of such books and records to verify the accuracy of the Royalty Payments to the Purchaser hereunder and the accuracy of any Royalty Report or Distribution Report or of information contained in any certificate of an officer of a Selling Party provided to the Purchaser pursuant to Section 5.1(e) of this Royalty Purchase and Sale Agreement.

(c)Any such audit shall occur (i) not more than once in any calendar year, (ii) upon not less than 30 days prior written notice, and (iii) during normal business hours, and shall be conducted by a nationally recognized independent accounting firm selected and engaged by the Purchaser, subject to the reasonable consent of the Selling Parties (which consent shall not be unreasonably withheld, conditioned or delayed), which accounting firm shall agree to keep all such books and records and any other information confidential to the extent required hereunder and under the License Agreements (provided that nothing herein shall require the Selling Parties to disclose any information to the Purchaser or any such independent accounting firm to the extent such disclosure would constitute a breach by a Selling Party of any confidentiality obligations under a License Agreement as in effect on the date hereof).  If such audit results in a determination that for any period covered by such audit, based on payments received by the Selling Parties under the License Agreements and withdrawals made to the Collection Account during such period, there was an under-payment of Royalty Payments to the Purchaser, such amount shall be promptly paid by the Selling Parties to the Purchaser, plus interest, calculated on a

Confidential Information indicated by [***] has been omitted from this filing and filed separately with the Securities Exchange Commission.

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365-day or 366-day basis, as applicable, at a rate equal to the then current prime rate of interest quoted in the Money Rates section of the on-line edition of the Wall Street Journal (at http://www.interactive.wsj.com) plus two percent (2%), for the period from and including the date when such amount should have been paid by a Selling Party to the Purchaser in accordance with this Royalty Purchase and Sale Agreement through but excluding the date of payment of such amount, together with all interest thereon in accordance with this Section 5.1(c). The fees and expenses of the independent accounting firm shall be borne by the Purchaser, unless the audit shows an under-payment of more than five percent (5%) for any calendar year of Royalty Payments received by Purchaser during such period.

(d)[***]

(e)[***]

Section 5.2Public Announcement; Confidentiality.

(a)After the execution of this Royalty Purchase and Sale Agreement, each party may make public disclosure with respect to this Royalty Purchase and Sale Agreement and the transactions contemplated hereby; provided that (A) any such public disclosure in the form of a press release shall be in a form mutually acceptable to the Purchaser and the Selling Parties, (B) each of the Purchaser and Depomed shall provide the other a reasonable prior opportunity to review any such public disclosure to be contained in any current report on Form 8-K to be filed with the SEC in connection with the execution of this Royalty Purchase and Sale Agreement (it being understood that no further prior review shall be required for any disclosure contained in any other report filed with, or furnished to, the SEC so long as such disclosure is consistent with such prior disclosure or is otherwise required to be disclosed as determined in the good faith judgment of the disclosing party, pursuant to GAAP or Applicable Law), and (C) the parties shall cooperate with respect to any requests to be submitted to the SEC or other Governmental Authority for confidential treatment of portions of this Royalty Purchase and Sale Agreement (and any other Transaction Documents).

(b)Except as required by Applicable Law or the rules and regulations of any securities exchange or trading system or any Governmental Authority and except as otherwise set forth in this Section 5.2, any Receiving Party who is provided or furnished with any Confidential Information pursuant to the provisions of this Agreement will treat and hold as confidential and will cause each of its Affiliates, directors, officers, employees, agents, representatives and similarly situation persons to whom any such information is disclosed, in the same manner that it treats and holds the confidentiality of its own proprietary and confidential information, and not disclose to any Person any and all Confidential Information furnished to it by the Disclosing Party, and to use such Confidential Information only in connection with the Transaction Documents and the performance of the transactions contemplated hereby. Notwithstanding the foregoing, except to the extent that such disclosure would not be permitted under the terms of any confidentiality obligations

Confidential Information indicated by [***] has been omitted from this filing and filed separately with the Securities Exchange Commission.

27

under any License Agreement (in which case, the Disclosing Party shall designate the Confidential Information as restricted from such further disclosure), the Receiving Party may disclose Confidential Information on a need-to-know basis to its directors, employees, managers, officers, agents, advisors, lawyers, bankers, lenders, investors (and potential lenders and investors) and, in the case of the Purchaser, transferees or assignees of the Subject Assets; provided, however, that such Persons shall be informed of the confidential nature of such information and shall be obligated to keep such Confidential Information confidential pursuant to obligations of confidentiality no less onerous than those set forth herein.

(c)In the event that the Selling Parties or the Purchaser receives a subpoena, or other validly-issued administrative or judicial process, requesting that Confidential Information of the other party hereto be disclosed, it will promptly notify such other party of such receipt. The party hereto receiving such request will thereafter be entitled to comply with such subpoena or other process, only to the extent required by Applicable Law.

Section 5.3Commercially Reasonable Efforts; Further Assurances.

(a)Subject to the terms and conditions of this Royalty Purchase and Sale Agreement, each party hereto will use commercially reasonable efforts to take, or cause to be taken, all actions and to do, or cause to be done, all things necessary under Applicable Laws to consummate the transactions contemplated by the Transaction Documents to which either Selling Party or the Purchaser, as applicable, is party, including to (i) perfect the Contribution, (ii) perfect, vest and maintain in the Purchaser consistent with the terms hereof good, valid and marketable rights and interests in and to the Subject Assets, free and clear of all Liens (other than Permitted Liens), (iii) execute and deliver such other documents, certificates, instruments, agreements and other writings and to take such other actions as may be necessary, or reasonably requested by the other party hereto, in order to consummate or implement expeditiously the transactions contemplated by any Transaction Document to which either Selling Party or the Purchaser, as applicable, is party, (iv) create, evidence and perfect the Purchaser’s back-up security interest granted pursuant to Section 2.1(e) (including the execution of a Control Agreement with respect to the Collection Account), and (v) enable the Purchaser to exercise or enforce any of the Purchaser’s rights under any Transaction Document to which either Selling Party or the Purchaser, as applicable, is party.

(b)The Selling Parties and the Purchaser shall cooperate and provide assistance as reasonably requested by a party hereto, at the expense of such party hereto (except as otherwise set forth herein), in connection with any litigation, arbitration, investigation or other proceeding (whether threatened, existing, initiated or contemplated prior to, on or after the date hereof) to which such party hereto, any of its Affiliates or controlling persons or any of their respective officers, directors, equityholders, controlling persons, managers, agents or employees is or may become a party or is or may become otherwise directly or indirectly affected or as to which any such Persons have a direct or indirect interest, in each case relating to any Transaction

Confidential Information indicated by [***] has been omitted from this filing and filed separately with the Securities Exchange Commission.

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Document, the Subject Assets or the transactions described herein or therein but in all cases excluding any litigation brought by a Selling Party (for itself or on behalf of any Seller Indemnified Party) against the Purchaser or brought by the Purchaser (for itself or on behalf of any Purchaser Indemnified Party) against a Selling Party; provided that nothing herein shall require the disclosure of any information that would impair the attorney-client privilege applicable thereto; provided, further, that, the parties agree to take all such reasonable steps to allow for the disclosure of any such information in a manner that will not impair the attorney-client privilege, including entering into a joint defense agreement or other agreement with one another in order to maintain the attorney-client privilege of any such information disclosed.

(c)Each Selling Party and the Purchaser shall comply with all Applicable Laws with respect to the Transaction Documents, the License Agreements, the Subject Assets and all ancillary agreements related thereto.

(d)Neither Selling Party shall enter into any contract, agreement or other legally binding arrangement (whether written or oral), or grant any right to any other Person, in any case that would conflict with the Transaction Documents or the rights granted to the Purchaser hereunder or thereunder, or impair either Seller Party’s ability to perform its obligations under the Transaction Documents, or, except as permitted hereby, impair any of the Purchaser’s rights and remedies under the Transaction Documents.

Section 5.4Royalty Payments on Account of the Subject Assets; Royalty Payment Instruction.

(a)Promptly following the execution of this Agreement, Depomed shall deliver a Royalty Payment Instruction to each Licensee or otherwise direct each Licensee to make all Royalty Payments to the Collection Account.  Funds deposited into the Collection Account shall be swept on a weekly basis into the Purchaser Account.  No Selling Party shall terminate, or otherwise have any right to terminate, amend or modify, the Control Agreement or change the Collection Account, without the Purchaser’s prior written consent.  Any such consent, which the Purchaser may grant or withhold in its sole and absolute discretion, shall be subject to the satisfaction of each of the following conditions to the satisfaction of the Purchaser:  (i) any successor financial institution at which the Collection Account will be maintained shall be acceptable to the Purchaser; (ii) the Purchaser, the Seller and such successor financial institution shall have entered into a Control Agreement; (iii) all funds and items in the Collection Account that is to be terminated shall be transferred to the new account held at the successor financial institution prior to the termination of the then existing Collection Account; and (iv) the Purchaser shall have received evidence that all Licensees have been instructed to remit all future amounts payable under the License Agreements to the new account at the successor financial institution.  All amounts in respect of Royalty Payments deposited in the Collection Account shall be held by the Seller in the Collection Account in trust for the benefit of the Purchaser.

Confidential Information indicated by [***] has been omitted from this filing and filed separately with the Securities Exchange Commission.

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(b)The Collection Account shall be the account into which all payments (other than reimbursement payments under clause (A)(i) of the provisio to the definition of Royalty Payments) made to a Selling Party in respect of any License Agreement are to be remitted.  All amounts deposited into the Collection Account shall be swept from the Collection Account into the Purchaser Account on a weekly basis; provided, however, that the Seller shall be permitted to withdraw from the Collection Account in advance of any sweep any estimated amounts owed a Selling Party in respect of estimated Reimbursable Expenses and Royalty Payables and any amounts deposited in such Collection Account constituting any indemnity payments and cost reimbursements that are expressly excluded from the definition of Royalty Payments.

(c)If any Licensee, any Sublicensee or any other Person (notwithstanding the terms of the Royalty Payment Instruction with respect to its License Agreement) makes any payment in respect of the Subject Assets directly to either Selling Party (or to any of their Subsidiaries) other than payments made to the Collection Account, then (i) the portion of such payment that represents Royalty Payments owed to the Purchaser at such time shall be held by such Selling Party (or such Subsidiary) in trust for the benefit of the Purchaser, and (ii) such Selling Party promptly, and in any event no later than five Business Days following the receipt by such Selling Party (or such Subsidiary) of such portion of such payment, shall remit, or cause to remitted, such portion of such payment to the Collection Account in the exact form received with all necessary endorsements.

(d)If any Licensee takes any Set-off in accordance with the terms of its License Agreement where such Set-off (or any portion thereof) is made in respect of any event occurring, circumstance existing or action taken prior to the Royalty Payments Commencement Date but has the effect of reducing amounts to be paid to the Purchaser following the Closing Date, then the Selling Parties shall cause the amount of such Set-off (or portion thereof, as the case may be) to be paid promptly (but in no event later than five Business Days following such Set-off) to the Purchaser Account.

(e)Within 5 Business Days of the delivery of any Distribution Report, the parties shall make such payments as necessary to correct any underpayments or overpayments to the Purchaser as identified in such Distribution Report (taking into account any payments due to the Seller pursuant to Section 5.8).

(f)All amounts payable by a Selling Party to the Purchaser or the Purchaser to a Selling Party under this Royalty Purchase and Sale Agreement but not paid within such 5 Business Day period, unless contesting in good faith any such amounts owed, shall accrue interest from and including the date that is the 5th Business Day following delivery of the applicable Distribution Report through but excluding the date such payment, together with all interest thereon in accordance with this Section 5.4(e), is made by the applicable party at a rate, calculated on a 365-day or 366-day basis, as applicable, equal to the then current prime rate of interest quoted in the

Confidential Information indicated by [***] has been omitted from this filing and filed separately with the Securities Exchange Commission.

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Money Rates section of the on-line edition of the Wall Street Journal (at http://www.interactive.wsj.com) plus two percent (2%).

(g)Neither Selling Party shall amend, modify, supplement, restate, waive, cancel or terminate any Royalty Payment Instruction without the prior written consent of the Purchaser, except to the extent necessary to effect a change in the Collection Account in accordance with Section 5.4(a).

Section 5.5License Agreements.

[*** 3 Pages Redacted ***]

(f)Subject to the provisions of each of the License Agreements and any rights of Licensees thereunder and any limitations that Selling Party reasonably requires to protect the attorney-client privilege based on advice from outside counsel (provided that, where so advised, the Selling Parties shall enter into a joint defense agreement or other agreement with the Purchaser in order to maintain the attorney-client privilege of any information shared with the Purchaser), each Selling Party shall make available its relevant records and personnel to the Purchaser in connection with any prosecution of litigation by either Selling Party or the Purchaser against any Licensees to enforce any of the Purchaser’s rights under this Royalty Purchase and Sale Agreement or any of the License Agreements, and shall at the Purchaser’s expense (unless otherwise provided for herein), provide reasonable assistance and authority to file and bring the litigation, including, if required to bring the litigation, being joined as a party plaintiff.

(g)[***]

Section 5.6Termination of a License Agreement. [***]

(a)[***]

(b)[***]

Section 5.7Audits. No Selling Party shall cause an inspection or audit of any Licensee’s books and records to be conducted pursuant to the terms of the applicable License Agreement without the prior written consent of the Purchaser, which consent shall not be unreasonably withheld or delayed. In the event that the Purchaser consents in writing to a request by a Selling Party to cause an inspection or audit of any Licensee’s books and records, then, if requested by the Purchaser, at the Purchaser’s expense and subject to the confidentiality limitations under the applicable License Agreement, the Purchaser shall be entitled to participate in such audit and inspection, including any audit and inspection of such Licensee’s books and records with respect to each DM Portfolio Product, and to select such third party representatives to participate in such audit and inspection (including the use of any public accounting firm). In addition, the Selling Parties shall, upon the written request of the Purchaser and in any event in accordance with the terms of the License Agreement, cause an inspection or audit of any Licensee’s books and records to be conducted pursuant to, and in accordance with the terms of the applicable License Agreement with respect to any DM Portfolio Products.

Confidential Information indicated by [***] has been omitted from this filing and filed separately with the Securities Exchange Commission.

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For the purposes of exercising the Purchaser’s rights pursuant to this Section 5.7 in circumstances where the Purchaser is requesting that a Selling Party cause an inspection or audit to be made, the Selling Parties shall use such third party representatives as selected by the Purchaser (including the use of any public accounting firm) for such purpose.  The Selling Parties and the Purchaser agree that all of the expenses of any inspection or audit carried out for the benefit of and at the request of the Purchaser that would otherwise be borne by a Selling Party pursuant to the applicable License Agreement shall instead be borne by the Purchaser, including fees and expenses of any third party representatives and the Selling Parties’ reasonable, documented out-of-pocket costs. To the extent that disclosure of an inspection or audit report prepared by any appropriately qualified third party representative (whether or not a public accounting firm) following the Purchaser’s exercise of its rights under this Section 5.7 (whether the Purchaser is participating in an inspection or audit or requesting that a Selling Party cause an inspection or audit) is permitted pursuant to any of the License Agreements, the Selling Parties will, subject to the confidentiality restrictions under the applicable License Agreement, furnish to the Purchaser a copy of any inspection or audit report prepared in connection with such inspection or audit. [***]

Section 5.8Reversionary Interest. Depomed shall be entitled to receive an amount equal to 50% of the Royalty Payments, net of any reasonable and documented out-of-pocket costs and expenses incurred by the Purchaser in connection with this Royalty Purchase and Sale Agreement (including costs and expenses associated with audits, defending any DM Intellectual Property Rights and enforcing the License Agreement or any of the Transaction Documents and any other costs and expenses borne by the Purchaser hereunder), once the Purchaser has received aggregate payments (excluding any amounts previously paid to the Purchaser that are subject to return by the Purchaser but including the amount of any taxes withheld for the benefit of Purchaser on such payments) in respect of Royalty Payments under this Royalty Purchase and Sale Agreement in an amount equal to the Reversionary Interest Threshold (Depomed’s right to such Royalty Payments, the “Reversionary Interest,” and the date that such Reversionary Interest Threshold has been met, the “Reversionary Interest Commencement Date”).  Following the Reversionary Interest Commencement Date, within 5 Business Days of Purchaser’s receipt of a Distribution Report, the Purchaser shall provide to the Selling Parties a report showing in reasonable detail the calculation of the payments in respect of the Reversionary Interest for the applicable calendar quarter and pay to Depomed the Reversionary Interest with respect to Royalty Payments received during such calendar quarter. At the request of Depomed, Purchaser shall provide supporting documentation with respect to any costs and expenses deducted from the Royalty Payments for purposes of calculating payments in respect of the Reversionary Interest. For so long as Depomed is entitled to receive payments in respect of the Reversionary Interest hereunder and for a period of three years thereafter, upon prior written notice to the Purchaser, the Selling Parties have the right to require an audit of such books and records to verify the accuracy of the calculation of payments in respect of the Reversionary Interest on the same terms, mutatis mutandis, as the audit rights of the Purchaser under Section 5.1(c).

Section 5.9Tax Matters.

(a)Notwithstanding the accounting treatment thereof, for United States federal, state, local and foreign tax purposes, the Selling Parties and the

Confidential Information indicated by [***] has been omitted from this filing and filed separately with the Securities Exchange Commission.

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Purchaser shall treat the transactions contemplated by the Transaction Documents as a sale for United States federal, state, local and foreign tax purposes. Accordingly, any and all Royalty Payments made pursuant to the License Agreements after the Closing Date shall be treated as made to the Purchaser (or, after the Reversionary Interest Commencement Date, such portion as applicable to the Seller, as applicable) for United States federal, state, local and foreign tax purposes. The parties shall cooperate to effect the foregoing treatment for United States federal, state, local and foreign tax purposes in the event that, notwithstanding the Royalty Payment Instruction, any Licensee, any Sublicensee or any other Person makes any future remittance of Royalty Payments to a Selling Party which the Selling Party must remit to the Purchaser pursuant to Section 5.4 of this Royalty Purchase and Sale Agreement. The Selling Parties shall report the Royalty Payments hereunder on Form 1099-MISC or applicable form as royalties for United States federal, state and local income tax purposes. The Purchaser shall provide to the Selling Parties such properly completed and executed IRS Form W-9 or other applicable forms, certificates or documents as reasonably requested by Selling Parties from time to time for purposes of establishing the Purchaser’s residency for tax purposes and any applicable exemptions or reductions from U.S. withholding taxes.

(b)The parties hereto agree not to take any position that is inconsistent with the provisions of this Section 5.8 on any tax return or in any audit or other administrative or judicial proceeding unless (i) the other party hereto has consented to such actions or (ii) the party hereto that contemplates taking such an inconsistent position has been advised by nationally recognized tax counsel in writing that there is no “reasonable basis” (within the meaning of Treasury Regulation Section 1.6662-3(b)(3)) for the position specified in this Section 5.8. If there is an inquiry by any Governmental Authority of the Selling Parties or the Purchaser related to this Section 5.8, the parties hereto shall cooperate with each other in responding to such inquiry in a reasonable manner consistent with this Section 5.8.

Section 5.10Existence. Each Selling Party shall (a) preserve and maintain its existence (except as permitted under Section 9.4 in respect of Depomed), (b) use commercially reasonable efforts to preserve and maintain its rights, franchises and privileges, except to the extent the failure to do so would not reasonably be expected to result in an Adverse Change, and (c) qualify and remain qualified in good standing in each jurisdiction where the failure to preserve and maintain such qualifications could reasonably be expected to result in an Adverse Change.

Section 5.11Seller Operations. The Seller was formed solely for the purpose of owning the Contributed Assets and the transfer of the Subject Assets to the Purchaser pursuant hereto and shall not engage in any business or other activity not expressly contemplated by the Transaction Documents.  Except as permitted under Section 9.4, all of the equity interests in Seller have at all times been, and shall always be, owned, directly or indirectly, by Depomed.  The Seller will not acquire or otherwise possess any assets or incur any liabilities, Liens (other than Permitted Liens) or other obligations (contractual or otherwise) except in connection with the performance of its obligations under the Transaction Documents or resulting out of the ownership of the Contributed Assets that are not Subject Assets.  The Seller will at all times remain in existence as a limited liability company separate and distinct from Depomed or any

Confidential Information indicated by [***] has been omitted from this filing and filed separately with the Securities Exchange Commission.

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other Person and will not consent to or enter into agreement or contract with respect to reorganization, merger, recapitalization or consolidation of the Seller with or into any other Person.  Neither the Seller nor Depomed or any manager of the Seller shall amend or alter the Seller Organizational Documents, agree to dissolve the Seller or otherwise windup its affairs or allow or take any action for the Seller to become subject to any Bankruptcy Event.  The Seller shall not fail to correct any known misunderstanding regarding the separate identity of the Seller and shall maintain its accounts, books and records separate from any other Person (including Depomed) and will not commingle any funds with any other Person (including Depomed), except to the extent set forth herein with respect to amounts deposited in the Collection Account.

Section 5.12Enforcement of DM Portfolio Patents. [***]

Section 5.13Compliance with Obligations under Certain Agreements. [***]

Section 5.14Compliance with Terms of Certain Agreements.

(a)[***]

(b)[***]

(c)[***]

Section 5.15Withdrawal of Certain Asserted Claims.

(a)[***]

(b)[***]

Section 5.16Enforcement of DM Portfolio Patents [***]. [***]

ARTICLE VI
THE CLOSING

Section 6.1Closing. The closing of the transactions contemplated hereby (the “Closing”) shall take place contemporaneous with the execution of this Royalty Purchase and Sale Agreement (the “Closing Date”), at the offices of Gibson, Dunn & Crutcher, 333 South Grand Avenue, Los Angeles, CA 90071, or such other place as the parties hereto mutually agrees.

Section 6.2Closing Deliverables of the Selling Parties. At or prior to the Closing, the Selling Parties shall have delivered or cause to be delivered to the Purchaser the following:

(a)this Royalty Purchase and Sale Agreement duly executed by each Selling Party;

(b)the Bill of Sale duly executed by each Selling Party;

Confidential Information indicated by [***] has been omitted from this filing and filed separately with the Securities Exchange Commission.

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(c)evidence, in form and substance reasonably satisfactory to the Purchaser, of the consummation of the Contribution, including delivery of the Contribution Agreement executed by each Selling Party;

(d)a certificate of an executive officer of each Selling Party (the statements made in which shall be true and correct on and as of the Closing Date): (i) attaching copies, certified by such officers as true and complete, of (x) the certificate of incorporation and bylaws of Depomed and the Seller Organizational Documents and (y) resolutions of the board of directors or other governing body of Depomed authorizing and approving the execution, delivery and performance by Depomed of the Transaction Documents and the transactions contemplated herein and therein and (ii) setting forth the incumbency of the officer or officers of each Selling Party who have executed and delivered the Transaction Documents, including therein a signature specimen of each such officer or officers; and

(e)such other certificates, documents and financing statements as the Purchaser may have reasonably requested, including a financing statement reasonably satisfactory to the Purchaser to create, evidence and perfect the sale, assignment, transfer, conveyance and grant of the Subject Assets pursuant to Section 2.1 and the back-up security interest granted pursuant to Section 2.1(e).

Section 6.3Closing Deliverables of the Purchaser. At the Closing, the Purchaser shall deliver or cause to be delivered to the Selling Parties the following:

(a)this Royalty Purchase and Sale Agreement duly executed by the Purchaser;

(b)the Bill of Sale duly executed by the Purchaser; and

(c)payment of the Purchase Price in accordance with Section 2.2.

Section 6.4Post-Closing Matter.  The Seller shall establish the Collection Account within 15 days of the Closing Date and the parties shall enter into a Control Agreement with respect to the Collection Account within 15 days of the Closing Date.  Promptly upon establishment of the Collection Account, the Selling Parties shall execute and distribute to each Licensee a Royalty Payment Instructions with respect to the applicable License Agreement.  The parties acknowledge and agree that the Collection Account to be established pursuant to this Section 6.4 shall provide for the regular sweeping of all funds in the Collection Account into the Purchaser Account on a basis of no less often than weekly.

ARTICLE VII
INDEMNIFICATION

Section 7.1Indemnification by the Seller. Each Selling Party, on a joint and several basis, agrees to indemnify and hold each of the Purchaser and its Affiliates and any and all of their respective partners, directors, managers, members, officers, employees, agents and controlling persons (each, a “Purchaser Indemnified Party”) harmless from and against, and will pay to each Purchaser Indemnified Party the amount of, any and all Losses (including

Confidential Information indicated by [***] has been omitted from this filing and filed separately with the Securities Exchange Commission.

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reasonable attorneys’ fees) awarded against or incurred or suffered by such Purchaser Indemnified Party, arising out of, or involving any third party claim, demand, action or proceeding arising out of, (i) any breach of any representation, warranty or certification made by a Selling Party in or pursuant to any of the Transaction Documents or a Distribution Report, (ii) any breach of or default by a Selling Party of any covenant or agreement of such Selling Party under any Transaction Document or any License Agreement, (iii) any Excluded Liabilities and Obligations, (iv) third party claims arising on or after the Closing Date and asserted against a Purchaser Indemnified Party with respect to the transactions contemplated in any Transaction Document or the License Agreements (other than to the extent any such Losses arise out of an alleged or actual violation of Applicable Law by any Purchaser Indemnified Party or an actual breach by any Purchaser Indemnified Party of any Transaction Document or an alleged or actual breach by any Purchaser Indemnified Party of any other agreement or obligation to which such Purchaser Indemnified Party is a party or to which it or its assets are otherwise subject or bound),  and (v) any fees, expenses, costs, liabilities or other amounts incurred or owed by a Selling Party or its Affiliates to any brokers, financial advisors or comparable other Persons retained or employed by it or for its benefit in connection with the transactions contemplated by this Royalty Purchase and Sale Agreement; provided, however, that the foregoing shall exclude any indemnification to any Purchaser Indemnified Party (A) that results from the bad faith, gross negligence or willful misconduct of such Purchaser Indemnified Party, or (B) to the extent resulting from acts or omissions of the Seller or any of its Affiliates based upon the written instructions from any Purchaser Indemnified Party (unless the Selling Party is otherwise liable for such Losses pursuant to the terms of this Royalty Purchase and Sale Agreement). Any amounts due to any Purchaser Indemnified Party hereunder shall be payable by the Selling Parties to such Purchaser Indemnified Party upon demand.

Section 7.2Indemnification by the Purchaser. The Purchaser agrees to indemnify and hold each of the Selling Parties and their Affiliates and any and all of their respective partners, directors, managers, members, officers, employees, agents and controlling Persons (each, a “Seller Indemnified Party”) harmless from and against, and will pay to each Seller Indemnified Party the amount of, any and all Losses (including reasonable attorneys’ fees) awarded against or incurred or suffered by such Seller Indemnified Party, arising out of, or involving any third party claim, demand, action or proceeding arising out of, (i) any breach of any representation, warranty or certification made by the Purchaser in or pursuant to any of the Transaction Documents, (ii) any breach of or default under any covenant or agreement by the Purchaser to a Selling Party pursuant to any Transaction Document to which the Purchaser is party, (iii) any fees, expenses, costs, liabilities or other amounts incurred or owed by the Purchaser or its Affiliates to any brokers, financial advisors or comparable other Persons retained or employed by it or for its benefit in connection with the transactions contemplated by this Royalty Purchase and Sale Agreement, and (iv) acts or omissions of a Selling Party or any of its Affiliates based upon written instructions from any Purchaser Indemnified Party (unless the Selling Party is otherwise liable for such Losses pursuant to the terms of this Royalty Purchase and Sale Agreement); provided, however, that the foregoing shall exclude any indemnification to any Seller Indemnified Party (A) that results from the bad faith, gross negligence or willful misconduct of such Seller Indemnified Party, (B) to the extent resulting from the performance by a Selling Party or any other Person (excluding the Purchaser) or the failure of a Selling Party or any other Person (excluding the Purchaser) to perform any of its obligations under, or any breach of any of a Selling Party’s representations and warranties in, any of the Transaction Documents

Confidential Information indicated by [***] has been omitted from this filing and filed separately with the Securities Exchange Commission.

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or (C) to the extent resulting from acts or omissions of the Purchaser or any of its Affiliates based upon the written instructions from any Seller Indemnified Party. Any amounts due to any Seller Indemnified Party hereunder shall be payable by the Purchaser to such Seller Indemnified Party upon demand.

Section 7.3Procedures. If any claim, demand, action or proceeding (including any investigation by any Governmental Authority) shall be brought or alleged against an indemnified party in respect of which indemnity is to be sought against an indemnifying party pursuant to Section 7.1 or Section 7.2, the indemnified party shall, promptly after receipt of notice of the commencement of any such claim, demand, action or proceeding, notify the indemnifying party in writing of the commencement of such claim, demand, action or proceeding, enclosing a copy of all papers served, if any; provided, that the omission to so notify such indemnifying party will not relieve the indemnifying party from any liability that it may have to any indemnified party under Section 7.1 or Section 7.2 unless, and only to the extent that, the indemnifying party is actually prejudiced by such omission. In the event that any such action is brought against an indemnified party and it notifies the indemnifying party of the commencement thereof in accordance with this Section 7.3, the indemnifying party will be entitled, at the indemnifying party’s sole cost and expense, to participate therein and, to the extent that it may wish, to assume the defense thereof, with counsel selected by such indemnifying party, and, after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party will not be liable to such indemnified party under this Article VII for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof other than reasonable costs of investigation. In any such proceeding, an indemnified party shall have the right to retain its own counsel, but the reasonable fees and expenses of such counsel shall be at the expense of such indemnified party unless (a) the indemnifying party and the indemnified party shall have mutually agreed to the retention of such counsel, (b) the indemnifying party has assumed the defense of such proceeding and has failed within a reasonable time to retain counsel reasonably satisfactory to such indemnified party or (c) the named parties to any such proceeding (including any impleaded parties) include both the indemnifying party and the indemnified party and representation of both parties by the same counsel would be inappropriate due to actual or potential conflicts of interests between them based on the advice of counsel to the indemnified party. It is agreed that the indemnifying party shall not, in connection with any proceeding or related proceedings in the same jurisdiction, be liable for the reasonable fees and expenses of more than one separate law firm (in addition to local counsel where necessary) for all such indemnified parties. The indemnifying party shall not be liable for any settlement of any proceeding effected without its prior written consent, but, if settled with such consent or if there be a final judgment for the plaintiff, the indemnifying party agrees to indemnify the indemnified party from and against any Loss by reason of such settlement or judgment. No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement, compromise or discharge of any claim or pending or threatened proceeding in respect of which any indemnified party is or could have been a party and indemnity could have been sought hereunder by such indemnified party, unless such settlement, compromise or discharge, as the case may be, (i) includes an unconditional written release of such indemnified party, in form and substance reasonably satisfactory to the indemnified party, from all liability on claims that are the subject matter of such claim or proceeding, (ii) does not include any statement as to an admission of fault, culpability or failure

Confidential Information indicated by [***] has been omitted from this filing and filed separately with the Securities Exchange Commission.

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to act by or on behalf of any indemnified party and (iii) does not impose any continuing material obligation or restrictions on any indemnified party.

Section 7.4Exclusive Remedy. Subject to Section 9.2, following the Closing, the indemnification afforded by this Article VII shall be the sole and exclusive remedy for any and all Losses awarded against or incurred or suffered by a Seller Indemnified Party or Purchaser Indemnified Party (as applicable) in connection with the transactions contemplated by the Transaction Documents, including with respect to any breach of any representation, warranty or certification made by a party hereto in or pursuant to any of the Transaction Documents or a Distribution Report or any breach of or default under any covenant or agreement by a party hereto pursuant to any Transaction Document. Notwithstanding the foregoing, the limitations set forth in this Section 7.4 shall not apply to a party’s claim for indemnification hereunder in the case of fraud, bad faith or willful misconduct. In addition, it is understood and agreed among the Selling Parties and the Purchaser that, notwithstanding this Section 7.4, the Purchaser may exercise any remedies available to it at law or in equity in the event that (i) a Bankruptcy Event has occurred with respect to a Selling Party or (ii) the back-up security interest granted to the Purchaser pursuant to Section 2.1(e) shall cease to create, or shall be asserted by a Selling Party not to create, in the event that the transfer contemplated by this Royalty Purchase and Sale Agreement is held not to be a sale, a valid, perfected, first priority security interest in the Subject Assets, except to the extent that any such loss of perfection or priority results from the failure of the Purchaser to make related filings or to continue previously filed financing statements and other documents prior to the expiration thereof or the failure of the Purchaser to enter into a Control Agreement with respect to the Collection Account.

ARTICLE VIII
TERMINATION

Section 8.1Termination Date. This Royalty Purchase and Sale Agreement shall terminate on the third anniversary following the date upon which the later of the following occurs: (a) October 25, 2021, and (b) at such time as no Royalty Payments remain payable under any License Agreement and each of the License Agreements has expired by their terms.

Section 8.2Effect of Termination. In the event of the termination of this Royalty Purchase and Sale Agreement pursuant to Section 7.01, this Royalty Purchase and Sale Agreement shall become void and of no further force and effect, except for those rights and obligations that have accrued prior to the date of such termination or relate to any period prior thereto, including the payment in accordance with the terms hereof of the Royalty Payments or other monetary payment on account of the Subject Assets.  Notwithstanding the foregoing, Article I, Article VII, Article VIII, Article IX, and Section 5.2(b) shall survive such termination and there shall be no liability on the part of any party hereto, any of its Affiliates or controlling Persons or any of their respective officers, directors, equityholders, debtholders, members, partners, controlling Persons, managers, agents or employees, other than as provided for in this Section 8.02. Nothing contained in this Section 8.02 shall relieve any party hereto from liability for any breach of this Agreement that occurs prior to such termination, which liability shall survive such termination.

Confidential Information indicated by [***] has been omitted from this filing and filed separately with the Securities Exchange Commission.

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ARTICLE IX
MISCELLANEOUS

Section 9.1Survival. All representations, warranties and covenants made herein and in any other Transaction Document or any certificate delivered pursuant to this Royalty Purchase and Sale Agreement shall survive the execution and delivery of this Royalty Purchase and Sale Agreement and the Closing until the termination of this Agreement; provided, however, that (i) the representations and warranties made pursuant to Sections 3.7, 3.8 and 3.14 shall survive for a period of two years from the Closing Date and (ii) the representations and warranties made pursuant to Section 3.6 shall survive for a period of four years from the Closing Date. No party hereto shall have any liability or obligations of any nature with respect to a representation and warranty after the termination of the survival thereof, unless the other party shall have delivered written notice to such party, pursuant to Section 7.3, for indemnification with respect to a breach of such representation and warranty prior to the date of such termination.

Section 9.2Performance; Equitable Relief. Each of the parties hereto acknowledges that the other parties hereto will have no adequate remedy at law if it fails to perform any of its obligations under any of the Transaction Documents. In such event, each of the parties hereto agrees that the other parties hereto shall have the right, in addition to any other rights it may have (whether at law or in equity), to specific performance of this Royalty Purchase and Sale Agreement and to pursue any other equitable remedies including injunction. Each of the parties hereto may pursue such specific performance or other equitable remedies without going through any of the procedures set forth in Article VII.  In furtherance of the foregoing, Depomed hereby guarantees, and shall be directly liable for, performance by the Seller in respect of all of the Seller’s obligations arising out of or in relation to any of the Transaction Documents and the transactions contemplated thereby.

Section 9.3Notices.  Except as otherwise expressly provided herein, all notices, consents, waivers and other communications hereunder shall be in writing and shall be effective (a) upon receipt when sent through the mails, registered or certified mail, return receipt requested, postage prepaid, with such receipt to be effective the date of delivery indicated on the return receipt, (b) upon receipt when sent by an overnight courier, (c) on the date personally delivered to an authorized officer of the party to which sent or (d) on the date transmitted by facsimile or other electronic transmission with a confirmation of receipt, in all cases, with a copy emailed to the recipient at the applicable address, addressed to the recipient as follows:

if to a Selling Party, to:

Depomed, Inc. 
7999 Gateway Boulevard, Suite 300
Newark, California
Attention: Legal Department
Telephone: (510) 744-8000
Facsimile: (510) 744-8001
Email: mgossling@depomed.com

Confidential Information indicated by [***] has been omitted from this filing and filed separately with the Securities Exchange Commission.

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with a copy to:

Cooley LLP

101 California St., 5th Floor

San Francisco, CA 94111

Attn:  Gian-Michele aMarca

Email:  gmamarca@cooley.com

if to the Purchaser, to:

PDL BioPharma, Inc.
932 Southwood Blvd.
Incline Village, Nevada 89451
Attention: General Counsel
Telephone: (775) 832-8500
Facsimile: (775) 832-8501
Email: general.counsel@pdl.com

with a copy to:

Gibson, Dunn & Crutcher LLP
333 South Grand Avenue
Los Angeles, California 90071-3197
Attention:  Dhiya El-Saden, Esq.
Telephone: (213) 229-7196
Facsimile: (213) 229-6196
Email: delsaden@gibsondunn.com

Each party hereto may, by notice given in accordance herewith to the other party hereto, designate any further or different address to which subsequent notices, consents, waivers and other communications shall be sent. Notwithstanding the foregoing, the Selling Parties and the Purchaser may deliver reports and notices under Section 5.1 via email provided that the parties shall have agreed in writing upon mutually acceptable procedures for such delivery.

Section 9.4Successors and Assigns. The provisions of this Royalty Purchase and Sale Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns. The Seller shall not be entitled to assign (whether by contract, operation of law, merger, consolidation, reorganization, sale of all or substantially all of such Person’s assets or all of such Person’s assets related to any DM Portfolio Product or otherwise) any of its obligations and rights under this Royalty Purchase and Sale Agreement without the prior written consent of the Purchaser. Either Depomed or the Purchaser may assign (whether by contract, operation of law, merger, consolidation, reorganization, sale of all or substantially all of such Person’s assets or all of such Person’s assets related to any DM Portfolio Product or otherwise) any of its obligations and rights hereunder, in whole or in part, without restriction and without the consent of the other party; provided that (a) in the case of Depomed, it must assign all (and not part) of its rights and obligations hereunder and all of its equity interests in the Seller as part of the same transaction or series of transactions, any assignee must expressly assume in writing the obligations of Depomed hereunder and such assignment may not result in

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an Adverse Change, and (b) in the case of the Purchaser, the assignee (other than in the case of an assignment solely in the nature of a security interest) shall expressly assume the obligations of the Purchaser hereunder. The assigning party shall give notice of any such assignment to the other parties pursuant to Section 9.3 hereof promptly after the occurrence thereof.

Section 9.5Nature of Relationship. The relationship between the Selling Parties, on the one hand, and the Purchaser, on the other, is solely that of seller and purchaser, and neither the Selling Parties, on the one hand, nor the Purchaser, on the other, has any fiduciary or other special relationship with the other party hereto or any of its Affiliates. Nothing contained herein or in any other Transaction Document shall be deemed to constitute the Selling Parties and the Purchaser as a partnership, an association, a joint venture or any other kind of entity or legal form.

Section 9.6Entire Agreement. This Royalty Purchase and Sale Agreement together with the Exhibits hereto (which are incorporated herein by reference), the other Transaction Documents, and that certain Mutual Nondisclosure Agreement, as amended, dated as of February 28, 2012 by and among the Purchaser and Depomed, constitute the entire agreement between the parties hereto with respect to the subject matter hereof and supersede all prior agreements, understandings and negotiations, both written and oral, between the parties hereto with respect to the subject matter of this Royalty Purchase and Sale Agreement. No representation, inducement, promise, understanding, condition or warranty not set forth herein (or in the Exhibits hereto or the other Transaction Documents) has been made or relied upon by either party hereto. Neither this Royalty Purchase and Sale Agreement nor any provision hereof is intended to confer upon any Person other than the parties hereto and the other Persons referenced in Article VII any rights or remedies hereunder.

Section 9.7Governing Law.

(a)THIS ROYALTY PURCHASE AND SALE AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL SUBSTANTIVE LAWS OF THE STATE OF NEW YORK WITHOUT REFERENCE TO THE RULES THEREOF RELATING TO CONFLICTS OF LAW OTHER THAN SECTION 5-1401 OF THE GENERAL OBLIGATIONS LAW OF THE STATE OF NEW YORK, AND THE OBLIGATIONS, RIGHTS AND REMEDIES OF THE PARTIES HEREUNDER SHALL BE DETERMINED IN ACCORDANCE WITH SUCH LAWS.

(b)Each of the parties hereto hereby irrevocably and unconditionally submits, for itself and its property, to the non-exclusive jurisdiction of the Supreme Court of the State of New York sitting in New York County and of the United States District Court of the Southern District of New York, and any appellate court from any thereof, in any action or proceeding arising out of or relating to this Royalty Purchase and Sale Agreement, or for recognition or enforcement of any judgment, and each of the parties hereto hereby irrevocably and unconditionally agrees that all claims in respect of any such action or proceeding may be heard and determined in such New York State court or, to the extent permitted by Applicable Law, in such federal court. Each of the parties hereto agrees that a final judgment in

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41

any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by Applicable Law.

(c)Each of the parties hereto hereby irrevocably and unconditionally waives, to the fullest extent it may legally and effectively do so, any objection that it may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of or relating to this Royalty Purchase and Sale Agreement in any court referred to in Section 9.7(b). Each of the parties hereto hereby irrevocably waives, to the fullest extent permitted by Applicable Law, the defense of an inconvenient forum to the maintenance of such action or proceeding in any such court.

(d)Each of the parties hereto irrevocably consents to service of process in the manner provided for notices in Section 9.3. Nothing in this Royalty Purchase and Sale Agreement will affect the right of any party hereto to serve process in any other manner permitted by Applicable Law. Each of the parties hereto waives personal service of any summons, complaint or other process, which may be made by any other means permitted by New York law.

Section 9.8Waiver of Jury Trial. EACH PARTY HERETO HEREBY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN ANY LEGAL PROCEEDING DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS ROYALTY PURCHASE AND SALE AGREEMENT, OR THE TRANSACTIONS CONTEMPLATED HEREBY (WHETHER BASED ON CONTRACT, TORT OR ANY OTHER THEORY). EACH PARTY HERETO (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF THE OTHER PARTY HERETO HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT THE OTHER PARTY HERETO WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT AND THE OTHER PARTY HERETO HAVE BEEN INDUCED TO ENTER INTO THIS ROYALTY PURCHASE AND SALE AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION 9.8.

Section 9.9Severability. If one or more provisions of this Royalty Purchase and Sale Agreement are held to be invalid, illegal or unenforceable by a court of competent jurisdiction, such invalidity, illegality or unenforceability shall not affect any other provision of this Royalty Purchase and Sale Agreement, which shall remain in full force and effect, and the parties hereto shall replace such invalid, illegal or unenforceable provision with a new provision permitted by Applicable Law and having an economic effect as close as possible to the invalid, illegal or unenforceable provision. Any provision of this Royalty Purchase and Sale Agreement held invalid, illegal or unenforceable only in part or degree by a court of competent jurisdiction shall remain in full force and effect to the extent not held invalid, illegal or unenforceable.

Section 9.10Counterparts. This Royalty Purchase and Sale Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. This Royalty Purchase and Sale Agreement shall become effective when each party hereto shall have received a counterpart

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hereof signed by the other party hereto. Any counterpart may be executed by facsimile or other electronic transmission, and such facsimile or other electronic transmission shall be deemed an original.

Section 9.11Amendments; No Waivers. Neither this Royalty Purchase and Sale Agreement nor any term or provision hereof may be amended, supplemented, restated, waived, changed or modified except with the written consent of the parties hereto. No failure or delay by any party hereto in exercising any right, power or privilege hereunder shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. No notice to or demand on any party hereto in any case shall entitle it to any notice or demand in similar or other circumstances. No waiver or approval hereunder shall, except as may otherwise be stated in such waiver or approval, be applicable to subsequent transactions. No waiver or approval hereunder shall require any similar or dissimilar waiver or approval thereafter to be granted hereunder.

Section 9.12Cumulative Remedies. The remedies herein provided are cumulative and not exclusive of any remedies provided by Applicable Law.

Section 9.13Table of Contents and Headings. The Table of Contents and headings of the Articles and Sections of this Royalty Purchase and Sale Agreement have been inserted for convenience of reference only, are not to be considered a part hereof and shall in no way modify or restrict any of the terms or provisions hereof.

Section 9.14No Presumption Against Drafting Party. Each of the parties hereto acknowledges that each party to this Royalty Purchase and Sale Agreement has been represented by counsel in connection with this Royalty Purchase and Sale Agreement and the transactions contemplated by this Royalty Purchase and Sale Agreement.  Accordingly, any rule of law or any legal decision that would require interpretation of any claimed ambiguities in this Royalty Purchase and Sale Agreement against the drafting party has no application and is expressly waived.

[SIGNATURE PAGE FOLLOWS]

Confidential Information indicated by [***] has been omitted from this filing and filed separately with the Securities Exchange Commission.

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IN WITNESS WHEREOF, the parties hereto have executed this Royalty Purchase and Sale Agreement as of the day and year first written above.

DEPOMED, INC.

/s/ James A. Schoeneck

Name: James A. Schoeneck

Title: President and Chief Executive Officer

DEPO DR SUB, LLC

By: Depomed, Inc.

Its: Managing Member

/s/ James A. Schoeneck

Name: James A. Schoeneck

Title: President and Chief Executive Officer

PDL BIOPHARMA, INC.

/s/ John P. McLaughlin

Name: John P. McLaughlin

Title: President and Chief Executive Officer

Confidential Information indicated by [***] has been omitted from this filing and filed separately with the Securities Exchange Commission.

Royalty Purchase and Sale Agreement

EX-10.51

Exhibit 10.51

CERTAIN MATERIAL (INDICATED BY [***]) HAS BEEN OMITTED FROM THIS DOCUMENT PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT.  THE OMITTED MATERIAL HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.

ASSET PURCHASE AGREEMENT

by and between

NAUTILUS NEUROSCIENCES, INC.,

as Seller

and

DEPOMED, INC.,

as Purchaser

Dated as of December 17, 2013

Confidential Information indicated by [***] has been omitted from this filing and filed separately with the Securities Exchange Commission.

ARTICLE I		PURCHASE AND SALE	1
	1.1	Purchase and Sale	1
	1.2	Assets Not Being Acquired	3
	1.3	Assumed Liabilities	4
	1.4	Excluded Liabilities	5
	1.5	Purchase Price and Terms	6
	1.6	Escrow	7
	1.7	Net Sales Milestone Payments	7
	1.8	Allocation of Purchase Price	8
	1.9	Non-assignable Assets; Certain Consents	9
	1.10	Transfer Fees and Taxes	10
	1.11	Archival Copies	10
ARTICLE II		CLOSING	11
	2.1	Closing Date	11
	2.2	Seller’s Closing Deliverables	11
	2.3	Purchaser’s Closing Deliverables	12
ARTICLE III		REPRESENTATIONS AND WARRANTIES REGARDING SELLER	13
	3.1	Incorporation and Qualification	13
	3.2	Ownership Interests in Other Entities	13
	3.3	Capitalization	13
	3.4	Authority; Enforceability	13
	3.5	No Violation	14
	3.6	Consents	14
	3.7	Purchased Assets	14
	3.8	Financial Statements and Controls	15
	3.9	Absence of Undisclosed Liabilities	15
	3.10	Accounts Payable	15
	3.11	Absence of Certain Changes or Events	16
	3.12	Personal Property	17
	3.13	Inventory	17
	3.14	Intellectual Property	18
	3.15	Contracts	19
	3.16	Environmental Matters	20
	3.17	Tax Matters	21
	3.18	Employee Benefits	22
	3.19	Employees; Labor Proceedings	23
	3.20	Permits	23
	3.21	Compliance with Law	24
	3.22	Legal Matters	24
	3.23	Healthcare Regulatory Matters	24
	3.24	Insurance	26
	3.25	Product Liability	26
	3.26	Absence of Certain Practices	26
	3.27	No Affiliate Transactions	26

Confidential Information indicated by [***] has been omitted from this filing and filed separately with the Securities Exchange Commission.

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	3.28	Customers and Suppliers	26
	3.29	Government Programs	27
	3.30	Brokers and Finders	27
	3.31	Solvency	27
	3.32	Disclosure	27
ARTICLE IV		REPRESENTATIONS AND WARRANTIES OF PURCHASER	27
	4.1	Incorporation and Qualification	27
	4.2	Authority; Enforceability	28
	4.3	No Violation	28
	4.4	Consents	28
	4.5	Legal Matters	29
	4.6	Brokers and Finders	29
	4.7	Financial Ability to Perform	29
	4.8	Projections	29
	4.9	Solvency	29
ARTICLE V		COVENANTS AND OTHER AGREEMENTS	29
	5.1	Restrictive Covenants of Seller	29
	5.2	Non-Disparagement by Purchaser	31
	5.3	Transition Plan; Payments Received	32
	5.4	Notification to FDA	32
	5.5	Cooperation in Litigation	33
	5.6	Power of Attorney; Right of Endorsement	33
	5.7	Access to Books and Records	33
	5.8	Removal of Purchased Assets	34
	5.9	Further Assurances	34
	5.10	Publicity	35
	5.11	Maintenance of Insurance	35
	5.12	SEC Filings	35
	5.13	Conduct of the Business	36
	5.14	Recordation of Transferred Intellectual Property	36
	5.15	Notification of Customers and Vendors	36
	5.16	Tax Matters	36
	5.17	Waiver of Bulk Sales Laws	38
	5.18	Anticipated Dissolution of Seller	38
	5.19	Use of Seller Brands	38
	5.20	Processing of Rebates and Chargebacks	39
	5.21	Medicaid Access and Price Reporting	39
	5.22	Enforcement of Covenants Not to Compete	39
ARTICLE VI		SURVIVAL; INDEMNIFICATION	40
	6.1	Survival of Representations and Warranties and Covenants and Agreements; Indemnification Claims Period	40
	6.2	Indemnification Obligations	40
	6.3	Limitations on Indemnification Obligations	41
	6.4	Indemnification Claim Procedure	42

Confidential Information indicated by [***] has been omitted from this filing and filed separately with the Securities Exchange Commission.

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	6.5	Third Party Claims	43
	6.6	Recourse Against Insurance	44
	6.7	Waiver of Certain Damages	45
	6.8	Tax Treatment of Indemnification Payments	45
	6.9	Source of Recovery	45
	6.10	Exclusive Remedy	46
ARTICLE VII		MISCELLANEOUS	47
	7.1	Expenses	47
	7.2	Notices	47
	7.3	Assignment	48
	7.4	Severability	49
	7.5	Interpretation	49
	7.6	Construction	50
	7.7	Amendment and Waiver	50
	7.8	Entire Agreement; No Implied Warranties	50
	7.9	Counterparts	51
	7.10	Governing Law	51
	7.11	Consent to Jurisdiction; Waiver of Jury Trial	51
	7.12	No Third Party Beneficiaries	52
	7.13	Remedies	53
	7.14	Relationship of the Parties	53

ANNEX A — Definitions

EXHIBITS:

Exhibit A:	Escrow Agreement
Exhibit B:	Bill of Sale
Exhibit C:	Assignment of Contracts
Exhibit D-1:	Patent Assignment
Exhibit D-2:	Trademark Assignment
Exhibit E:	Transition Plan
Exhibit F:	FIRPTA Certificate
Exhibit G-1:	Seller FDA Letter (NDA)
Exhibit G-2:	Seller FDA Letter (IND)
Exhibit H-1:	Purchaser FDA Letter (NDA)
Exhibit H-2:	Purchaser FDA Letter (IND)
Exhibit I:	Blanket Authorization Letter
Exhibit J:	Letter Agreement

SCHEDULES:

Schedule 1.1(a)	Prepaid Accounts
Schedule 1.1(b)	Equipment and Machinery
Schedule 1.1(c)	Inventory

Confidential Information indicated by [***] has been omitted from this filing and filed separately with the Securities Exchange Commission.

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Schedule 1.1(d)	Assigned Contracts
Schedule 1.1(e)	Registered Intellectual Property Rights
Schedule 1.1(f)	Telephone and Facsimile Numbers
Schedule 1.2(p)	Other Excluded Assets
Schedule 1.3(a)	Customer Deposits
Schedule 1.3(c)	Other Assumed Liabilities under Seller Permits
Schedule 2.2(c)	Third Party Consents
Disclosure Schedule of Seller

Confidential Information indicated by [***] has been omitted from this filing and filed separately with the Securities Exchange Commission.

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ASSET PURCHASE AGREEMENT

This Asset Purchase Agreement is made as of December 17, 2013, by and between Nautilus Neurosciences, Inc., a Delaware corporation (“Seller”), and Depomed, Inc., a California corporation (“Purchaser”).  Seller and Purchaser are sometimes referred to herein collectively as the “Parties” and individually as a “Party.”

RECITALS

Seller is engaged principally in the business of researching, developing, testing, licensing, producing, marketing, selling and distributing Seller’s diclofenac potassium for oral solution product referred to as Cambia® (the “Product”) (the “Business”).

Seller desires to sell, transfer, convey, assign and deliver to Purchaser, and Purchaser desires to purchase or otherwise acquire from Seller, certain assets of Seller relating to the Product, on the terms and conditions set forth herein.

Capitalized terms used but not defined in this Agreement have the meanings ascribed to such terms in Annex A.

AGREEMENT

Now, therefore, in consideration of the premises and the representations, warranties, covenants and agreements contained in this Agreement and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and intending to be legally bound, the Parties agree as follows:

ARTICLE I

PURCHASE AND SALE

1.1Purchase and Sale.  Upon the terms and subject to the conditions contained in this Agreement, at the Closing, in exchange for the Purchase Price, Seller shall sell or otherwise transfer, convey, assign and deliver to Purchaser, and Purchaser shall purchase or otherwise acquire from Seller, all of the right, title and interest of Seller in, to and under the following, but only the following, assets and rights (collectively, the “Purchased Assets”), free and clear of all Liens (other than Permitted Liens):

(a)all prepaid accounts and expenses, security and other deposits, unbilled charges and other similar current assets relating to the Product or the Business, all of which are set forth on Schedule 1.1(a);

(b)all equipment and machinery required to manufacture the Product owned by Seller, all of which are set forth on Schedule 1.1(b);

(c)all inventory, including raw materials, work-in-process, samples (other than samples to be destroyed by Seller’s sales representatives in fulfillment of the Transition

Confidential Information indicated by [***] has been omitted from this filing and filed separately with the Securities Exchange Commission.

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Plan) and finished goods, supplies, spare parts, packaging and other items of inventory (the “Inventory”), all of which, as of December 16, 2013, are set forth on Schedule 1.1(c);

(d)the Contracts (including purchase orders) set forth on Schedule 1.1(d) and all rights thereunder (collectively, the “Assigned Contracts”);

(e)all Intellectual Property Rights, including all Registered Intellectual Property Rights, used in, developed for, held for use in, or relating to, the Product or the Business, other than the Intellectual Property Rights set forth on Schedule 1.2(p) (the “Transferred Intellectual Property”), with all of such Registered Intellectual Property Rights set forth on Schedule 1.1(e);

(f)all rights to telephone and facsimile numbers, including all ten (10)-digit “800”, “888” or similar numbers, used in, developed for, held for use in or relating to, the Product or the Business, all of which are set forth on Schedule 1.1(f), as well as rights to receive mail and other communications addressed to Seller relating to the Product or the Business (including mail and communications from Governmental Authorities, customers, vendors, contract manufacturers, suppliers, distributors, licensors, licensees, agents and others);

(g)the Seller Permits, to the extent transferrable under applicable Law;

(h)all choses-in-action, rights under guarantees and warranties, rights of set-off, rights of recoupment, rights to indemnification, rights to refunds, rights of recovery and similar rights in favor of Seller with respect to any Purchased Asset, any Assumed Liability, the Product or the Business, but excluding (i) the items described on Schedule 1.2(p), (ii) any of the foregoing arising under any Excluded Asset (including any Contract other than an Assigned Contract) or (iii) which cannot be transferred to Purchaser without violation of Law;

(i)the Regulatory Files;

(j)all customer, vendor, contract manufacturer, supplier, distributor, licensor and licensee lists, books, data, records, manuals, ledgers, files, documents, correspondence, forms and other materials and databases (in any form or medium) maintained for, used in, developed for, held for use in, or relating to, the Product or the Business, whether or not maintained at the offices of Seller, including all scientific data associated with the Product (including clinical, pre-clinical, chemistry, formulation, technical, stability and toxicological data), methods, processes, formulas, validations, chemical specifications, chemical and finished goods analytical test methods, studies, advertising and marketing materials, product descriptions and specifications, drawings, price information, package specifications, regulatory files, correspondence, mailing lists, purchase orders, work orders, credit, collection and sales records, sales and promotional materials and records (including collateral, artwork, call lists and distribution history), laboratory notebooks, training manuals and materials, purchasing materials and records, market surveys, market research and related materials, marketing rights, stationery, business procedures, cost and pricing information, business plans, reference catalogs, equipment maintenance data, Paragraph IV litigation files, accounting records, studies, reports and health and safety related documents and data;

Confidential Information indicated by [***] has been omitted from this filing and filed separately with the Securities Exchange Commission.

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(k)any books, records, documents, correspondence or any other documents to the extent they relate primarily or exclusively to the Assumed Liabilities or to any of the Purchased Assets identified in the other provisions of this Section 1.1; provided, however, that any information not related to the Assumed Liabilities or the Purchased Assets may be redacted from such documents; and

(l)all goodwill generated by or otherwise associated with any of the assets or rights identified in the other provisions of this Section 1.1.

1.2Assets Not Being Acquired.  Purchaser and Seller expressly understand and agree that Purchaser is not purchasing or acquiring, and Seller is not selling or otherwise transferring, conveying, assigning or delivering, any assets or rights of Seller that are not specifically listed in Section 1.1 as Purchased Assets, and all such other assets and rights shall be excluded from the Purchased Assets (the “Excluded Assets”).  For the avoidance of doubt, Excluded Assets shall include the following, whether or not the same are disclosed to Purchaser in or pursuant to this Agreement or otherwise:

(a)all accounts receivable, notes receivable and other receivables relating to the Product or the Business arising out of the conduct of the Business by Seller or any Affiliate of Seller before the Closing Date;

(b)all cash and cash equivalents, bank accounts and securities of Seller;

(c)all Seller Benefit Plans and all rights in connection with and assets of any Seller Benefit Plans;

(d)all rights, causes of action and Claims that may be asserted against third parties solely arising out of or related to any of the Excluded Assets identified in the other provisions of this Section 1.2 or any of the Excluded Liabilities, including any rights to damages, fees or expenses in connection therewith;

(e)any rights of Seller under this Agreement and the Transaction Documents;

(f)all Tax Returns, financial statements, Tax audit information, organizational documents, minute books, corporate seal, stock records, and correspondence and other documents related exclusively to the foregoing items;

(g)all employee-related or employee benefit-related files or records;

(h)all records, documents and correspondence of Seller specifically relating to the negotiation and consummation of the transactions contemplated hereby, and any other books and records which Seller is prohibited from disclosing or transferring to Purchaser under applicable Law;

(i)except as otherwise expressly provided in this Agreement, the Seller Insurance Policies and claims and other rights to proceeds thereof;

Confidential Information indicated by [***] has been omitted from this filing and filed separately with the Securities Exchange Commission.

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(j)all refunds of Taxes for which Seller bears responsibility pursuant to Section 5.16(a) that were paid by Seller or its Affiliates;

(k)any books, records, documents, correspondence or any other documents to the extent they relate solely to Excluded Liabilities or to any of the Excluded Assets identified in the other provisions of this Section 1.2;

(l)all the furnishings, furniture, computer equipment, office and other equipment and supplies, vehicles and other tangible personal property;

(m)all computer software and systems (including related documentation) used in, developed for, held for use in, or relating to, the Business, including maintenance agreements related thereto;

(n)all leased real property;

(o)the name “Nautilus” and all variants thereof, and all rights associated therewith; and

(p)the items described on Schedule 1.2(p).

1.3Assumed Liabilities.  Subject to the terms and conditions of this Agreement, as partial consideration for the Purchased Assets, at the Closing, Purchaser shall assume and agree to pay, perform and discharge when due the following, but only the following, Liabilities and obligations of Seller, in each case, excluding the Excluded Liabilities (collectively, the “Assumed Liabilities”):

(a)all customer deposits relating to the Product or the Business arising on or after the Closing, all of which are set forth on Schedule 1.3(a);

(b)all Liabilities arising under or relating to the Assigned Contracts (i) arising on or after the Closing or (ii) of the type referred to in Section 1.3(e)

(c)all Liabilities arising under or relating to the transferred Seller Permits (i) arising on or after the Closing, (ii) of the type referred to in Section 1.3(e) or (g) or (iii) disclosed on Schedule 1.3(c);

(d)all Liabilities of Purchaser or its Affiliates relating to employee benefits, compensation or other arrangements with respect to, or the employment by Purchaser or its Affiliates of, any Transferred Employee arising on or after the Closing;

(e)all Liabilities for Rebates with respect to Product dispensed on or after January 1, 2014, other than any of the foregoing resulting from a breach of any Contract prior or the violation of a government reimbursement program by Seller prior to Closing;

(f)all Liabilities related to returns of the Product received on or after the Closing Date, other than any such returns resulting from a breach of any Contract by Seller prior

Confidential Information indicated by [***] has been omitted from this filing and filed separately with the Securities Exchange Commission.

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to the Closing or any violation of a government reimbursement program by Seller prior to the Closing;

(g)all Liabilities for Chargebacks with respect to Product dispensed on or after January 1, 2014, other than any of the foregoing resulting from a breach of any Contract by Seller prior to the Closing or any violation of a government reimbursement program by Seller prior to the Closing; and

(h)all other Liabilities arising on or after the Closing to the extent (but only to the extent) arising out of or relating to the ownership or operation of the Business and the Purchased Assets by Purchaser on or after the Closing.

1.4Excluded Liabilities.  Notwithstanding anything to the contrary contained in this Agreement or any of the Transaction Documents, Seller acknowledges that Seller shall retain and satisfy, and Purchaser shall not assume or otherwise be responsible or liable for, any Liabilities or obligations of Seller other than the Assumed Liabilities, whether or not relating to the Purchased Assets or the Business (collectively, the “Excluded Liabilities”).  For the avoidance of doubt, Excluded Liabilities shall include the following, whether or not the same are disclosed to Purchaser in or pursuant to this Agreement or otherwise:

(a)any Indebtedness of Seller for borrowed money, including the Senior Debt;

(b)any Liability with respect to any Proceedings asserted on or prior to the Closing or to the extent the basis of which arose prior to the Closing;

(c)any Taxes for which Seller is liable pursuant to Section 5.16(a);

(d)any Liability resulting from or arising out of any of the Excluded Assets;

(e)any Liability resulting from or arising out of any of the Seller Benefit Plans (whether such Liability arises before, on or after the Closing, including: (i) unfunded Liabilities under any Seller Benefit Plan, (ii) Liabilities with respect to the termination of any Seller Benefit Plan and (iii) any accrued but unpaid Claim under any Seller Benefit Plan);

(f)except as specifically provided in Section 1.3(d), any Liability of Seller relating to or arising out of (i) the employment, or termination of employment, of any Business Employee against Seller, or (ii) workers’ compensation claims of any Business Employee of Seller;

(g)any Liability of Seller to NNI Holdings Corp.;

(h)any Liability of Seller to any holder or former holder of equity interests in Seller or any Affiliate of Seller, in such equityholder’s capacity as such;

(i)any Liability of Seller under this Agreement or the Transaction Documents;

Confidential Information indicated by [***] has been omitted from this filing and filed separately with the Securities Exchange Commission.

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(j)any Liability of Seller for expenses or fees incident to or arising out of the negotiation, preparation, approval or authorization of this Agreement, the Transaction Documents or the consummation (or preparation for the consummation) of the transactions contemplated hereby and thereby (including all attorneys’ and accountants’ fees and brokerage fees incurred by or imposed upon Seller);

(k)any Liability under any bulk sales, bulk transfer laws or comparable Laws of any jurisdiction which may be applicable to the transactions contemplated by this Agreement;

(l)all Liabilities for Rebates with respect to Product dispensed prior to January 1, 2014;

(m)all Liabilities for Chargebacks with respect to Product dispensed prior to January 1, 2014;

(n)except for any Liability of the type referred to in Section 1.3(e) or (g), any Liability arising under or relating to the Assigned Contracts arising prior to the Closing Date, including any obligation to pay royalties and milestones, as applicable, with respect to Product sold prior to the Closing; and

(o)any Liability resulting from or arising out of the conduct any business by Seller or any Affiliate of Seller (other than the Business) or the ownership of the Excluded Assets, whether before, on or after the Closing.

1.5Purchase Price and Terms.

(a)Upon the terms and subject to the conditions contained in this Agreement, as consideration for the Purchased Assets to be sold, transferred, conveyed, assigned and delivered to Purchaser pursuant to Section 1.1, Purchaser shall (i) at the Closing, pay to Seller an aggregate amount equal to Forty Eight Million Seven Hundred Twenty Five Thousand Dollars ($48,725,000) (the “Cash Purchase Price”); (ii) at the Closing, assume the Assumed Liabilities; and (iii) if and to the extent earned in accordance with Section 1.7, pay to Seller the Net Sales Milestone Payment(s) (collectively, the “Purchase Price”).

(b)The Cash Purchase Price shall be paid at the Closing as follows:

(i)to the administrative agent under the Credit Agreement dated as of December 5, 2012 among Seller, as borrower, the lenders party thereto and [***], as agent (the “Senior Debt”), for delivery to the lenders thereunder, [***], which is the amount necessary to satisfy in full the obligations of Seller thereunder in accordance with the Payoff Letter, by wire transfer of immediately available funds to the account specified in the Payoff Letter;

(ii)to Wells Fargo Bank, N.A. (the “Escrow Agent”), Seven Million Five Hundred Thousand Dollars ($7,500,000) (the “Escrow Deposit”), in accordance with Section 1.6, by wire transfer of immediately available funds to an account designated in writing by the Escrow Agent; and

Confidential Information indicated by [***] has been omitted from this filing and filed separately with the Securities Exchange Commission.

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(iii)to Seller, [***], by wire transfer of immediately available funds to an account designated in writing by Seller.

1.6Escrow.  At the Closing, pursuant to and in accordance with Section 1.5(b)(ii) Purchaser shall deposit the Escrow Deposit into an escrow account (the “Escrow Account”) established for such purpose with the Escrow Agent pursuant to an escrow agreement by and among Purchaser, Seller and the Escrow Agent in substantially the form attached to this Agreement as Exhibit A (the “Escrow Agreement”).  The Escrow Deposit shall be held in the Escrow Account until the second (2nd) anniversary of the Closing Date, subject to extension as set forth in the Escrow Agreement (the “Escrow Period”), subject to the terms of the Escrow Agreement, to serve as an escrow fund for the payment of any amount payable to Purchaser pursuant to Section 5.16 and (c) any indemnifiable Losses payable to any Purchaser Indemnified Party pursuant to Article VI.  At the end of the Escrow Period, the amount of the Escrow Deposit then held in the Escrow Account, less any amounts subject to a pending Notice of Claim (as determined in accordance with the Escrow Agreement), and all interest and income earned on the Escrow Deposit, shall be disbursed by the Escrow Agent to Seller in accordance with the terms and conditions of the Escrow Agreement.  Purchaser shall pay the fees and expenses of the Escrow Agent under the Escrow Agreement.

1.7Net Sales Milestone Payments.

(a)Purchaser shall pay, without duplication, the following non-refundable, non-creditable, one (1) time net sales milestone payments (the “Net Sales Milestone Payments”) in respect of the Purchased Assets, the first time the applicable “Annual Net Sales” dollar value set forth below is achieved (based on Net Sales of the Product in any full calendar year), in each case, by wire transfer in immediately available funds to an account designated in writing by Seller, which payment shall be made no later than forty five (45) days following the end of the applicable calendar year; provided, that (i) any Net Sales Milestone Payment may be payable in the same calendar year as any other Net Sales Milestone Payment and (ii) any obligation to make a Net Sales Milestone Payment shall be subject to offset as provided in Section 1.7(c) and Section 6.9(a).  Seller acknowledges that the right to receive Net Sales Milestone Payments is not a security, shall not be represented by a certificate or other instrument and shall not represent a security or ownership interest in Purchaser, its Affiliates or any of their respective assets.

Annual Net Sales:		Net Sales Milestone Payment:
[***]		[***]
$	100,000,000	[***]

(b)Commencing with the [***] and continuing until the earlier to occur of (i) the payment to Seller of the Net Sales Milestone Payment with respect to the achievement of annual Net Sales of One Hundred Million Dollars ($100,000,000) or (ii) [***] (such period, the “Milestone Period”), within forty five (45) days after the end of each calendar quarter, Purchaser shall deliver to Seller a statement (each, a “Net Sales Statement”) setting forth (A) the amount of Net Sales with respect to such calendar quarter and with respect to the period from January 1 of the calendar year of which such calendar quarter is a part through the end of such calendar quarter and (B) the “gross to net” adjustments with respect to the calculation of Net Sales for

Confidential Information indicated by [***] has been omitted from this filing and filed separately with the Securities Exchange Commission.

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such calendar quarter and calendar year (which calculation shall be made in conformity with, and show the individual components of, the definition of Net Sales).

(c)Any dispute with respect to a Net Sales Statement shall be resolved in accordance with Section 5.7(c).  If such resolution results in an adjustment to the amount payable by Purchaser to Seller pursuant to Section 1.7(a), Purchaser shall pay to Seller cash in the amount of such adjustment within five (5) Business Days after such dispute is finally resolved, which payment shall be by wire transfer of immediately available funds to the account designated by Seller.

1.8Allocation of Purchase Price.  The Cash Purchase Price and those Assumed Liabilities, costs and other items included in “consideration” for purposes of Code section 1060 (the “Section 1060 Consideration”) shall be allocated among the Purchased Assets in compliance with Code section 1060 and the Treasury Regulations thereunder, in accordance with this Section 1.8 (such allocation, the “Allocation”).  As soon as reasonably practicable (and in any event within one hundred twenty (120) days) after the Closing Date, Purchaser shall prepare and deliver to Seller a proposed Allocation (the “Draft Allocation”).  During the thirty (30) day period following such delivery, Seller may, but shall not be obligated to, dispute any of the items in the Draft Allocation by delivery of a written notice to Purchaser that provides reasonable detail concerning each item in the Draft Allocation that Seller disputes and the basis of such dispute.  If Seller does not deliver such a dispute notice to Purchaser within such thirty (30) day period, the Draft Allocation shall conclusively be deemed the “Final Allocation”, which shall be final and binding upon the Parties.  If Seller delivers such a dispute notice within such thirty (30) day period, then for a period of thirty (30) days after the date of such dispute notice, Purchaser and Seller shall negotiate in good faith to resolve the disputed items.  If Purchaser and Seller resolve all of the disputed items during such thirty (30) day period,  the Draft Allocation shall be revised to reflect such resolution, and as so revised shall be the Final Allocation and shall be final and binding upon the Parties.  [***]  Within fifteen (15) days after the Final Allocation has been determined in accordance with this Section 1.8, Purchaser shall cause to be prepared and delivered to Seller IRS Forms 8594 and any required exhibits thereto, and any similar forms required under applicable state, local or foreign Tax Law, which shall conform to the Final Allocation.  Purchaser and Seller shall each timely file the applicable Form 8594 with the IRS in accordance with the requirements of Code Section 1060 and the Treasury Regulations thereunder, and such other forms with the applicable Governmental Authorities in accordance with the requirements of the applicable Tax Law.  Upon any subsequent payments (or assumption of liabilities) that, under applicable Tax Law, result in an adjustment to the Section 1060 Consideration as previously reported on a Form 8594 filed with the IRS, Purchaser shall prepare a revised Final Allocation and shall deliver to Seller such revised Final Allocation, together with a supplemental Form 8594 (and any supplemental forms required under any other applicable Tax Law) conforming to such revised Final Allocation.  To the extent Seller has any objections to such revised Final Allocation, the Parties will use the same procedures as described above in this Section 1.8 to resolve such dispute.  Upon resolution of such dispute, if any, the Final Allocation (as revised) will be final and binding upon the Parties and the supplemental Form 8594 will be revised to reflect the resolution of any such dispute.  Purchaser and Seller shall each file such supplemental Form 8594 with the Internal Revenue Service in accordance with the requirements of Code section 1060 and the Treasury Regulations thereunder (and any such other supplemental forms with the applicable Governmental Authority in accordance with

Confidential Information indicated by [***] has been omitted from this filing and filed separately with the Securities Exchange Commission.

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such other applicable Tax Law).  Purchaser and Seller shall, and shall cause their respective Affiliates to, report, act and file Tax Returns consistent with the Final Allocation (as revised, if applicable) in all respects and for all purposes, and Purchaser and Seller shall not, and shall cause their respective Affiliates to not, take any position, whether on audit, Tax Returns or otherwise, that is inconsistent with the Final Allocation (as revised, if applicable), unless required to do so by applicable Law.

1.9Non-assignable Assets; Certain Consents.

(a)Notwithstanding anything to the contrary in this Agreement, and subject to the provisions of this Section 1.9(a), to the extent that the sale, transfer, conveyance, assignment or delivery, or attempted sale, transfer, conveyance, assignment or delivery, to Purchaser of any Purchased Asset or the assignment or delegation, or attempted assignment or delegation, to Purchaser of any Assumed Liability (in each case other than an Assigned Contract identified with an asterisk on Schedule 1.1(d)) would require the permit, license, variance, exemption, Order, consent, authorization, approval or waiver of a Person (including any Governmental Authority) (an “Other Consent”), and such Other Consent shall not have been obtained prior to the Closing Date, this Agreement shall not constitute a sale, transfer, conveyance, assignment or delivery, or an attempted sale, transfer, conveyance, assignment or delivery, of such Purchased Asset or assignment or delegation, or attempted assignment or delegation, of such Assumed Liability.  Following the Closing, Purchaser shall use commercially reasonable efforts, and Seller shall cooperate with such efforts as Purchaser may reasonably request, to obtain any such Other Consents with respect to any and all of the Purchased Assets and Assumed Liabilities, or any release, substitution or amendment required to novate all of the Purchased Assets and Assumed Liabilities or to obtain in writing the unconditional release of Seller to such arrangements, so that, in each case, Purchaser shall obtain Seller’s right, title and interest to the Purchased Assets and Purchaser shall be solely responsible for the Assumed Liabilities from and after the Closing Date; provided, however, that neither Seller nor Purchaser shall be required to pay any consideration therefor.  Once such Other Consent is obtained, Seller shall sell, assign, transfer, convey and deliver to Purchaser the relevant Purchased Asset to which such consent, authorization, approval, waiver, release, substitution or amendment relates, or Purchaser shall assume the relevant Assumed Liability to which such Other Consent relates, in each case for no additional consideration.  Applicable Transfer Taxes in connection with such sale, transfer, conveyance, assignment, or delivery shall be paid by Purchaser in accordance with Section 1.10.

(b)To the extent that any Purchased Asset or Assumed Liability cannot be transferred to Purchaser following the Closing pursuant to this Section 1.9 or is not transferred to Purchaser within thirty (30) days following the Closing, Purchaser and Seller shall use commercially reasonable efforts to enter into such arrangements (such as subleasing, sublicensing or subcontracting) to provide to the Parties the economic and, to the extent permitted under applicable Law, operational equivalent of the transfer of such Purchased Asset or Assumed Liability to Purchaser as of the Closing and the performance by Purchaser of its obligations with respect thereto.  Purchaser shall, as agent or subcontractor for Seller pay, perform and discharge fully the liabilities and obligations of Seller thereunder from and after the Closing Date.  To the extent permitted under applicable Law, Seller shall hold in trust for and pay to Purchaser promptly upon receipt thereof, such Purchased Asset and all income, proceeds and other monies received by Seller to the extent related to such Purchased Asset in connection

Confidential Information indicated by [***] has been omitted from this filing and filed separately with the Securities Exchange Commission.

9

with the arrangements under this Section 1.9(b).  The obligations of the Parties under this Section 1.9(b) shall expire on the six (6) month anniversary of the Closing Date.

(c)With respect to the Assigned Contracts designated with an asterisk on Schedule 1.1(d), the Parties desire that the assignment of such Assigned Contract shall be effective on January 1, 2014.  Accordingly, from and after the Closing and through January 1, 2014, Seller shall undertake commercially reasonable efforts to obtain such consents to assignment effective as of January 1, 2014, and Purchaser shall provide such assistance in connection therewith as Seller may reasonably request; provided, however, that neither Seller nor Purchaser shall be required to pay any consideration therefor.  Purchaser acknowledges and agrees that Seller may also deliver a notice of termination of each such Assigned Contract, to become effective no sooner than March 31, 2014.  If the consent to assignment of any such Assigned Contract has not been obtained on or before January 1, 2014, Seller shall continue to perform such Assigned Contract for the benefit of Purchaser until the first to occur of the assignment of such Assigned Contract to Purchaser or the termination of such Assigned Contract, and in connection therewith: (i) Seller shall keep Purchaser reasonably apprised of all requests for payment under such Assigned Contract with respect to Product dispensed on or after January 1, 2014, (ii) shall take such direction from Purchaser as Purchaser may reasonably request with respect to the acceptance or rejection of any such request for payment under such Assigned Contract and with respect to the negotiation or other resolution thereof and (iii) Purchaser shall pay or reimburse Seller for, or otherwise assume financial responsibility for, all amounts that may become payable under such Assigned Contract with respect to Product dispensed on or after January 1, 2014 and, in addition, Purchaser shall indemnify and hold harmless Seller for all acts and omissions of Seller (other than acts or omissions that constitute fraud or bad faith) taken in furtherance of such Assigned Contract during such period at the request of Purchaser.

1.10Transfer Fees and Taxes.  Purchaser shall be responsible for, and shall pay, all Transfer Taxes, provided, however, that in the case of any Transfer Taxes that are the responsibility of Seller under applicable Tax Law, Purchaser’s obligation to pay such Transfer Taxes shall be fulfilled by means of a reimbursement to Seller, which reimbursement shall become due promptly after Seller has provided Purchaser with a receipt or some other form of reasonable evidence that Seller has remitted such Transfer Taxes to the appropriate Governmental Authority and a copy of any accompanying Tax Return filed or submitted to such Governmental Authority.  Purchaser shall be entitled to (and Seller shall promptly pay to Purchaser) any refunds of such Transfer Taxes to the extent that Purchaser has made reimbursement for such Transfer Taxes.  Purchaser shall file all necessary Tax Returns and other documentation required to be filed by it under applicable Law with respect to all Transfer Taxes, and, if required by applicable Law, the Parties shall join in the execution of any such Tax Returns and other documentation.  Each Party shall use commercially reasonable efforts to take such actions as the other Party may reasonably request in connection with efforts to mitigate, reduce or eliminate any Transfer Taxes and to obtain any certificate or other document from any taxing authority or any other Person as may be necessary to mitigate, reduce or eliminate any Transfer Taxes.

1.11Archival Copies.  Seller may retain copies, solely for purposes of complying with the Seller’s standard archival procedures, of all or any part of the documentation of Seller that is

Confidential Information indicated by [***] has been omitted from this filing and filed separately with the Securities Exchange Commission.

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included among the Purchased Assets, provided, however, that such copies shall, for the avoidance of doubt, be treated as Business Confidential Information.

ARTICLE II

CLOSING

2.1Closing Date.  The closing for the consummation of the transactions contemplated by this Agreement (the “Closing”) shall take place at the offices of Baker Botts L.L.P. located at 1001 Page Mill Road, Building One, Suite 200, Palo Alto, California 94304 at 10:00 a.m. (Pacific Standard Time) on the date hereof or at such other place and such other time as Seller and Purchaser may agree in writing.  The date on which the Closing occurs is referred to herein as the “Closing Date.”

2.2Seller’s Closing Deliverables.  At the Closing, Seller shall deliver to Purchaser the following:

(a)a bill of sale, in substantially the form attached to this Agreement as Exhibit B (the “Bill of Sale”), executed by Seller;

(b)an assignment and assumption agreement, in substantially the form attached to this Agreement as Exhibit C (the “Assignment of Contracts”), executed by Seller;

(c)each third party consent identified on Schedule 2.2(c);

(d)a patent assignment, in substantially the form attached to this Agreement as Exhibit D-1, and a trademark assignment, in substantially the form attached to this Agreement as Exhibit D-2 (collectively, the “Assignments of Transferred Intellectual Property”), each executed by Seller;

(e)letters from Seller to the FDA transferring to Purchaser the rights of the Seller Permits issued by the FDA, in the forms attached to this Agreement as Exhibit G-1 and Exhibit G-2 (collectively, the “Seller FDA Letters”), each executed by Seller;

(f)the Escrow Agreement, duly executed by Seller and the Escrow Agent;

(g)a certificate of the Secretary of Seller certifying as complete, accurate and in effect as of the Closing: (i) an attached copy of the certificate of incorporation, certified as of a recent date by the Secretary of State of the State of Delaware and the bylaws of Seller certified as of a recent date by the Secretary of Seller, and (ii) resolutions adopted by Seller’s board of directors and stockholders approving the execution and delivery of this Agreement and each Transaction Document to which Seller is or will be a party and the consummation of the transactions contemplated hereby and thereby, and certifying to the incumbency and signatures of the officers (or equivalent) of Seller executing this Agreement and each Transaction Document to which Seller is or will be a party and any other document relating to the transactions contemplated hereby and thereby;

Confidential Information indicated by [***] has been omitted from this filing and filed separately with the Securities Exchange Commission.

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(h)a payoff letter, in a form reasonably acceptable to Purchaser, with respect to the Senior Debt (the “Payoff Letter”), executed by [***], as agent;

(i)an affidavit of Seller, executed by Seller and dated as of the Closing Date, certifying that Seller is not a “foreign person” within the meaning of Code section 1445, in substantially the form attached to this Agreement as Exhibit F;

(j)an opinion letter of Kelley Drye & Warren LLP;

(k)access to the Purchased Assets that are in the possession or control of Seller (and to the extent existing in physical or electronic form), to assume possession and control thereof;

(l)a letter agreement, in the form attached to this Agreement as Exhibit L, executed by each party thereto;

(m)a blanket letter from Seller to each vendor, supplier or manufacturer of the Product authorizing and directing each such Person to disclose Business Confidential Information in the possession of such Person to Purchaser, in substantially the form attached to this Agreement as Exhibit I (the “Blanket Authorization Letter”); and

(n)a properly completed and duly executed IRS Form W-9 establishing that Seller is exempt from backup withholding.

2.3Purchaser’s Closing Deliverables.  At the Closing, Purchaser shall deliver to Seller the following:

(a)wire transfers of the Cash Purchase Price in the manner provided in Section 1.5(b);

(b)the Assignment of Contracts, executed by Purchaser;

(c)the Assignments of Transferred Intellectual Property, executed by Purchaser;

(d)the Escrow Agreement, executed by Purchaser;

(e)an opinion letter of Baker Botts L.L.P.;

(f)letters from Purchaser to the FDA assuming responsibility for post-Closing obligations for the applicable Seller Permits issued by the FDA, in substantially the forms attached to this Agreement as Exhibit H-1 and Exhibit H-2 (collectively, the “Purchaser FDA Letters”), each executed by Purchaser; and

(g)a certificate of the Secretary of Purchaser certifying as complete, accurate and in effect as of the Closing resolutions adopted by Purchaser’s board of directors, approving the execution and delivery of this Agreement and the Transaction Documents to which Purchaser is or will be a party and the consummation of the transactions contemplated hereby and thereby,

Confidential Information indicated by [***] has been omitted from this filing and filed separately with the Securities Exchange Commission.

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and certifying to the incumbency and signatures of the officers of Purchaser executing this Agreement, the Transaction Documents to which Purchaser is or will be a party and any other document relating to the transactions contemplated hereby and thereby.

ARTICLE III

REPRESENTATIONS AND WARRANTIES REGARDING SELLER

Seller represents and warrants to Purchaser that, except as set forth in the Disclosure Schedule:

3.1Incorporation and Qualification.  Seller is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Delaware and has all required corporate power and corporate authority to own, license, lease or otherwise hold its assets and properties and to carry on its business as it is currently conducted.  Seller is qualified to transact business and is in good standing (with respect to jurisdictions that recognize such concept) in the jurisdictions set forth on Section 3.1 of the Disclosure Schedule, which jurisdictions constitute all of the jurisdictions in which Seller is required to be so qualified, except where the failure to be so qualified and in good standing would not have, individually or in the aggregate, a Material Adverse Effect.  Prior to the Closing Date, Seller has included in the Data Room complete and correct copies of the Organizational Documents of Seller, in each case as in effect as of the Closing.

3.2Ownership Interests in Other Entities.  Seller does not own, of record or beneficially, directly or indirectly (a) any shares of capital stock or securities convertible into or exchangeable or exercisable for capital stock of any other corporation; or (b) any equity interest in any limited or unlimited liability company, partnership or other business enterprise.

3.3Capitalization.  Section 3.3(a) of the Disclosure Schedule sets forth the name of each equityholder in Seller and the respective ownership percentages of each such equityholder in Seller.  Except as set forth in Section 3.3(b) of the Disclosure Schedule, there are no Contracts to which Seller or, to Seller’s Knowledge, any other Person, is a party with respect to: (i) the issue of any equity interests in Seller, (ii) the voting of any equity interests in Seller (including any proxy or director nomination rights); or (iii) the transfer of any equity interests of Seller.  Seller does not have any obligation (contingent or otherwise) to purchase, redeem, retire, call or otherwise acquire any of its equity interests.  None of the equity securities of Seller are registered or required to be registered under the Exchange Act.

3.4Authority; Enforceability.  Seller has the required corporate power and corporate authority to execute and deliver this Agreement and each Transaction Document to which Seller is or will become a party, to perform its obligations hereunder and thereunder and to consummate the transactions contemplated hereby and thereby.  The execution, delivery and performance by Seller of this Agreement and each Transaction Document to which Seller is or will become a party and the consummation by Seller of the transactions contemplated hereby and thereby have been duly authorized by all necessary corporate action on the part of Seller.  This Agreement and each Transaction Document to which Seller is or will become a party has been, or when executed shall be, duly and validly executed by Seller.  Assuming that this Agreement

Confidential Information indicated by [***] has been omitted from this filing and filed separately with the Securities Exchange Commission.

13

and each Transaction Document to which Seller is or will become a party is a valid and binding obligation of each other party thereto, this Agreement and each such Transaction Document constitutes, or when executed shall constitute, a valid and binding agreement of Seller, enforceable against Seller in accordance with its terms, subject to the Equitable Exceptions.

3.5No Violation.  The execution, delivery and performance by Seller of this Agreement and each Transaction Document to which Seller is or will become a party and the consummation by Seller of the transactions contemplated hereby and thereby do not and shall not, directly or indirectly (assuming the consents referred to in Section 3.6 are obtained prior to the Closing), (a) conflict with or violate the Organizational Documents of Seller, (b) result in a violation of any Law applicable to Seller or by which any of the Purchased Assets are bound, or (c) except as set forth in Section 3.5(a) of the Disclosure Schedule, constitute a breach of or result in a default (or an event which, with or without notice or passage of time or both, would constitute a material default) under, or result in the termination of, or accelerate the performance required by, or result in a right of termination or acceleration under, or result in the creation of any Lien upon any of the Purchased Assets under any of the terms, conditions or provisions of, any Contract set forth in Section 3.15 of the Disclosure Schedule.  Except as set forth in Section 3.5(b) of the Disclosure Schedule, none of the Assigned Contracts requires the consent, approval, Order or authorization of, action by or in respect of, or registration, declaration or filing with any third party for Seller to enter into this Agreement and each Transaction Document to which Seller is or will become a party or to consummate the transactions contemplated hereby and thereby.

3.6Consents.  Except as set forth in Section 3.6 of the Disclosure Schedule, no declaration, filing or registration with, or notice to, or authorization, consent, Order or approval of, any Governmental Authority is required to be obtained or made in connection with the execution, delivery and performance by Seller of this Agreement or any of the Transaction Documents to which Seller is or will become a party or the consummation by Seller of the transactions contemplated hereby or thereby, except for such declarations, filings, registrations, notices, authorizations, consents, Orders and approvals which, if not obtained or made, would not reasonably be expected to materially diminish or impair the use or value of the Purchased Assets or the value or operation of the Business.

3.7Purchased Assets.

(a)The Assigned Contracts include all of the manufacturing and supply Contracts to which Seller is a party, and such Assigned Contracts are all of the Contracts necessary for Purchaser to have the Product manufactured for it in substantially the same manner as the Product is currently manufactured for Seller.  The Transferred Intellectual Property and the Assigned Contracts include all of the Intellectual Property Rights necessary for Purchaser to conduct the Business immediately after the Closing in substantially the same manner that it is currently conducted by Seller, except that Purchaser will not have any rights to Seller’s name other than as set forth in Section 5.19.

(b)Except with respect to Intellectual Property Rights (as to which the sole representations and warranties of Seller are made in Section 3.14), Seller has good and marketable title, or holds valid and enforceable leases or licenses, to all of the Purchased Assets,

Confidential Information indicated by [***] has been omitted from this filing and filed separately with the Securities Exchange Commission.

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in each case, free and clear of all Liens, other than (i) Permitted Liens or (ii) Liens set forth in Section 3.7(b) of the Disclosure Schedule.  At the Closing, Seller will convey, transfer, assign and deliver to Purchaser good title to the Purchased Assets, free and clear of all Liens other than Permitted Liens.  Seller has not granted any rights, options or licenses relating to the Purchased Assets except (i) non-exclusive implied licenses to end-users in the ordinary course of business, (ii) options, licenses or agreements that have been terminated on or prior to the Closing, and (iii) the Assigned Contracts.

3.8Financial Statements and Controls.

(a)Attached as Section 3.8 of the Disclosure Schedule are the audited balance sheet of Seller as at December 31, 2011 and December 31, 2012, respectively, together with the related audited statements of operations and cash flows of Seller for the one (1) year periods then ended (the “Audited Financial Statements”), and the unaudited balance sheet of Seller as at October 31, 2013, together with the related unaudited statements of operations and cash flows for the ten (10) month period then ended (the “Unaudited Financial Statements” and, together with the Audited Financial Statements, the “Financial Statements”).  The Financial Statements were prepared in accordance with GAAP applied on a basis consistent with prior periods and fairly present in all material respects the consolidated financial position, results of operations and cash flows of Seller at the date and for the period indicated and are consistent, in all material respects, with the books and records of Seller (except that the Unaudited Financial Statements lack footnote disclosure and other presentation items, and do not include year-end audit adjustments (which adjustments will not be material, individually or in the aggregate)).

(b)Seller maintains books and records reflecting its assets and liabilities, including the Purchased Assets and the Assumed Liabilities, that are accurate in all material respects.  Seller maintains proper and adequate internal accounting controls sufficient to provide reasonable assurance that: (i) transactions are executed with management’s authorization; (ii) transactions are recorded as necessary to permit preparation of the financial statements of Seller and to maintain accountability for the assets of Seller; and (iii) access to the assets of Seller is permitted only in accordance with management’s authorization.

3.9Absence of Undisclosed Liabilities.  Except as disclosed in the Financial Statements or as set forth in Section 3.9 of the Disclosure Schedule, Seller did not have as of October 31, 2013 (the “Balance Sheet Date”), and has not incurred since the Balance Sheet Date, any Liabilities with respect to the Purchased Assets or the Assumed Liabilities that would be required to be disclosed on a balance sheet of Seller prepared in accordance with GAAP, except for such Liabilities that: (a) were incurred after the Balance Sheet Date in the ordinary course of business (none of which results from, arises out of, relates to or is in the nature of, any breach of contract or violation of Law); (b) are permitted by this Agreement; (c) are Excluded Liabilities or (d) have been discharged or paid in full or will have been discharged or paid in full prior to the Closing.

3.10Accounts Payable.  No accounts payable of Seller related to the Product or the Business have been outstanding for more than sixty (60) days.

Confidential Information indicated by [***] has been omitted from this filing and filed separately with the Securities Exchange Commission.

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3.11Absence of Certain Changes or Events.  Except as set forth in Section 3.11 of the Disclosure Schedule,

(a)since January 1, 2013:

(i)Seller has sold the Product to wholesalers and distributors only in the ordinary course of business; and

(ii)Seller has not engaged in any practice with the intent of increasing the levels of inventory of the Product outside of the ordinary course of business and in anticipation of entering into this Agreement or any similar transaction with respect to the Product or the Business;

(b)since the Balance Sheet Date, Seller has not suffered or experienced any changes, events, circumstances or developments which, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect;

(c)since the Balance Sheet Date, Seller has conducted the Business only in the ordinary course; and

(d)since the Balance Sheet Date, Seller has not:

(i)merged or consolidated with any Person, acquired any equity interest in any Person or entered into a business combination with any Person; or acquired or agreed to acquire any assets that are or will be used in, developed for, held for use in, or related to, the Business, except for acquisitions of Inventory, spare parts, office equipment and supplies and of replacements for worn or obsolete items in the ordinary course of business;

(ii)sold, licensed, leased, subleased, encumbered, assigned or otherwise disposed of, or entered into any Contract to sell, license, lease, encumber, assign or otherwise dispose of, any of its assets used in, developed for, held for use in, or related to, the Product or the Business, other than sales or returns of obsolete or surplus equipment in the ordinary course of business;

(iii)authorized, recommended, proposed or announced an intention to adopt a plan of complete or partial liquidation or dissolution;

(iv)except as required by Law or any employment agreement with a Business Employee or in the ordinary course of business, (A) paid or agreed to pay any pension, retirement allowance or other employee benefit to any officer, director or management employee of Seller, whether past or present, who performs or performed services in respect of the Business; (B) entered into any new, or materially amended any existing, employment or severance or termination agreement with any officer, director or management employee of Seller who performs services in respect of the Business; (C) became obligated under any new Seller Benefit Plan or employment agreement that was not in existence on June 30, 2013 or amended any Seller Benefit Plan or

Confidential Information indicated by [***] has been omitted from this filing and filed separately with the Securities Exchange Commission.

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employment agreement in existence on such date if such amendment would have the effect of materially enhancing any benefits thereunder with respect to any Business Employee;

(v)(A) assumed or incurred any Indebtedness (except for accounts payable in the ordinary course of business) that would constitute an Assumed Liability; (B) guaranteed any Indebtedness of any other Person that would constitute an Assumed Liability; or (C) created any Lien on any of the Purchased Assets or the assets of Seller used in, developed for, held for use in, or related to, the Business, except for Permitted Liens;

(vi)made any loan or advance to, or guaranteed any Liabilities of, any Person that would constitute a Purchased Asset;

(vii)except in the ordinary course of business, (A) entered into any Contract with respect to the Product or the Business; or (B) modified, rescinded, terminated, waived, released or otherwise amended in any material respect any of the terms or provisions of any Assigned Contract;

(viii)made any material change in its accounting policies, other than as required by GAAP or applicable Law;

(ix)to the extent related to, or otherwise having any effect on the Business, and except as consistent with past practice and as would not result in penalties or late charges or adversely affect Seller’s relationship with vendors, suppliers or licensors, delayed payment on or failed to pay when due the trade accounts payable or other recurring expenses of Seller;

(x)incurred any material damage, destruction or loss, or made or filed any Claim concerning any such damage, destruction or Loss (whether or not covered by insurance), or experienced any condemnation or other taking, in each case with respect to any asset used in, developed for, held for use in, or related to, the Product or the Business and which adversely affects Seller, the Product or the Business; or

(xi)entered into any Contract to take any of the actions set forth in this Section 3.11.

3.12Personal Property.  The tangible personal property included in the Purchased Assets is in good operating condition and repair (reasonable wear and tear excepted) and adequate for the purposes for which it is currently used.  There are no pending or, to Seller’s Knowledge, threatened, condemnation or similar Proceedings against Seller or any of the Purchased Assets or any item of personal property used in, developed for, held for use in, or relating to, the Product or the Business.

3.13Inventory.  The Inventory consists of a quality and quantity usable and salable in the ordinary course of business consistent with past practice, except for obsolete, damaged, defective or slow-moving items in commercially reasonable amounts.  All trade inventories of the Product comprising part of the Inventory have the expiration dates as set forth in Section 3.13 of the Disclosure Schedule.  To Seller’s Knowledge, all of the Inventory is, as of the Closing,

Confidential Information indicated by [***] has been omitted from this filing and filed separately with the Securities Exchange Commission.

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free of defects (including defects in packaging, labeling, and storage) and systematic or chronic problems and complies in all material respects with all applicable specifications and all applicable Law, including all regulatory requirements and environmental Laws, including cGMP, and may be introduced into interstate commerce in the United States in accordance with applicable Law.  All Inventory that has been returned, has expired or has been deemed unusable or not fit for sale, has been or will be destroyed in accordance with the policies of Seller and applicable Law.  For purposes of this Agreement, “cGMP” means the then-current good manufacturing practices required by the FDA, as defined in 21 C.F.R. Parts 210 and 211, for the manufacture and testing of pharmaceutical materials.

3.14Intellectual Property.

(a)All of the Transferred Intellectual Property is either (i) owned exclusively by Seller free and clear of all (A) Liens (other than Permitted Liens and the Liens set forth on Section 3.14(a)(i) of the Disclosure Schedule) and (B) except as set forth in Section 3.14(a)(ii) of the Disclosure Schedule, any requirement of any royalty, milestone or similar payments or (ii) licensed to Seller pursuant to an Assigned Contract on the terms and conditions set forth therein.

(b)Section 3.14(b) of the Disclosure Schedule identifies a complete and correct list of any registrations or applications for registration of any Transferred Intellectual Property that is owned by Seller or licensed by Seller from APR Applied Pharma Research S.A. (collectively, the “Registered Intellectual Property Rights”) and the current status of all Registered Intellectual Property Rights.  All Registered Intellectual Property Rights (i) have been duly filed or registered with the applicable Governmental Authority and properly maintained in all material respects, including the timely submission of all necessary filings and payment of fees in accordance with the legal and administrative requirements in the appropriate jurisdictions and (ii) have not lapsed or expired.  Seller has complied in all material respects, including the duty to disclose and applicable duties of candor, in the filing, maintaining and prosecution of the Registered Intellectual Property Rights.

(c)To Seller’s Knowledge, the operation of the Business by Seller does not infringe, violate, conflict with or constitute a material misappropriation of any Intellectual Property Right of any Person (including rights to privacy or publicity) or constitute unfair competition or an unfair trade practice under applicable Law.  Seller has not received any written notice from any Person notifying Seller of, or requesting, that in relation to the Product, the Purchased Assets (including the Transferred Intellectual Property) or the Business, Seller enter into a license, under any Intellectual Property Right of such Person.  To Seller’s Knowledge, there is currently no infringement by any Person of any Seller Intellectual Property.

(d)Except as set forth on Section 3.5 of the Disclosure Schedule, neither this Agreement nor each Transaction Document, nor the consummation of the transactions contemplated hereby and thereby, will result in the loss or impairment of any Transferred Intellectual Property.

(e)Seller has taken reasonable steps to protect, maintain, and safeguard the Seller Intellectual Property for which improper or unauthorized disclosure would impair in any material respect the value of such Seller Intellectual Property.

Confidential Information indicated by [***] has been omitted from this filing and filed separately with the Securities Exchange Commission.

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(f)To Seller’s Knowledge, no current employee of Seller is in material violation or material breach of any term of any Contract with Seller relating to the nondisclosure or confidentiality of intellectual property rights or of non-compete covenants designed to protect intellectual property rights.

3.15Contracts.

(a)Section 3.15(a) of the Disclosure Schedule lists, under the relevant heading, all written and, to Seller’s Knowledge, oral Contracts to which Seller is a party or by which Seller is bound, which relate to the Purchased Assets or the Business and which fall within any of the following categories:

(i)each Contract (A) requiring a payment, or a commitment to make a payment, by Seller in excess of Two Hundred Fifty Thousand Dollars ($250,000) during the one (1) year period ending on the first (1st) anniversary of the Closing Date or (B) which requires a payment, or a commitment to make a payment, by Seller in excess of Two Hundred Fifty Thousand Dollars ($250,000) during the one (1) year period ending on the Closing Date;

(ii)each Contract with a customer of Seller that requires payments to Seller that were in excess of Two Hundred Fifty Thousand Dollars ($250,000) during the one (1) year period ending on the Closing Date;

(iii)each Contract imposing any material restrictions on the ability of Seller to engage in any line of business, or otherwise imposing material limitations on the conduct of business by Seller;

(iv)each Contract relating to mortgaging, pledging or otherwise placing a Lien on any of the Purchased Assets;

(v)each Contract providing for the guaranty by Seller of any Liability of any Person other than Seller; or any Contract that includes any requirement that Seller provide indemnification to or otherwise support the business or Liabilities of any other Person;

(vi)each Contract not fully performed for the purchase of any services, equipment or fixed assets by Seller related to the Business or any of the Purchased Assets, for a price in excess of Fifty Thousand Dollars ($50,000) in the aggregate over a twelve (12) month period;

(vii)each Contract under which Seller is lessee of, or holds or operates any Purchased Asset for which the annual rental payments exceed Fifty Thousand Dollars ($50,000);

(viii)each Contract providing for the license or other grant to Seller of the right to use any Seller Intellectual Property, other than software that (A) is commercially available without customization, (B) has general applicability to businesses

Confidential Information indicated by [***] has been omitted from this filing and filed separately with the Securities Exchange Commission.

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and (C) requires aggregate payments during any calendar year of any kind, including upfront or annual maintenance fees, of less than Ten Thousand Dollars ($10,000);

(ix)each Contract involving or resulting in a commitment of Seller to make a capital expenditure or to purchase a capital asset involving at least Fifty Thousand Dollars ($50,000);

(x)each Contract that obligates Seller to obtain all or a substantial portion of its requirements for any goods or services from, or, except for Contracts with customers, supply all or a substantial portion of the requirements for any goods or services of, any other Person, in each case which could be binding on Purchaser or any of its Affiliates after the Closing;

(xi)each Contract to enter into any of the foregoing;

(xii)each assignment document covering any Transferred Intellectual Property; and

(xiii)each (A) Contract that Seller reasonably considers to be material to the Purchased Assets, the Assumed Liabilities or the operation of the Business and (B) Assigned Contract, in each case, not included in the preceding clauses (i) through (xii).

(b)All Assigned Contracts are valid and binding obligations of Seller and, to Seller’s Knowledge, valid and binding obligations of each other parties thereto, subject to the Equitable Exceptions.  Seller has performed in all material respects all obligations required to be performed by Seller under the Assigned Contracts and is not (with or without the lapse of time or giving of notice or both) in breach, violation or default under any of the Assigned Contracts in any material respect, and to Seller’s Knowledge, no other party thereto is (with or without the lapse of time or giving of notice or both) in breach, violation or default thereunder in any material respect.  No other party to any of the Assigned Contracts has delivered to Seller a written or, to Seller’s Knowledge, oral, notice that such other party intends to terminate such Assigned Contract or its relationship with Seller.  Prior to the Closing Date, Seller has included in the Data Room true and correct copies of each Assigned Contract.  Except as set forth in in Section 3.15(b) of the Disclosure Schedule, each Assigned Contract is assignable or transferable to Purchaser without (i) the written consent of, or prior written notice to, any other party thereto or (ii) the making of any payment or grant of any other consideration, rights or license to any other party thereto or any Person.

3.16Environmental Matters.

(a)Seller conducts its business and operations in material compliance with all applicable Environmental Laws and holds, and is in material compliance with, all Seller Permits required under applicable Environmental Laws.  Seller has not received any written notice of any Proceeding that remains outstanding and that asserts any liability on the part of Seller either under any Environmental Law or otherwise in respect of the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling, or the emission, discharge, release or threatened release into the environment, of any pollutant, contaminant, or hazardous or toxic substances.

Confidential Information indicated by [***] has been omitted from this filing and filed separately with the Securities Exchange Commission.

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(b)To Seller’s Knowledge, there are no PCBs, asbestos, urea formaldehyde or radioactive substances on, under or in any property, facility or equipment occupied, owned or used by Seller.

3.17Tax Matters.

(a)Seller has timely filed or caused to be filed (taking into account any validly obtained extensions) with the appropriate Tax authority all Income Tax Returns that are required to be filed by (or in the case of consolidated or combined Income Tax Returns, with respect to) Seller, and all material other Tax Returns that are required to be filed by Seller.  All such Tax Returns are true, correct and complete in all material respects.  All Taxes due and owing by Seller (whether or not shown on any Tax Return) have been paid.  Seller is not currently the beneficiary of any extension of time within which to file any Tax Return.

(b)Seller has properly withheld and paid all Taxes it is required to have withheld and paid in connection with amounts paid or owing by it to any Person.

(c)Except as set forth in Section 3.17(c) of the Disclosure Schedule, no action, suit, proceeding, examination, audit, assessment, deficiency, claim or dispute concerning the Tax liability of the Seller has been asserted or, to Seller’s Knowledge, proposed by any Governmental Authority for any Tax period for which the statute of limitations has not expired.

(d)Section 3.17(d) of the Disclosure Schedule: (i) indicates those Tax Returns that have been audited and (ii) identifies those Tax Returns that currently are the subject of audit. Seller has made available to Purchaser correct and complete copies of (A) all Income, franchise, payroll and sales and use Tax Returns filed by Seller and (B) all examination reports and statements of deficiencies assessed against or agreed to by Seller, in the case of each of (A) and (B) for all taxable period ending on or after December 31, 2010.

(e)Except as set forth at Section 3.17(e) of the Disclosure Schedule, Seller has not waived (or been requested to waive) any statute of limitations in respect of Taxes or agreed (or been requested to agree) to any extension of time with respect to a Tax assessment or deficiency.

(f)Seller is not a party to any Tax allocation or sharing agreement.  Seller has not been a member of an Affiliated Group (other than a group the common parent of which was NNI Holdings Corp.) and has no liability for the Taxes of any other Person (other than NNI Holdings Corp., as common parent of the Affiliated Group of which Seller is a member) under Treasury Regulation section 1.1502-6 (or any similar provision of state, local or foreign Tax Law), by contract, as a successor or transferee or otherwise.

(g)Seller has not been a party to any ‘‘listed transaction,’’ as defined in Code section 6707A(c)(2) and Treasury Regulation section 1.6011-4(b)(2).

(h)There are no Liens with respect to Taxes, nor, to Seller’s Knowledge, is any Tax authority in the process of imposing any Lien for Taxes, upon any of the Purchased Assets, other than with respect to Taxes (i) not yet due and payable or (ii) being contested in good faith and which are set forth in Section 3.17(h) of the Disclosure Schedule.

Confidential Information indicated by [***] has been omitted from this filing and filed separately with the Securities Exchange Commission.

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(i)No written claim has been made by any Tax authority that Seller is or may be subject to taxation, with regard to the Business or the Purchased Assets, in a jurisdiction where Seller does not file a Tax Return.

(j)None of the Purchased Assets is subject to or owned by any Tax partnership, as defined in Code section 761 and the related U.S. Treasury regulations, or any analogous provision of applicable Tax Law.

(k)Seller has voluntarily filed IRS Form 8947 with respect to the 2012 sales year.  Seller has not received any notice from the IRS of any Branded Prescription Fee due and payable with respect to sales by the Business for any sales year.

(l)Seller has not entered into any Tax abatement or Tax credit agreements with any Tax authority relating to Taxes with respect to the Business or the Purchased Assets which would be binding on Purchaser or its Affiliates.  Seller has not recorded a reserve for Tax Liabilities for financial accounting purposes due to (i) possible nexus in a jurisdiction in the United States in which Seller has not filed Tax Returns as a result of the operation, ownership or use of the Purchased Assets or the Business; or (ii) possible permanent establishment in a jurisdiction outside the United States in which Seller has not filed Tax Returns as a result of operation, ownership or use of the Purchased Assets or the Business.

(m)None of the Purchased Assets (i) is property required to be treated as being owned by another person pursuant to the provisions of section 168(f)(8) of the Internal Revenue Code of 1954, as amended and in effect immediately prior to the enactment of the Tax Reform Act of 1986, (ii) constitutes “tax-exempt use property” within the meaning of Code section 168(h)(1) or (iii) is “tax-exempt bond financed property” within the meaning of Code section 168(g).

3.18Employee Benefits.

(a)Seller has made all contributions required to be made to or with respect to each Seller Benefit Plan and paid or accrued all liabilities on account of each Seller Benefit Plan in existence on or prior to the Closing Date, in each case to the extent applicable to the Business Employees.

(b)No Seller Benefit Plan is, and neither Seller nor any ERISA Affiliate of Seller has ever sponsored a Benefit Plan that is or was, subject to Title IV of ERISA or Section 412 or 430 of the Code.  Except as set forth in Section 3.18(b) of the Disclosure Schedule, Seller does not have any obligation to provide postretirement medical or life insurance benefits to Seller’s current or former employees or other parties providing services in respect of the Business, or any dependent or beneficiary thereof, except as otherwise required under state or Federal benefits continuation laws. No Seller Benefit Plan is, and Seller and Seller’s ERISA Affiliates have never contributed to or been obligated to contribute to, a “multiemployer plan” (within the meaning of Sections 3(37) or 4001(a)(3) of ERISA) under Subtitle E of ERISA.

(c)Except as set forth in Section 3.18(c) of the Disclosure Schedule, the consummation of the transactions contemplated by this Agreement will not: (i) result in any payment becoming due, or increase the amount of any compensation due, to any Business

Confidential Information indicated by [***] has been omitted from this filing and filed separately with the Securities Exchange Commission.

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Employee; (ii) increase any benefits otherwise payable under any Seller Benefit Plan to any Business Employee; or (iii) result in the acceleration of the time of payment or vesting of any such compensation or benefits.

3.19Employees; Labor Proceedings.

(a)A list of all employees of Seller as of the Closing Date (the “Business Employees”) in set forth in Section 3.19(a) of the Disclosure Schedule, which list includes each Business Employee’s name and title or position.

(b)Seller is in compliance with, and has in the past complied with, in all material respects, all applicable Laws relating to employment, employment practices, terms and conditions of employment and wages and hours with respect to the Business (collectively “Labor Laws”).

(c)There are no material Proceedings pending or, to Seller’s Knowledge, threatened against Seller with respect to any Labor Laws.

(d)None of the employees of Seller is in a bargaining unit represented by a union that has been recognized by Seller.  To Seller’s Knowledge, there are no pending petitions and no pending charges on file with the National Labor Relations Board, and there are no known efforts by employees to attempt to form a bargaining unit for the purpose of collective bargaining under the National Labor Relations Act.  There are no collective bargaining agreements with Seller in effect or that are currently being negotiated by Seller.  There are no threatened or actual strikes, slowdowns, work stoppages, lockouts, protests or bannering activity by or with respect to the employees of Seller.

(e)Seller has not effectuated: (i) any “plant closing” (as defined in the WARN Act) affecting any site of employment or one or more facilities or operating units within any site of employment of Seller; or (ii) any “mass layoff” (as defined in the WARN Act) affecting any site of employment or facility of Seller and the consummation of the transactions contemplated by this Agreement and the Transaction Documents will not constitute a “plant closing” or “mass layoff”.

3.20Permits.  Section 3.20 of the Disclosure Schedule sets forth an accurate and complete list of all permits, licenses, franchises, variances, exemptions, Orders and other authorizations, certificates, consents and approvals of, with or from any Governmental Authority necessary for Seller to conduct the Businesses as currently conducted and has been conducted prior to the Closing Date and to own the Purchased Assets (collectively, the “Seller Permits”).  Each of the Seller Permits is in full force and effect, Seller is in compliance in all material respects with, and is not in material violation of any of, the terms, conditions and requirements of the Seller Permits, and Seller has not received any written notice from any Governmental Authority that it is in violation of any of the terms, conditions and requirements of the Seller Permits.  Seller has not received any written, or to Seller’s Knowledge, oral, notice with respect to any failure by Seller to timely possess any permit, license, franchise, variance, exemption, Order or other authorization, certificate, consent or approval of, with or from any Governmental Authority.

Confidential Information indicated by [***] has been omitted from this filing and filed separately with the Securities Exchange Commission.

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3.21Compliance with Law.  Except with respect to: (a) environmental matters (as to which Seller’s sole representations and warranties are in Section 3.16); (b) Tax matters (as to which Seller’s sole representations and warranties are in Section 3.17); (c) employee benefit plan and ERISA matters (as to which Seller’s sole representations and warranties are in Section 3.18); (d) Labor Laws (as to which Seller’s sole representations and warranties are in Section 3.19); (e) healthcare regulatory matters (as to which Seller’s sole representations and warranties are in Section 3.23); and (f) Foreign Corrupt Practices Act and unlawful payments (as to which Seller’s sole representations and warranties are in Section 3.26), and except as set forth in Section 3.21 of the Disclosure Schedule, Seller is in compliance in all material respect with, and is not in material violation of or non-compliance with, nor since January 1, 2012 has Seller received any written notice of any violation of or non-compliance with, any applicable Law (including any Order) with respect to the Product, the Business or the ownership or operation of the Purchased Assets.  Except as set forth in Section 3.21 of the Disclosure Schedule, no such written notice alleges a violation or instance of non-compliance that is pending or remains unresolved.

3.22Legal Matters.  Except as set forth in Section 3.22 of the Disclosure Schedule: (a) there are no Proceedings pending or, to Seller’s Knowledge, threatened against Seller, the Business or any of the Purchased Assets before any Governmental Authority and (b) there are no Proceedings that have been brought by Seller or that Seller intends to initiate with respect to the Business or any of the Purchased Assets.  Seller is not a party to or bound by any Order or similar restriction (i) with respect to the Purchased Assets or the Business or (ii) which would otherwise reasonably be expected to have an adverse impact on the ability of Seller or, after the Closing, Purchaser to conduct the Business.  None of the Purchased Assets is subject to an Order or similar restriction and Seller is not subject to any Order that prohibits or restricts the consummation of the transactions contemplated by this Agreement or any of the Transaction Documents.  Except as set forth in Section 3.22 of the Disclosure Schedule, Seller has not received or been notified in writing or, to Seller’s Knowledge, orally of any Paragraph IV Certification Notice in accordance with 21 U.S.C. § 355(j)(2)(B) advising Seller of the filing of an Abbreviated New Drug Application with respect to the Product (“ANDA”).  To Seller’s Knowledge, except as set forth in Section 3.22(c) of the Disclosure Schedule, no ANDA filing has been threatened with respect to the Product.

3.23Healthcare Regulatory Matters.

(a)The Product has been researched, developed, tested, manufactured, supplied, promoted, distributed, marketed, commercialized, stored and sold, as applicable, by Seller and, to Seller’s Knowledge, by each other Person on behalf of Seller, in compliance in all material respects with (i) all applicable Health Laws and (ii) all Seller Permits.  The Product is not adulterated or misbranded within the meaning of the FDA Act or any similar governmental act or Law of any jurisdiction.  The clinical trials (including any post-marketing studies) conducted by or on behalf of Seller relating to the Product were conducted in all material respects in accordance with all applicable Laws and all applicable clinical trial protocols, informed consents and applicable requirements of the FDA.

(b)Seller has made available to Purchaser complete and correct copies of (i) each NDA and each Investigational New Drug application (“IND”) submitted by or on behalf of Seller to the FDA with respect to the Product; (ii) all other material document, correspondence,

Confidential Information indicated by [***] has been omitted from this filing and filed separately with the Securities Exchange Commission.

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filing or other communication submitted to a Regulatory Authority or the Department of Justice by or on behalf of Seller or received from a Regulatory Authority or the Department of Justice by or on behalf of Seller, in each case, with respect to the Product, the Purchased Assets or the Business; (iii) all material scientific, clinical and safety data of Seller with respect to the Product; and (iv) all audit reports performed by Seller or on its behalf to assess Seller’s compliance with applicable Health Laws.

(c)Except as described in Section 3.23(c)(i) of the Disclosure Schedule, Seller has not received, nor with respect to the Product is there any pending or outstanding:  (i) Form 483 observations, FDA warning letters or post-sale warnings or other regulatory warning letters or sanctions; (ii) inspectional observations or establishment inspection reports reciting penalties for corrective or remedial action or requiring corrective action plans; (iii) field notifications or alerts; (iv) import alerts, holds or detentions; or (v) other documents that, in the case of each of the preceding clauses (i) through (iv), have been received by Seller from the FDA or any other Governmental Authority relating to the Product, or any facility in which the Product is manufactured, packaged or stored, and that assert ongoing material lack of compliance with any such Laws by Seller.

(d)Seller is not in violation of, and, to Seller’s Knowledge, Seller is not the subject of, any pending investigation by a Governmental Authority regarding activities prohibited under, the U.S. Anti-Kickback Act (42 U.S.C. § 1320a-7b(b), et seq.), the U.S. Stark Law (42 U.S.C. § 1395nn), the U.S. False Claims Act (31 U.S.C. § 3729, et seq.), the Trade Agreements Act (19 U.S.C. §§2501-2581) or any other Laws governing participation in United States healthcare programs, or any comparable state or foreign Laws.  There is no Proceeding pending or, to Seller’s Knowledge, threatened in writing against Seller that would reasonably be expected to result in the exclusion of Seller from any third party payment program in which they participate.

(e)Seller has not received any written notice from the FDA or any other Governmental Authority that it has commenced, and to Seller’s Knowledge neither the FDA nor any other Governmental Authority has threatened to commence, any action to withdraw its approval or request the recall of the Product, or commenced, or to Seller’s Knowledge threatened to commence, any action to enjoin production at any facility at which the Product is manufactured.

(f)Seller has not, and to Seller’s Knowledge, no director, officer, employee or agent of Seller has, committed an act, made a statement, or failed to make a statement, that would reasonably be expected to provide a basis for any Governmental Authority to invoke the FDA policy respecting “Fraud, Untrue Statements of Material Facts, Bribery and Illegal Gratuities,” set forth in 56 Fed. Reg. 46191 (September 10, 1991) or any similar policy, in each case as related to the Product, the Purchased Assets or the Business.  Seller, and, to Seller’s Knowledge, no director, officer, employee or agent of Seller, has been convicted of any crime or engaged in any conduct for which debarment or similar punishment is mandated or permitted by 21 U.S.C. § 335a(a) or any similar Laws or authorized by 21 U.S.C. § 335a(b) or any similar Laws.  Seller has not, and, to Seller’s Knowledge, no director, officer, employee or agent of Seller has been, convicted of any crime or engaged in any conduct for which such Person could

Confidential Information indicated by [***] has been omitted from this filing and filed separately with the Securities Exchange Commission.

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be excluded from participating in the Federal health care programs under Section 1128 of the Social Security Act of 1935, as amended, or any similar Laws.

(g)The annual Prescription Drug User Fees for the Products due for all time periods prior to the Closing have been timely paid by Seller in full when due.

3.24Insurance.  Section 3.24 of the Disclosure Schedule contains a complete and correct list of all fire and casualty, liability, errors and omissions, workers’ compensation, title, directors and officers and other forms of insurance owned or held by Seller (or covering its assets or businesses) in connection with the Business (collectively, the “Seller Insurance Policies”).  Seller maintains the Seller Insurance Policies in such amounts, and with such deductibles and against such risks and losses, as are customary for companies of similar size in Seller’s industry, and also maintain all policies of insurance which are required by their respective written or, to Seller’s Knowledge, oral Contracts, in such amounts as is specified in such Contracts.  All of the Seller Insurance Policies are currently in effect, all premiums due and payable thereon have been paid, and no written notice of cancellation or termination has been received by Seller with respect to any such policy.  There is no claim pending under any of the Seller Insurance Policies relating to the Product, the Business or the Purchased Assets as to which coverage has been insufficient, questioned, denied or disputed by any underwriter of any Seller Insurance Policy.

3.25Product Liability.  No product liability or warranty claims exist or have been made in writing, or to Seller’s Knowledge, orally, to Seller and, to Seller’s Knowledge, no such claims have been threatened against Seller, in each case, relating to the Product or the Business.  To Seller’s Knowledge, no events or circumstances have occurred that relate to the Product or the Business that would reasonably form the basis for a product liability claim.  There is no Order outstanding against Seller (or to Seller’s Knowledge, any other Person or entity) relating to product liability or manufacturing defect claims with respect to the Product.

3.26Absence of Certain Practices.  Seller has not, and to Seller’s Knowledge, no employee, officer, director or agent of or other Person associated with or acting on behalf of Seller has, directly or indirectly, (a) violated any provision of the Foreign Corrupt Practices Act of 1977, as amended or (b) used any Seller funds for (i) any unlawful contributions, gifts, entertainment or other unlawful expenses relating to political activity, (ii) any unlawful payment to foreign or domestic government officials or employees or to foreign or domestic political parties or campaigns or (iii) any bribe, payoff, influence payment, kickback or other similar unlawful payment.

3.27No Affiliate Transactions.  Except as set forth in Section 3.27 of the Disclosure Schedule, there are no transactions or Contracts between Seller and any of its officers, directors or Affiliates with respect to the Business.  Seller has not, since the Balance Sheet Date, extended or maintained credit, arranged for the extension of credit, or renewed an extension of credit, in the form of a personal loan to or for any director or executive officer Seller.

3.28Customers and Suppliers.  Section 3.28(a) of the Disclosure Schedule contains a list of the five (5) largest customers and the three (3) largest suppliers of Seller for the twelve (12) month period ended October 31, 2013 (measured by revenue to Seller with respect to customers and payments by Seller with respect to suppliers) with respect to the Business.  To

Confidential Information indicated by [***] has been omitted from this filing and filed separately with the Securities Exchange Commission.

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Seller’s Knowledge, since January 1, 2013, no customer or supplier listed on Section 3.28(a) of the Disclosure Schedule has cancelled or otherwise terminated, or made a material adverse change in, or made any written threat to Seller that such customer or supplier plans to cancel or otherwise terminate or make a material adverse change in, its relationship with Seller.  Section 3.28(b) of the Disclosure Schedule sets forth each order for Product shipped by Seller during the period beginning December 1, 2013 through the date immediately preceding the Closing Date.  Section 3.28(c) of the Disclosure Schedule sets forth each open order for Product received but not shipped through the date immediately preceding the Closing Date.

3.29Government Programs.  Except as set forth on Section 3.29 of the Disclosure Schedule, the Product is not (a) listed under the Federal Supply Schedule of the U.S. Department of Veterans Affairs, (b) covered by or reimbursed under any federal or state Medicaid or other health care program pursuant to a Contract to which Seller is a signatory or (c) covered by or reimbursed under any military or U.S. Department of Veterans Affairs program pursuant to a Contract to which Seller is a signatory, in each case, to the extent Seller is or would be required to pay any rebates, chargebacks or discounts with respect to the Product or to make or submit any “average price”, “best price” or other similar calculation.

3.30Brokers and Finders.  Except as set forth in Section 3.30 of the Disclosure Schedule, no agent, broker, investment banker, financial advisor or other Person is entitled to any brokerage, finder’s, financial advisor’s or other similar fee or commission in connection with the transactions contemplated by this Agreement or the Transaction Documents based upon arrangements made by or on behalf of Seller.

3.31Solvency.  Seller is not currently Insolvent and Seller shall not be rendered Insolvent by any of the transactions contemplated by this Agreement.  Immediately after giving effect to the consummation of the transactions contemplated by this Agreement: (a) Seller shall be able to pay its Liabilities as they become due in Seller’s ordinary course of business; (b) Seller shall not have unreasonably small capital with which to conduct its present or proposed business; and (c) Seller shall have assets (calculated at fair market value) that exceed its Liabilities.

3.32Disclosure.  None of this Agreement, any Schedule, any Exhibit, the Disclosure Schedule or any Transaction Document contains any untrue statement of a material fact, or, to Seller’s Knowledge, omits any statement of a material fact necessary to make the statements contained herein or therein not misleading.

ARTICLE IV

REPRESENTATIONS AND WARRANTIES OF PURCHASER

Purchaser represents and warrants to Seller as follows:

4.1Incorporation and Qualification.  Purchaser is a corporation duly incorporated, validly existing and in good standing under the laws of standing under the Laws of the State of California.  Purchaser has all the required corporate power and corporate authority to own, license, lease or otherwise hold and operate its assets and to carry on its business as currently

Confidential Information indicated by [***] has been omitted from this filing and filed separately with the Securities Exchange Commission.

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being conducted.  Purchaser is qualified to transact business and in good standing in each jurisdiction (with respect to jurisdictions that recognize such concept) in each jurisdiction in which the properties owned, licensed, leased or otherwise held by it or the nature of the business conducted by it makes such qualification necessary, except where the failure to be so qualified and in good standing would not have, individually or in the aggregate, a material adverse effect on the ability of Purchaser to perform its obligations under this Agreement and the Transaction Documents to which it is or will become a party or to consummate the transactions contemplated hereby and thereby.

4.2Authority; Enforceability.  Purchaser has the required corporate power and corporate authority to execute and deliver this Agreement and each Transaction Document to which Purchaser is or will become a party, to perform its obligations hereunder and thereunder and to consummate the transactions contemplated hereby and thereby.  The execution, delivery and performance by Purchaser of this Agreement and each Transaction Document to which Purchaser is or will become a party and the consummation by Purchaser of the transactions contemplated hereby and thereby have been duly authorized by all necessary corporate action on the part of Purchaser.  This Agreement and each Transaction Document to which Purchaser is or will become a party has been, or when executed shall be, duly and validly executed by Purchaser.  Assuming that this Agreement and each Transaction Document to which Purchaser is or will become a party is a valid and binding agreement of Seller (if Seller is a party thereto), this Agreement and each such Transaction Document constitutes, or when executed shall constitute, a valid and binding agreement of Purchaser, enforceable against Purchaser in accordance with its terms, subject to the Equitable Exceptions.

4.3No Violation.  The execution, delivery and performance by Purchaser of this Agreement and each Transaction Document to which Purchaser is or will become a party and the consummation by Purchaser of the transactions contemplated hereby and thereby do not and shall not, directly or indirectly: (a) conflict with or violate the Organizational Documents of Purchaser, (b) result in a violation of any Law applicable to Purchaser or by which any of its assets are bound or (c) constitute a breach of or result in a default (or an event which, with or without notice or passage of time or both, would constitute a material default) under, or result in the termination of, or accelerate the performance required by, or result in a right of termination or acceleration under, or result in the creation of any Lien upon any of the material assets or properties of Purchaser under any of the terms, conditions or provisions of any written or, to the Knowledge of Purchaser, oral Contract to which Purchaser is a party or by which Purchaser or any of its assets is bound, except in the cases of clauses (b) and (c) above, where the violation, breach, default, termination, acceleration or Lien would not have a material adverse effect on Purchaser’s ability to consummate the transactions contemplated hereby.

4.4Consents.  Except the filings by Purchaser required under the Exchange Act, no declaration, filing or registration with, or notice to, or authorization, consent, Order or approval of, any Governmental Authority is required to be obtained or made in connection with the execution, delivery and performance by Purchaser of this Agreement or any of the Transaction Documents to which Purchaser is or will become a party or the consummation by Purchaser of the transactions contemplated hereby or thereby.

Confidential Information indicated by [***] has been omitted from this filing and filed separately with the Securities Exchange Commission.

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4.5Legal Matters.  There are no Proceedings pending or, to the knowledge of Purchaser, threatened against Purchaser or any of its assets before any Governmental Authority, or any Orders outstanding against Purchaser, in each case that would adversely affect Purchaser’s ability to perform its obligations under this Agreement and the Transaction Documents to which Purchaser is or will become a party or the right of Purchaser to enter into this Agreement or any of the Transaction Documents to which Purchaser is or will become a party or to consummate the transactions contemplated hereby or thereby.

4.6Brokers and Finders.  No agent, broker, investment banker, financial advisor or other Person is entitled to any brokerage, finder’s, financial advisor’s or other similar fee or commission in connection with the transactions contemplated by this Agreement or the Transaction Documents based upon arrangements made by or on behalf of Purchaser or any of its representatives or Affiliates.

4.7Financial Ability to Perform.  Purchaser has cash on hand and committed financing that, together, will at the Closing be sufficient to consummate the transactions contemplated by this Agreement, upon the terms contemplated by this Agreement, and to pay its transaction fees and expenses.

4.8Projections.  Purchaser agrees and acknowledges that neither Seller nor any of its Affiliates nor any of its or their respective representatives has made, and Seller is not making, any representations and warranties with respect to any projections, estimates or budgets made available to Purchaser, its Affiliates or any of its or their respective representatives by Seller, its Affiliates or any of their respective representatives concerning any future revenues, future results of operations (or any component thereof), future cash flows or future financial condition (or any component thereof) of Seller, except as expressly set forth in Article III.

4.9Solvency.  Purchaser is not currently Insolvent and Purchaser shall not be rendered Insolvent by any of the transactions contemplated by this Agreement.  Immediately after giving effect to the consummation of the transactions contemplated by this Agreement: (a) Purchaser shall be able to pay its Liabilities as they become due in its ordinary course of business; (b) Purchaser shall not have unreasonably small capital with which to conduct its present or proposed business; and (c) Purchaser shall have assets (calculated at fair market value) that exceed its Liabilities.  In connection with the transactions contemplated by this Agreement and the Transaction Documents, Purchaser has not incurred, and shall not incur, debts beyond its ability to pay as they become absolute and matured.

ARTICLE V

COVENANTS AND OTHER AGREEMENTS

5.1Restrictive Covenants of Seller.  As a material inducement to Purchaser to enter into this Agreement and to consummate the transactions contemplated by this Agreement, Seller hereby agrees as follows:

(a)Confidentiality.  Seller shall not, and shall cause each of Seller’s Affiliates to not, at any time from and after the Closing, disclose to any Person or use for any purpose other

Confidential Information indicated by [***] has been omitted from this filing and filed separately with the Securities Exchange Commission.

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than exercising its rights and performing its obligations under this Agreement and the Transaction Documents to which it is a party, any Business Confidential Information; provided, however, that Seller and its Affiliates may make such disclosures of Business Confidential Information as are required under applicable Law or securities exchange listing requirements, in each case as long as Seller or such Affiliate: (i) provides reasonable advance notice of such requirement to Purchaser so that Purchaser may seek a protective order or other appropriate remedy; (ii) reasonably cooperates with Purchaser to obtain an appropriate protective order or other reliable assurance that confidential treatment shall be accorded to such information, and (iii) discloses only such information as it is legally required to disclose.  Prior to the dissolution of Seller in accordance with Section 5.18, Seller shall use commercially reasonable efforts (recognizing that Seller will actively take steps to wind-up its affairs and distribute substantially all of its assets as promptly as practical after the Closing Date during this period and taking into account the personnel and financial resources available to Seller from time to time during such period) to prevent the unauthorized or illegitimate use or disclosure of Business Confidential Information by any Person who has received Business Confidential Information from Seller, or any Affiliate of Seller, prior to the Closing Date.  From and after the dissolution of Seller in accordance with Section 5.18, the Seller Representative shall notify Purchaser in writing of any such unauthorized or illegitimate use or disclosure of Business Confidential Information of which the Seller Representative becomes aware and assign (subject to any applicable statutory, contractual or legal limitations on such assignment) the rights of Seller or the Seller Representative to prevent such use or disclosure.

(b)Non-Competition.  Seller shall not, and shall cause each of Seller’s Affiliates to not, at any time during the [***] period after the Closing, directly or indirectly, on its own behalf or on behalf of or in conjunction with another Person, own, operate, manage, control, engage in the business of (whether in corporate, proprietorship or partnership form or otherwise) or otherwise participate in, or be employed by, consult with, assist, advise or engage in services for any Person principally engaged in, [***] (the “Restricted Business”).  Notwithstanding the foregoing, this Section 5.1(b) shall not prohibit Seller or any of Seller’s Affiliates, assigns or successors-in-interest from being a passive owner of not more than one percent (1%) of the outstanding capital stock of a Person which is publicly-traded, as long as Seller or such Affiliate of Seller has no active participation in such Person’s business.  [***]

(c)Non-Solicitation.  Seller shall not, and shall cause each of Seller’s Affiliates to not, at any time during the [***] period after the Closing, directly or indirectly, on its own behalf or on behalf of or in conjunction with another Person: (i) induce or attempt to induce any Person who is an officer, director, employee or employee-equivalent independent contractor of Purchaser to leave the employ of or terminate or breach their respective Contracts or relationships with Purchaser, or in any other way deliberately interferewith the relationship between Purchaser and any such Person; (ii) solicit the employment of any Person who is or was, within the [***] period preceding such solicitation, an officer, director, employee or employee-equivalent independent contractor of Purchaser; (iii) hire or otherwise engage any Person who is or was, within the [***] period preceding such hiring or engagement, an officer, director, employee or employee-equivalent independent contractor of Purchaser; or (iv) induce or attempt to induce any customer, vendor, contract manufacturer, supplier, distributor, licensor, licensee or other business relation of or to Purchaser to cease doing business with Purchaser, to reduce or otherwise adversely change its business with Purchaser, or in any other way deliberately interfere

Confidential Information indicated by [***] has been omitted from this filing and filed separately with the Securities Exchange Commission.

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with the relationship between Purchaser and any such customer, vendor, contract manufacturer, supplier, distributor, licensor, licensee or other business relation; provided, however, that no general advertisement or general solicitation not targeted to any officers, directors,  employees or employee-equivalent independent contractors of Purchaser shall be deemed to be a solicitation thereof in violation of Section 5.1(c)(iii).

(d)Non-Disparagement.  Seller shall instruct its directors and officers and the directors and officers (or equivalent) of each of its Affiliates to not at any time from and after the Closing, directly or indirectly, make any written or oral statement concerning Purchaser that is reasonably likely to be harmful to Purchaser, the Business or the business reputation of Purchaser; provided, however, that the restriction set forth in this Section 5.1(d) shall not: (i) prohibit truthful testimony compelled by legal process; or (ii) prevent Seller or its Affiliates from exercising its or their rights or remedies under this Agreement or any other Contract between Seller or its Affiliates and Purchaser.

(e)Reformation.  Seller agrees and acknowledges that the covenants of Seller set forth in this Section 5.1: (i) are reasonable in geographic and temporal scope and in all other respects; and (ii) have been made in order to induce Purchaser to enter into this Agreement and consummate the transactions contemplated hereby, and Purchaser would not have entered into this Agreement or consummated the transactions contemplated hereby, in each case but for the covenants of Seller contained in this Section 5.1.  If, at any time of enforcement of any of the provisions of this Section 5.1, a Governmental Authority determines that the duration, scope or area restrictions stated herein are not enforceable under applicable Law, the Parties agree that the maximum duration, scope or area (as applicable) permitted by applicable Law shall be substituted for the duration, area or scope (as applicable) stated herein and the Governmental Authority shall be authorized by the Parties to revise the restrictions contained herein to cover such maximum duration, area or scope (as applicable).  This Section 5.1(e) shall be read in conjunction with (and not to the exclusion of) Section 7.4.

(f)Injunctive Relief.  The Parties agree that any breach or attempted breach of this Section 5.1 would cause irreparable injury to Purchaser, which cannot be adequately compensated in monetary damages.  Therefore, Purchaser may, in addition to, and not in lieu of, any of the other rights and remedies available hereunder, seek to have the provisions of this Section 5.1 specifically enforced by any court of competent jurisdiction by way of an injunction or other equitable relief.  Purchaser shall not be required prove actual damages or the inadequacy of monetary damages in connection with its efforts to obtain equitable relief concerning this Section 5.1.

5.2Non-Disparagement by Purchaser.  Purchaser shall instruct its managers, directors and officers and the managers, directors and officers (or equivalent) of each of its Affiliates to not at any time after the Closing, directly or indirectly, make any written or oral statement concerning Seller that is reasonably likely to be harmful to Seller or the business reputation of Seller; provided, however, that the restriction set forth in this Section 5.2 shall not: (a) prohibit truthful testimony compelled by legal process; or (b) prevent Purchaser or its Affiliates from exercising its or their rights or remedies under this Agreement or any other Contract between Purchaser or any of its respective Affiliates and Seller.

Confidential Information indicated by [***] has been omitted from this filing and filed separately with the Securities Exchange Commission.

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5.3Transition Plan; Payments Received.

(a)Each of Seller and Purchaser shall take all actions reasonably necessary to implement and carry out the transition plan attached hereto as Exhibit E (the “Transition Plan”).

(b)During the ninety (90) day period after the Closing, (i) Seller shall hold in trust for Purchaser any cash, checks or other property that Seller or its Affiliates may receive after the Closing which properly belongs to Purchaser under the terms and conditions of this Agreement, and shall promptly (and in any event at least once every fifteen (15) days) transfer and deliver to Purchaser, from time to time as and when received by Seller or its Affiliates, any such cash, checks with appropriate endorsements (using commercially reasonable efforts not to convert such checks into cash) or other property, and shall reasonably account to Purchaser for all such receipts; (ii) Seller shall promptly forward to Purchaser copies of any communications or other information received by Seller or its Affiliates in respect of the Product, the Business or any of the Purchased Assets or Assumed Liabilities; (iii) Seller shall, as soon as reasonably practicable after receipt, forward to Purchaser any telephone calls, orders, notices, requests, inquiries and other communications relating to the Product, the Business or any of the Purchased Assets or the Assumed Liabilities that Seller or any of its Affiliates receive; and (iv) Seller shall otherwise cooperate in such manner as Purchaser may reasonably request to provide for an orderly transfer of the Product, the Business, the Purchased Assets and Assumed Liabilities from Seller to Purchaser.

(c)During the ninety (90) day period after the Closing, Purchaser shall hold in trust for Seller any cash or checks that Purchaser or its Affiliates may receive after the Closing which properly belongs to Seller under the terms and conditions of this Agreement, and shall promptly (and in any event at least once every fifteen (15) days) transfer and deliver to Seller, from time to time as and when received by Purchaser or its Affiliates, any such cash or checks, with appropriate endorsements (using commercially reasonable efforts not to convert such checks into cash), and shall reasonably account to the Sellers for all such receipts.

(d)In consideration of the Transition Plan, at the Closing Purchaser shall pay to Seller [***] by wire transfer of immediately available funds to an account designated in writing by Seller and upon the later of (i) delivery by Seller of the unaudited financial statements referred to in Section 5.12 and (ii) delivery by Rothstein Kass of its consent to the inclusion of its audit report with respect to the Audited Financial Statements to be included in Purchaser’s Current Report on Form 8-K with respect to the acquisition of the Business and the Purchased Assets contemplated by this Agreement, Purchaser shall pay to Seller an additional [***] by wire transfer of immediately available funds to an account designated in writing by Seller.

5.4Notification to FDA.  Promptly after the Closing, Purchaser shall make all filings with, and give all notices to, all Governmental Authorities, including the FDA, required in connection with the transfer of the Transferred Intellectual Property and Seller Permits, and Seller shall provide such assistance in connection therewith as Purchaser may reasonably request.  The Parties agree to use their commercially reasonable efforts to take any other actions required by the FDA or any other Governmental Authority to effect such transfer.

Confidential Information indicated by [***] has been omitted from this filing and filed separately with the Securities Exchange Commission.

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5.5Cooperation in Litigation.  Purchaser and Seller shall reasonably cooperate with one another at the requesting Party’s expense in the prosecution or defense of any Proceeding or Claim arising from their respective conduct of the Business and involving one or more third parties.  The Party requesting such cooperation shall pay the reasonable out-of-pocket expenses incurred in providing such cooperation (including reasonable legal fees and disbursements) by the Party providing such cooperation and by its representatives, but shall not be responsible for reimbursing such Party or its representatives for their time spent in such cooperation.  The Parties agree and acknowledge that this Section 5.5 does not limit, modify or otherwise affect any of the respective rights or obligations of the Parties under Article VI or apply to any Proceeding or Claim to which Article VI is applicable.

5.6Power of Attorney; Right of Endorsement.  Effective as of the Closing, Seller hereby constitutes and appoints Purchaser and its successors and assigns the true and lawful attorney of Seller with full power of substitution, in the name of Seller or the name of Purchaser: (a) to endorse for Seller, without recourse (as such concept is contemplated for Uniform Commercial Code purposes), any and all checks, notes and other instruments included in the Purchased Assets; (b) to negotiate, execute and deliver consents and approvals for the transfer of Purchased Assets requiring such consents and approvals, but which consents and approvals have not been obtained as of the Closing; and (c) to institute and prosecute all Proceedings and Claims which Purchaser may deem proper or advisable in order to collect, assert or enforce any claim, right or title in or to the Purchased Assets in favor of Purchaser.  Seller agrees and acknowledges that the foregoing powers are coupled with an interest and shall be irrevocable by Seller, directly or indirectly by the dissolution of Seller or in any other manner.  The Parties agree and acknowledge that this Section 5.6 does not limit, modify or otherwise affect any of the respective rights, powers and obligations of the Parties under any of the other provisions of this Agreement or any Transaction Document.

5.7Access to Books and Records.

(a)After the Closing and until the fifth (5th) anniversary of the Closing Date, Purchaser shall permit Seller, at Seller’s expense, to have reasonable access to the books, records and files included among the Purchased Assets as may be reasonably required for any financial reporting, Tax Return preparation or Tax compliance matters of Seller.  The Parties agree that any access or other rights under this Section 5.7(a) shall be provided only after reasonable advance written request by Seller and shall occur only during normal business hours, and Seller shall reasonably cooperate with Purchaser so that such access or other rights do not unreasonably disrupt the operations of Purchaser.  Purchaser agrees to preserve and keep all of the books, records and files of the Business included in the Purchased Assets for a period of not less than five (5) years after the Closing Date, or for any longer period as may be required: (i) by any Governmental Authority; (ii) by any Law; or (iii) in connection with any ongoing Proceeding.  The Parties agree and acknowledge that Purchaser may condition its obligations under this Section 5.7(a) on receipt from Seller of a customary agreement restricting use and disclosure by Seller of the information provided by Purchaser to Seller or otherwise obtained by Seller in exercising its rights under this Section 5.7(a).

(b)After the Closing and until the fifth (5th) anniversary of the Closing Date, Seller shall permit Purchaser, at Purchaser’s expense, to have reasonable access to, and the right

Confidential Information indicated by [***] has been omitted from this filing and filed separately with the Securities Exchange Commission.

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to make copies of, the books, records and files of Seller and its Affiliates not included among the Purchased Assets as may be reasonably required for any financial reporting, Tax Return preparation or Tax compliance matters of Purchaser.  In addition, Seller shall make available to Purchaser employees of Seller (if any) who are familiar with any such matter requested.  The Parties agree that any access or other rights under this Section 5.7(b) shall be provided only after reasonable advance written request by Purchaser and shall occur only during normal business hours, and Purchaser shall reasonably cooperate with Seller so that such access or other rights do not unreasonably disrupt the operations of Seller.  Seller agrees to preserve and keep all of the books, records and files related to the Business, the Purchased Assets or the Assumed Liabilities but not included among the Purchased Assets for a period of not less than five (5) years after the Closing Date, or for any longer period as may be required: (i) by any Governmental Authority; (ii) by any Law; or (iii) in connection with any ongoing Proceeding.  The Parties agree and acknowledge that Seller may condition its obligations under this Section 5.7(b) on receipt from Purchaser of a customary agreement restricting use and disclosure by Purchaser of the information provided by Seller to Purchaser or otherwise obtained by Purchaser in exercising its rights under this Section 5.7(b).

(c)Purchaser shall, from the Closing Date until the second (2nd) anniversary of the end of the Milestone Period, as applicable, keep accurate books of all accounts and other records in sufficient detail so that any Net Sales Statement can be properly and fully ascertained.  Purchaser shall, at the request of Seller, permit a nationally recognized registered independent auditor in the United States selected by Seller and reasonably acceptable to Purchaser (the “Independent Auditor”) to review during ordinary business hours and upon no less than thirty (30) days’ prior written notice, but on no more than one (1) occasion per calendar year, such books and records as may be necessary to determine the accuracy of any Net Sales Statement.  The Independent Auditor shall be bound by a confidentiality agreement, in a form reasonably acceptable to Purchaser, to keep all information acquired from Purchaser confidential, and shall be permitted to disclose to Seller only whether any Net Sales Statement was accurate and the amount, if any, owed to or by Seller under Section 1.7(a).  The Independent Auditor shall send a copy of its written reports to Purchaser at the same time such reports are sent to Seller, and the findings of the Independent Auditor in such report shall be binding on the Parties for all purposes.  Seller shall be responsible for the fees and expenses of the Independent Auditor, provided, however, that Purchaser shall reimburse Seller in full for all such costs and expenses of the Independent Auditor if the Independent Auditor determines that the amounts paid by Purchaser pursuant to Section 1.7(a) are less than ninety five percent (95%) of the amount actually owed for the relevant period of the audit.

5.8Removal of Purchased Assets.  Except as expressly provided in the Transition Plan, as soon as reasonably practicable after the Closing Date (and in any event on or before January 15, 2014), Purchaser shall, at its expense, remove all Purchased Assets from Seller’s premises.  Such removal shall be done in such manner as to avoid any damage to any of Seller’s premises and any disruption of the business operations to be conducted by Seller after the Closing.

5.9Further Assurances.  In addition to the other obligations of the Parties provided in this Agreement, from time to time, as and when requested by either Party the other Party shall execute and deliver, or cause to be executed and delivered, all such documents and instruments

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and shall take, or cause to be taken, all such further or other actions as the requesting Party may reasonably deem necessary or desirable (except as expressly provided in this Agreement, at the requesting Party’s reasonable expense) to evidence and effectuate the transactions contemplated by this Agreement or any Transaction Document.  Without limiting the foregoing, at any time from and after the Closing Date, Seller retains or obtains possession or control of any assets that existed as of the Closing Date and would have constituted a Purchased Asset on such date, Seller shall promptly, but in no event later than three (3) Business Days after coming into such possession or control, deliver or return (or cause to be delivered or returned) such Purchased Asset to Purchaser for no additional consideration.

5.10Publicity.  Except and solely to the extent required by applicable Law or permitted by this Section 5.10, (a) Purchaser shall not make any public announcement with respect to the existence of or subject matter of this Agreement or the transactions contemplated hereby without the prior written consent of Seller; and (b) Seller shall not make any public announcement with respect to the existence of or subject matter of this Agreement or the transactions contemplated hereby without the prior written consent of Purchaser.  To the extent any such public announcement is required by applicable Law (other than applicable securities Laws, including the Exchange Act), the disclosing Party shall (i) provide reasonable advance written notice of such requirement to the non-disclosing Party so that such other Party may seek a protective order or other appropriate remedy, (ii) reasonably cooperate with the other Party to obtain an appropriate protective order or other reliable assurance that confidential treatment shall be accorded to such information and (iii) disclose only such information as it is advised by outside legal counsel in writing that it is legally required to disclose.  If Purchaser and Seller come to an agreement on a press release, then each of Purchaser and Seller may issue further press releases and similar announcements without the consent of the other Party, provided that each such press release or similar announcement contains, with respect to the information concerning this Agreement or the Transaction Documents and the transactions contemplated hereby and thereby, solely the information that is contained in the press release approved by the Parties.  The foregoing provisions of this Section 5.10 shall not apply to a Party in connection with exercising such Party’s rights or remedies under this Agreement or any other Contract between such Party or its Affiliates and the other Party.

5.11Maintenance of Insurance.  On or before the Closing, Seller shall obtain a six (6) year tail policy with respect to its product liability insurance as currently in effect, solely with respect to the conduct or operation of the Business by Seller prior to the Closing (the “Tail Policy”).

5.12SEC Filings.  Seller shall prepare interim financial statements for the period from January 1, 2013 through September 30, 2013 and the corresponding period in 2012 to be included in Purchaser’s reports and filings with the Securities and Exchange Commission (the “SEC”).  Seller shall complete such interim financial statements no later than forty (40) days following the Closing.  Purchaser shall engage Rothstein Kass, at Purchaser’s sole cost and expense, to undertake such review as may be necessary in order for Rothstein Kass to provide its consent to the inclusion of its audit report with respect to and including the Audited Financial Statements in Purchaser’s Current Report on Form 8-K with respect to the acquisition of the Business and the Purchased Assets contemplated by this Agreement.  During the period commencing on the Closing Date and ending thirty (30) days after delivery of the interim

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financial statements referred to in the first sentence of this Section 5.12, Seller shall provide such assistance as Purchaser may reasonably request related to the preparation by Purchaser of pro forma financial statements for the Business.  The reasonable and documented fees and expenses of Rothstein Kass shall be at Purchaser’s sole cost and expense, and the fees and expenses of Seller related to its performance under this Section 5.12 shall be included as part of the payments contemplated by the Transition Plan.

5.13Conduct of the Business.  Purchaser shall continue to operate its business in the ordinary course and as it deems appropriate in its sole discretion, notwithstanding any provision of this Agreement to the contrary.

5.14Recordation of Transferred Intellectual Property.  Purchaser shall be responsible, at its sole cost and expense, for all applicable recordations of the assignment of the Transferred Intellectual Property.  Seller shall execute and deliver to Purchaser such assignments and other documents, certificates and instruments reasonably requested by Purchaser for Purchaser’s filing with the applicable registries and other recording authorities to record the transfer of the Transferred Intellectual Property in accordance with applicable Law.

5.15Notification of Customers and Vendors.  Seller shall cooperate with Purchaser, at Purchaser’s expense, in such manner as Purchaser may reasonable request in connection with the delivery by Purchaser of:  (a) the Blanket Authorization Letter; (b) a letter to the wholesale distributors of the Product; and (c) a letter to vendors and suppliers relating to the Product.

5.16Tax Matters.

(a)Apportionment of Taxes.

(i)Seller shall bear and be liable for (A) all Taxes of any kind imposed on or with respect to the Purchased Assets or the conduct or operation of the Business for all Tax periods or portions thereof ending on or before the Closing Date, but excluding (1) any Taxes resulting directly or indirectly from any transaction (other than any transaction contemplated by this Agreement or any of the Transaction Documents) occurring on the Closing Date but after the Closing outside the ordinary course of business and (2) Transfer Taxes that are the responsibility of Purchaser pursuant to Section 1.10; (B) all Income, franchise and other similar Taxes of Seller or any of its Affiliates (including Income, franchise and other similar Taxes relating to or arising from the consummation of the transactions contemplated by this Agreement or the Transaction Documents); (C) all Taxes of Seller or any of its Affiliates that do not relate to the Purchased Assets or the Business (which, for the avoidance of doubt, includes any loss of deductibility pursuant to Code section 280G or any increased withholding as result of Code section 4999 with respect to compensation paid by Seller in connection with the transactions contemplated by this Agreement or the Transaction Documents); and (D) all Taxes of NNI Holdings Corp.

(ii)For purposes of this Agreement, any Taxes imposed with respect to a Tax period that includes, but does not end on, the Closing Date (a “Straddle Period”), whether imposed or assessed before or after the Closing Date, shall be

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apportioned between the portion of such Straddle Period ending on and including the Closing Date, on the one hand, and the portion of such Straddle Period beginning after the Closing Date, on the other hand, in the following manner: (A) in the case of all real and personal property taxes or similar ad valorem taxes levied with respect to the Purchased Assets, the amount of Tax allocable to a portion of the Straddle Period shall be made on the basis of the number of days before and including the date of this Agreement and the number of days after the Closing Date that are included in the Straddle Period and (B) in the case of all other Taxes, the amount of Tax allocable to a portion of the Straddle Period shall be made by an interim closing of the books by assuming that the taxable period ended at the close of business on the Closing Date, except that (1) any Tax resulting directly or indirectly from a transaction (other than any transaction contemplated by this Agreement or any of the Transaction Documents) outside the ordinary course of business that occurs on the date of this Agreement but after the Closing  shall be allocated to the portion of the Straddle Period beginning after the Closing Date, and (2) exemptions, allowances or deductions that are calculated on an annual basis shall be prorated on the basis of the number of days in such portion elapsed through the Closing Date as compared to the number of days in the portion elapsing after the Closing Date.

(b)Assistance and Cooperation.  Purchaser and Seller agree to furnish or cause to be furnished to each other, upon request, as promptly as practicable, such information and assistance relating to the Business and the Purchased Assets (including access to books and records, employees, contractors and representatives) as is reasonably necessary for the filing of all Tax Returns, the claiming of any exemption or exclusion from the application or imposition of any Taxes or making of any election related to Taxes, determining the proration of Taxes under Section 5.16(a), the preparation for any audit by any Governmental Authority, and the prosecution or defense of any claim, suit or proceeding relating to any Tax involving the Business, the Purchased Assets, or the Allocation (as adjusted from time to time in accordance with this Agreement).  Subject to Article VI, the requesting Party shall pay the other Party any reasonable out-of-pocket third party costs incurred by the other Party in providing such assistance.  Subject to Section 6.4(a), (i) Seller shall promptly notify Purchaser in writing upon receipt by Seller (or any of its Affiliates) of notice of any pending or threatened Tax audit, assessment, action or demand relating to the income, properties or operations of Seller (or such Affiliate) that reasonably would be expected to relate to or give rise to a Lien on the Purchased Assets or in Liability to Purchaser or its Affiliates and (ii) Seller, on the one hand, and Purchaser, on the other hand, shall promptly notify the other in writing upon receipt of written notice of any pending or threatened Tax audit, assessment, action or demand challenging the Allocation.

(c)Refunds. Seller shall promptly forward to or reimburse Purchaser for any refunds of ad valorem or property Taxes that were paid by Purchaser with respect to Tax periods (or portions thereof) beginning after the date of this Agreement (including any credits in lieu of ad valorem or property Taxes which are clearly attributable to such Taxes paid by Purchaser), to the extent actually received or utilized by Seller or any of its Affiliates.  If Seller has paid the amount of a Tax refund described in this Section 5.16(c) to Purchaser and the applicable Governmental Authority later requires Seller or its Affiliates to repay to such Governmental Authority all or a portion of the amount of such refund, then Purchaser shall repay to Seller or its applicable Affiliate the amount Seller or its Affiliate was required to repay to the Governmental

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Authority (including interest imposed by the Governmental Authority) within ten (10) Business Days of Seller’s notice to Purchaser that such repayment is required.

5.17Waiver of Bulk Sales Laws.  Seller and Purchaser hereby waive, to the fullest extent allowable under applicable Law, compliance with the requirements of the bulk sales or bulk transfer Laws of any jurisdiction which may be applicable to the transactions contemplated by this Agreement and the Transaction Documents; provided, however, that any Liability arising from or relating to the failure to so comply with such requirements shall be an Excluded Liability.

5.18Anticipated Dissolution of Seller.  Purchaser acknowledges that Seller intends to cease conducting business, wind up its affairs and dissolve as soon as it is able to do so after the Closing; provided that such dissolution shall not occur prior to July 1, 2014.  With respect to such cessation of business, winding up and dissolution, Purchaser acknowledges and agrees that (a) Seller may designate a liquidating trustee or other Person (the “Seller Representative”), who shall be identified in a written notice to Purchaser delivered to Purchaser at least seven (7) days prior to such designation and who shall in writing assume and be bound by the covenants of Seller set forth in Section 1.8, Section 1.10, Section 5.1(a), Section 5.1(d) as the same would apply to the directors and officers of the Seller Representative (if any), Section 5.1(e), Section 5.1(f), Section 5.5, Section 5.7, Section 5.9, Section 5.10, Section 5.14, Section 5.16(b), Section 5.16(c), Section 5.22, Article VI and Article VII; and (b) from and after the dissolution of Seller in accordance with this Section 5.18, there shall be no further performance by Seller or the Seller Representative of any post-Closing covenants of Seller contained in this Agreement other than those set forth in the preceding clause (a).  For the avoidance of doubt, the provisions of this Section 5.18 shall not have any impact on the power of attorney granted by Seller pursuant to Section 5.6 or: (i) relieve Seller of any liability for the breach of any of its representations and warranties or covenants and agreements set forth in this Agreement or any of the Transaction Documents occurring prior to such dissolution or with respect to any Excluded Liability, Excluded Asset or any other matter for which indemnification is available to the Purchaser Indemnified Parties, or any of them, in each case pursuant to, and subject to the limitations of, Article VI, (ii) relieve the Seller Representative of any liability for the Seller Representative’s breach of any of the covenants and agreements identified in the foregoing clause (a) occurring after such dissolution or (c) preclude the Seller Representative from enforcing against Purchaser, for the benefit of Seller’s estate or liquidation beneficiaries,  the representations and warranties and covenants and agreements of Purchaser set forth in this Agreement or any of the Transaction Documents made to or for the benefit of Seller or for indemnification with respect to any other matter for which indemnification is available to the Seller Indemnified Parties, or any of them, pursuant to, and subject to the limitations of, Article VI.

5.19Use of Seller Brands.  Purchaser will be permitted, for a period commencing on the Closing Date and ending no later than the date of the latest expiration date for any individual unit of finished Products included in the Inventory (the “Trademark Period”) to use the trademarks of Seller not included in the Purchased Assets used in connection with the Product (the “Seller Brands”), solely to the extent set forth packaging materials and labels for the Product included in the Inventory.  Seller hereby grants to Purchaser a fully-paid, royalty-free, non-exclusive, sublicensable, non-transferable and non-assignable right and license to use the Seller Brands used in connection with the Product for the purposes expressly set forth in this

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Section 5.19 for the Trademark Period.  All other uses by Purchaser of the Seller Brands not contemplated by this Section 5.19 will be subject to Seller’s prior written consent, which consent may be withheld in Seller’s sole discretion.  Nothing contained in this Agreement will be construed as an assignment to Purchaser of any right, title or interest in the Seller Brands; it being understood that all rights, title and interest relating to the Seller Brands are expressly reserved by Seller.

5.20Processing of Rebates and Chargebacks.  Seller will process all Rebates and Chargebacks with respect to the Product dispensed prior to January 1, 2014.

5.21Medicaid Access and Price Reporting.

(a)Access.  After the Closing Date, Seller (i) will provide Purchaser access to the Centers for Medicare and Medicaid Services (“CMS”) “Drug Data Reporting for Medicaid” database for the Product and (ii) for periods through December 31, 2013, Seller will be exclusively responsible for reporting and certifying all necessary monthly and quarterly Average Manufacturer Price (“AMP”) calculations and Customer Prompt Pay Discounts in accordance with Federal law.  For periods starting after December 31, 2013, Purchaser will be exclusively responsible for reporting and certifying all necessary monthly and quarterly AMP calculations and Customer Prompt Pay Discounts in accordance with Federal law.

(b)Medicaid Price Reporting.  Seller shall continue monthly and quarterly reporting to CMS on each Medicaid Finished Product with Seller’s labeler code for periods through December 31, 2013, and shall simultaneously furnish such information to Purchaser.  “Medicaid Finished Product” means (i) the “average manufacturer price” to the CMS on a monthly basis within thirty (30) calendar days of the end of each month and (ii) the “quarterly average manufacturer price,” “Best Price,” “total exempt sales at the nominal price” and “aggregate customary prompt pay discounts” to the CMS on a quarterly basis within thirty (30) calendar days of the end of each quarter, for the Product.

5.22Enforcement of Covenants Not to Compete.  From and after the Closing, Seller shall (a) during the period ending on [***], notify Purchaser in writing of any breach of which Seller becomes aware by [***] of his covenant not to compete, covenant not to solicit or covenant of confidentiality set forth in his employment agreement with Seller (collectively, the “Covenants Not To Compete”), (b) cooperate in such manner as Purchaser may reasonably request, at Purchaser’s cost and expense, to enforce through the period ending [***] such Covenants Not To Compete for the benefit of Purchaser (and thereafter to take actions with respect to any breach thereof occurring prior to [***], (c) upon request by Purchaser, waive the inclusion of Purchaser and its Affiliates (and any other Person designated by Purchaser) from the Covenants Not To Compete applicable to [***] (as designated by Purchaser) and (d) not waive (except as provided in the preceding clause (c)), amend or terminate the employment agreement of [***] in a manner that would reduce the Covenants Not To Compete set forth therein through [***] or Seller’s ability to enforce the Covenants Not To Compete.

Confidential Information indicated by [***] has been omitted from this filing and filed separately with the Securities Exchange Commission.

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ARTICLE VI

SURVIVAL; INDEMNIFICATION

6.1Survival of Representations and Warranties and Covenants and Agreements; Indemnification Claims Period.

(a)Each of the representations and warranties contained in this Agreement shall survive until the expiration of the Escrow Period, and shall thereupon expire.

(b)No claim for indemnification may be asserted against any of the Parties (i) concerning any of the matters set forth in Section 6.2 unless a Notice of Claim has been received by Purchaser, if Purchaser is the Indemnifying Party, or by Seller, if Seller is the Indemnifying Party, prior to the expiration of the Escrow Period; provided, however, if a Notice of Claim has been received by Purchaser, if Purchaser is the Indemnifying Party, or by Seller, if Seller is the Indemnifying Party, prior to such applicable date, then the claim for indemnification with respect to the matters set forth in such Notice of Claim will survive until such later date as such claim for indemnification has been fully and finally resolved in accordance with this Article VI.

6.2Indemnification Obligations.

(a)Subject to the other provisions of this Article VI, from and after the Closing, Seller shall indemnify Purchaser and each of its Affiliates and its and their respective directors, officers, employees, shareholders, partners, members, managers, agents and representatives  (each, a “Purchaser Indemnified Party”), for any Losses actually incurred by any Purchaser Indemnified Party to the extent arising from or relating to any of the following: (i) the breach of any representation and warranty of Seller set forth in this Agreement or any Transaction Document to which it is a party; (ii) the breach of any covenant or agreement of Seller contained in this Agreement or any Transaction Document to which it is a party; (iii) any of the Excluded Assets; (iv) any of the Excluded Liabilities; (v) failure to comply with applicable bulk sales or bulk transfer Laws; or (vi) any claims brought by any Business Employee or any other current, former or terminated employee, consultant or independent contractor of Seller or any of its Affiliates with respect to such Person’s employment or retention with, or termination from employment or retention with, Seller or any of its Affiliates.

(b)Subject to the other provisions of this Article VI, from and after the Closing, Purchaser shall indemnify Seller, its Affiliates and each of Seller’s and such Affiliates’ respective, directors, officers, employees, stockholders, partners, members, managers, agents and representatives  (each, a “Seller Indemnified Party”), for any Losses actually incurred by any Seller Indemnified Party to the extent arising from or relating to any of the foregoing: (i) the breach of any representation and warranty of Purchaser set forth in this Agreement or any Transaction Document to which it is a party; (ii) the breach of any covenant or agreement of Purchaser contained in this Agreement or any Transaction Document to which it is a party; (iii) any of the Assumed Liabilities; or (iv) any claims brought by any current or terminated employee, consultant or employee equivalent independent contractor of Seller with respect to any violation of Law by Purchaser in connection with the hiring of any Business Employees by

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Purchaser or with respect to such Person’s employment or retention with, or termination from employment or retention with, Purchaser.

6.3Limitations on Indemnification Obligations.  The rights of the Purchaser Indemnified Parties and Seller Indemnified Parties to indemnification pursuant to the provisions of this Article VI are subject to the following limitations:

(a)Notwithstanding anything to the contrary in this Article VI: (i) except with respect to Losses incurred by a Purchaser Indemnified Party as a result of a breach of a Core Representation, in no event shall Seller be required to provide indemnification to any of the Purchaser Indemnified Parties with respect to any claim for indemnification made pursuant to Section 6.2(a)(i), unless and until the Losses incurred by the Purchaser Indemnified Parties aggregate at least [***] (the “Indemnification Threshold”), after which point Seller shall be required to provide indemnification with respect to indemnifiable Losses with respect to claims for indemnification made pursuant to Section 6.2(a)(i), including the Indemnification Threshold; and (ii) in no event shall Seller be required to provide indemnification to the Purchaser Indemnified Parties for indemnifiable Losses with respect to any claim for indemnification made pursuant to Section 6.2(a)(i) in an aggregate amount in excess of [***] (the “Indemnification Cap”); provided, however, that the limitations set forth in this Section 6.3(a) shall not apply to any Excluded Claim.

(b)Notwithstanding anything to the contrary in this Article VI: (i) except with respect to Losses incurred by a Seller Indemnified Party as a result of a breach of a Core Representation, in no event shall Purchaser be required to provide indemnification to any of Seller Indemnified Parties with respect to any claim for indemnification made pursuant to Section 6.2(b)(i), unless and until the Losses incurred by Seller Indemnified Parties aggregate at the Indemnification Threshold, after which point Purchaser shall be required to provide indemnification with respect to indemnifiable Losses with respect to claims for indemnification made pursuant to Section 6.2(b)(i) including the Indemnification Threshold; and (ii) in no event shall Purchaser be required to provide indemnification to Seller Indemnified Parties for indemnifiable Losses arising from claims for indemnification made pursuant to Section 6.2(b)(i) in an aggregate amount in excess of the Indemnification Cap; provided, however, that the limitations set forth in this Section 6.3(b) shall not apply to any Excluded Claim.

(c)Nature of Claim.  To the extent that any claim for indemnification could be made by Purchaser under Section 6.2(a)(i) (and for this purpose not giving effect to the Indemnification Threshold, as the same may be applicable thereto), such claim for indemnification may be made by Purchaser only under Section 6.2(a)(i) (and for this purpose giving effect to the Indemnification Threshold, as the same may be applicable thereto).  To the extent that any claim for indemnification could be made by Seller under Section 6.2(b)(i) (and for this purpose not giving effect to the Indemnification Threshold, as the same may be applicable thereto), such claim for indemnification may be made by Purchaser only under Section 6.2(b)(i) (and for this purpose giving effect to the Indemnification Threshold, as the same may be applicable thereto).

Confidential Information indicated by [***] has been omitted from this filing and filed separately with the Securities Exchange Commission.

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6.4Indemnification Claim Procedure.

(a)Promptly after obtaining knowledge of any matter that a Purchaser Indemnified Party or a Seller Indemnified Party, acting in good faith, reasonably believes will entitle such Purchaser Indemnified Party or Seller Indemnified Party (in such capacity, an “Indemnified Party”) to indemnification under this Article VI from any Person who would be obligated to indemnify such Indemnified Party if the claim is indemnifiable hereunder (such obligated Person, the “Indemnifying Party”), such Indemnified Party shall promptly provide to Seller, if the Indemnified Party is a Purchaser Indemnified Party, or to Purchaser, if the Indemnified Party is a Seller Indemnified Party, notice describing the matter in reasonable detail, including the nature of the claim, the basis for the indemnification obligation and the Losses resulting therefrom (a “Notice of Claim”); provided, however, that the failure to timely provide a Notice of Claim hereunder shall not relieve any Indemnifying Party of the obligation to indemnify such Indemnified Party except to the extent that such Indemnified Party’s failure to provide or delay in providing a Notice of Claim actually prejudices the Indemnifying Party’s ability to defend against or contest or resolve such matter.

(b)For claims for indemnification under this Article VI other than those relating to Third Party Claims, during the period of thirty (30) Business Days after delivery of the Notice of Claim, the Indemnifying Party may deliver to the Indemnified Party who delivered such Notice of Claim a response (a “Response Notice”) in which the Indemnifying Party (i) agrees that the full amount of Losses stated in the Notice of Claim is owed to such Indemnified Party (in which case such Response Notice shall be accompanied by a payment to the Indemnified Party of such amount by the Indemnifying Party by wire transfer of immediately available funds or, if payment is to be made from the Escrow Deposit, express authorization to the Escrow Agent (in accordance with the Escrow Agreement) to make immediate payment of such amount to the Indemnified Party from the Escrow Deposit), (ii) agrees that part (but not all) of the amount of Losses stated in the Notice of Claim is owed to such Indemnified Party (in which case such Response Notice shall be accompanied by a payment to the Indemnified Party of such agreed amount by the Indemnifying Party by wire transfer of immediately available funds or, if payment is to be made from the Escrow Deposit, express authorization to the Escrow Agent (in accordance with the Escrow Agreement) to make immediate payment of such agreed  amount to the Indemnified Party from the Escrow Deposit) or (iii) asserts that no part of the amount of Losses stated in the Notice of Claim is owed to such Indemnified Party.  Unless the Indemnifying Party agrees in such Response Notice that the full amount of Losses stated in the Notice of Claim is owed to such Indemnified Party, such Response Notice shall set forth, in reasonable detail, the Indemnifying Party’s objections to the claims and its basis for such objections.  If the Indemnifying Party fails to provide such a Response Notice to the Indemnified Party who delivered the related Notice of Claim within such thirty (30) Business Day period, the Indemnifying Parties shall be deemed to have accepted to all of the claims set forth in the Notice of Claim.  If the Indemnifying Party provides a Response Notice within such thirty (30) Business Day period and such Response Notice objects to any of the claims set forth in the Notice of Claim, the Indemnified Party and the Indemnifying Party shall negotiate the resolution of the claim(s) for a period of not less than thirty (30) Business Days after such Response Notice is delivered to such Indemnified Party.  If the Indemnified Party and the Indemnifying Party are unable to resolve all such claims within such time period, the Indemnified Party or the Indemnifying Party may thereafter pursue any legal remedies available to it with respect solely to the unresolved claims, subject, to the extent applicable, to the Indemnification Threshold, the Indemnification Cap and the other provisions of this Article VI.

Confidential Information indicated by [***] has been omitted from this filing and filed separately with the Securities Exchange Commission.

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6.5Third Party Claims.

(a)The Indemnifying Party shall have the right to assume and pursue, at its sole cost and expense, the defense of any claim or Proceeding by a third party (a “Third Party Claim”), with counsel selected by it, which counsel shall be reasonably acceptable to the Indemnified Party, upon notification thereof to the Indemnified Party within forty-five (45) days after the Notice of Claim has been delivered to the Indemnifying Party; provided, however, that the Indemnifying Party shall not have the right to assume or pursue, or to continue to assume or pursue, the defense of a Third Party Claim if (i) such Third Party Claim seeks exclusively equitable or injunctive relief against a Purchaser Indemnified Party; (ii) such Third Party Claim involves a request for monetary relief and also equitable or injunctive against a Purchaser Indemnified Party which, if granted, would adversely impact , in any material manner, the business or business reputation of a Purchaser Indemnified Party; (iii) the Indemnified Party reasonably concludes, based on the written opinion of counsel, that  there is an irreconcilable conflict of interest between the Indemnifying Party and the Indemnified Party in the conduct of such defense; or (iv) the Indemnifying Party fails to deliver, at or before the time it assumes the defense of such Third Party Claim, evidence reasonably acceptable to the Indemnified Party that the Indemnifying Party will have adequate financial resources to defend against such Third Party Claim (it being acknowledged that a written statement from either of Seller’s private equity sponsors that such sponsor will provide financial support for such assumption of defense shall be sufficient evidence of adequate financial resources).  If (A) the Indemnified Party does not receive such notification from the Indemnifying Party within such forty-five (45) day period that the Indemnifying Party will assume the defense of such Third Party Claim; (B) at any time after the Indemnifying Party has assumed the defense of a Third Party Claim, the Indemnifying Party withdraws from such defense or fails to adequately perform, or unreasonably delays in performing, its obligations to assume or pursue the defense of any such Third Party Claim or (C) the Indemnifying Party is not permitted to assume or conduct, or at any time after the Indemnifying has assumed the defense of a Third Party Claim, the Indemnifying Party is no longer permitted to assume or conduct, the defense of a Third Party Claim in accordance with the immediately preceding sentence, the Indemnified Party shall be entitled to assume, commence and pursue its defense of such Third Party Claim and be indemnified for the reasonable fees and expenses of counsel selected by it (limited to one (1) firm for all Indemnified Parties and, if applicable, one (1) local counsel in each applicable jurisdiction for all Indemnified Parties) (which fees and expenses shall be Losses under this Agreement), if such Indemnified Party is entitled to indemnification with respect to such Third Party Claim pursuant to this Article VI.  The Indemnified Party shall promptly inform the Indemnifying Party of all material developments related thereto.

(b)During the forty-five (45) day period referred to in Section 6.5(a), the Indemnified Party shall, and shall cause the other Purchaser Indemnified Parties or Seller Indemnified Parties, as applicable, to, provide such information to the Indemnifying Party as the Indemnifying Party may reasonably request in connection with its evaluation of whether a Third Party Claim is indemnifiable under this Article VI.  The Indemnifying Party’s election to assume the defense of any Third Party Claim shall constitute an irrevocable admission by the Indemnifying Party that any Losses resulting therefrom are indemnifiable Losses for which the Indemnified Party is entitled to indemnification under this Article VI.

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(c)If the Indemnifying Party assumes the defense of a Third Party Claim, it shall thereafter promptly inform the Indemnified Party of all material developments related thereto.  With respect to any Third Party Claim for which the Indemnifying Party has assumed the defense (and for which none of the conditions listed in the first sentence of Section 6.5(a) apply), the Indemnified Party shall have the right, but not the obligation, to participate, at its own cost and expense, in the defense of such Third Party Claim through legal counsel reasonably selected by it, but, subject to the Indemnified Party’s right to assume or pursue the defense of such Third Party Claim pursuant to Section 6.5(a)(iii),  shall not assert or pursue, directly or through its counsel, any contrary or inconsistent defenses.  The Indemnified Party shall, and shall cause its Affiliates to, during normal business hours, upon reasonable notice, cooperate in all reasonable ways with, reasonably make its and their relevant files and records reasonably available for inspection and copying by, make its and their employees reasonably available to, and otherwise render reasonable assistance to, the Indemnifying Party.

(d)If the Indemnifying Party (having assumed the defense of a Third Party Claim) or the Indemnified Party (having proceeded with its own defense of a Third Party Claim in accordance with this Section 6.5) proposes to settle or compromise such Third Party Claim, the Indemnifying Party or the Indemnified Party (as applicable) shall provide notice to that effect (together with a reasonably detailed statement of the terms and conditions of such settlement or compromise) to the Indemnifying Party or to the Indemnified Party (as applicable), which notice shall be provided a reasonable time prior to the proposed time for effecting such settlement or compromise, and may not affect any such settlement or compromise without the prior written consent of the Indemnifying Party or the Indemnified Party (as applicable), which consent shall not be unreasonably withheld, conditioned or delayed.  If (i) the Indemnifying Party provides any such notice; (ii) the related settlement or compromise offer provides for the full release of the Indemnified Party from any and all liability in respect of such Third Party Claim and does not have an adverse impact on the business, operations or business reputation of the Purchaser Indemnified Party or require future payments, by the Indemnified Party; and (iii) the Indemnified Party fails to provide, in a reasonably timely manner, its  consent to such settlement or compromise, then notwithstanding anything to the contrary in this Article VI, the Indemnifying Party’s indemnification obligation under this Article VI with respect to such Third Party Claim will not exceed the amount of such settlement or compromise offer and the Indemnified Party shall be required to pay the excess of the amount necessary to settle or compromise the Third Party Claim over the amount of such settlement or compromise offer.

6.6Recourse Against Insurance.  The amount of any claim for indemnification by any Indemnified Party pursuant to this Article VI shall be reduced to reflect any insurance proceeds recoverable by and actually paid to any Indemnified Party with respect to the matter giving rise to such claim, provided that in no event shall any indemnification payment be delayed in anticipation of the receipt of any such insurance proceeds.  An Indemnified Party shall, and cause its Affiliates to: (a) in good faith, seek recovery, at its or their own expense, of all insurance proceeds to which it may be entitled (including under the Tail Policy) with respect to all Losses with respect to which such Indemnified Party makes a claim for indemnification pursuant to this Article VI; and (b) promptly keep the Indemnifying Party reasonably informed of all material matters related thereto.  To the extent that such Indemnified Party or any of its Affiliates receives any amount under insurance coverage with respect to a matter for which it has previously received payment in indemnification pursuant to this Article VI, such Indemnified

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Party shall, as soon as reasonably practicable after the receipt of such insurance proceeds, (i) in the case of a Purchaser Indemnified Party, pay and reimburse to the Escrow Agent (if such payment is to be delivered by a Purchaser Indemnified Party during the Escrow Period) or to Seller (if such payment is to be delivered by a Purchaser Indemnified Party after the end of the Escrow Period or to the extent such amount exceeds the payment with respect to the underlying claim paid from the Escrow Account) for any prior indemnification payment with respect to the matter giving rise to such claim (up to the amount of such insurance proceeds, less any retroactive premium adjustments directly attributable thereto) and (ii) in the case of a Seller Indemnified Party, pay and reimburse to Purchaser for any prior indemnification payment with respect to the matter giving rise to such claim (up to the amount of such insurance proceeds, less any retroactive premium adjustments directly attributable thereto).

6.7Waiver of Certain Damages.  Notwithstanding anything to the contrary in this Article VI or elsewhere in this Agreement, in no event shall any Indemnifying Party be liable to an Indemnified Party under this Article VI for consequential, special, incidental, indirect, exemplary or punitive damages, loss of future revenue, income or profits, loss of benefit of the bargain or similar items, regardless of whether the possibility of such damages, losses or similar items was disclosed to such Indemnified Party or any of such Indemnified Party’s respective representatives in advance or could have been reasonably foreseen by such Indemnified Party; provided, however, that this limitation shall not apply if, and solely to the extent that, such Indemnified Party is seeking to obtain through indemnification reimbursement of Losses resulting from an award in a Third Party Claim against such Indemnified Party of consequential, special, incidental, indirect or punitive damages, loss of future revenue, income or profits, loss of benefit of the bargain or similar items.

6.8Tax Treatment of Indemnification Payments.  Unless otherwise required by applicable Tax Law, any indemnification payments made pursuant to this Article VI shall be treated for all Tax purposes as adjustments to the Purchase Price.

6.9Source of Recovery.

(a)Any amount that is finally determined to be due to any Purchaser Indemnified Party under Section 6.2(a) or Section 5.16 shall be paid by release to Purchaser (on behalf of such Purchaser Indemnified Party) from the Escrow Account of funds equal to the lesser of (A) such amount or (B) the full amount of Escrow Deposit then remaining in the Escrow Account, in accordance with the terms of the Escrow Agreement.  In the event the Escrow Deposit is depleted or is insufficient to cover the amount of Losses for which Purchaser is entitled to indemnification by Seller under this Article VI, Purchaser may, at its sole discretion, set off any indemnification payment to which it is entitled under this Article VI, in each case against payment of any Net Sales Milestone Payments.  If Purchaser shall set off any amounts pursuant to this Section 6.9(a), and Seller objects to such set off by written notice to Purchaser given within thirty (30) days of such set off and it is determined that Purchaser has improperly set off any amount, Purchaser shall be required to pay to Seller interest on such improperly set off portion of such Net Sales Milestone Payments at a rate per month equal to the prime rate then in effect plus two percent (2.0%), to the maximum extent permitted by applicable Law.  Such interest shall accrue and compound on a daily basis from the date on which the improperly set off portion of such Net Sales Milestone Payments should have initially been paid

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to Seller.  In addition to accrued interest on any improperly set off portion of such Net Sales Milestone Payments, Purchaser shall pay to Seller reasonable attorneys’ fees and expenses and other reasonable costs and expenses incurred in connection with the collection of any such unpaid portion thereof.

(b)Any amount that is finally determined to be due to any Seller Indemnified Party under Section 6.2(b) or Section 5.16 shall be paid by Purchaser to such Seller Indemnified Party within five (5) Business Days after such determination by wire transfer of immediately available funds to such account as such Seller Indemnified Party may designate in writing reasonably in advance of such payment.

6.10Exclusive Remedy.

(a)Except as set forth in Section 6.10(c), notwithstanding anything to the contrary in this Agreement or otherwise: (i) following the Closing, Seller shall have no liability of any kind to Purchaser or any other Purchaser Indemnified Party, subject only to the Purchaser Indemnified Parties’ ability to bring indemnification claims pursuant to Section 5.16 or this Article VI and to be paid as provided in Section 5.16 or this Article VI, which shall be the sole and exclusive remedies of the Purchaser Indemnified Parties for breach of any representations and warranties or covenants and agreements of Seller contained in this Agreement, with respect to Excluded Liabilities, Tax matters, employment matters or otherwise with respect to this Agreement, the Transaction Documents or the transactions contemplated hereby or thereby; and (ii) Purchaser, on behalf of itself and all other Purchaser Indemnified Parties, hereby irrevocably waives any right to any other remedy, following the Closing, whether for any breach of any representations and warranties and covenants and agreements of Seller contained in this Agreement, with respect to Excluded Liabilities, Tax matters, employment matters or otherwise with respect to this Agreement, the Transaction Documents or the transactions contemplated hereby and thereby.  Without limiting the generality of the preceding sentence of this Section 6.10(a), except to the extent the same constitute Excluded Claims, the rights and claims waived by Purchaser and the Purchaser Indemnified Parties under this Section 6.10(a) include claims for contribution or other rights of recovery arising out of or relating to any Environmental Law (whether now or hereinafter in effect), breach of contract, breach of representations and warranties, misrepresentation (whether reckless, negligent or otherwise (but not intentional)), gross negligence, and all other claims, whether based in contract, tort, breach of duty or otherwise.

(b)Except as set forth in Section 6.10(c), notwithstanding anything to the contrary in this Agreement or otherwise: (i) following the Closing, Purchaser shall have no liability of any kind to Seller or any other Seller Indemnified Party, subject only to the Seller Indemnified Parties’ ability to bring indemnification claims pursuant to Section 5.16 or this Article VI and to be paid as provided in Section 5.16 or this Article VI, which shall be the sole and exclusive remedies of the Seller Indemnified Parties for breach of any representations and warranties or covenants and agreements of Seller contained in this Agreement, with respect to Assumed Liabilities, Tax matters, employment matters or otherwise with respect to this Agreement, the Transaction Documents or the transactions contemplated hereby or thereby; and (ii) Seller, on behalf of itself and all other Seller Indemnified Parties, hereby irrevocably waives any right to any other remedy, following the Closing, whether for any breach of any

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representations and warranties and covenants and agreements of Purchaser contained in this Agreement, with respect to Assumed Liabilities, Tax matters, employment matters or otherwise with respect to this Agreement, the Transaction Documents or the transactions contemplated hereby and thereby.  Without limiting the generality of the preceding sentence of this Section 6.10(b), except to the extent the same constitute Excluded Claims, the rights and claims waived by Seller and the Seller Indemnified Parties under this Section 6.10(b) include claims for contribution or other rights of recovery arising out of or relating to any Environmental Law (whether now or hereinafter in effect), breach of contract, breach of representations and warranties, misrepresentation (whether reckless, negligent or otherwise (but not intentional)), gross negligence, and all other claims, whether based in contract, tort, breach of duty or otherwise.

(c)Section 6.10(a) and Section 6.10(b) shall not apply to any claim related to any fraud, intentional misrepresentation or willful misconduct or any claim for equitable relief under Section 7.13 made with respect to breaches of any covenant, agreement or obligation set forth in this Agreement or any Transaction Document (“Excluded Claims”); provided, however, that if an Excluded Claim is made, then the Party prevailing with respect to such Excluded Claim shall be entitled to reimbursement from the other Party for all fees and expenses (including reasonable attorneys’ and accountants’ fees and court costs) incurred by such prevailing Party with respect to such claim and any Proceeding with respect thereto.

ARTICLE VII

MISCELLANEOUS.

7.1Expenses.  Except as otherwise specifically provided for in this Agreement or the Transaction Documents, each Party shall bear the costs and expenses (including fees and disbursements of counsel, financial advisors and accountants and financing fees, if any) incurred by or on behalf of such Party in connection with this Agreement, the Transaction Documents and the transactions contemplated hereby and thereby, regardless of whether or not the Closing is consummated.

7.2Notices.  All notices, requests, demands, waivers and other communications required or permitted to be given under this Agreement shall be in writing and shall be deemed to have been duly given if: (a) delivered personally; (b) mailed using certified or registered mail with postage prepaid, return receipt requested; or (c) sent by next day or overnight mail or delivery using a nationally recognized overnight courier service, as follows:

if to Purchaser:

Depomed, Inc.

7999 Gateway Boulevard, Suite 300

Newark, California  94560

Attention:  Legal Department

with a copy (which shall not constitute notice, request, demand, waiver or other communication to Purchaser) to:

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Baker Botts L.L.P.

1001 Page Mill Road

Building One, Suite 200

Palo Alto, California  94304

Attention:  Brian D. Lee

if to Seller:

NNI Holdings Corp.

135 Routes 202 / 206

Bedminster, New Jersey  07921

Attention:  Peter Lankau

with copies (which shall not constitute notice, request, demand, waiver or other communication to Seller) to:

Tailwind Management LP

485 Lexington Avenue, 23rd Floor

New York, New York  10017

Attention:  Geoffrey S. Raker

and to:

Kelley Drye & Warren LLP

400 Atlantic Street

Stamford, Connecticut  06901

Attention: John T. Capetta

and to:

Kelley Drye & Warren LLP

3050 K Street, NW

Washington, DC 20007

Attention: Jay R. Schifferli

A Party may designate a new address to which notices, requests, demands, waivers and other communications shall thereafter be transmitted by providing written notice to that effect to the other Parties.  Each notice, request, demand, waiver or other communication transmitted in the manner described in this Section 7.2 shall be deemed to have been provided, received and become effective for all purposes hereunder at the time it shall have been delivered to the addressee as indicated by the return receipt (if transmitted by mail) or the affidavit or receipt of the messenger (if transmitted by personal delivery or courier service).

7.3Assignment.  This Agreement and all of the provisions hereof shall be binding upon and inure to the benefit of the Parties and their respective successors, permitted assigns, heirs and legal representatives; provided that neither this Agreement nor any of the rights,

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interests or obligations hereunder may be assigned or delegated, in whole or in part, by operation of Law or otherwise, (i) by Purchaser without the prior written consent of Seller; or (ii) by Seller without the prior written consent of Purchaser; except that (A) Seller may assign, without Purchaser’s consent, with prior written notice to Purchaser, its rights and delegate its obligations under this Agreement to the Seller Representative in accordance with Section 5.18; and (B) Purchaser may assign this Agreement, without Seller’s consent, with prior written notice to Seller, to (I) any of its Affiliates; provided, however, that any such assignment by Purchaser to any of its Affiliates shall not relieve Purchaser of its primary liability for obligations hereunder or enlarge, alter or change any obligation of Seller hereunder or (II) a successor to all or substantially all of the business of Purchaser, whether by way of merger, sale of stock, sale of assets or other transaction or series of related transactions.  With respect to any proposed assignment of this Agreement by Purchaser to a successor of that portion of Purchaser’s business comprising the Business, if such portion of Purchaser’s business is less than substantially all of Purchaser’s business, the consent of Seller shall not be unreasonably withheld, conditioned or delayed.  Any purported assignment or delegation by any Party of this Agreement or any of the rights or obligations hereunder in violation of this Section 7.3 will be null and void.

7.4Severability.  If any provision of this Agreement shall hereafter be held to be invalid, unenforceable or illegal, in whole or in part, in any jurisdiction under any circumstances for any reason: (a) such provision shall be reformed to the minimum extent necessary to cause such provision to be valid, enforceable and legal while preserving the intent of the Parties as expressed in, and the benefits to such Parties provided by, such provision; or (b) if such provision cannot be so reformed, such provision shall be severed from this Agreement and an equitable adjustment shall be made to this Agreement (including addition of necessary further provisions to this Agreement) so as to give effect to the intent as so expressed and the benefits so provided.  Such holding shall not affect or impair the validity, enforceability or legality of such provision in any other jurisdiction or under any other circumstances.  Neither such holding nor such reformation or severance shall affect or impair the legality, validity or enforceability of any other provision of this Agreement.

7.5Interpretation.  All references in this Agreement to annexes, exhibits, schedules, articles, sections, subsections and other subdivisions refer to the corresponding annexes, schedules, articles, sections, subsections and other subdivisions of or to this Agreement unless expressly provided otherwise.  Titles appearing at the beginning of any articles, sections, subsections or other subdivisions of this Agreement are for convenience only and shall not affect in any way the meaning or interpretation of this Agreement. Annexes, exhibits and schedules to this Agreement are attached hereto and by this reference incorporated herein for all purposes.  Any capitalized term used but not defined in an annex or schedule to this Agreement have the meaning set forth in this Agreement.  The words “this Agreement,” “herein,” “hereby,” “hereunder” and “hereof,” and words of similar import, refer to this Agreement as a whole and not to any particular article, section, subsection or other subdivision hereof unless expressly so limited herein.  The words “either,” “or,” “neither,” “nor,” and “any” are not exclusive, and the word “or” is deemed to have the meaning “and/or”.  The word “including” (in its various forms) means including without limitation.   All references to “$” and dollars shall be deemed to refer to United States currency unless otherwise specifically provided.  Pronouns in masculine, feminine or neuter genders shall be construed to state and include any other gender, and words, terms and titles (including terms defined herein) in the singular form shall be construed to

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include the plural and vice versa, unless the context otherwise requires.  Unless expressly stated to the contrary, references in this Agreement or Annex A to any Contract are to that Contract as amended, modified or supplemented from time to time in accordance with the terms thereof.  References in this Agreement to a Person shall include the successors and assigns thereof.  All references to materials in this Agreement, including any report, record, file or other document, shall, in each case, include any form or medium of such materials (including electronic form).

7.6Construction.  The language used in this Agreement shall be deemed to be the language chosen by the Parties to express their mutual intent, and no rule of strict construction shall be applied against any Party based on any claim that such Party or counsel to such Party drafted this Agreement or any provision hereof.  The Parties acknowledge and agree that any exception to a representation and warranty of Seller contained in this Agreement that is disclosed in any section of the Disclosure Schedule under the caption referencing such representation and warranty shall be deemed to also be an exception to each other representation and warranty of Seller contained in this Agreement to the extent that it would be reasonably apparent that such exception is applicable to such other representation and warranty.  Certain information set forth in the Disclosure Schedule is included therein solely for informational purposes and may not be required to be disclosed pursuant to this Agreement, and the disclosure of any information shall not be deemed to constitute an acknowledgment or admission that such information is required to be disclosed in connection with the representations and warranties made by Seller in this Agreement or that it is material, nor shall such information be deemed to establish a standard of materiality.

7.7Amendment and Waiver.  This Agreement may not be amended except by an instrument in writing executed by Purchaser and Seller, which states that it constitutes an amendment to this Agreement and specifies the provision(s) that are being amended.  Any provision of this Agreement may be waived at any time by (a) Purchaser, by delivery by Purchaser of a written instrument executed by Purchaser, which states that it constitutes a waiver of this Agreement and specifies the provision(s) that are being waived; and (b) Seller, by delivery by Seller of a written instrument executed by Seller, which states that it constitutes a waiver of this Agreement and specifies the provision(s) that are being waived.  Any such waiver shall be effective only to the extent specifically set forth in such written instrument.  Neither the exercise (from time to time and at any time) by a Party of, nor the delay or failure (at any time or for any period of time) to exercise by a Party, any right, power or remedy shall constitute a waiver of the right to exercise, or impair, limit or restrict the exercise of, such right, power or remedy or any other right, power or remedy at any time and from time to time thereafter.  No waiver of any right, power or remedy of a Party shall be deemed to be a waiver of any other right, power or remedy of such Party or shall, except to the extent so waived, impair, limit or restrict the exercise of such right, power or remedy.

7.8Entire Agreement; No Implied Warranties.  This Agreement (including the annex, exhibits and schedules referred to herein), the Transaction Documents and the Confidentiality Agreement dated as of June, 3, 2011 by and between Seller and Purchaser constitute the entire agreement, and supersede all of the previous or contemporaneous Contracts, representations, warranties and understandings (whether oral or written), by or between the Parties with respect to the subject matter hereof, including any letter of intent, exclusivity agreement, term sheet or memorandum of terms entered into or exchanged by the Parties.  The annex, exhibits and

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schedules specifically referred to herein, and delivered pursuant hereto, are an integral part of this Agreement.  No representation, warranty, promise, inducement or statement of intention has been made by either Party, any of its Affiliates or any of its or their respective representatives related to the transactions contemplated by this Agreement that is not embodied in this Agreement or any Transaction Document, and neither of the Parties shall be bound by, or be liable for, any alleged representation, warranty, promise, inducement or statement of intention not embodied herein or therein.  Each of the Parties acknowledges and agrees that is has not relied on any representation, warranty, promise, inducement or statement of intention made by any other Party, other than the representations and warranties expressly set forth in this Agreement or any Transaction Document.

7.9Counterparts.  This Agreement may be signed in any number of counterparts, each of which (when executed and delivered) shall constitute an original instrument, but all of which together shall constitute one and the same instrument.  This Agreement shall become effective and be deemed to have been executed and delivered by each of the Parties at such time as counterparts hereto shall have been executed and delivered by all of the Parties, regardless of whether all of the Parties have executed the same counterpart.  Counterparts may be delivered via facsimile or other electronic transmission (including pdf) and any counterpart so delivered shall be deemed to have been duly and validly delivered and be valid and effective for all purposes.

7.10Governing Law.  THIS AGREEMENT, THE TRANSACTIONS CONTEMPLATED HEREBY, ALL RELATIONSHIPS BETWEEN THE PARTIES HEREUNDER AND ALL DISPUTES AND PROCEEDINGS (IN CONTRACT, IN TORT OR OTHERWISE) ARISING OUT OF OR RELATING TO ANY OF THE FOREGOING SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH, AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, WITHOUT GIVING EFFECT TO ANY CHOICE OR CONFLICT OF LAW PROVISION (WHETHER OF THE STATE OF NEW YORK OR ANY OTHER JURISDICTION) THAT WOULD CAUSE THE APPLICATION OF THE LAWS OF ANY JURISDICTION OTHER THAN THE STATE OF NEW YORK.

7.11Consent to Jurisdiction; Waiver of Jury Trial.

(a)EACH PARTY HEREBY IRREVOCABLY AND UNCONDITIONALLY AGREES THAT ALL PROCEEDINGS (IN CONTRACT, IN TORT OR OTHERWISE) ARISING OUT OF OR RELATING TO THIS AGREEMENT, THE TRANSACTIONS CONTEMPLATED HEREBY, ANY RELATIONSHIPS BETWEEN THE PARTIES HEREUNDER AND ANY DISPUTES WITH RESPECT TO ANY OF THE FOREGOING SHALL BE COMMENCED AND PROSECUTED EXCLUSIVELY IN THE COURTS OF THE COUNTY OF NEW YORK, STATE OF NEW YORK AND ANY APPELLATE COURT THEREFROM OR THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK AND ANY APPELLATE COURT THEREFROM (COLLECTIVELY, THE “NEW YORK COURTS”).  EACH PARTY HEREBY IRREVOCABLY AND UNCONDITIONALLY CONSENTS AND SUBMITS, FOR ITSELF AND ITS ASSETS,  TO THE EXCLUSIVE JURISDICTION OF ANY OF THE NEW YORK COURTS IN RESPECT OF ANY SUCH PROCEEDING.  EACH PARTY HEREBY

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IRREVOCABLY AND UNCONDITIONALLY CONSENTS TO SERVICE OF PROCESS IN THE MANNER PROVIDED FOR NOTICES IN SECTION 7.2.  NOTHING IN THIS AGREEMENT WILL AFFECT THE RIGHT OF ANY PARTY TO THIS AGREEMENT TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW.

(b)EACH PARTY HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES, TO THE FULLEST EXTENT IT MAY LEGALLY AND EFFECTIVELY DO SO, ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY PROCEEDING (IN CONTRACT, IN TORT OR OTHERWISE) ARISING OUT OF OR RELATING TO THIS AGREEMENT, THE TRANSACTIONS CONTEMPLATED HEREBY, ANY RELATIONSHIPS BETWEEN THE PARTIES HEREUNDER AND ANY DISPUTES WITH RESPECT TO ANY OF THE FOREGOING IN ANY OF THE NEW YORK COURTS.  EACH OF THE PARTIES HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, THE DEFENSE OF AN INCONVENIENT FORUM TO THE MAINTENANCE OF SUCH PROCEEDING IN ANY OF THE NEW YORK COURTS.  EACH OF THE PARTIES AGREES THAT A FINAL JUDGMENT IN ANY SUCH PROCEEDING SHALL BE CONCLUSIVE AND MAY BE ENFORCED IN OTHER JURISDICTIONS BY SUIT ON THE JUDGMENT OR IN ANY OTHER MANNER PROVIDED BY LAW.

(c)EACH PARTY ACKNOWLEDGES AND AGREES THAT ANY PROCEEDING (IN CONTRACT, IN TORT OR OTHERWISE) ARISING OUT OF OR RELATING TO THIS AGREEMENT, THE TRANSACTIONS CONTEMPLATED HEREBY, ANY RELATIONSHIPS BETWEEN THE PARTIES HEREUNDER AND ANY DISPUTES WITH RESPECT TO ANY OF THE FOREGOING WILL INVOLVE COMPLICATED AND DIFFICULT ISSUES, AND THEREFORE EACH PARTY IRREVOCABLY AND UNCONDITIONALLY WAIVES ANY RIGHT SUCH PARTY MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY SUCH PROCEEDING.

(d)EACH PARTY CERTIFIES AND ACKNOWLEDGES THAT (i) NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF ANY PROCEEDING ARISING UNDER OR RELATING TO THIS AGREEMENT, SEEK TO ENFORCE THE FOREGOING WAIVERS, (ii) SUCH PARTY UNDERSTANDS AND HAS CONSIDERED THE IMPLICATIONS OF SUCH WAIVERS, (iii) SUCH PARTY MAKES SUCH WAIVERS VOLUNTARILY, AND (iv) SUCH PARTY HAS BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATION IN THIS SECTION 7.11.

7.12No Third Party Beneficiaries.  No Person other than Purchaser and Seller has, is intended to have, or shall have any rights, remedies, obligations or benefits under any provision of this Agreement, other than (a) any permitted successors and assigns of the Parties under Section 7.3 (who are intended third party beneficiaries of this Agreement) and (b) Purchaser Indemnified Parties and Seller Indemnified Parties (who are intended third party beneficiaries of Article VI).

Confidential Information indicated by [***] has been omitted from this filing and filed separately with the Securities Exchange Commission.

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7.13Remedies.  Except as otherwise provided in Section 6.10, each of the Parties shall have and retain all rights and remedies, at law or in equity, including rights to specific performance and injunctive or other equitable relief, arising out of or relating to a breach or threatened breach of this Agreement.  Without limiting the generality of the foregoing, each of the Parties acknowledges that money damages would not be a sufficient remedy for any breach or threatened breach of this Agreement and that irreparable harm would result if this Agreement were not specifically enforced.  Therefore, the rights and obligations of the Parties shall be enforceable by a decree of specific performance issued by any court of competent jurisdiction, and appropriate injunctive relief shall be granted in connection therewith, without the necessity of posting a bond or other security or proving irrevocable harm and without regard to the adequacy of any remedy at law.  Each of the Parties agrees that it will not oppose the granting of an injunction, specific performance and other equitable relief when available pursuant to the terms of this Agreement on the basis that the other Party has an adequate remedy at law or an award of specific performance is not an appropriate remedy for any reason at law or equity.  No breach of any representation, warranty, covenant or agreement contained herein shall give rise to any right on the part of Purchaser, after the Closing, to rescind this Agreement or the transactions contemplated hereby.   Subject to the provisions of  Section 6.10, a Party’s right to specific performance or injunctive relief shall be in addition to all other legal or equitable remedies available to such Party.

7.14Relationship of the Parties.  In making and performing this Agreement, the Parties are acting, and intend to be treated, as independent entities and nothing contained in this Agreement shall be construed or implied to create an agency, partnership, joint venture, or employer and employee relationship between Seller and Purchaser or any of their respective Affiliates.  Except as otherwise expressly provided herein, neither Purchaser nor Seller may act on behalf of Seller or Purchaser (as applicable) and neither Purchaser nor Seller may make (or has any authority to make) any representation, warranty or commitment, whether express or implied, on behalf of Seller or Purchaser (as applicable), or incur any charges or expenses for or in the name of Seller or Purchase (as applicable).  Neither Purchaser nor Seller shall be liable for the act of Seller or Purchaser (as applicable), unless such act is expressly authorized in writing by all Parties. The relationship of Purchaser and Seller under this Agreement is, and is intended to be, one of independent contractors hereunder.

[signature page follows]

Confidential Information indicated by [***] has been omitted from this filing and filed separately with the Securities Exchange Commission.

53

The Parties have executed this Asset Purchase Agreement as of the date first above written.

SELLER:
NAUTILUS NEUROSCIENCES, INC.
By:	/s/ William Maichle
Name:	William Maichle
Title:	Chief Executive Officer
PURCHASER:
DEPOMED, INC.
By:	/s/ James A. Shoeneck
Name:	James A. Schoeneck
Title:	Chief Executive Officer

[SIGNATURE PAGE TO ASSET PURCHASE AGREEMENT]

Confidential Information indicated by [***] has been omitted from this filing and filed separately with the Securities Exchange Commission.

54

ANNEX A

DEFINITIONS

As used in the Agreement, each of the following terms has the meaning given in this Annex A:

“Accounting Arbitrator” has the meaning set forth in Section 1.8.

“Affiliate” or “Affiliates” of any particular Person means any other Person controlling, controlled by or under common control with such particular Person; provided, however, that Seller’s Affiliates shall be deemed not to include any portfolio company of any of the investment funds managed by Tailwind Management LP or Galen Management, LLC other than NNI Holdings Corp. and Seller.  For the purposes of this definition, “controlling,” “controlled” and “control” means the possession, directly or indirectly, of the power to direct the management and policies of a Person whether through the ownership of voting securities, by Contract or otherwise.  For the avoidance of doubt, the directors and officers of Seller or NNI Holdings Corp. shall not be deemed to be Affiliates of Seller.

“Affiliated Group” means any affiliated group within the meaning of Section 1504(a) of the Code or any similar or analogous group defined under a similar or analogous provision of applicable state, local or foreign Tax Law.

“Agreement” means this Asset Purchase Agreement, including the annex, exhibits and schedules hereto (including the Disclosure Schedule), as amended and modified from time to time in accordance with its provisions.

“Allocation” has the meaning set forth in Section 1.8.

“AMP” has the meaning set forth in Section 5.21(a).

“ANDA” has the meaning set forth in Section 3.22.

“Assignment of Contracts” has the meaning set forth in Section 2.2(b).

“Assignments of Transferred Intellectual Property” has the meaning set forth in Section 2.2(d).

“Assigned Contracts” has the meaning set forth in Section 1.1(d).

“Assumed Liabilities” has the meaning set forth in Section 1.3.

“Audited Financial Statements” has the meaning set forth in Section 3.8(a).

“Balance Sheet Date” has the meaning set forth in Section 3.9.

“Benefit Plan” means each material pension, profit sharing, 401(k), retirement, deferred compensation, stock purchase, stock option, stock appreciation right or other equity based compensation plans, incentive, bonus, vacation, employment, severance, retention, change in control, medical, life insurance, disability, dental insurance and other employee benefit plan,

Confidential Information indicated by [***] has been omitted from this filing and filed separately with the Securities Exchange Commission.

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agreement, plan, policy and program maintained or contributed to by Seller for the benefit of current or former employees or current or former directors of Seller, whether written or oral, and whether or not subject to ERISA.

“Bill of Sale” has the meaning set forth in Section 2.2(a).

“Blanket Authorization Letter” has the meaning set forth in Section 2.2(n).

“Branded Prescription Fee” means a fee imposed by the IRS pursuant to Section 9008 of the Patient Protection and Affordable Care Act, P.L. 111-148, as amended by Section 1404 of the Health Care and Education Reconciliation Act of 2010, P.L. 111-152.

“Business” has the meaning set forth in the Recitals.

“Business Confidential Information” means any and all confidential or proprietary information of a Party or any of such Party’s Affiliates related to the Business, the Purchased Assets or the Assumed Liabilities, in each case regardless of whether such information is included among the Purchased Assets and regardless of whether such information is written or oral, including all physical or electronic embodiments of any of the foregoing; provided, however, that “Business Confidential Information” shall not include information that Seller can demonstrate (a) is or becomes generally available to the public other than as a result of a disclosure by Seller or any of Seller’s Affiliates or their respective representatives, or (b) is or becomes available to Seller on a non-confidential basis from a source that is not prohibited from disclosing such information by a contractual, fiduciary, regulatory or other obligation to Purchaser or any of Purchaser’s Affiliates.

“Business Day” means each Monday, Tuesday, Wednesday, Thursday and Friday that is not a day on which banking institutions are authorized or obligated by Law or executive order to be closed in the State of New York.

“Business Employees” has the meaning set forth in Section 3.19(a).

“Cash Purchase Price” has the meaning set forth in Section 1.5(a).

“CDAPCA” means the Comprehensive Drug Abuse Prevention and Control Act of 1970.

“CERCLA” means the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended.

“cGMP” has the meaning set forth in Section 3.13.

“Chargebacks” means all credits, chargebacks, reimbursements, administrative fees and other financial obligations to wholesalers and other distributors, group purchasing organizations, insurers, Governmental Authorities and other institutions related to the Product.

“Claim” means any complaint, allegation, charge, petition, appeal, demand, notice, filing or claim of any kind that commences, alleges a basis to commence or threatens to commence any Proceeding by or before any Governmental Authority, or that asserts, alleges a basis to assert or

Confidential Information indicated by [***] has been omitted from this filing and filed separately with the Securities Exchange Commission.

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threatens to assert any right, breach, default, violation, noncompliance, termination, cancellation or other action or omission that would reasonably be expected to result in a Loss.

“Closing” has the meaning set forth in Section 2.1.

“Closing Date” has the meaning set forth in Section 2.1.

“CMS” has the meaning set forth in Section 5.21(a).

“Code” means the Internal Revenue Code of 1986, as amended.

“Contract” means any agreement, contract, commitment, instrument, undertaking or arrangement that is binding upon the parties thereto.

“Core Representations” means the representations and warranties contained in Section 3.1, Section 3.4, Section 3.5, Section 3.6, Section 3.7, Section 3.17, Section 3.30, Section 4.1, Section 4.2, Section 4.3, Section 4.4 or Section 4.6.

“Covenants Not to Compete” has the meaning set forth in Section 5.22.

“CSA” means the Controlled Substances Act.

“Data Room” means the electronic documentation site established prior to the Closing Date at [***] on behalf of Seller.

“DEA” means the United States Drug Enforcement Administration.

“Disclosure Schedule” means the disclosure schedule of Seller to this Agreement, which is incorporated by reference into and made a part of this Agreement.

“Draft Allocation” has the meaning set forth in Section 1.8.

“Environment” has the meaning set forth in CERCLA.

“Environmental Law” means any federal, state, local, municipal or foreign Law relating to the Environment, as in effect on or prior to the Closing Date, including any statute, regulation or order pertaining to: (a) treatment, storage, disposal, generation or transportation of industrial, toxic or hazardous substances or solid hazardous waste; (b) soil, air and water pollution; (c) surface water, groundwater and soil contamination; (d) the Release or threatened Release into the Environment of waste, toxic or hazardous substances, or solid or hazardous waste, including emissions, discharges, injections, spills, escapes or dumping of pollutants, contaminants or chemicals; and (e) manufacture, processing, use, distribution, treatment, storage, disposal, transportation or handling of pollutants, contaminants, chemicals or industrial, toxic or hazardous substances or oil or petroleum products or solid or hazardous waste.

“Equitable Exceptions” means any limitations on the enforceability of obligations resulting from: (a) bankruptcy, insolvency, reorganization, fraudulent conveyance, moratorium or other requirements of Laws, Orders or equitable principles now or hereafter in effect relating to or

Confidential Information indicated by [***] has been omitted from this filing and filed separately with the Securities Exchange Commission.

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affecting the enforcement of creditors’ rights or debtors’ obligations generally; and (b) as to the remedy of specific performance and injunctive and other forms of equitable relief, the imposition of equitable defenses and the discretion of the Governmental Authority before which any Proceeding therefor may be brought (regardless of whether enforcement is sought in a Proceeding at law or in equity).

“ERISA” means the Employee Retirement Income Security Act of 1974, as amended.

“ERISA Affiliate” means each entity (whether or not incorporated) that, together with any other Person, is or has been considered in the past six (6) years to be under common control and treated as a single employer for purposes of Section 313(b), (c), (m) or (o) of the Code or Section 4001(a)(14) of ERISA.

“Escrow Account” has the meaning set forth in Section 1.6.

“Escrow Agent” has the meaning set forth in Section 1.5(b)(ii).

“Escrow Agreement” has the meaning set forth in Section 1.6.

“Escrow Deposit” has the meaning set forth in Section 1.5(b)(ii).

“Escrow Period” has the meaning set forth in Section 1.6.

“Exchange Act” means the Securities Exchange Act of 1934, as amended.

“Excluded Assets” has the meaning set forth in Section 1.2.

“Excluded Claims” has the meaning set forth in Section 6.10(b).

“Excluded Liabilities” has the meaning set forth in Section 1.4.

“FDA” means the United States Food and Drug Administration.

“FDA Act” means the United States Federal Food, Drug, and Cosmetic Act of 1938, as amended.

“Final Allocation” has the meaning set forth in Section 1.8.

“Financial Statements” has the meaning set forth in Section 3.8(a).

“GAAP” means United States generally accepted accounting principles, as in effect on the Closing Date.

“Generic Equivalent” means an A/B rated generic version of the Product.

“Governmental Authority” means any federal, state, local or foreign government or political subdivision thereof, or any agency or instrumentality of such government or political subdivision, or any self-regulated organization or other non-governmental regulatory authority or quasi-governmental authority (to the extent that the rules, regulations or orders of such

Confidential Information indicated by [***] has been omitted from this filing and filed separately with the Securities Exchange Commission.

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organization or authority have the force of Law), or any arbitrator, court or tribunal of competent jurisdiction.

“Health Laws” means any Law the purpose of which is to ensure the safety, efficacy and quality of medicines by regulating the research, development, manufacturing, commercialization and distribution of these products, including Laws relating to good laboratory practices, good clinical practices, investigational use, product marketing authorization, manufacturing compliance and approval, good manufacturing practices, labeling, advertising, privacy, promotional practices, pricing, safety surveillance, record keeping and filing of required reports, including the FDA Act, the CDAPCA, the CSA, the PPACA, the Health Insurance Portability and Accountability Act of 1996, the Public Health Service Act, as amended, and applicable regulations issued by a Regulatory Authority.

“Income Tax” means any federal, state, local or foreign Tax measured by or based upon income, including any interest, penalty or addition thereto.

“Income Tax Return” mean a Tax Return relating to Income Taxes.

“IND” has the meaning set forth in Section 3.23(b).

“Indebtedness” means, with respect to any Person, without duplication, (a) any obligation of such Person (i) constituting the principal amount, plus any related accrued and unpaid interest, fees, expenses and prepayment premiums or penalties, of indebtedness for borrowed money; (ii) evidenced by any note, bond, debenture, bankers acceptance, letter of credit or other instrument, facility or debt security (including a purchase money obligation); (iii) upon which interest charges (other than late payment charges) are customarily paid or owed; (iv) issued or assumed as the deferred purchase price of property or services, conditional sale obligations and obligation under any title retention agreement; or (v) under any lease or similar arrangement that would be required to be accounted for by the lessee as a capital lease in accordance with GAAP; (b) any synthetic lease obligations, sale-leaseback obligations and other similar indebtedness obligations, whether secured or unsecured; (c) any direct or indirect guarantee (or keepwell agreement) by such Person of any indebtedness of any other Person described in the preceding clause (a); (d) any obligation to reimburse any bank or other Person for amounts paid under a letter of credit or similar instrument (other than those issued in respect of the performance obligations in the ordinary course of business); and (e) any obligations under interest rate, currency and other derivative Contracts.

“Independent Auditor” has the meaning set forth in Section 5.7(c).

“Indemnification Cap” has the meaning set forth in Section 6.3(a).

“Indemnification Threshold” has the meaning set forth in Section 6.3(a).

“Indemnified Party” has the meaning set forth in Section 6.4(a).

“Indemnifying Party” has the meaning set forth in Section 6.4(a).

Confidential Information indicated by [***] has been omitted from this filing and filed separately with the Securities Exchange Commission.

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“Insolvent” means that the fair value of the assets of the relevant Person, at a fair valuation, exceeds the sum of the debts and other Liabilities of such Person.

“Intellectual Property Rights” means all of the following in any jurisdiction throughout the world, whether registered or unregistered, whether owned or held for use under license: (a) patents, patent applications and patent disclosures, together with all divisions, continuations, continuations-in-part, reissues, revisions, additions, extensions and reexaminations thereof; (b) copyrights, including all applications and registrations, and works of authorship, whether or not copyrightable; (c) trademarks, service marks and trade names, including all applications and registrations and the goodwill connected with the use of and symbolized by the foregoing; (d) trade secrets and other confidential know-how; (e) websites and internet domain name registrations; (f) any registrations of, applications to register, and renewals and extensions of, any of the foregoing with or by any Governmental Authority in any jurisdiction; and (g) all other moral, proprietary and intellectual property rights.

“Inventory” has the meaning set forth in Section 1.1(c).

“IRS” means the Internal Revenue Service.

“Knowledge of Purchaser” means the actual knowledge of any of the Chief Executive Officer, Chief Financial Officer or General Counsel of Purchaser.

“Labor Laws” has the meaning set forth in Section 3.19(b).

“Law” means any treaty, statute, law, ordinance, regulation, judgment, decree, injunction, ruling, Order or rule issued, promulgated or entered by or with any Governmental Authority.

“Liability” means any liability or obligation of any kind or nature, whether known or unknown, whether asserted or unasserted, whether absolute or contingent, whether accrued or unaccrued, whether liquidated or unliquidated, and whether due or to become due.

“Liens” means any mortgage, pledge, deed of trust, hypothecation, claim, security interest, title defect or other similar restriction, title retention agreement, restriction on transfer, encumbrance, option, easement, rights of access, encroachment, lien or other similar encumbrance.

“Loss” means any claim, liability, shortage, damage, settlement, deficiency, expense (including reasonable attorneys’ and accountants’ fees), assessment, Tax or loss of any kind.

“Material Adverse Effect” means any event, circumstance, change or effect that has or would reasonably be expected to have a material adverse effect on the business, results of operations, condition (financial or otherwise) or assets of Seller with respect to the Purchased Assets or the Business, or on the ability of Seller to consummate the transactions contemplated hereby; provided, however, that in no event shall any effect resulting from the occurrence of any of the following be considered a Material Adverse Effect: (a) any change in general economic or political conditions or changes affecting the industry generally in which Seller operates, so long as such change does not disproportionately affect the Business; (b) any natural disaster, any act of terrorism, sabotage, military action or war (whether or not declared) or any other social or political disruption, in each case including any escalation or worsening thereof; (c) any adverse

Confidential Information indicated by [***] has been omitted from this filing and filed separately with the Securities Exchange Commission.

A-6

change arising from or relating to any change in accounting requirements applicable to Seller or to any change in Laws or Orders applicable to Seller or, in each case, in the interpretation thereof; (d) the announcement of this Agreement or the transactions contemplated by this Agreement or other communication by Purchaser of its plans or intentions with respect to the Business or the Purchased Assets; (e) the consummation of the transactions contemplated by this Agreement or any actions by Purchaser or Seller required by this Agreement or, in the case of Seller, taken at the express written consent of Purchaser; (f) any failure by Seller to meet any internal or published projections, forecasts or revenue or earnings predictions for any period ending on or after the Closing Date (it being understood that the effects giving rise or contributing to such failure that are not otherwise excluded from the definition of a “Material Adverse Effect” may be deemed to constitute a Material Adverse Effect or be taken into account in determining whether a Material Adverse Effect has occurred); or (g) any adverse change arising from or relating to the approval or launch of, or any change in the pricing of, any pharmaceutical product other than the Product.

“Medicaid Finished Product” has the meaning set forth in Section 5.21(b).

“Milestone Period” has the meaning set forth in Section 1.7(b).

“NDA” means a New Drug Application pursuant to Section 505 of the FDA Act, including (a) any supplements, amendments or modifications submitted to or required by the FDA, (b) any successor application or procedure designated under the FDA Act (or any successor law to the FDA Act) after the Closing Date (for the avoidance of doubt, this clause (b) refers to a change in the FDA Act rather than a modification of a New Drug Application that is filed on an application and in accordance with a procedure provided for under the FDA Act as of the Closing Date) or (c) any foreign counterpart of a U.S. New Drug Application for approval to market, including, where applicable, applications for labeling, pricing and reimbursement approval.

“Net Sales” means, with respect to a specified period, the actual gross amount invoiced on sales of the Product by a Selling Person to independent, unrelated third parties in bona fide, arm’s length transactions, less the following deductions determined in accordance with GAAP to the extent actually incurred, allowed, paid, accrued, specifically allocated, or included in the gross invoiced sales price with respect to such sales to third parties and not otherwise received, recovered by or reimbursed to such Selling Person calculated to arrive at net sales: (a) freight, insurance and other transportation charges to the extent added to the sales price and set forth separately as such on the total amount invoiced; (b) any sales, use, value-added, excise taxes, duties or allowances and/or government charges on the selling price of the Product which fall due and are paid as a consequence of such sale; (c) chargebacks, trade, quantity, cash discounts and rebates actually allowed and taken to the extent customary in the trade, including managed health care organizations, pharmacy benefit managers (or equivalents thereof), federal, state/provincial, local or other Governmental Authority, or their agencies or purchasers, reimbursers, or trade customers and discounts to customers, including cash coupons, vouchers and loyalty cards (and their redemption) and co-pay assistance; (d) allowances or credits, including allowances or credits to customers on account of rejection, defects or returns of the Product or because of a retroactive price reduction, including for recalls or damaged goods and billing errors; (e) commissions allowed or paid to third party distributors, brokers or agents other than sales personnel, sales representatives and sales agents employed by the Selling Person; (f) 

Confidential Information indicated by [***] has been omitted from this filing and filed separately with the Securities Exchange Commission.

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amounts payable resulting from governmental (or agency thereof) mandated rebate programs; and (g) other deductions actually taken by customers that are customary in the trade or as permitted by applicable Law and GAAP.

“Net Sales Milestone Payments” has the meaning set forth in Section 1.7(a).

“Net Sales Statement” has the meaning set forth in Section 1.7(b).

“New York Courts” has the meaning set forth in Section 7.11(a).

“Notice of Claim” has the meaning set forth in Section 6.4(a).

“Order” means any judgment, writ, decree, directive, decision, injunction, ruling, award or order (including any consent decree or cease and desist order) of any kind of any Governmental Authority.

“Organizational Documents” of a Person means: (a) its articles of incorporation, certificate of incorporation, certificate of formation or similar document(s) filed with a Governmental Authority, which filing forms or organizes such Person; and (b) its bylaws, limited liability company operating agreement, partnership agreement, trust agreement or similar document(s), whether or not filed with a Governmental Authority, which organize or govern the internal affairs of such Person.

“Other Consent” has the meaning set forth in Section 1.9(a).

“Paragraph IV” means Section 505(j)(2)(A)(vii)(IV) of the FDA Act.

“Party” and “Parties” have the meaning set forth in the Preamble.

“Payoff Letter” has the meaning set forth in Section 2.2(h)

“Permitted Liens” means: (a) Liens for Taxes that are being contested in good faith and for which appropriate reserves have been established on the Financial Statements or that are not yet due; (b) purchase money Liens and Liens securing rental payments under capital lease arrangements; (c) mechanic’s, materialmen’s, carrier’s, repairer’s and other similar Liens arising or incurred in the ordinary course of business or that are not yet due and payable or that are being contested in good faith; (d) rights of parties under Assigned Contracts to the extent the same relate to performance after the Closing; (e) Liens of lessors or licensors in the assets leased or licensed; and (f) other Liens arising not in connection with the borrowing of money, which do not materially affect the ownership or use of the underlying Purchased Asset.

“Person” means any natural person and any firm, partnership, association, corporation, company, limited liability company, trust, business trust, Governmental Authority or other entity.

“PPACA” means the Patient Protection and Affordable Care Act.

“Proceeding” means any action, suit, arbitration, mediation, litigation, hearing, audit or administrative proceeding involving any Governmental Authority.

Confidential Information indicated by [***] has been omitted from this filing and filed separately with the Securities Exchange Commission.

A-8

“Product” has the meaning set forth in the Recitals.

“Purchase Price” has the meaning set forth in Section 1.5(a).

“Purchased Assets” has the meaning set forth in Section 1.1.

“Purchaser” has the meaning set forth in the Preamble.

“Purchaser FDA Letters” has the meaning set forth in Section 2.3(f).

“Purchaser Indemnified Parties” has the meaning set forth in Section 6.2(a).

“Rebates” means rebates, price reductions and administrative fees and related adjustments charged by or payments to (a) state Medicaid and other federal, state and local governmental programs and their participants, and by health plans, insurance companies, Medicare Part D prescription drug plans, pharmacy benefits managers, mail service pharmacies, long term care providers, specialty pharmacies and other health care providers, or their agencies or purchasers, reimbursers, or trade customers and discounts to customers, including cash coupons, vouchers, loyalty cards (and their redemption) and co-pay assistance, and (b) service, administrative and inventory management fees due to wholesalers, distributors and group purchasing organizations based on sales of the Product (in each case, other than Chargebacks).

“Registered Intellectual Property Rights” has the meaning set forth in Section 3.14(b).

“Regulatory Authority” means any national (e.g., the FDA in the United States), supra-national, regional, state or local Governmental Authority involved in the granting of Seller Permits, in any given jurisdiction, including, as applicable, the FDA, Health Canada, European Medicines Agency (EMA), the Drug Enforcement Administration (DEA), Centers for Medicare and Medicaid Services (CMS).

“Regulatory Files” means (a) all adverse event reports and other data, information and materials relating to adverse experiences and other safety issues with respect to the Product; (b) all material correspondence between Seller and any Governmental Authority relating to the Product, including any filings, submissions, safety reports or updates, complaint files and product quality reviews and all clinical or pre-clinical data derived from clinical studies conducted or sponsored by Seller; and (c) all other records, data and material held by Seller with respect to its compliance with the FDA Act, CDAPCA, CSA, PPACA and applicable regulations issued by a Regulatory Authority (both with respect to the Product and to Seller’s activities subject to the FDA Act, CDAPCA, CSA, PPACA or the applicable regulations issued by a Regulatory Authority).

“Release” has the meaning set forth in CERCLA.

“Response Notice” has the meaning set forth in Section 6.4(b).

“Restricted Business” has the meaning set forth in Section 5.1(b).

“SEC” has the meaning set forth in Section 5.12.

Confidential Information indicated by [***] has been omitted from this filing and filed separately with the Securities Exchange Commission.

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“Section 1060 Consideration” has the meaning set forth in Section 1.8.

“Seller” has the meaning set forth in the Preamble.

“Seller Benefit Plan” means each Benefit Plan under which Seller has or may have any Liabilities.

“Seller Brands” has the meaning set forth in Section 5.19.

“Seller FDA Letters” has the meaning set forth in Section 2.22(e).

“Seller Indemnified Party” has the meaning set forth in Section 6.2(b).

“Seller Insurance Policies” has the meaning set forth in Section 3.24.

“Seller Intellectual Property” means all of Intellectual Property Rights related to the Product or the Business or that are necessary for the conduct of the Business as currently conducted by Seller.

“Seller Permits” has the meaning set forth in Section 3.20.

“Seller Representative” has the meaning set forth in Section 5.20.

“Seller’s Knowledge” means the actual knowledge of Peter Lankau, William Maichle and Neil Milano.

“Selling Person” means Purchaser, each of its Affiliates and each licensee, sublicensee, assignee or other grantee of rights from Purchaser or any of its Affiliates or another Selling Person to develop, market or sell the Product or any Affiliate of the foregoing.

“Senior Debt” has the meaning set forth in Section 1.5(b)(i).

“Straddle Period” has the meaning set forth in Section 5.16(a)(ii).

“Subsidiary” means, with respect to any Person, any other Person (other than a natural person or a Governmental Authority), whether incorporated or unincorporated, with respect to which such Person, directly or indirectly: (a) owns at least a majority of the securities or ownership interests having by their terms ordinary voting power to elect members of the board of directors or similar body governing the affairs of such other Person or otherwise able to direct the business and policies of such other Person or (b) would be entitled to receive at least a majority of the assets of such other Person upon the dissolution thereof.

“Tail Policy” has the meaning set forth in Section 5.11.

“Tax” or “Taxes” means any federal, state, local or foreign net or gross income, gross receipts, license, payroll, employment, excise, severance, stamp, stamp duty, ad valorem, service, service use, business, unclaimed property, escheat, occupation, premium, environmental, customs duties, capital stock, franchise, profits, withholding, social security, unemployment, disability, real property, personal property, sales, use, transfer, registration, value added, goods and services,

Confidential Information indicated by [***] has been omitted from this filing and filed separately with the Securities Exchange Commission.

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alternative or add-on minimum, estimated, or other tax, duty, levy, assessment, deduction, withholding or similar charge of any kind whatsoever imposed, assessed or collected by, or payable to, any Governmental Authority including any interest, penalties or additions thereto.

“Tax Returns” means all returns, reports, forms, declarations, statements, estimated returns, elections, disclosures, claims for refund and information returns supplied or required to be supplied to a Governmental Authority relating to Taxes, including any schedule or attachment thereto and including any amendment thereof.

“Third Party Claim” has the meaning set forth in Section 6.5(a).

“Trademark Period” has the meaning set forth in Section 5.19.

“Transaction Documents” means the Escrow Agreement, the Bill of Sale, the Assignment of Contracts, the Assignments of Transferred Intellectual Property, the Transition Plan, the documents referred to in Section 2.2 and any other document or instrument (other than this Agreement) to be entered into by or among the Parties in connection with the transactions contemplated by this Agreement.

“Transfer Taxes” means all sales, use, transfer, documentary, stamp, registration and other similar Taxes, and all conveyance, recording and other similar fees, incurred in connection with the consummation of the transactions contemplated by this Agreement.

“Transferred Intellectual Property” has the meaning set forth in Section 1.1(e).

“Transition Plan” has the meaning set forth in Section 5.3(a).

“WARN Act” means the Worker Adjustment and Retraining Notification Act and the rules and regulations promulgated thereunder or any similar state or local law.

“Unaudited Financial Statements” has the meaning set forth in Section 3.8(a).

* * * *

Confidential Information indicated by [***] has been omitted from this filing and filed separately with the Securities Exchange Commission.

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EX-21

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Exhibit 21

SUBSIDIARIES OF THE REGISTRANT

Name of Subsidiary	State or Jurisdiction of Organization
Depo DR Sub, LLC	Delaware

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Exhibit 21

SUBSIDIARIES OF THE REGISTRANT

EX-23.1

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Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

        We consent to the incorporation by reference in the following Registration Statements: and related Prospectuses:

1)

Registration Statements on Form S-3 (No. 333-66843, No. 333-53486, No. 333-66688, No. 333-86542, No. 333-104956, No. 333-108973, No. 333-121891, No. 333-156539 and No. 333-181709) and in the related Prospectuses of Depomed, Inc.,



1)

Registration Statements on Form S-8 (No. 333-66923, No. 333-85419, No. 333-54982, No. 333-101796 and No. 333-105994) pertaining to the 1995 Stock Option Plan, as amended, of Depomed, Inc.,



1)

Registration Statement on Form S-8 (No. 333-167015, No. 333-116697, No. 333-145291, No. 333-156538 and No. 333-181710) pertaining to the 2004 Equity Incentive Plan and the 2004 Employee Stock Purchase Plan of Depomed, Inc.,

of our reports dated March 17, 2014 with respect to the consolidated financial statements and schedule of Depomed, Inc. and the effectiveness of internal control over financial reporting of Depomed, Inc., included in this Annual Report (Form 10-K) for the year ended December 31, 2013.

	/s/ Ernst & Young LLP
Redwood City, California March 17, 2014

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Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

EX-31.1

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Exhibit 31.1

CERTIFICATION PURSUANT TO RULE 13a-14(a)
OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, James A. Schoeneck, certify that:

        1.     I have reviewed this Annual Report of Depomed, Inc.;

        2.     Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

        3.     Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

        4.     The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

        (a)   designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

        (b)   designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

        (c)   evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

        (d)   disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

        5.     The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function):

        (a)   all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

        (b)   any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: March 17, 2014

/s/ JAMES A. SCHOENECK
James A. Schoeneck
President and Chief Executive Officer

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Exhibit 31.1

CERTIFICATION PURSUANT TO RULE 13a-14(a) OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

EX-31.2

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Exhibit 31.2

CERTIFICATION PURSUANT TO RULE 13a-14(a)
OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, August J. Moretti, certify that:

        1.     I have reviewed this Annual Report of Depomed, Inc.;

        2.     Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

        3.     Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

        4.     The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

        (a)   designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

        (b)   designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

        (c)   evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

        (d)   disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

        5.     The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function):

        (a)   all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

        (b)   any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: March 17, 2014

/s/ AUGUST J. MORETTI
August J. Moretti
Chief Financial Officer

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Exhibit 31.2

CERTIFICATION PURSUANT TO RULE 13a-14(a) OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

EX-32.1

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Exhibit 32.1

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

        In connection with the Annual Report of Depomed, Inc. (the "Company") on Form 10-K for the period ending December 31, 2013 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, James A. Schoeneck, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:

        (1)   The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

        (2)   The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: March 17, 2014

/s/ JAMES A. SCHOENECK
James A. Schoeneck
President and Chief Executive Officer

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Exhibit 32.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

EX-32.2

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Exhibit 32.2

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

        In connection with the Annual Report of Depomed, Inc. (the "Company") on Form 10-K for the period ending December 31, 2013 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, August J. Moretti, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:

        (1)   The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

        (2)   The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: March 17, 2014

/s/ AUGUST J. MORETTI

August J. Moretti
Chief Financial Officer

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Exhibit 32.2

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

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ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Details) (USD $) In Thousands, unless otherwise specified	12 Months Ended																		0 Months Ended
	Dec. 31, 2013 Item	Dec. 31, 2013 Minimum	Dec. 31, 2013 Minimum Managed Care Rebates	Dec. 31, 2013 Minimum Medicare Part D Coverage Gap Rebates	Dec. 31, 2013 Maximum	Dec. 31, 2013 Maximum Managed Care Rebates	Dec. 31, 2013 Maximum Medicare Part D Coverage Gap Rebates	Dec. 31, 2013 Gralise Minimum	Dec. 31, 2013 Gralise Maximum	Dec. 31, 2013 Zipsor	Dec. 31, 2013 500mg Glumetza	Dec. 31, 2013 1000mg Glumetza Minimum	Dec. 31, 2013 1000mg Glumetza Maximum	Dec. 31, 2013 CAMBIA Minimum	Dec. 31, 2013 CAMBIA Maximum	Dec. 31, 2013 Lazanda Minimum	Dec. 31, 2013 Lazanda Maximum	Dec. 31, 2013 Liability related to sale of future royalties	Oct. 18, 2013 Liability related to sale of future royalties PDL BioPharma
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Number of product candidates under clinical development	1
Summary Of Significant Accounting Policies
Royalty and milestone payments received	$ 240,500																	$ 240,500	$ 240,500
Product return period prior to expiration					6 months
Period after expiration for accepting unsalable product					12 months
Product shelf-life								24 months	36 months	36 months	48 months	24 months	36 months	24 months	48 months	24 months	36 months
Discount taken off period after the quarter in which product shipped to the customer		1 month			2 months
Cash discount (as a percent)	2.00%
Discount reimbursement period after filling of prescription subject to discount	1 month
Period after the quarter in which prescription is filled for paying rebate		2 months			3 months
Period after the quarter in which prescription is filled for rebate			1 month	2 months		2 months	3 months

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COMMITMENTS AND CONTINGENCIES (Details 2)	3 Months Ended	1 Months Ended	0 Months Ended
	May 31, 2012 Gralise ANDA Filers Item	Nov. 30, 2010 FDA	Jul. 26, 2013 Banner Pharmacaps
Legal matters
Number of patents infringed	6
Number of patents found not infringed	2
Period of commencement of lawsuit	45 days		45 days
Period of stay for FDA approval	30 months		30 months
Eligible period of regulatory exclusivity for marketing of Orphan-designated drug		7 years

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PROPERTY AND EQUIPMENT (Details) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2013	Dec. 31, 2012	Dec. 31, 2011
Property and Equipment
Property and equipment, gross	$ 14,743	$ 16,313
Less: Accumulated depreciation and amortization	(6,403)	(8,076)
Property and equipment, net	8,340	8,237
Property and equipment under capitalized leases	0	0
Depreciation and amortization expense	6,161	2,561	399
Furniture and office equipment
Property and Equipment
Property and equipment, gross	3,547	2,169
Laboratory equipment
Property and Equipment
Property and equipment, gross	5,151	4,623
Leasehold improvements
Property and Equipment
Property and equipment, gross	6,045	9,325
Construction in Progress
Property and Equipment
Property and equipment, gross		$ 196

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STOCK-BASED COMPENSATION (Details)	12 Months Ended
	Dec. 31, 2013	Dec. 31, 2012	Dec. 31, 2011
ESPP
Assumptions used to calculate the fair value of awards granted
Risk-free interest rate, minimum (as a percent)	0.08%	0.12%	0.05%
Risk-free interest rate, maximum (as a percent)	0.10%	0.16%	0.44%
Dividend yield	0.00%	0.00%	0.00%
Expected option term	6 months	6 months
Expected stock price volatility, minimum (as a percent)	28.80%	35.60%	60.10%
Expected stock price volatility, maximum (as a percent)	35.00%	44.30%	76.60%
ESPP | Minimum
Assumptions used to calculate the fair value of awards granted
Expected option term			6 months
ESPP | Maximum
Assumptions used to calculate the fair value of awards granted
Expected option term			2 years
Stock options
Assumptions used to calculate the fair value of awards granted
Risk-free interest rate, minimum (as a percent)	0.67%	0.51%	0.77%
Risk-free interest rate, maximum (as a percent)	1.38%	0.78%	1.99%
Dividend yield	0.00%	0.00%	0.00%
Expected stock price volatility, minimum (as a percent)	49.20%	64.10%	73.90%
Expected stock price volatility, maximum (as a percent)	63.50%	67.50%	76.40%
Stock options | Minimum
Assumptions used to calculate the fair value of awards granted
Expected option term	4 years 5 months 23 days	4 years 6 months	4 years 6 months 14 days
Stock options | Maximum
Assumptions used to calculate the fair value of awards granted
Expected option term	4 years 6 months 4 days	4 years 6 months 14 days	4 years 10 months 2 days

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MARKETABLE SECURITIES (Details 4) (Level 3, Contingent consideration, USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2013	Dec. 31, 2012
Changes in fair value of all financial liabilities measured at fair value on a recurring basis
Balance at the beginning of the period	$ 1,342
Acquisitions	12,554
Net accretion value adjustments	908	100
Balance at the end of the period	14,804	1,342
Zipsor
Changes in fair value of all financial liabilities measured at fair value on a recurring basis
Balance at the beginning of the period	1,342
Net accretion value adjustments	296
Balance at the end of the period	1,638
Lazanda
Changes in fair value of all financial liabilities measured at fair value on a recurring basis
Acquisitions	8,004
Net accretion value adjustments	612
Balance at the end of the period	8,616
CAMBIA
Changes in fair value of all financial liabilities measured at fair value on a recurring basis
Acquisitions	1,010
Balance at the end of the period	$ 1,010

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LIABILITY RELATED TO SALE OF FUTURE ROYALTIES (Tables)

12 Months Ended

Dec. 31, 2013

LIABILITY RELATED TO SALE OF FUTURE ROYALTIES.

Schedule of the activity within the liability account

The following table shows the activity within the liability account during the year ended December 31, 2013 (in thousands):

Liability related to sale of future royalties—beginning balance	$	—
Proceeds from sale of future royalties		240,500
Non-cash interest expense recognized		4,488
Payments from Depomed to PDL		(17,909	)
Total liability related to sale of future royalties as of December 31, 2013		227,079
Less: current portion		(49,455	)
Liability related to sale of future royalties, less current portion	$	177,624

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STOCK-BASED COMPENSATION (Details 3) (USD $)	12 Months Ended					1 Months Ended	12 Months Ended
	Dec. 31, 2013	Dec. 31, 2012	Dec. 31, 2013 ESPP	Dec. 31, 2012 ESPP	Dec. 31, 2011 ESPP	May 31, 2004 ESPP Minimum	Dec. 31, 2013 Stock options	Dec. 31, 2012 Stock options	Dec. 31, 2011 Stock options	Dec. 31, 2013 Stock options The 1995 Plan	Dec. 31, 2012 Stock options The 1995 Plan	Dec. 31, 2011 Stock options The 1995 Plan	Dec. 31, 2013 Stock options The 1995 Plan Minimum	Dec. 31, 2013 Stock options The 1995 Plan Maximum	Dec. 31, 2013 Stock options The 2004 Plan	Dec. 31, 2012 Stock options The 2004 Plan	Dec. 31, 2011 Stock options The 2004 Plan	Dec. 31, 2013 Stock options The 2004 Plan Minimum	Dec. 31, 2013 Stock options The 2004 Plan Maximum	Dec. 31, 2013 Incentive stock options The 1995 Plan Minimum	Dec. 31, 2013 Incentive stock options The 2004 Plan Minimum	Dec. 31, 2013 Nonstatutory stock options The 1995 Plan Minimum	Dec. 31, 2013 Nonstatutory stock options The 2004 Plan Minimum
Stock-based compensation
Weighted-average grant date fair value of awards granted (in dollars per share)							$ 3.35	$ 3.09	$ 4.38
Weighted-average grant date fair value of stock purchase rights granted (in dollars per share)			$ 1.87	$ 1.44	$ 2.67
Total intrinsic value of options exercised							$ 1,700,000	$ 1,800,000	$ 12,200,000
Total fair value of options vested							5,100,000	4,100,000	2,400,000
Total unrecognized compensation expense, net of estimated forfeitures							7,900,000
Average vesting period for recognition of unrecognized compensation expense							2 years
Cash received from stock option exercises							2,800,000	1,800,000	7,600,000
Number of shares authorized under plan			2,500,000							4,700,000					14,450,000
Shares available for future issuance			713,592							0					3,199,468
Exercise price of awards as percentage of the fair value of common stock						85.00%														100.00%	100.00%	85.00%	85.00%
Term of awards														10 years					10 years
Vesting period										4 years					4 years
Awards vesting by the end of the first year (as a percent)													25.00%					25.00%
Shares
Options outstanding at the beginning of the period (in shares)										60,550	114,950	341,600			5,762,022	4,900,217	4,940,345
Options granted (in shares)															1,769,363	2,006,950	2,762,181
Options exercised (in shares)	(621,090)	(628,394)								(37,800)	(40,800)	(215,850)			(583,290)	(587,594)	(2,163,266)
Options forfeited (in shares)																	(639,043)
Options expired (in shares)										(22,750)	(13,600)	(10,800)			(429,124)	(557,551)
Options outstanding at the end of the period (in shares)											60,550	114,950			6,518,971	5,762,022	4,900,217
Options exercisable and expected to become exercisable (in shares)															5,999,687
Options exercisable (in shares)															3,448,487
Weighted-Average Exercise Price
Options outstanding at the beginning of the period (in dollars per share)										$ 6.59	$ 5.05	$ 4.83			$ 5.76	$ 5.44	$ 3.21
Options granted (in dollars per share)															$ 6.86	$ 5.86	$ 7.35
Options exercised (in dollars per share)										$ 6.73	$ 2.50	$ 4.68			$ 4.33	$ 2.95	$ 3.04
Options forfeited (in dollars per share)																	$ 4.51
Options expired (in dollars per share)										$ 6.37	$ 5.83	$ 5.31			$ 6.46	$ 6.26
Options outstanding at the end of the period (in dollars per share)											$ 6.59	$ 5.05			$ 6.14	$ 5.76	$ 5.44
Options exercisable and expected to become exercisable (in dollars per share)															$ 6.10
Options exercisable (in dollars per share)															$ 5.66
Weighted-Average Remaining Contractual Term
Options outstanding at the end of the period															7 years 5 months 19 days
Options exercisable and expected to become exercisable															7 years 4 months 10 days
Options exercisable at the end of the period															6 years 6 months 18 days
Aggregate Intrinsic Value
Options outstanding at the end of the period															28,933,000
Options exercisable and expected to become exercisable															26,863,000
Options exercisable at the end of the period															$ 16,974,000

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SCHEDULE II: VALUATION AND QUALIFYING ACCOUNTS

12 Months Ended

Dec. 31, 2013

SCHEDULE II: VALUATION AND QUALIFYING ACCOUNTS

SCHEDULE II: VALUATION AND QUALIFYING ACCOUNTS

SCHEDULE II: VALUATION AND QUALIFYING ACCOUNTS

(in thousands)

			Additions
Description	Balance at Beginning of Year		Charged as a Reduction to Revenue(1)		Change in Deferred Revenue(1)			Deductions(2)			Balance at End of Year
Sales and return allowances, discounts, chargebacks and rebates:
Year ended December 31, 2013	$	15,159	$	28,743	$	—		$	(24,172	)	$	19,730
Year ended December 31, 2012	$	12,559	$	12,872	$	(611	)	$	(9,661	)	$	15,159
Year ended December 31, 2011	$	8,092	$	12,960	$	516		$	(9,009	)	$	12,559

			Additions
	Balance at Beginning of Year		Additions charged to costs and expenses		Other Additions		Deductions			Balance at End of Year
Deferred tax asset valuation allowance:
Year ended December 31, 2013(3)	$	42,500	$	—	$	—	$	(39,830	)	$	2,670
Year ended December 31, 2012	$	34,700	$	7,800	$	—	$	—		$	42,500
Year ended December 31, 2011(4)	$	62,300	$	—	$	—	$	(27,600	)	$	34,700

(1)

Additions to sales discounts and allowances are recorded as a reduction of deferred revenue until such time revenue is recognized.

(2)

Deductions to sales discounts and allowances relate to discounts or allowances actually taken or paid.

(3)

The Company reversed a valuation allowance of $39.8 million.

(4)

Valuation allowance reduced by $27.6 million due to a reduction in the Company's deferred tax assets.

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DEFERRED REVENUE (Details) (USD $)			1 Months Ended									1 Months Ended			1 Months Ended
	Dec. 31, 2013	Dec. 31, 2012	Jul. 31, 2005 Valeant	Dec. 31, 2004 Valeant	Dec. 31, 2013 Valeant	Dec. 31, 2012 Valeant	Dec. 31, 2013 Santarus	Dec. 31, 2012 Santarus	Dec. 31, 2013 Santarus Commercialization Agreement	Dec. 31, 2012 Santarus Commercialization Agreement	Aug. 31, 2011 Santarus Commercialization Agreement	Jul. 31, 2008 Santarus Promotion Agreement	Aug. 31, 2012 Janssen	Dec. 31, 2012 Janssen	Jul. 31, 2011 Ironwood
Deferred revenue, current portion:
Deferred license revenue, current portion	$ 3,041,000	$ 3,273,000			$ 1,598,000	$ 1,598,000	$ 1,443,000	$ 1,444,000						$ 231,000
Deferred revenue, current portion	3,041,000	3,273,000
Deferred license revenue, non-current portion:
Deferred license revenue, non-current portion	12,475,000	15,516,000			10,905,000	12,503,000	1,570,000	3,013,000
Total deferred revenue	15,516,000	18,789,000			12,500,000				3,000,000	4,800,000	9,200,000
Additional information
Upfront fee received			$ 25,000,000	$ 25,000,000								$ 12,000,000	$ 10,000,000		$ 900,000

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LICENSE AND COLLABORATIVE ARRANGEMENTS (Details) (USD $)	12 Months Ended			1 Months Ended			3 Months Ended	12 Months Ended					1 Months Ended							3 Months Ended		11 Months Ended	1 Months Ended		3 Months Ended	12 Months Ended		1 Months Ended		12 Months Ended				1 Months Ended
	Dec. 31, 2013	Dec. 31, 2012	Dec. 31, 2011	Mar. 31, 2011 Abbott Products Inc.	Jan. 31, 2011 Abbott Products Inc.	Feb. 28, 2009 Abbott Products Inc.	Mar. 31, 2011 Abbott Products Inc.	Dec. 31, 2011 Abbott Products Inc.	Dec. 31, 2013 Santarus, Inc. Commercialization Agreement	Dec. 31, 2012 Santarus, Inc. Commercialization Agreement	Dec. 31, 2011 Santarus, Inc. Commercialization Agreement	Aug. 31, 2011 Santarus, Inc. Commercialization Agreement	Jul. 31, 2008 Santarus, Inc. Promotion Agreement	Mar. 31, 2012 Boehringer Ingelheim International GMBH	Dec. 31, 2013 Ironwood Pharmaceuticals, Inc.	May 31, 2012 Ironwood Pharmaceuticals, Inc.	Jul. 31, 2011 Ironwood Pharmaceuticals, Inc.	Oct. 31, 2010 Janssen Pharmaceutica N.V.	Aug. 31, 2010 Janssen Pharmaceutica N.V.	Dec. 31, 2013 Janssen Pharmaceutica N.V.	Mar. 31, 2013 Janssen Pharmaceutica N.V.	Dec. 31, 2013 Janssen Pharmaceutica N.V. Item	Aug. 31, 2012 Janssen Pharmaceuticals, Inc.	Nov. 30, 2008 Mallinckrodt Item	Sep. 30, 2013 Mallinckrodt	Dec. 31, 2008 Mallinckrodt	Dec. 31, 2013 Patheon Puerto Rico, Inc.	Jul. 31, 2005 Valeant Pharmaceuticals International, Inc.	Dec. 31, 2004 Valeant Pharmaceuticals International, Inc.	Dec. 31, 2013 Valeant Pharmaceuticals International, Inc.	Dec. 31, 2012 Valeant Pharmaceuticals International, Inc.	Dec. 31, 2011 Valeant Pharmaceuticals International, Inc.	Dec. 31, 2010 Valeant Pharmaceuticals International, Inc.	May 31, 2002 Valeant Pharmaceuticals International, Inc. 500mg Glumetza	May 31, 2002 Valeant Pharmaceuticals International, Inc. 1000mg Glumetza	Jun. 30, 2013 Ventiv Item	May 31, 2012 Ventiv Item
License and collaborative arrangements
Milestone payment received					$ 48,000,000									$ 2,500,000	$ 500,000	$ 1,000,000		$ 5,000,000
License and other revenue	12,796,000	18,798,000	81,798,000				48,000,000		1,400,000	3,300,000	2,000,000									1,400,000	2,200,000										1,600,000	1,600,000	1,600,000
Upfront fee received						25,000,000							12,000,000				900,000		5,000,000				10,000,000			4,000,000		25,000,000	25,000,000
Revenue recognized				11,300,000				12,600,000
Royalties on net product sales, percentage in 2011									26.50%
Royalties on net product sales, percentage in 2012									29.50%
Royalties on net product sales, percentage in 2013 and 2014									32.00%
Royalties on net product sales, percentage in 2015 and beyond									34.50%
Royalty revenue	45,003,000	44,535,000	9,997,000						42,100,000	42,800,000	9,600,000																			400,000	400,000	400,000
Period during which distribution and sales responsibility of product transitioned											4 months
Percent of out-of-pocket costs reimbursed to company									70.00%
Percent of out-of-pocket costs reimbursed by company									30.00%
Upfront agreement fee deferred revenue balance	15,516,000	18,789,000							3,000,000	4,800,000		9,200,000																		12,500,000
Number of projects completed																						2
Number of products to be developed by utilizing Acuform technology																								4
Aggregate upfront fee received																										5,500,000
Upfront fee received for formulation work to be performed under the agreement																										1,500,000
Milestone revenue recognized																									5,000,000
Non-cancelable purchase orders and minimum purchase obligations																											500,000
Royalty receivable as a percentage of net sales																																		6.00%	1.00%
Royalty payable as a percentage of net sales																																		1.00%
Royalty expense																														400,000	500,000	200,000
Number of part-time sales representatives dedicated to the Company																																				27	78
Monthly fixed fee payment																																				$ 200,000	$ 500,000
Number of full-time sales representatives dedicated to the company																																				2

XML

BUSINESS COMBINATIONS (Tables)

12 Months Ended

Dec. 31, 2013

CAMBIA

Business combinations

Summary of the purchase price consideration

The following table presents a summary of the purchase price consideration for the CAMBIA acquisition (in thousands):

Cash for CAMBIA and related inventories	$	48,725
Fair value of contingent consideration		1,010
Purchase price	$	49,735

Summary of the fair values of the tangible and identifiable intangible assets acquired and liabilities assumed

The following table summarizes the fair values of the tangible and identifiable intangible assets acquired and liabilities assumed at the acquisition date (in thousands):

Intangible asset—CAMBIA product rights	$	51,360
Inventories		3,837
Other assets		409
Sales reserve liabilities		(1,847	)
Unfavorable contract assumed		(3,540	)
Bargain purchase		(484	)
	$	49,735

Schedule of unaudited pro forma financial information

	2013		2012
Net revenue	$	143,753	$	104,652
Net income (loss)	$	29,821	$	(47,717	)
Net income (loss) per share—basic	$	0.53	$	(0.85	)
Net income (loss) per share—diluted	$	0.52	$	(0.85	)

Lazanda

Business combinations

Summary of the purchase price consideration

The following table presents a summary of the purchase price consideration for the Lazanda acquisition (in thousands):

Cash for Lazanda, related property, inventories and other assets	$	4,000
Fair Value of contingent consideration		8,004
Purchase Price	$	12,004

Summary of the fair values of the tangible and identifiable intangible assets acquired and liabilities assumed

The following table summarizes the fair values of the tangible and identifiable intangible assets acquired and liabilities assumed at the acquisition date (in thousands):

Intangible asset—Lazanda product rights	$	10,450
Inventories		1,334
Property, plant and equipment		356
Other assets		116
Current liabilities		(283	)
Goodwill		31
	$	12,004

Zipsor

Business combinations

Summary of the purchase price consideration

The following table presents a summary of the purchase price consideration for the Zipsor acquisition (in thousands):

Cash for Zipsor and related inventories	$	26,436
Fair Value of contingent consideration		1,303
Purchase Price	$	27,739

Summary of the fair values of the tangible and identifiable intangible assets acquired and liabilities assumed

The following table summarizes the fair values of the tangible and identifiable intangible assets acquired and liabilities assumed at the acquisition date (in thousands):

Intangible asset—Zipsor product rights	$	27,100
Inventories		2,428
Other assets		100
Property, plant and equipment		43
Current liabilities		(1,840	)
Bargain purchase		(92	)
	$	27,739

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LIABILITY RELATED TO SALE OF FUTURE ROYALTIES (Details) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2013
Activity within the liability account
Proceeds from sale of future royalties	$ 240,500
Non-cash interest expense recognized	4,488
Less: current portion	(49,455)
Liability related to sale of future royalties, less current portion	177,624
Liability related to sale of future royalties
Activity within the liability account
Proceeds from sale of future royalties	240,500
Non-cash interest expense recognized	4,488
Payments from Depomed to PDL	17,909
Total liability related to sale of future royalties at the end of the period	227,079
Less: current portion	(49,455)
Liability related to sale of future royalties, less current portion	$ 177,624
Effective annual interest rate (as a percent)	10.00%

XML

SUBSEQUENT EVENTS (Details) (USD $) In Thousands, unless otherwise specified			0 Months Ended
	Dec. 31, 2013	Dec. 31, 2012	Mar. 12, 2014 Subsequent event Mallinckrodt
Subsequent events
Milestone payment receivable from approval of NDA	$ 10,824	$ 10,078	$ 10,000
Number of days in which milestone payment after NDA approval is due			30 days

XML

RELATED PARTY TRANSACTIONS (Details) (USD $)	12 Months Ended			1 Months Ended	3 Months Ended	12 Months Ended
	Dec. 31, 2013	Dec. 31, 2012	Dec. 31, 2011	Apr. 30, 2011 Carl A. Pelzel	Jun. 30, 2011 Carl A. Pelzel	Dec. 31, 2013 Burrill Securities Maximum
Related party transactions
Amount paid to related party under the separation agreement				$ 520,000
Period of base salary for payments under the separation agreement				1 year
Period over which payments were made to related party				1 year
Period for which health and dental insurance COBRA premiums of related party were paid				18 months
Accelerated vesting period of options				3 months
One-time severance charge					1,000,000
Stock-based compensation related to the accelerated vesting	6,108,000	5,070,000	3,869,000		400,000
Severance expense related to future payments and health care benefits					600,000
Amount of fee paid						$ 500,000

XML

INVENTORIES (Details) (USD $)			12 Months Ended		12 Months Ended			12 Months Ended
	Dec. 31, 2013	Dec. 31, 2012	Dec. 31, 2013 Lazanda	Jul. 29, 2013 Lazanda	Dec. 31, 2013 Zipsor	Dec. 31, 2012 Zipsor	Jun. 21, 2012 Zipsor	Dec. 31, 2013 CAMBIA	Dec. 17, 2013 CAMBIA
INVENTORIES
Raw materials	$ 1,951,000	$ 1,927,000
Work-in-process	181,000	1,569,000
Finished goods	9,056,000	6,787,000
Less: allowance for obsolescence	(1,043,000)	(696,000)
Total	10,145,000	9,587,000
Business combinations
Business acquisition step up in value of inventories				600,000		1,200,000	1,900,000		3,700,000
Business acquisition cost of sales related to the step-up value			$ 100,000		$ 700,000			$ 200,000

XML

LICENSE AND COLLABORATIVE ARRANGEMENTS

12 Months Ended

Dec. 31, 2013

LICENSE AND COLLABORATIVE ARRANGEMENTS

LICENSE AND COLLABORATIVE ARRANGEMENTS

NOTE 2. LICENSE AND COLLABORATIVE ARRANGEMENTS

Abbott Products Inc. (formerly Solvay Pharmaceuticals, Inc.)

        In January 2011, Abbott Products received FDA approval of Gralise for the management of PHN, which triggered a $48.0 million development milestone from Abbott Products to us, which the Company received in February 2011. Because the milestone was both substantive in nature and based on past performance, and was achieved, the entire $48.0 million was recognized as license revenue in the first quarter of 2011.

        Pursuant to the exclusive license agreement originally entered into in November 2008, Solvay Pharmaceuticals, Inc. (subsequently acquired by Abbott) paid us a $25.0 million upfront fee in February 2009. The upfront payment received was originally scheduled to be recognized as revenue ratably until January 2013, which represented the estimated length of time our development and supply obligations existed under the agreement. In connection with the termination of the license agreement with Abbott Products, the Company no longer has continuing obligations to Abbott Products. Accordingly, all remaining deferred revenue related to the $25.0 million upfront license fee previously received from Abbott Products was fully recognized as revenue in March 2011, resulting in immediate recognition of approximately $11.3 million of license revenue. The Company recognized $12.6 million of license revenue related to this upfront fee for the year ended December 31, 2011.

Santarus, Inc.

        In August 2011, the Company entered into a commercialization agreement with Santarus granting Santarus exclusive rights to manufacture and commercialize Glumetza in the United States. The commercialization agreement supersedes the promotion agreement between the parties previously entered into in July 2008.

        Under the commercialization agreement, the Company transitioned to Santarus responsibility for manufacturing, distribution, pharmacovigilance and regulatory affairs. The Company ceased shipments of Glumetza in August 2011, and Santarus began distributing and recording product sales on shipments of Glumetza in September 2011. Santarus will continue to be responsible at its expense for advertising and promotional marketing activities for Glumetza.

        Under the commercialization agreement, Santarus was also required to pay the Company royalties on net product sales of Glumetza in the United States of 26.5% in 2011; 29.5% in 2012; 32.0% in 2013 and 2014; and 34.5% in 2015 and beyond, prior to generic entry of a Glumetza product. In the event of generic entry of a Glumetza product in the United States, the parties were to share proceeds equally based on a gross margin split. Royalty revenue from Santarus for the years ended December 31, 2013, 2012 and 2011 was $42.1 million, $42.8 million and $9.6 million, respectively. Royalty revenue from Santarus for the year ended 2011 represented four months of Santarus distributing Glumetza under the commercialization agreement.

        The Company is financially responsible for returns of Glumetza distributed by the Company, up to the amount of the product returns reserve account for Glumetza product returns on the date immediately before Santarus began distributing Glumetza. The Company is financially responsible for Glumetza rebates and chargebacks up to the amount of its reserve accounts for those items. Santarus is responsible for all other Glumetza returns, rebates and chargebacks.

        Under the commercialization agreement, the Company is responsible for managing any patent infringement lawsuits with respect to Glumetza-related patents, subject to certain consent rights in favor of Santarus, including with regard to any proposed settlements. Santarus reimburses the Company for 70% of its out-of-pocket costs, and the Company reimburses Santarus for 30% of its out-of-pocket costs, related to such lawsuits. The Company was previously responsible for managing the patent infringement lawsuit against Lupin Limited (Lupin), which was settled in February 2012, and against Sun Pharmaceutical Industries, Inc. (Sun), which was settled in January 2013.

        Pursuant to the original promotion agreement, Santarus paid the Company a $12.0 million upfront fee in July 2008. The upfront payment received was originally being amortized as revenue ratably until October 2021, which represented the estimated length of time the Company's obligations existed under the promotion agreement related to manufacturing Glumetza and paying Santarus promotion fees on gross margin of Glumetza. The commercialization agreement in August 2011 superseded the promotion agreement and removed our promotion fee obligations and contemplated removal of our manufacturing obligations. The commercialization agreement included obligations with respect to manufacturing and regulatory transition to Santarus and managing the patent infringement lawsuits against Sun and Lupin. At the time of the commercialization agreement, all of these obligations were estimated to be completed in December 2013. During the fourth quarter of 2012, events occurred related to the transfer of manufacturing with one of the contract manufacturers of Glumetza that extended the estimated completion date of Depomed's manufacturing obligations to February 2016, which is now the estimated date the Company expects its obligations will be completed under the commercialization agreement.

        The Company recognized approximately $1.4 million, $3.3 million and $2.0 million of revenue associated with this upfront license fee during 2013, 2012 and 2011, respectively. The remaining deferred revenue balance is $3 million at December 31, 2013.

Boehringer Ingelheim International GMBH

        In March 2011, the Company entered into a license and service agreement with Boehringer Ingelheim granting Boehringer Ingelheim a license to use certain patents related to the Company's Acuform drug delivery technology in development of fixed dose combinations of extended release metformin and proprietary Boehringer Ingelheim compounds in development for type 2 diabetes. Under the terms of the agreement, Boehringer Ingelheim was also granted a right of reference to the New Drug Application covering Glumetza and associated data for use in potential regulatory submission processes.

        In March 2012, the Company achieved the first milestone under the agreement with respect to delivery of experimental batches of prototype formulations that meet required specifications, and received a nonrefundable $2.5 million milestone payment. As the milestone event was both substantive in nature and related to past performance, and achievement was not reasonably assured at the inception of the agreement, the Company recognized the entire amount of this payment as revenue in the first quarter of 2012. In October 2013, the Company sold its interest in milestones and royalties pursuant to this agreement to PDL

Ironwood Pharmaceuticals, Inc.

        In July 2011, the Company entered into a collaboration and license agreement with Ironwood Pharmaceuticals, Inc. (Ironwood) granting Ironwood a license for worldwide rights to the Company's Acuform drug delivery technology for an Ironwood early stage development program addressing refractory GERD. In connection with the research collaboration and license agreement, the Company received an upfront payment of $0.9 million and was reimbursed for initial product formulation work.

        In March 2012, the Company achieved the first milestone under the agreement upon delivery of experimental batches of prototype formulations that met agreed-upon specifications. This triggered a nonrefundable $1.0 million milestone payment which the Company received in May 2012. In December 2013, the Company achieved another milestone in the amount of $0.5 million upon acceptance by Ironwood of product for use in clinical trials.

Janssen Pharmaceutica N.V.

        In August 2010, the Company entered into a non-exclusive license agreement with Janssen granting Janssen a license to use certain patents related to our Acuform drug delivery technology in developing fixed dose combinations of canagliflozin and extended release metformin. The Company also granted Janssen a right to reference the New Drug Application covering Glumetza in Janssen's regulatory filings covering the products. In August 2010, Janssen paid the Company a $5.0 million upfront license fee. In September 2010, the Company achieved the first development milestone under the agreement related to formulation work, which triggered a $5.0 million milestone payment, which the Company received in October 2010.

        The Company also entered into a service agreement with Janssen under which it provided formulation work associated with the products. The formulation work under the agreement was completed in March 2011.

        In February and December 2013, the Company completed two projects for Janssen related to this program and recognized $2.2 million in revenue during the first quarter of 2013 and $1.4 million in revenue during the fourth quarter of 2013.

Janssen Pharmaceuticals, Inc.

        In August 2012, the Company entered into a license agreement with Janssen that grants Janssen a non-exclusive license to certain patents and other intellectual property rights to our Acuform drug delivery technology for the development and commercialization of tapentadol extended release products, including NUCYNTA ER (tapentadol extended-release tablets). The Company received a $10 million upfront license fee and receives low single digit royalties on net sales of NUCYNTA ER in the U.S., Canada and Japan from and after July 2, 2012 through December 31, 2021.

Mallinckrodt (formerly Covidien)

        In November 2008, the Company entered into a license agreement with Covidien (Mallinckrodt) granting Covidien (Mallinckrodt) worldwide rights to utilize the Company's Acuform technology for the exclusive development of four products containing acetaminophen in combination with opiates. In 2008, Covidien (Mallinckrodt) paid the Company a total of $5.5 million in upfront fees, representing a $4.0 million upfront license fee and a $1.5 million upfront payment for formulation work to be performed by the Company under the agreement. The entire $5.5 million was initially accounted for as a single unit of accounting and was being amortized ratably through November 2011, which was initially the estimated length of time the Company was obligated to perform formulation work under the agreement.

        In July 2013, the FDA accepted for filing a NDA from Mallinckrodt for Xartemis XR which is formulated with the Company's Acuform® drug delivery technology. The NDA acceptance triggered a $5 million milestone payment to the Company which was received and recognized in the third quarter of 2013. As the non-refundable milestone event was both substantive in nature and related to past performance, and achievement was not reasonably assured at the inception of the agreement, the milestone was recognized as revenue in its entirety upon achievement.

Patheon Puerto Rico, Inc.

        In September 2011, the Company entered into a manufacturing agreement with Patheon Puerto Rico, Inc. (Patheon), pursuant to which Patheon will manufacture, package and supply commercial quantities of Gralise.

        Under the agreement, the Company will provide rolling forecasts to Patheon of its requirements for the product, a portion of which will be considered a firm purchase order. At December 31, 2013, the Company had non-cancelable purchase orders and minimum purchase obligations of approximately $0.5 million under the manufacturing agreement with Patheon for the manufacture of Gralise. The Company may obtain a portion of its product requirements from a second manufacturing source. The Company will be responsible for providing Patheon with the active pharmaceutical ingredient in Gralise.

        The agreement will expire on May 31, 2016, subject to early termination under certain circumstances.

Valeant Pharmaceuticals International, Inc. (Formerly Biovail Laboratories, Inc.)

        In May 2002, the Company entered into a development and license agreement granting Valeant Laboratories Incorporated (Valeant) an exclusive license in the United States and Canada to manufacture and market Glumetza. Under the terms of the agreement, the Company was responsible for completing the clinical development program in support of the 500mg Glumetza. In July 2005, Valeant received FDA approval to market Glumetza in the United States. In accordance with the license agreement, Valeant paid a $25.0 million license fee payment to the Company.

        The Company will recognize the $25.0 million license fee payment as revenue ratably until October 2021, which represents the estimated length of time the Company's obligations exist under the arrangement related to royalties it is obligated to pay Valeant on net sales of the 500mg Glumetza in the United States and to use Valeant as the sole supplier of the 1000mg Glumetza. The Company recognized $1.6 million of license revenue related to the amortization of this upfront fee for each of the years ended December 31, 2012, 2011 and 2010. The remaining deferred revenue balance related to the $25.0 million upfront payment was $12.5 million as of December 31, 2013.

        Under the agreement, Valeant is obligated to pay the Company royalties of six percent on Canadian net sales of the 500mg Glumetza and one percent on Canadian net sales of the 1000mg Glumetza. The Company recognized royalty revenue under the agreement of $0.4 million, $0.4 million and $0.4 million for the years ended December 31, 2013, 2012 and 2011, respectively.

        The Company is obligated to pay Valeant royalties of one percent on net sales of the 500mg Glumetza in the United States. The Company recognized royalty expense under the agreement of $0.4 million, $0.5 million and $0.2 million for the years ended December 31, 2013, 2012 and 2011, respectively.

Ventiv Commercial Services, LLC

        In May 2012, the Company entered into a service agreement with Ventiv Commercial Services, LLC (Ventiv), which initially provided for a sales force of 78 part-time sales representatives employed by Ventiv but dedicated to the Company. Under the agreement, the Company paid Ventiv a monthly fixed fee of $0.5 million during the initial term of the agreement, which expired in June 2013. In June 2013, the Company and Ventiv amended the agreement to reduce the contract sales force to 27 part-time and 2 full-time sales representatives. Under the terms of the amended agreement, we are required to pay Ventiv a monthly fixed fee of $0.2 million during the term of the agreement, which was terminated in December 2013.

XML

INCOME TAXES (Details) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2013	Dec. 31, 2012	Dec. 31, 2011
Current:
Federal	$ 60,874	$ (19)	$ (466)
State	3,593	(75)	858
Foreign	3	3	4
Total current	64,470	(91)	396
Deferred:
Federal	(97,690)
State	(5,512)
Total deferred	(103,202)
Total (benefit) provision for income taxes	38,733	91	(396)
Reconciliation of income taxes at the statutory federal income tax rate to the actual tax rate
Tax at federal statutory rate	1,603	(10,454)	24,893
State tax, net of federal benefit	(3,177)	(48)	558
Foreign tax	3	3	4
Research Credit	(258)
Net Operating Losses not benefited (benefited)	(17,510)	9,094	(25,510)
Federal - AMT		(19)	(466)
Stock Based Compensation	923	1,038	774
Non deductible meals and entertainment	442	131	17
Non-deductible other expense	(133)	164	126
Change in Valuation Allowance	(20,626)
Total provision for income taxes	$ (38,733)	$ (91)	$ 396

XML

MARKETABLE SECURITIES (Details) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2013	Dec. 31, 2012
Amortized Cost
Total available-for-sale securities, Amortized Cost	$ 31,329	$ 48,763
Gross Unrealized Gains
Total available-for-sale securities, Gross Unrealized Gains	16	55
Total cash, cash equivalents and marketable securities, Gross Unrealized Gains	16	55
Gross Unrealized Losses
Total available-for-sale securities, Gross Unrealized Losses	(2)	(2)
Total cash, cash equivalents and marketable securities, Gross Unrealized Losses	(2)	(2)
Amortized Cost
Marketable securities
Cash and cash equivalents	244,674	29,076
Amortized Cost
Fair Value
Total cash, cash equivalents and marketable securities	276,003	77,839
Fair Value
Marketable securities
Cash and cash equivalents	244,674	29,076
Fair Value
Total available-for-sale securities, Fair Value	31,343	48,816
Total cash, cash equivalents and marketable securities	276,017	77,892
Corporate debt securities
Amortized Cost
Total maturing within 1 year and included in marketable securities	12,440	21,662
Total maturing between 1 and 2 years and included in marketable securities	4,075	7,858
Gross Unrealized Gains
Total maturing within 1 year and included in marketable securities	8	31
Total maturing between 1 and 2 years and included in marketable securities	5	7
Gross Unrealized Losses
Total maturing within 1 year and included in marketable securities	(2)
Total maturing between 1 and 2 years and included in marketable securities		(2)
Fair Value
Total maturing within 1 year and included in marketable securities	12,446	21,693
Total maturing between 1 and 2 years and included in marketable securities	4,080	7,863
U.S. government agency debt securities
Amortized Cost
Total maturing within 1 year and included in marketable securities	14,814	14,027
Total maturing between 1 and 2 years and included in marketable securities		3,208
Gross Unrealized Gains
Total maturing within 1 year and included in marketable securities	3	8
Total maturing between 1 and 2 years and included in marketable securities		8
Fair Value
Total maturing within 1 year and included in marketable securities	14,817	14,035
Total maturing between 1 and 2 years and included in marketable securities		3,216
U.S. Treasury securities
Amortized Cost
Total maturing within 1 year and included in marketable securities		2,008
Gross Unrealized Gains
Total maturing within 1 year and included in marketable securities		1
Fair Value
Total maturing within 1 year and included in marketable securities		2,009
Cash | Amortized Cost
Marketable securities
Cash and cash equivalents	26,728	11,769
Cash | Fair Value
Marketable securities
Cash and cash equivalents	26,728	11,769
Money market funds | Amortized Cost
Marketable securities
Cash and cash equivalents	217,946	11,268
Money market funds | Fair Value
Marketable securities
Cash and cash equivalents	217,946	11,268
Corporate debt securities | Amortized Cost
Marketable securities
Cash and cash equivalents		6,039
Corporate debt securities | Fair Value
Marketable securities
Cash and cash equivalents		$ 6,039

XML

INVENTORIES (Tables)

12 Months Ended

Dec. 31, 2013

INVENTORIES

Schedule of inventories

Inventories consist of finished goods, raw materials and work in process and are stated at the lower of cost or market and consist of the following (in thousands):

	December 31, 2013			December 31, 2012
Raw materials	$	1,951		$	1,927
Work-in-process		181			1,569
Finished goods		9,056			6,787
Less: allowance for obsolescence		(1,043	)		(696	)
Total	$	10,145		$	9,587

XML

MARKETABLE SECURITIES (Tables)

12 Months Ended

Dec. 31, 2013

MARKETABLE SECURITIES

Summary of securities classified as cash and cash equivalents and available-for-sale marketable securities

 Securities classified as cash and cash equivalents and available-for-sale marketable securities as of December 31, 2013 and 2012 are summarized below (in thousands).

December 31, 2013	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Cash and cash equivalents:
Cash	$	26,728	$	—	$	—		$	26,728
Money market funds		217,946		—		—			217,946
Total cash and cash equivalents	$	244,674	$	—	$	—		$	244,674
Available-for-sale securities:
Total maturing within 1 year and included in marketable securities:
Corporate debt securities	$	12,440	$	8	$	(2	)	$	12,446
Government agency debt securities		14,814		3		—			14,817
Total maturing between 1 and 2 years and included in marketable securities:
Corporate debt securities		4,075		5		—			4,080
Total available-for-sale securities	$	31,329	$	16	$	(2	)	$	31,343
Total cash, cash equivalents and marketable securities	$	276,003	$	16	$	(2	)	$	276,017

December 31, 2012	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Cash and cash equivalents:
Cash	$	11,769	$	—	$	—		$	11,769
Money market funds		11,268		—		—			11,268
U.S. corporate debt securities		6,039		—		—			6,039
Total cash and cash equivalents	$	29,076	$	—	$	—		$	29,076
Available-for-sale securities:
Total maturing within 1 year and included in marketable securities:
Corporate debt securities	$	21,662	$	31	$	—		$	21,693
U.S. government agency debt securities		14,027		8		—			14,035
U.S. Treasury securities		2,008		1		—			2,009
Total maturing between 1 and 2 years and included in marketable securities:
Corporate debt securities		7,858		7		(2	)		7,863
U.S. government agency debt securities		3,208		8		—			3,216
Total available-for-sale securities	$	48,763	$	55	$	(2	)	$	48,816
Total cash, cash equivalents and marketable securities	$	77,839	$	55	$	(2	)	$	77,892

Schedule of the gross unrealized losses and fair value of investments

The following table shows the gross unrealized losses and fair value of the Company's investments with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at December 31, 2013 (in thousands):

	Less Than 12 Months					12 Months or Greater				Total
	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses
Corporate debt securities	$	3,438	$	(2	)	$	—	$	—	$	3,438	$	(2	)
Total available-for-sale	$	3,438	$	(2	)	$	—	$	—	$	3,438	$	(2	)

Schedule of fair value hierarchy for financial assets and liabilities measured at fair value on a recurring basis

The following table represents the Company's fair value hierarchy for its financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2013 (in thousands):

	Level 1		Level 2		Level 3		Total
Money market funds	$	217,946	$	—	$	—	$	217,946
Corporate debt securities		—		16,526		—		16,526
Government agency debt securities		—		14,817		—		14,817
Total	$	217,946	$	31,343	$	—	$	249,289
Liabilities:
Contingent consideration—Zipsor	$	—	$	—	$	1,638	$	1,638
Contingent consideration—Lazanda		—		—		8,616		8,616
Contingent consideration—CAMBIA		—		—		1,010		1,010
Unfavorable contract assumed		—		—		3,540		3,540
	$	—	$	—	$	14,804	$	14,804

The following table represents the Company's fair value hierarchy for its financial assets measured at fair value on a recurring basis as of December 31, 2012 (in thousands):

	Level 1		Level 2		Level 3		Total
Money market funds	$	11,268	$	—	$	—	$	11,268
Corporate debt securities		6,039		29,556		—		35,595
Government agency debt securities		—		17,251		—		17,251
U.S. Treasury securities		—		2,009		—		2,009
Total	$	17,307	$	48,816	$	—	$	66,123
Liabilities:
Contingent consideration—Zipsor	$	—	$	—	$	1,342	$	1,342
	$	—	$	—	$	1,342	$	1,342

Summary of the changes in fair value of all financial liabilities measured at fair value on a recurring basis using significant unobservable inputs

The table below provides a summary of the changes in fair value of all financial liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the year ended December 31, 2013 (in thousands):

	Balance at December 31, 2012		Acquisitions 2013		Changes in Fair Value		Balance at December 31, 2013
Liabilities:
Contingent consideration obligations—Zipsor	$	1,342	$	—	$	296	$	1,638
Contingent consideration obligations—Lazanda		—		8,004		612		8,616
Contingent consideration obligations—CAMBIA		—		1,010		—		1,010
Unfavorable contract assumed		—		3,540		—		3,540
Total	$	1,342	$	12,554	$	908	$	14,804

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STOCK-BASED COMPENSATION (Details 2) (USD $) In Thousands, unless otherwise specified	12 Months Ended						3 Months Ended	12 Months Ended
	Dec. 31, 2013	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2013 Inventory	Dec. 31, 2012 Inventory	Dec. 31, 2011 Inventory	Jun. 30, 2011 Carl A. Pelzel	Dec. 31, 2013 Cost of sales	Dec. 31, 2012 Cost of sales	Dec. 31, 2011 Cost of sales	Dec. 31, 2013 Research and development expense	Dec. 31, 2012 Research and development expense	Dec. 31, 2011 Research and development expense	Dec. 31, 2013 Selling, general and administrative expense	Dec. 31, 2012 Selling, general and administrative expense	Dec. 31, 2011 Selling, general and administrative expense
Stock-based compensation
Compensation expense	$ 6,108	$ 5,070	$ 3,869	$ 0	$ 0	$ 0	$ 400	$ 42	$ 41	$ 68	$ 364	$ 568	$ 668	$ 5,702	$ 4,461	$ 3,133

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MARKETABLE SECURITIES (Details 2) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2013
Marketable securities
Fair Value, Less Than 12 Months	$ 3,438
Gross Unrealized Losses, Less than 12 months	(2)
Fair Value, Total	3,438
Gross Unrealized Losses, Total	(2)
Other than temporary impairments	0
Corporate debt securities
Marketable securities
Number of securities in an unrealized loss position	7
Fair Value, Less Than 12 Months	3,438
Gross Unrealized Losses, Less than 12 months	(2)
Fair Value, Total	3,438
Gross Unrealized Losses, Total	$ (2)

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PROPERTY AND EQUIPMENT (Tables)

12 Months Ended

Dec. 31, 2013

PROPERTY AND EQUIPMENT

Schedule of property and equipment

Property and equipment consists of the following (in thousands):

	December 31, 2013			December 31, 2012
Furniture and office equipment	$	3,547		$	2,169
Laboratory equipment		5,151			4,623
Leasehold improvements		6,045			9,325
Construction in progress		—			196
		14,743			16,313
Less: Accumulated depreciation and amortization		(6,403	)		(8,076	)
Property and equipment, net	$	8,340		$	8,237

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ACCOUNTS PAYABLE AND ACCRUED LIABILITIES (Tables)

12 Months Ended

Dec. 31, 2013

ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

Schedule of accounts payable and accrued liabilities

Accounts payable and accrued liabilities consist of the following (in thousands):

	December 31, 2013		December 31, 2012
Accounts payable	$	2,232	$	2,360
Accrued compensation		7,077		5,015
Accrued rebates and sales discounts		8,594		4,250
Allowance for product returns		10,278		10,831
Accrued contract sales organization fees		962		420
Accruals for Inventory		87		2,990
Royalty payable to PDL		6,902		—
Other accrued liabilities		5,705		6,712
Total accounts payable and accrued liabilities	$	41,837	$	32,578

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ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

12 Months Ended

Dec. 31, 2013

ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization

        Depomed, Inc. (Depomed or the Company) is a specialty pharmaceutical company focused on pain and other conditions and diseases of the central nervous system. The products that comprise our current specialty pharmaceutical business are Gralise® (gabapentin), a once-daily product for the management of postherpetic neuralgia (PHN) that we launched in October 2011, Zipsor® (diclofenac potassium) liquid filled capsules, a product for the treatment of mild to moderate acute pain that we acquired in June 2012, Lazanda® (fentanyl) nasal spray, a product for the management of breakthrough pain in cancer patients that we acquired in July 2013, and CAMBIA® (diclofenac potassium for oral solution), a product for the acute treatment of migraine attacks that we acquired in late December 2013.

        The Company also has a portfolio of royalty and milestone producing license agreements based on our proprietary Acuform® gastroretentive drug delivery technology with Mallinckrodt Inc. (Mallinckrodt), Ironwood Pharmaceuticals, Inc. (Ironwood) and Janssen Pharmaceuticals, Inc.

        On October 18, 2013, the Company sold its interests in royalty and milestone payments under its license agreements in the Type 2 diabetes therapeutic area to PDL BioPharma, Inc. (PDL) for $240.5 million (PDL transaction). The interests sold include royalty and milestone payments accruing from and after October 1, 2013: (a) from Santarus with respect to sales of Glumetza® (metformin HCL extended-release tablets) in the United States; (b) from Merck & Co., Inc. (Merck) with respect to sales of Janumet XR® (sitagliptin and metformin HCL extended-release); (c) from Janssen Pharmaceutica N.V. and Janssen Pharmaceuticals, Inc. (collectively, Janssen) with respect to potential future development milestones and sales of Janssen's investigational fixed-dose combination of Invokana® (canagliflozin) and extended-release metformin; (d) from Boehringer Ingelheim International GMBH (Boehringer Ingelheim) with respect to potential future development milestones and sales of the investigational fixed-dose combinations of drugs and extended-release metformin subject to Depomed's license agreement with Boehringer Ingelheim; and (e) from LG Life Sciences Ltd. (LG) and Valeant International Bermuda SRL (Valeant) for sales of extended-release metformin in Korea and Canada, respectively.

        The Company has one product candidate under clinical development, DM-1992 for Parkinson's disease. DM-1992 completed a Phase 2 trial for Parkinson's disease, and the Company announced a summary of the results of that trial in November 2012. The Company continues to evaluate partnering opportunities and monitor competitive developments.

Basis of Preparation

        The Company's consolidated financial statements are prepared in accordance with the Financial Accounting Standards Board Accounting Standards Codification, or the Codification, which is the single source for all authoritative U.S. generally accepted accounting principles, or U.S. GAAP.

Principles of Consolidation

        The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Depo DR Sub LLC (Depo DR Sub) which was formed to facilitate the PDL transaction in the third quarter of 2013. All intercompany accounts and transactions have been eliminated in consolidation.

        Depo DR Sub was formed in October 2013 for the sole purpose of facilitating the sale of the Company's interests in the royalty and milestone payments under its license agreements in the Type 2 diabetes therapeutic area to PDL. The Company contributed to Depo DR Sub all of its right, title and interest in each of the license agreements to receive royalty payments. Immediately following the transaction, Depo DR Sub sold to PDL, among other things, such right to receive royalty payments, for an upfront cash purchase price of $240.5 million,

        The Company and Depo DR Sub continue to retain the duties and obligations under the specified license agreements. These include the collection of the royalty and milestones amounts due and enforcement of related provisions under the specified license agreements, among others. In addition, the Company and Depo DR Sub must prepare a quarterly distribution report relating to the specified license agreements, containing among other items, the amount of royalty payments received by the Company, reimbursable expenses and set-offs. The Company and Depo DR Sub must also provide PDL with notice of certain communications, events or actions with respect to the specified license agreements and infringement of any underlying intellectual property.

Use of Estimates

        The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Although management believes these estimates are based upon reasonable assumptions within the bounds of its knowledge of the Company's business and operations, actual results could differ materially from those estimates.

Revenue Recognition

        The Company recognizes revenue from the sale of its products, royalties earned, and on payments received and services performed under contractual arrangements.

        Revenue is recognized when there is persuasive evidence that an arrangement exists, delivery has occurred and title has passed, the price is fixed or determinable and the Company is reasonably assured of collecting the resulting receivable. Revenue arrangements with multiple elements are evaluated to determine whether the multiple elements met certain criteria for dividing the arrangement into separate units of accounting, including whether the delivered element(s) have stand-alone value to the Company's customer or licensee. Where there are multiple deliverables combined as a single unit of accounting, revenues are deferred and recognized over the period that we remain obligated to perform services.

• •

  Product Sales—The Company sells commercial products to wholesale distributors and retail pharmacies. Products sales revenue is recognized when title has transferred to the customer and the customer has assumed the risks and rewards of ownership, which typically occurs on delivery to the customer.

  •

  Product Sales Allowances—The Company recognizes product sales allowances as a reduction of product sales in the same period the related revenue is recognized. Product sales allowances are based on amounts owed or to be claimed on the related sales. These estimates take into consideration the terms of our agreements with customers, historical product returns, rebates or discounts taken, estimated levels of inventory in the distribution channel, the shelf life of the product and specific known market events, such as competitive pricing and new product introductions. If actual future results vary from our estimates, the Company may need to adjust these estimates, which could have an effect on product sales and earnings in the period of adjustment. The Company's sales allowances include:

  •

  Product Returns—The Company allows customers to return product for credit on returned product that is within six months before and up to 12 months after its product expiration date. The Company estimate product returns on Gralise, Zipsor, CAMBIA and Lazanda. The Company also estimate returns on sales of Glumetza made by the Company through August 2011, as we are financially responsible for return credits on Glumetza product we shipped as part of the Company's commercialization with Santarus in August 2011. Under the terms of the Zipsor Asset Purchase Agreement, the Company also assumed financial responsibility for returns of Zipsor product previously sold by Xanodyne. Under the terms of the CAMBIA Asset Purchase Agreement, the Company also assumed financial responsibility for returns of CAMBIA product previously sold by Nautilus. The Company did not assume financial responsibility for returns of Lazanda product previously sold by Archimedes. See Note 16 of the Notes to Financial Information for further information on the acquisition of Zipsor, CAMBIA and Lazanda.
  

  The shelf life of Gralise is 24 to 36 months from the date of tablet manufacture. The shelf life of Zipsor is 36 months from the date of tablet manufacture. The shelf life of CAMBIA is 24 to 48 months from the manufacture date. The shelf life of Lazanda is 24 to 36 months from the manufacture date. The shelf life of the 500mg Glumetza is 48 months from the date of tablet manufacture and the shelf life of the 1000mg Glumetza is 24 to 36 months from the date of tablet manufacture. The Company monitors actual return history on an individual product lot basis since product launch, which provide it with a basis to reasonably estimate future product returns, taking into consideration the shelf life of product at the time of shipment, shipment and prescription trends, estimated distribution channel inventory levels and consideration of the introduction of competitive products.

  Because of the shelf life of our products and our return policy of issuing credits on returned product that is within six months before and up to 12 months after its product expiration date, there may be a significant period of time between when the product is shipped and when the Company issues credit on a returned product. Accordingly, the Company may have to adjust these estimates, which could have an effect on product sales and earnings in the period of adjustments.

  •

  Wholesaler and Retail Pharmacy Discounts—The Company offers contractually determined discounts to certain wholesale distributors and retail pharmacies that purchase directly from it. These discounts are either taken off-invoice at the time of shipment or paid to the customer on a quarterly basis one to two months after the quarter in which product was shipped to the customer.

  •

  Prompt Pay Discounts—The Company offers cash discounts to its customers, generally 2% of the sales price, as an incentive for prompt payment. Based on the Company's experience, the Company expects its customers to comply with the payment terms to earn the cash discount.

  •

  Patient Discount Programs—The Company offers patient discount co-pay assistance programs in which patients receive certain discounts off their prescriptions at participating retail pharmacies. The discounts are reimbursed by the Company approximately one month after the prescriptions subject to the discount are filled.

  •

  Medicaid Rebates—The Company participates in Medicaid rebate programs, which provide assistance to certain low-income patients based on each individual state's guidelines regarding eligibility and services. Under the Medicaid rebate programs, the Company pays a rebate to each participating state, generally two to three months after the quarter in which prescriptions subject to the rebate are filled.

  •

  Chargebacks—The Company provides discounts to authorized users of the Federal Supply Schedule (FSS) of the General Services Administration under an FSS contract with the Department of Veterans Affairs. These federal entities purchase products from the wholesale distributors at a discounted price, and the wholesale distributors then charge back to the Company the difference between the current retail price and the price the federal entity paid for the product.

  •

  Managed Care Rebates—The Company offers discounts under contracts with certain managed care providers who do not purchase directly from it. The Company generally pays managed care rebates one to two months after the quarter in which prescriptions subject to the rebate are filled.

  •

  Medicare Part D Coverage Gap Rebates—The Company participates in the Medicare Part D Coverage Gap Discount Program under which it provides rebates on prescriptions that fall within the "donut hole" coverage gap. The Company generally pays Medicare Part D Coverage Gap rebates two to three months after the quarter in which prescriptions subject to the rebate are filled.

  •

  Launch Discounts—The Company offered certain discounts in connection with the launch and commercial availability of Gralise in October 2011. These launch discounts include off-invoice discounts to wholesalers and stocking rebates to pharmacies for stocking Gralise that were paid in November 2011.

  •

  Royalties—Royalties are recognized as earned in accordance with the contract terms when royalties from licensees can be reliably measured and collectability is reasonably assured.

• • Under the commercialization agreement between the Company and Santarus, the Company receives royalties on net sales of Glumetza distributed by Santarus in the United States. Santarus commenced distributing and recording product sales on shipments of Glumetza in September 2011. See Note 2 for further information on the Santarus commercialization agreement.

    Royalties received from Santarus on sales of Glumetza, from Merck on sales of Janumet XR and from Janssen on sales of NUCYNTA ER are recognized in the period earned as the royalty amounts can be estimated and collectability is reasonably assured.

    In October 2013, the Company sold its interests in royalty and milestone payments under our license agreements in the Type 2 diabetes therapeutic area to PDL for $240.5 million. This transaction was accounted for as a liability that will be amortized using the interest method over the life of the agreement. As a result of this liability accounting, even though the Company does not retain the related royalties and milestones under the transaction as the amounts are remitted to PDL, the Company will continue to record revenue related to these royalties and milestones.

  •

  License and Collaborative Arrangements—Revenue from license and collaborative arrangements is recognized when the Company has substantially completed its obligations under the terms of the arrangement and the Company's remaining involvement is inconsequential and perfunctory. If the Company has significant continuing involvement under such an arrangement, license and collaborative fees are recognized over the estimated performance period. The Company recognizes milestone payments for its research and development collaborations upon the achievement of specified milestones if (1) the milestone is substantive in nature, and the achievement of the milestone was not reasonably assured at the inception of the agreement; (2) consideration earned relates to past performance and (3) the milestone payment is nonrefundable. A milestone is considered substantive if the consideration earned from the achievement of the milestone is consistent with the Company's performance required to achieve the milestone or consistent with the increase in value to the collaboration resulting from the Company's performance, the consideration earned relates solely to past performance, and the consideration earned is reasonable relative to all of the other deliverables and payments within the arrangement. License, milestones and collaborative fee payments received in excess of amounts earned are classified as deferred revenue until earned.

Stock-Based Compensation

        Compensation expense for stock-based compensation is based on the single-option approach, includes an estimate for forfeitures and is recognized over the vesting term of the options using the straight-line method. Depomed estimates forfeitures based on historical experience. Depomed uses historical option exercise data to estimate the expected life of the options.

Research and Development Expense and Accruals

        Research and development expenses include salaries, clinical trial costs, consultant fees, supplies, manufacturing costs for research and development programs and allocations of corporate costs. All such costs are charged to research and development expense as incurred. These expenses result from the Company's independent research and development efforts as well as efforts associated with collaborations. The Company reviews and accrues clinical trial expenses based on work performed, which relies on estimates of total costs incurred based on patient enrollment, completion of patient studies and other events. The Company follows this method since reasonably dependable estimates of the costs applicable to various stages of a research agreement or clinical trial can be made. Accrued clinical costs are subject to revisions as trials progress to completion. Revisions are charged to expense in the period in which the facts that give rise to the revision become known.

Shipping and Handling Costs

        Shipping and handling costs incurred for inventory purchases and product shipments are recorded in cost of sales in the Statements of Operations.

Advertising Costs

        Costs associated with advertising are expensed on first showing. Advertising expense for the years ended December 31, 2013, 2012 and 2011 were $1.3 million, $1.7 million and $2.1 million, respectively.

Comprehensive Income (Loss)

        Comprehensive income (loss) is comprised of net income (loss) and other comprehensive income (loss). Other comprehensive income (loss) includes certain changes in equity of the Company that are excluded from net income (loss). Unrealized gains and losses on the Company's available-for-sale securities are reported separately in shareholders' equity and included in accumulated other comprehensive income (loss). Comprehensive income (loss) for the years ended December 31, 2013, 2012 and 2011 has been reflected in the Consolidated Statements of Comprehensive Income (loss).

Cash, Cash Equivalents and Marketable Securities

        The Company considers all highly liquid investments with an original maturity (at date of purchase) of three months or less to be cash equivalents. Cash and cash equivalents consist of cash on deposit with banks, money market instruments and commercial paper. The Company places its cash, cash equivalents and marketable securities with high quality U.S. government and financial institutions and to date has not experienced material losses on any of its balances. The Company records cash and cash equivalents at amortized cost, which approximates the fair value. All marketable securities are classified as available-for-sale since these instruments are readily marketable. These securities are carried at fair value, which is based on readily available market information, with unrealized gains and losses included in accumulated other comprehensive income (loss) within shareholders' equity. The Company uses the specific identification method to determine the amount of realized gains or losses on sales of marketable securities. We regularly review all of our investments for other-than-temporary declines in fair value. Our review includes the consideration of the cause of the impairment including the creditworthiness of the security issuers, the number of securities in an unrealized loss position and the severity and duration of the unrealized losses. When we determine that the decline in fair value of an investment is below our accounting basis and this decline is other-than-temporary, we reduce the carrying value of the security we hold and record a loss in the amount of such decline. Realized gains or losses have been insignificant and are included in interest and other income in the Consolidated Statements of Operations.

Accounts Receivable

        Trade accounts receivable are recorded net of allowances for cash discounts for prompt payment. To date the Company has not recorded a bad debt allowance due to the fact that the majority of its product revenue comes from sales to a limited number of financially sound companies who have historically paid their balances timely. The need for bad debt allowance is evaluated each reporting period based on our assessment of the credit worthiness of our customers or any other potential circumstances that could result in bad debt.

        Receivables from collaborative partners represent amounts due from Santarus, Merck and Janssen.

Inventories

        Inventories are stated at the lower of cost or market with cost determined by specific manufactured lot. Inventories consist of costs of the active pharmaceutical ingredient, contract manufacturing and packaging costs. The Company writes-off the value of inventory for potentially excess, dated or obsolete inventories based on an analysis of inventory on hand and projected demand.

Property and Equipment

        Property and equipment are stated at cost, less accumulated depreciation and amortization (See Note 5 of the Notes to the Consolidated Financial Statements). Depreciation is calculated using the straight-line method over the estimated useful lives of the respective assets, as follows:

Furniture and office equipment	3 - 5 years
Laboratory equipment	3 - 5 years
Leasehold improvements	Shorter of estimated useful life or lease term

Intangible Assets

        Intangible assets consist of purchased developed technology and trademarks. We determine the fair values of acquired intangible assets as of the acquisition date. Discounted cash flow models are typically used in these valuations, which require the use of significant estimates and assumptions, including but not limited to, developing appropriate discount rates and estimating future cash flows from product sales and related expenses. We evaluate purchased intangibles for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. An impairment loss would be recognized when estimated undiscounted future cash flows expected to result from the use of the asset and its eventual disposition are less than its carrying amount. Estimating future cash flows related to an intangible asset involves significant estimates and assumptions. If our assumptions are not correct, there could be an impairment loss or, in the case of a change in the estimated useful life of the asset, a change in amortization expense.

Net Income (Loss) Per Share

        Basic net income (loss) per share is calculated by dividing the net income (loss) by the weighted-average number of shares of common stock outstanding during the period. Diluted net income per share is calculated by dividing the net income by the weighted-average number of shares of common stock outstanding during the period, plus dilutive common shares for the period determined using the treasury stock method. Diluted net loss per share is calculated by dividing the net loss by the weighted-average number of shares of common stock outstanding during the period. For purposes of this calculation, options to purchase stock are considered to be potential common shares and are only included in the calculation of diluted net income (loss) per share when their effect is dilutive. Basic and diluted earnings per share are calculated as follows:

(in thousands, except for per share amounts)	2013		2012			2011
Numerator:
Net income (loss)	$	43,313	$	(29,781	)	$	70,726
Denominator for basic net income (loss) per share		56,736		55,893			54,563
Net effect of dilutive common shares		—		—			1,527
Denominator for diluted net income (loss) per share:		57,544		55,893			56,090
Basic net income (loss) per share	$	0.76	$	(0.53	)	$	1.30
Diluted net income (loss) per share	$	0.75	$	(0.53	)	$	1.26

        For the years ended December 31, 2013, 2012 and 2011, 4.8 million, 6.0 million and 1.5 million dilutive common shares, respectively, were not included in dilutive net income (loss) per share because their effect was anti-dilutive.

Income Taxes

        The Company's income tax policy is to record the estimated future tax effects of temporary differences between the tax bases of assets and liabilities and amounts reported in the Company's accompanying Consolidated Balance Sheets, as well as operating loss and tax credit carryforwards. The Company follows the guidelines set forth in the applicable accounting guidance regarding the recoverability of any tax assets recorded on the Consolidated Balance Sheet and provides any necessary allowances as required. Determining necessary allowances requires the Company to make assessments about the timing of future events, including the probability of expected future taxable income and available tax planning opportunities.

        The Company is subject to examination of its income tax returns by various tax authorities on a periodic basis. The Company regularly assesses the likelihood of adverse outcomes resulting from such examinations to determine the adequacy of its provision for income taxes. The Company has applied the provisions of the applicable accounting guidance on accounting for uncertainty in income taxes, which requires application of a more-likely-than-not threshold to the recognition and de-recognition of uncertain tax positions. If the recognition threshold is met, the applicable accounting guidance permits the Company to recognize a tax benefit measured at the largest amount of tax benefit that, in the Company's judgment, is more than 50 percent likely to be realized upon settlement. It further requires that a change in judgment related to the expected ultimate resolution of uncertain tax positions be recognized in earnings in the period of such change.

Segment Information

        The Company operates in one operating segment and has operations solely in the United States. To date, all of the Company's revenues from product sales are related to sales of Glumetza, Gralise, Zipsor, Lazanda and CAMBIA in the United States. The Company has recognized license and royalty revenue from license agreements in the territories of the United States, Canada and Korea.

Concentration of Risk

        The Company invests cash that is currently not being used for operational purposes in accordance with its investment policy in low-risk debt securities of the U.S. Treasury, U.S. government sponsored agencies and very highly rated banks and corporations. The Company is exposed to credit risk in the event of a default by the institutions holding the cash equivalents and available-for sale securities to the extent recorded on the balance sheet.

        The Company is subject to credit risk from its accounts receivable related to product sales and royalties. The majority of the Company's trade accounts receivable arises from product sales in the United States. Three wholesale distributors represented 35%, 37% and 21% of product shipments for the year ended December 31, 2013. These three customers individually comprised 23%, 35% and 34%, respectively, of product sales-related accounts receivable as of December 31, 2013. Three wholesale distributors represented 39%, 40% and 14% of product shipments for the year ended December 31, 2012. These three customers individually comprised 46%, 42% and 5%, respectively, of product sales-related accounts receivable as of December 31, 2012. Three wholesale distributors represented 46%, 32% and 17% of product shipments for the year ended December 31, 2011. These three customers individually comprised 54%, 29% and 9%, respectively, of product sales-related accounts receivable as of December 31, 2011.Accounts receivable balances related to product sales were $11.4 million, $3.6 million and $4.4 million for the years ended December 31, 2013, 2012 and 2011, respectively. The Company relies on a single third-party contract manufacturer organization in Puerto Rico to manufacture Gralise and two third-party suppliers for the supply of gabapentin, the active pharmaceutical ingredient in Gralise. The Company also relies on single third-party contract suppliers: Accucaps, DPT Lakewood, Inc., and MiPharm, S.p.A. for supply of Zipsor, Lazanda and CAMBIA respectively.

        Accounts receivable related to royalties was $7.2 million for the year ended December 31, 2013, of which $6.4 million related to Santarus. Accounts receivable related to royalties were $5.1 million for the year ended December 31, 2012, of which $4.4 million related to Santarus.

        To date, the Company has not experienced any losses with respect to the collection of its accounts receivable and believes that its entire accounts receivable balances are collectible.

Recent Accounting Pronouncements

        In July 2013, the Financial Accounting Standards Board issued a new accounting standard that will require the presentation of certain unrecognized tax benefits as a reduction to deferred tax assets rather than as a liability when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. This guidance is effective for our interim and annual periods beginning January 1, 2014. We do not believe the adoption of this guidance will have a material impact on our consolidated financial statements.

        In February 2013, the FASB issued Accounting Standards Update No. 2013-02, Comprehensive Income (Topic 220)—Reporting of Amounts Reclassified out of Accumulated Other Comprehensive Income (ASU 2013-02), to improve the reporting of reclassifications out of accumulated other comprehensive income. ASU 2013-02 requires an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under U.S. GAAP to be reclassified in its entirety to net income. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety from accumulated other comprehensive income to net income in the same reporting period, an entity is required to cross-reference other disclosures required under U.S. GAAP that provide additional detail about those amounts. ASU 2013-02 is effective for us during the first quarter of fiscal 2014 with earlier adoption permitted, which should be applied prospectively. The adoption of this standard did not have a material impact on our consolidated financial statements.

        In December 2011, the FASB issued ASU 2011-11, "Balance Sheet: Disclosures about Offsetting Assets and Liabilities." ASU 2011-11 enhances disclosures regarding financial instruments and derivative instruments. Entities are required to provide both net information and gross information for these assets and liabilities in order to enhance comparability between those entities that prepare their financial statements on the basis of U.S. GAAP and those entities that prepare their financial statements on the basis of IFRS. The requirements of ASU 2011-11 are effective for interim and annual periods beginning on or after January 1, 2013 and are to be applied retrospectively. The adoption of this standard did not have a material impact on our consolidated financial statements.

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DEFERRED REVENUE (Tables)

12 Months Ended

Dec. 31, 2013

DEFERRED REVENUE

Schedule of deferred revenue

Deferred revenue consists of the following (in thousands):

	December 31, 2013		December 31, 2012
Deferred revenue, current portion:
Deferred license revenue, current portion:
Valeant	$	1,598	$	1,598
Santarus		1,443		1,444
Janssen		—		231
Deferred license revenue, current portion		3,041		3,273
Deferred revenue, current portion	$	3,041	$	3,273
Deferred license revenue, non-current portion:
Valeant		10,905		12,503
Santarus		1,570		3,013
Deferred license revenue, non-current portion		12,475		15,516
Total deferred revenue	$	15,516	$	18,789

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ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Details 2) (USD $) In Millions, unless otherwise specified	12 Months Ended
	Dec. 31, 2013	Dec. 31, 2012	Dec. 31, 2011
Advertising Costs
Advertising expense	$ 1.3	$ 1.7	$ 2.1
Furniture and office equipment | Minimum
Property and Equipment
Estimated useful lives	3 years
Furniture and office equipment | Maximum
Property and Equipment
Estimated useful lives	5 years
Laboratory equipment | Minimum
Property and Equipment
Estimated useful lives	3 years
Laboratory equipment | Maximum
Property and Equipment
Estimated useful lives	5 years

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COMMITMENTS AND CONTINGENCIES (Details) (USD $)	12 Months Ended			1 Months Ended		1 Months Ended
	Dec. 31, 2013	Dec. 31, 2012	Dec. 31, 2011	Jun. 30, 2011 1330 and 1360 O'Brien Drive sqft	Jan. 31, 2012 1430 O'Brien Drive sqft	Apr. 30, 2012 New lease Newark sqft Item	Dec. 31, 2013 New lease Newark	Dec. 31, 2012 New lease Newark
Leases
Square feet agreed to lease				46,000	9,000	52,500
Lease extension term				12 months
Additional square feet obligated to lease						8,000
Number of lease renewal terms						1
Lease renewal option period						5 years
Lease renewal, minimum notice period prior to lease expiration						12 months
Lease termination penalty interest (as a percent)						8.00%
Future aggregate amount payable as rent over the remaining term of the lease	$ 13,308,000						$ 13,300,000
Deferred rent							1,500,000	900,000
Rent Expense	1,000,000	2,300,000	1,500,000
Future minimum payments under operating leases for facilities
2014	1,178,000
2015	1,233,000
2016	1,440,000
2017	1,485,000
Thereafter	7,972,000
Total	13,308,000						13,300,000
Cash contributions from landlords	$ 5,000,000	$ 1,300,000

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CONSOLIDATED BALANCE SHEETS (USD $) In Thousands, unless otherwise specified	Dec. 31, 2013	Dec. 31, 2012
Current assets:
Cash and cash equivalents	$ 244,674	$ 29,076
Marketable securities	27,263	37,737
Accounts receivable	11,451	3,614
Receivables from collaborative partners	10,824	10,078
Inventories	10,145	9,587
Deferred tax assets, net	26,860
Prepaid and other current assets	5,828	5,175
Total current assets	337,045	95,267
Marketable securities, long-term	4,080	11,079
Property and equipment, net	8,340	8,237
Intangible assets, net	82,521	25,078
Deferred tax assets, net, non-current	76,342
Other assets	325	1,992
TOTAL ASSETS	508,653	141,653
Current liabilities:
Accounts payable and accrued liabilities	41,837	32,578
Income taxes payable	61,875
Deferred license revenue	3,041	3,273
Liability related to the sale of future royalties	49,455
Other current liabilities	649	830
Total current liabilities	156,857	36,681
Deferred license revenue, non-current portion	12,475	15,516
Contingent consideration liability	11,264	1,342
Liability related to the sale of future royalties, less current portion	177,624
Other long-term liabilities	13,017	4,178
Commitments
Shareholders' equity:
Preferred stock, no par value, 5,000,000 shares authorized; Series A convertible preferred stock, 25,000 shares designated, 18,158 shares issued and surrendered, and zero shares outstanding at December 31, 2013 and December 31, 2012
Common stock, no par value, 100,000,000 shares authorized; 57,369,683 and 56,383,713 shares issued and outstanding at December 31, 2013 and December 31, 2012, respectively	221,124	211,266
Additional paid-in capital	347
Accumulated deficit	(84,048)	(127,361)
Accumulated other comprehensive Income (loss), net of tax	(7)	31
Total shareholders' equity	137,416	83,936
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$ 508,653	$ 141,653

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MARKETABLE SECURITIES (Details 3) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2013	Dec. 31, 2012
Fair value hierarchy for financial assets and liabilities
Liabilities, contingent consideration	$ 11,264	$ 1,342
Recurring | Level 1
Fair value hierarchy for financial assets and liabilities
Assets	217,946	17,307
Recurring | Level 1 | Corporate debt securities
Fair value hierarchy for financial assets and liabilities
Assets		6,039
Recurring | Level 1 | Money market funds
Fair value hierarchy for financial assets and liabilities
Assets	217,946	11,268
Recurring | Level 2
Fair value hierarchy for financial assets and liabilities
Assets	31,343	48,816
Recurring | Level 2 | Corporate debt securities
Fair value hierarchy for financial assets and liabilities
Assets	16,526	29,556
Recurring | Level 2 | Government agency debt securities
Fair value hierarchy for financial assets and liabilities
Assets	14,817	17,251
Recurring | Level 2 | U.S. Treasury securities
Fair value hierarchy for financial assets and liabilities
Assets		2,009
Recurring | Level 3
Fair value hierarchy for financial assets and liabilities
Unfavorable contract assumed	3,540
Liabilities	14,804	1,342
Recurring | Level 3 | Zipsor
Fair value hierarchy for financial assets and liabilities
Liabilities, contingent consideration	1,638	1,342
Recurring | Level 3 | Lazanda
Fair value hierarchy for financial assets and liabilities
Liabilities, contingent consideration	8,616
Recurring | Level 3 | CAMBIA
Fair value hierarchy for financial assets and liabilities
Liabilities, contingent consideration	1,010
Recurring | Total
Fair value hierarchy for financial assets and liabilities
Assets	249,289	66,123
Unfavorable contract assumed	3,540
Liabilities	14,804	1,342
Recurring | Total | Zipsor
Fair value hierarchy for financial assets and liabilities
Liabilities, contingent consideration	1,638	1,342
Recurring | Total | Lazanda
Fair value hierarchy for financial assets and liabilities
Liabilities, contingent consideration	8,616
Recurring | Total | CAMBIA
Fair value hierarchy for financial assets and liabilities
Liabilities, contingent consideration	1,010
Recurring | Total | Corporate debt securities
Fair value hierarchy for financial assets and liabilities
Assets	16,526	35,595
Recurring | Total | Government agency debt securities
Fair value hierarchy for financial assets and liabilities
Assets	14,817	17,251
Recurring | Total | U.S. Treasury securities
Fair value hierarchy for financial assets and liabilities
Assets		2,009
Recurring | Total | Money market funds
Fair value hierarchy for financial assets and liabilities
Assets	$ 217,946	$ 11,268

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CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (USD $) In Thousands, except Share data, unless otherwise specified	Total	Common Stock	Additional Paid-In Capital	Accumulated Other Comprehensive Income	Accumulated Deficit
Balances at Dec. 31, 2010	$ 23,106	$ 191,343		$ 69	$ (168,306)
Balances (in shares) at Dec. 31, 2010		52,957,787
Increase (Decrease) in Stockholders' Equity
Issuance of common stock upon exercise of options	7,588	7,588
Issuance of common stock upon exercise of options (in shares)		2,379,116
Issuance of common stock under employee stock purchase plan	711	711
Issuance of common stock under employee stock purchase plan (in shares)		169,217
Stock-based compensation	3,869	3,869
Net income (loss)	70,726				70,726
Unrealized gain (loss) on available-for-sale securities	(82)			(82)
Balances at Dec. 31, 2011	105,918	203,511		(13)	(97,580)
Balances (in shares) at Dec. 31, 2011		55,506,120
Increase (Decrease) in Stockholders' Equity
Issuance of common stock upon exercise of options	1,835	1,835
Issuance of common stock upon exercise of options (in shares)	628,394	628,394
Issuance of common stock under employee stock purchase plan	851	851
Issuance of common stock under employee stock purchase plan (in shares)	203,389	203,389
Issuance of common stock in conjunction with vesting of restricted stock units	278	278
Issuance of common stock in conjunction with vesting of restricted stock units (in shares)		45,810
Stock-based compensation	4,791	4,791
Net income (loss)	(29,781)				(29,781)
Unrealized gain (loss) on available-for-sale securities	44			44
Balances at Dec. 31, 2012	83,936	211,266		31	(127,361)
Balances (in shares) at Dec. 31, 2012	56,383,713	56,383,713
Increase (Decrease) in Stockholders' Equity
Issuance of common stock upon exercise of options	2,782	2,782
Issuance of common stock upon exercise of options (in shares)	621,090	621,090
Issuance of common stock under employee stock purchase plan	966	966
Issuance of common stock under employee stock purchase plan (in shares)	222,062	222,062
Issuance of common stock in conjunction with vesting of restricted stock units	765	765
Issuance of common stock in conjunction with vesting of restricted stock units (in shares)		142,818
Stock-based compensation	5,345	5,345
Windfall tax benefit	347		347
Net income (loss)	43,313				43,313
Unrealized gain (loss) on available-for-sale securities	(38)			(38)
Balances at Dec. 31, 2013	$ 137,416	$ 221,124	$ 347	$ (7)	$ (84,048)
Balances (in shares) at Dec. 31, 2013	57,369,683	57,369,683

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STOCK-BASED COMPENSATION (Details 5) (The 2004 Plan, Restricted stock units, USD $) In Millions, except Share data, unless otherwise specified	12 Months Ended
	Dec. 31, 2013
The 2004 Plan | Restricted stock units
Stock-based compensation
Vesting period	4 years
Annual vesting percentage	25.00%
Number of Shares
Non-vested restricted stock units at the beginning of the period (in shares)	137,430
Granted (in shares)	394,587
Vested (in shares)	(142,818)
Forfeited (in shares)	(6,580)
Non-vested restricted stock units at the end of the period (in shares)	382,619
Weighted Average Grant Date Fair Value Per Share
Non-vested restricted stock units at the beginning of the period (in dollars per share)	$ 6.11
Granted (in dollars per share)	$ 6.77
Vested (in dollars per share)	$ 6.56
Forfeited (in dollars per share)	$ 6.77
Non-vested restricted stock units at the end of the period (in dollars per share)	$ 6.61
Weighted Average Remaining Contractual Term
Non-vested restricted stock units at the end of the period	1 year 9 months 18 days
Additional disclosures
Total fair value of awards vested	$ 0.9

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STOCK-BASED COMPENSATION (Tables)

12 Months Ended

Dec. 31, 2013

STOCK-BASED COMPENSATION

Schedule of assumptions used to calculate the fair value of option grants

	2013	2012	2011
Employee and Director Stock Options
Risk-free interest rate	0.67 - 1.38%	0.51 - 0.78%	0.77 - 1.99%
Dividend yield	None	None	None
Expected option term (in years)	4.48 - 4.51	4.50 - 4.54	4.54 - 4.84
Expected stock price volatility	49.2 - 63.5%	64.1 - 67.5%	73.9 - 76.4%

Schedule of assumptions used to calculate the fair value of stock purchase rights granted under the ESPP

	2013	2012	2011
Employee and Director Stock Purchase Rights
Risk-free interest rate	0.08 - 0.10%	0.12 - 0.16%	0.05 - 0.44%
Dividend yield	None	None	None
Expected option term (in years)	0.5	0.5	0.5 - 2.0
Expected stock price volatility	28.8 - 35%	35.6 - 44.3%	60.1 - 76.6%

Schedule of stock-based compensation expense recognized for stock options, restricted stock units and the ESPP

The following table presents stock-based compensation expense recognized for stock options, restricted stock units and the ESPP in the Company's Statements of Operations (in thousands):

	2013		2012		2011
Cost of sales	$	42	$	41	$	68
Research and development expense		364		568		668
Selling, general and administrative expense		5,702		4,461		3,133
Total	$	6,108	$	5,070	$	3,869

Stock-based compensation

Schedule of restricted stock units

	Number of Shares			Weighted Average Grant Date Fair Value Per Share		Weighted Average Remaining Contractual Term (In years)
Non-vested restricted stock units at December 31, 2012		137,430		$	6.11
Granted		394,587		$	6.77
Vested		(142,818	)	$	6.56
forfeited		(6,580	)	$	6.77
Non-vested restricted stock units at December 31, 2013		382,619		$	6.61		1.8

The 1995 Plan

Stock-based compensation

Summary of the options activity under the plan

	Shares			Weighted- Average Exercise Price
Options outstanding at December 31, 2010		341,600		$	4.83
Options exercised		(215,850	)		4.68
Options forfeited		—			—
Options expired		(10,800	)		5.31
Options outstanding at December 31, 2011		114,950		$	5.05
Options exercised		(40,800	)		2.50
Options forfeited		—			—
Options expired		(13,600	)		5.83
Options outstanding at December 31, 2012		60,550		$	6.59
Options exercised		(37,800	)		6.73
Options forfeited		—			—
Options expired		(22,750	)		6.37
Options outstanding at December 31, 2013		—		$	—
Options exercisable and expected to become exercisable at December 31, 2013		—		$	—
Options exercisable at December 31, 2013		—		$	—

The 2004 Plan

Stock-based compensation

Summary of the options activity under the plan

	Shares			Weighted- Average Exercise Price
Options outstanding at December 31, 2010		4,940,345		$	3.21
Options granted		2,762,181			7.35
Options exercised		(2,163,266	)		3.04
Options forfeited		(639,043	)		4.51
Options expired		—			—
Options outstanding at December 31, 2011		4,900,217		$	5.44
Options granted		2,006,950			5.86
Options exercised		(587,594	)		2.95
Options forfeited		—			—
Options expired		(557,551	)		6.26
Options outstanding at December 31, 2012		5,762,022		$	5.76
Options granted		1,769,363			6.86
Options exercised		(583,290	)		4.33
Options forfeited		—			—
Options expired		(429,124	)		6.46
Options outstanding at December 31, 2013		6,518,971		$	6.14
Options exercisable and expected to become exercisable at December 31, 2013		5,999,687		$	6.10
Options exercisable at December 31, 2013		3,448,487		$	5.66

	Weighted- Average Remaining Contractual Term (Years)		Aggregate Intrinsic Value (in thousands)
Options outstanding at December 31, 2013		7.47	$	28,933
Options exercisable and expected to become exercisable at December 31, 2013		7.36	$	26,863
Options exercisable at December 31, 2013		6.55	$	16,974

Summary of information regarding the stock options outstanding under the plan

Range of Exercise Prices	Number Outstanding		Weighted- Average Remaining Contractual Term (Years)		Weighted- Average Exercise Price (Outstanding)		Number Exercisable		Weighted- Average Exercise Price (Exercisable)
$1.49 - $3.27		701,650		5.02	$	2.62		692,367	$	2.61
$3.28 - $5.35		730,248		6.18	$	4.58		542,135	$	4.32
$5.56 - $5.91		1,019,548		8.23	$	5.78		454,094	$	5.74
$5.94 - $6.08		667,987		7.93	$	6.03		299,774	$	6.04
$6.11 - $6.29		587,060		6.46	$	6.15		336,790	$	6.17
$6.77 - $6.77		1,085,966		9.02	$	6.77		215,738	$	6.77
$7.02 - $8.36		992,512		7.62	$	7.76		539,862	$	7.88
$8.45 - $8.55		693,000		7.92	$	8.53		356,789	$	8.54
$8.71 - $8.71		26,000		9.17	$	8.71		—	$	0.00
$9.02 - $9.02		15,000		7.22	$	9.02		10,938	$	9.02
		6,518,971		7.47	$	6.14		3,448,487	$	5.66

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INCOME TAXES (Details 4) (USD $)	12 Months Ended
	Dec. 31, 2013	Dec. 31, 2012	Dec. 31, 2011
Deferred Tax Assets:
Net operating loss carryforwards	$ 4,237,000	$ 21,500,000
Tax carryforwards	133,000	4,700,000
In-process research and development	665,000	1,100,000
Deferred revenue	88,248,000	7,500,000
Intangibles	1,363,000	500,000
Other, net	11,226,000	7,200,000
Total deferred tax assets	105,872,000	42,500,000
Valuation allowance for deferred tax assets	(2,670,000)	(42,500,000)
Deferred tax assets, net	103,202,000
Increase (decrease) in valuation allowance	(39,800,000)	7,800,000	(27,600,000)
Federal and state net operating loss carryforwards related to stock option deductions	11,000,000
Tax effect of the stock option benefit	4,500,000
Activity related to unrecognized tax benefits
Unrecognized tax benefits at the beginning of the period	3,594,000	3,573,000
Gross increases - current year tax positions	174,000	21,000
Gross increases - prior year tax positions	111,000
Unrecognized tax benefits at the end of the period	$ 3,879,000	$ 3,594,000	$ 3,573,000

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BUSINESS COMBINATIONS

12 Months Ended

Dec. 31, 2013

BUSINESS COMBINATIONS

BUSINESS COMBINATIONS

NOTE 15. BUSINESS COMBINATIONS

The CAMBIA Acquisition

        On December 17, 2013, the Company entered into an Asset Purchase Agreement (Asset Purchase Agreement) with Nautilus Neurosciences, Inc., a Delaware corporation (Nautilus), pursuant to which the Company acquired from Nautilus all of the rights to CAMBIA® (diclofenac potassium for oral solution), including related product inventory, and assumed from Nautilus certain liabilities relating to CAMBIA, for an initial payment of $48.7 million in cash.

        Pursuant to the Asset Purchase Agreement, $7.5 million of the initial payment will be held in escrow for 24 months and applied towards the indemnification obligations of Nautilus as set forth in the Asset Purchase Agreement.

        In addition to the initial payment, the Company agreed to pay one-time, contingent cash payments upon the achievement of certain CAMBIA net sales milestones. Up to $5.0 million in sales milestones are payable to Nautilus, and up to $10.0 million in sales milestones are payable to third parties pursuant to contracts assigned to the Company. The net sales thresholds triggering such milestone payments to Nautilus range up to $100 million in calendar year net sales. The Company also assumed certain third party royalty obligations totaling not more than 11% of CAMBIA net sales.

        In accordance with the authoritative guidance for business combinations, the transaction with Nautilus was determined to be a business combination and was accounted for using the acquisition method of accounting.

        The following table presents a summary of the purchase price consideration for the CAMBIA acquisition (in thousands):

Cash for CAMBIA and related inventories	$	48,725
Fair value of contingent consideration		1,010
Purchase price	$	49,735

        The contingent consideration was recognized and measured at fair value as of the acquisition date. The Company determined the acquisition date fair value of the contingent consideration obligation based on an income approach derived from CAMBIA revenue estimates and a probability assessment with respect to the likelihood of achieving the level of net sales that would trigger the contingent payment. The fair value measurement is based on significant inputs not observable in the market and thus represents a Level 3 measurement as defined in fair value measurement accounting. The key assumptions in determining the fair value are the discount rate and the probability assigned to the potential milestones being achieved. At each reporting date, the Company will re-measure the contingent consideration obligation to estimated fair value. Any changes in the fair value of contingent consideration will be recognized in operating expenses until the contingent consideration arrangement is settled.

        The following table summarizes the fair values of the tangible and identifiable intangible assets acquired and liabilities assumed at the acquisition date (in thousands):

Intangible asset—CAMBIA product rights	$	51,360
Inventories		3,837
Other assets		409
Sales reserve liabilities		(1,847	)
Unfavorable contract assumed		(3,540	)
Bargain purchase		(484	)
	$	49,735

        The CAMBIA product rights of $51.4 million have been recorded as intangible assets on the accompanying consolidated balance sheet and are being amortized over the estimated useful life of the assets on a ratable basis through December 2023 as no other method could be reliably estimated. Total amortization expense for the year ended December 31, 2013 was approximately $0.2 million. For the year ended December 31, 2013, the Company incurred an aggregate of $0.1 million in acquisition-related costs. These expenses are included in selling, general and administrative expenses in the Company's consolidated statement of operations for the year ended December 31, 2013.

        The liability for the unfavorable contract assumed represents an obligation for the Company to make certain payments to a vendor upon the achievement of certain milestones by such vendor. This contract was entered into by Nautilus as part of a legal settlement unrelated to the CAMBIA acquisition. The liability of $3.5 million recorded above represents the fair value of the amounts by which the contract terms are unfavorable compared to the current market pricing and a probability weighted assessment of the likelihood that the stipulated milestones will be achieved by the third party within a specified time frame. The contract may be terminated if the third party fails to achieve these milestones in which case the fair value of the liability as of the date of the termination will be reversed on the balance sheet and reflected in the statement of operations as a credit within interest and other income. The Company will determine the fair value of this liability at each reporting period and record any changes within the consolidated statement of operations.

        The fair value of inventories acquired included a step-up in the value of CAMBIA inventories of $3.7 million that will be amortized to cost of sales as the acquired inventories are sold. The bargain purchase amount has been recorded within interest and other income in the accompanying consolidated statement of operations.

Pro forma financial information (unaudited)

        The unaudited financial information in the table below summarizes the combined results of operations of the Company and Nautilus on a pro forma basis, as though the companies had been combined as of January 1, 2012. The pro forma financial information is presented for informational purposes only and is not indicative of the results of operations that would have been achieved if the CAMBIA acquisition had taken place at the beginning of the period presented.

        The pro forma financial information for all periods presented includes the business combination accounting effect on the amortization charges from acquired intangible assets, adjustments to certain acquired assets and liabilities and acquisition costs reflected in the Company's and Nautilus' historical statements of operations for periods prior to the acquisition.

        The unaudited pro forma financial information for the years ended December 31, 2013 and 2012 combines the historical results for the Company for those years, with the historical results for Nautilus as a separate entity, for the years ended December 31, 2013 and 2012.

	2013		2012
Net revenue	$	143,753	$	104,652
Net income (loss)	$	29,821	$	(47,717	)
Net income (loss) per share—basic	$	0.53	$	(0.85	)
Net income (loss) per share—diluted	$	0.52	$	(0.85	)

        The above table includes pro forma adjustments to:

• •

  adjust depreciation expense related to fixed assets not acquired by the Company in connection with the CAMBIA acquisition.

  •

  adjust amortization expense to eliminate Nautilus' historical intangible asset amortization expense and record amortization of the acquired intangible assets;

  •

  adjust interest interest expense related to a term loan payable by Nautilus. The Company did not acquire the cash held by Nautilus nor did they assume the Nautilus outstanding term loan in connection with the CAMBIA acquisition.

The Lazanda Acquisition

        On July 29, 2013, the Company entered into an Asset Purchase Agreement with each of Archimedes Pharma US Inc., a Delaware corporation, Archimedes Pharma Ltd., a corporation registered under the laws of England and Wales, and Archimedes Development Ltd., a company registered under the laws of England and Wales (collectively, Archimedes), pursuant to which the Company acquired all of the U.S. and Canadian rights to Archimedes' product Lazanda® (fentanyl) nasal spray and related inventory for an initial payment of $4.0 million in cash. The Company also assumed certain liabilities related to Lazanda.

        Pursuant to the Asset Purchase Agreement, $1.0 million of the initial payment will be held in escrow for 18 months and applied towards the indemnification obligations of Archimedes as set forth in the Asset Purchase Agreement.

        In addition to the initial payment, the Company will also pay royalties on its net sales of Lazanda. In 2013 and 2014, the Company will not pay royalties to Archimedes, and third party royalties assumed by the Company in connection with the acquisition will be less than 5% of the Company's net sales of Lazanda. Thereafter, the Company will pay royalties to Archimedes and third parties totaling 13% to 15% of the Company's net sales of Lazanda. In addition to the initial payment and royalties, the Company will pay to Archimedes the following one-time, contingent cash payments upon the achievement by the Company of net sales of Lazanda equal to or in excess of the following net sales milestones: (i) $1.0 million at the end of the first calendar year in which net sales of Lazanda are $20.0 million; (ii) $2.5 million at the end of the first calendar year in which net sales of Lazanda are $45.0 million; (iii) $5.0 million at the end of the first calendar year in which net sales of Lazanda are $75.0 million; and (iv) $7.5 million at the end of the first calendar year in which net sales of Lazanda are $100.0 million.

        In accordance with the authoritative guidance for business combinations, the Asset Purchase Agreement with Archimedes was determined to be a business combination and was accounted for using the acquisition method of accounting. Pursuant to a letter dated August 21, 2013 (Letter) from the staff of the Division of Corporate Finance (Division) of the Securities and Exchange Commission, the Division stated that it would waive the requirement to provide a pro forma statement of operations if the use of forward-looking information is necessary to meaningfully present the effects of the acquisition of Lazanda by the Company. The Company's expense structure and commercialization infrastructure related to Lazanda are anticipated to differ significantly from the expense structure and commercialization infrastructure maintained by Archimedes with regard to Lazanda. As a result, the Company has concluded that the use of forward-looking information is necessary to meaningfully present the effects of the acquisition. Based on the guidance provided by the Division in the Letter, the Company has not presented a pro forma statement of operations.

        The following table presents a summary of the purchase price consideration for the Lazanda acquisition (in thousands):

Cash for Lazanda, related property, inventories and other assets	$	4,000
Fair Value of contingent consideration		8,004
Purchase Price	$	12,004

        The contingent consideration was recognized and measured at fair value as of the acquisition date. The Company determined the acquisition date fair value of the contingent consideration obligation based on an income approach derived from Lazanda revenue estimates and a probability assessment with respect to the likelihood of achieving the level of net sales that would trigger the contingent payment. The contingent consideration also includes royalties payable to Archimedes based on net sales where increase in the royalty rate is tied to a reduction in cost of goods sold. The fair value measurement is based on significant inputs not observable in the market and thus represents a Level 3 measurement as defined in fair value measurement accounting. The key assumptions in determining the fair value are the discount rate and the probability assigned to the potential milestones being achieved. At each reporting date, the Company will re-measure the contingent consideration obligation to estimated fair value. Any changes in the fair value of contingent consideration will be recognized in operating expenses until the contingent consideration arrangement is settled.

        The following table summarizes the fair values of the tangible and identifiable intangible assets acquired and liabilities assumed at the acquisition date (in thousands):

Intangible asset—Lazanda product rights	$	10,450
Inventories		1,334
Property, plant and equipment		356
Other assets		116
Current liabilities		(283	)
Goodwill		31
	$	12,004

        The Lazanda product rights of $10.5 million have been recorded as intangible assets on the accompanying condensed balance sheet and are being amortized over the estimated useful life of the asset on a ratable basis through August 2022. Total amortization expense for the year ended December 31, 2013 was approximately $0.5 million. For the year ended December 31, 2013, the Company incurred an aggregate of $0.1 million in acquisition-related costs. These expenses are included in selling, general and administrative expenses in the Company's consolidated statement of operations for the year ended December 31, 2013.

        The fair value of inventories acquired included a step-up in the value of Lazanda inventories of $0.6 million which will be amortized to cost of sales as the acquired inventories are sold.

The Zipsor Acquisition

        On June 21, 2012, the Company entered into an Asset Purchase Agreement with Xanodyne, pursuant to which the Company acquired Xanodyne's product Zipsor and related inventory for $26.4 million in cash, and assumed certain product related liabilities relating to Zipsor. In addition, the Company will make a one-time contingent payment to Xanodyne of $2.0 million in cash at the end of the first calendar year in which Depomed's net sales of Zipsor® products exceed $30.0 million and an additional, one-time contingent payment to Xanodyne of $3.0 million in cash at the end of the first year in which Depomed's net sales of Zipsor® products exceed $60.0 million.

        In accordance with the authoritative guidance for business combinations, the Asset Purchase Agreement with Xanodyne was determined to be a business combination and was accounted for using the acquisition method of accounting. Neither separate financial statements nor pro forma results of operations have been presented because the acquisition transaction does not meet the qualitative or quantitative materiality tests under SEC Regulation S-X.

        Pursuant to the Asset Purchase Agreement, $3.0 million of the initial payment will be held in escrow for 18 months and applied towards the indemnification obligations of Xanodyne as set forth in the Asset Purchase Agreement.

        The following table presents a summary of the purchase price consideration for the Zipsor acquisition (in thousands):

Cash for Zipsor and related inventories	$	26,436
Fair Value of contingent consideration		1,303
Purchase Price	$	27,739

        The contingent consideration was recognized and measured at fair value as of the acquisition date and is included within other long-term liabilities in the accompanying balance sheet. The Company determined the acquisition date fair value of the contingent consideration obligation based on an income approach derived from Zipsor revenue estimates and a probability assessment with respect to the likelihood of achieving the level of net sales that would trigger the contingent payment. The fair value measurement is based on significant inputs not observable in the market and thus represents a Level 3 measurement as defined in fair value measurement accounting. The key assumptions in determining the fair value are the discount rate and the probability assigned to the potential milestones being achieved. At each reporting date, the Company will re-measure the contingent consideration obligation to estimated fair value. Any changes in the fair value of contingent consideration will be recognized in operating expenses until the contingent consideration arrangement is settled.

        The following table summarizes the fair values of the tangible and identifiable intangible assets acquired and liabilities assumed at the acquisition date (in thousands):

Intangible asset—Zipsor product rights	$	27,100
Inventories		2,428
Other assets		100
Property, plant and equipment		43
Current liabilities		(1,840	)
Bargain purchase		(92	)
	$	27,739

        The Zipsor product rights of $27.1 million have been recorded as intangible assets on the accompanying condensed balance sheet and are being amortized over the estimated useful life of the asset on a ratable basis through July 2019. Total amortization expense for each of the years ended December 31, 2013 and December 31, 2012 was approximately $3.8 million and $2.0 million.

        The fair value of inventories acquired included a step-up in the value of Zipsor inventories of $1.9 million which is being amortized to cost of sales as the acquired inventories are sold. The cost of sales related to the step-up value of Zipsor for 2013 was $0.7 million. The bargain purchase amount has been recorded within Interest and other income in the accompanying consolidated statement of operations.

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INCOME TAXES (Tables)

12 Months Ended

Dec. 31, 2013

INCOME TAXES

Schedule of (benefit from) provision for income taxes

The (benefit from) provision for income taxes consists of the following (in thousands):

	Year Ended December 31,
	2013			2012			2011
Current:
Federal	$	60,874		$	(19	)	$	(466	)
State		3,593			(75	)		858
Foreign		3			3			4
		64,470			(91	)		396
Deferred:
Federal	$	(97,690	)	$	—		$	—
State		(5,512	)		—			—
Foreign		—			—			—
		(103,202	)		—			—
Total (benefit) provision for income taxes	$	(38,733	)	$	(91	)	$	396

Schedule of reconciliation of income taxes at the statutory federal income tax rate to the actual tax rate

A reconciliation of income taxes at the statutory federal income tax rate to the actual tax rate included in the statements of operations is as follows (in thousands):

	Year Ended December 31,
	2013			2012			2011
Tax at federal statutory rate	$	1,603		$	(10,454	)	$	24,893
State tax, net of federal benefit		(3,177	)		(48	)		558
Foreign tax		3			3			4
Research Credit		(258	)		—			—
Net Operating Losses not benefited (benefited)		(17,510	)		9,094			(25,510	)
Federal—AMT		—			(19	)		(466	)
Stock Based Compensation		923			1,038			774
Non deductible meals and entertainment		442			131			17
Non-deductible other expense		(133	)		164			126
Change in Valuation Allowance		(20,626	)		—			—
Total	$	(38,733	)	$	(91	)	$	396

Schedule of significant components of the Company's deferred tax assets

Significant components of the Company's deferred tax assets are as follows (in thousands):

	Year Ended December 31,
	2013			2012
Deferred Tax Assets:
Net operating loss carryforwards	$	4,237		$	21,500
Tax carryforwards		133			4,700
In-process research and development		665			1,100
Deferred revenue		88,248			7,500
Intangibles		1,363			500
Other, net		11,226			7,200
Total deferred tax assets		105,872			42,500
Valuation allowance for deferred tax assets		(2,670	)		(42,500	)
Deferred tax assets, net	$	103,202		$	—

Summary of the activity related to the entity's unrecognized tax benefits

The following table summarizes the activity related to our unrecognized tax benefits for the 2 years ended December 31, 2013 (in thousands):

Unrecognized tax benefits—January 1, 2012	$	3,573
Gross increases—current year tax positions		21
Settlements with taxing authorities		—
Expiration of statute of limitations		—
Unrecognized tax benefits—December 31, 2012		3,594
Gross increases—current year tax positions		174
Gross increases—prior year tax positions		111
Unrecognized tax benefits—December 31, 2013	$	3,879

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SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

12 Months Ended

Dec. 31, 2013

SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

NOTE 17. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

        The following tables set forth certain unaudited quarterly financial data for each of the eight quarters beginning with the quarter ended March 31, 2012 through the quarter ended December 31, 2013 (in thousands). This quarterly financial data is unaudited, but has been prepared on the same basis as the annual financial statements and, in the opinion of management, reflects all adjustments, consisting only of normal recurring adjustments necessary for a fair representation of the information for the periods presented. Operating results for any quarter are not necessarily indicative of results for any future period.

	2013 Quarter Ended
(in thousands)	March 31			June 30		September 30		December 31
Product sales	$	9,129		$	14,106	$	16,278	$	18,789
Total revenues		26,174			29,963		37,460		40,608
Gross margin on product sales		7,645			12,418		14,527		16,621
Income (loss) from operations		(5,533	)		532		6,838		7,480
Net income (loss)		(5,480	)		478		6,514		41,801
Basic net income (loss) per share	$	(0.10	)	$	0.01	$	0.11	$	0.73
Diluted net income (loss) per share	$	(0.10	)	$	0.01	$	0.11	$	0.72

	2012 Quarter Ended
	March 31			June 30			September 30			December 31
Product sales	$	2,109		$	3,201		$	9,684		$	12,489
Total revenues		16,835			14,110			33,282			26,590
Gross margin on product sales		1,591			1,759			7,921			10,173
Income (loss) from operations		(8,938	)		(15,983	)		(1,541	)		(3,891	)
Net income (loss)		(8,804	)		(15,780	)		(1,495	)		(3,704	)
Basic net income (loss) per share	$	(0.16	)	$	(0.28	)	$	(0.03	)	$	(0.07	)
Diluted net income (loss) per share	$	(0.16	)	$	(0.28	)	$	(0.03	)	$	(0.07	)

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SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) (Details) (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended								12 Months Ended
	Dec. 31, 2013	Sep. 30, 2013	Jun. 30, 2013	Mar. 31, 2013	Dec. 31, 2012	Sep. 30, 2012	Jun. 30, 2012	Mar. 31, 2012	Dec. 31, 2013	Dec. 31, 2012	Dec. 31, 2011
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Product sales	$ 18,789	$ 16,278	$ 14,106	$ 9,129	$ 12,489	$ 9,684	$ 3,201	$ 2,109	$ 58,302	$ 27,483	$ 41,178
Total revenues	40,608	37,460	29,963	26,174	26,590	33,282	14,110	16,835	134,205	90,816	132,973
Gross margin on product sales	16,621	14,527	12,418	7,645	10,173	7,921	1,759	1,591
Income (loss) from operations	7,480	6,838	532	(5,533)	(3,891)	(1,541)	(15,983)	(8,938)	9,317	(30,353)	70,698
Net income (loss)	$ 41,801	$ 6,514	$ 478	$ (5,480)	$ (3,704)	$ (1,495)	$ (15,780)	$ (8,804)	$ 43,313	$ (29,781)	$ 70,726
Basic net income (loss) per share (in dollars per share)	$ 0.73	$ 0.11	$ 0.01	$ (0.10)	$ (0.07)	$ (0.03)	$ (0.28)	$ (0.16)	$ 0.76	$ (0.53)	$ 1.30
Diluted net income (loss) per share (in dollars per share)	$ 0.72	$ 0.11	$ 0.01	$ (0.10)	$ (0.07)	$ (0.03)	$ (0.28)	$ (0.16)	$ 0.75	$ (0.53)	$ 1.26

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CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2013	Dec. 31, 2012	Dec. 31, 2011
Operating Activities
Net income (loss)	$ 43,313	$ (29,781)	$ 70,726
Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities:
Non-cash interest expense on liability related to PDL Transaction	4,488
Non-cash royalty revenue related to PDL Transaction	(18,104)
Depreciation and amortization	6,161	2,561	399
Amortization of investments	783	331	21
Gain on bargain purchase	(484)	(92)
Allowance for inventory obsolescence	347	584	(809)
Loss on disposal of property and equipment		28
Stock-based compensation	6,109	5,070	3,869
Contingent consideration fair value adjustment	909
Deferred income tax benefit	(103,202)
Excess tax benefit from stock-based compensation	347
Changes in assets and liabilities:
Accounts receivable	(7,838)	807	1,673
Receivables from collaborative partners	(726)	(1,943)	(7,881)
Inventories	4,266	(2,346)	(3,016)
Prepaid and other assets	1,540	(1,509)	(4,031)
Accounts payable and other accrued liabilities	10,833	5,661	7,811
Accrued compensation	2,063	1,780	597
Income taxes payable	62,222
Deferred revenue	(3,273)	(12,136)	(11,708)
Net cash provided by (used in) operating activities	9,754	(30,985)	57,651
Investing Activities
Purchases of property and equipment	(1,812)	(6,880)	(698)
Acquisition of business	(52,725)	(26,435)
Acquisition of patents	(150)
Purchases of marketable securities	(37,746)	(38,462)	(195,162)
Maturities of marketable securities	53,056	61,405	58,495
Sales of marketable securities	1,341	43,704	75,177
Net cash (used in) provided by investing activities	(38,036)	33,332	(62,188)
Financing Activities
Proceeds from sale of future royalties to PDL	240,500
Principal payments on long-term debt			(2,244)
Proceeds from issuance of common stock	3,727	2,686	8,298
Excess tax benefit from stock-based compensation	(347)
Net cash provided by financing activities	243,880	2,686	6,054
Net increase (decrease) in cash and cash equivalents	215,598	5,033	1,517
Cash and cash equivalents at beginning of year	29,076	24,043	22,526
Cash and cash equivalents at end of year	244,674	29,076	24,043
Cash paid during the period for:
Interest			133
Taxes	$ 45	$ 144

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CONSOLIDATED BALANCE SHEETS (Parenthetical) (USD $)	Dec. 31, 2013	Dec. 31, 2012
Preferred stock, no par value (in dollars per share)
Preferred stock, shares authorized	5,000,000	5,000,000
Common stock, no par value (in dollars per share)
Common stock, shares authorized	100,000,000	100,000,000
Common stock, shares issued	57,369,683	56,383,713
Common stock, shares outstanding	57,369,683	56,383,713
Series A convertible preferred stock
Preferred stock, shares authorized	25,000	25,000
Preferred stock, shares issued	18,158	18,158
Preferred stock shares surrendered	18,158	18,158
Preferred stock, shares outstanding	0	0

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COMMITMENTS AND CONTINGENCIES

12 Months Ended

Dec. 31, 2013

COMMITMENTS AND CONTINGENCIES

COMMITMENTS AND CONTINGENCIES

NOTE 10. COMMITMENTS AND CONTINGENCIES

Leases

        In June 2011, the Company entered into amendments to its existing leases for the Company's premises located at 1330 and 1360 O'Brien Drive, Menlo Park, California, consisting of approximately 46,000 rentable square feet. The lease amendments extended the term of the existing leases for 12 months, from February 1, 2012 through January 31, 2013. These leases were not renewed and terminated on January 31, 2013. The lease for the Company's premises located at 1430 O'Brien Drive, consisting of approximately 9,000 rentable square feet terminated on January 31, 2012.

        In April 2012, the Company entered into an office and laboratory lease agreement to lease approximately 52,500 rentable square feet in Newark, California commencing on December 1, 2012. The Company was obligated to lease approximately 8,000 additional rentable square feet commencing no later than December 1, 2015. The Lease will expire on November 30, 2022. However, the Company has the right to renew the lease for one additional five year term, provided that written notice is made to the landlord no later than 12 months prior to the lease expiration. The Company will have the one-time right to terminate the lease in its entirety effective as of November 30, 2017 by delivering written notice to the landlord on or before December 1, 2016. In the event of such termination, the Company will pay the landlord the unamortized portion of the tenant improvement allowance, specified additional allowances made by the landlord, waived base rent and leasing commissions, in each case amortized at 8% interest.

        The Company was allowed to control physical access to the premises upon signing the lease. Therefore, in accordance with the applicable accounting guidance, the lease term was deemed to have commenced in April 2012. Accordingly, the rent free periods and the escalating rent payments contained within the lease are being recognized on a straight-line basis from April 2012. The Company will pay approximately $13.3 million in aggregate rent over the remaining term of the lease for the above premises. Deferred rent for the years ended December 31, 2013 and 2012 was approximately $1.5 million and $0.9 million, respectively.

        Rent expense for the years ended December 31, 2013, 2012, and 2011 was $1.0 million, 2.3 million and $1.5 million, respectively.

        As of December 31, 2013 future minimum payments under operating leases for facilities were as follows (in thousands):

2014	$	1,178
2015		1,233
2016		1,440
2017		1,485
Thereafter		7,972
Total	$	13,308

Landlord Contributions to Leasehold Improvements

        In conjunction with entering into leases for office space, the Company receives contributions from landlords toward leasehold improvements which are included in the Deferred Rent and Other Non-Current Liabilities line item of the Company's consolidated statements of financial condition. These contributions are amortized as a reduction to rent expense over the non-cancelable lease terms to which they pertain. For the years ended December 31, 2013 and 2012, cash contributions from landlords were $5.0 million and $1.3 million.

Legal matters

Depomed v. Gralise ANDA Filers

        Between March 2012 and May 2012, we filed lawsuits in the United States District Court for the District of New Jersey in response to six ANDAs filed by companies seeking to market generic versions of 300mg and 600mg dosage strengths of Gralise prior to the expiration of our patents listed in the Orange Book for Gralise. The lawsuits have been consolidated for purposes of all pretrial proceedings. Our lawsuits against two of the six Gralise ANDA filers, Impax Laboratories and Watson Laboratories, have been dismissed as a result of the withdrawal of the ANDAs from consideration by the FDA. Our lawsuit against a third ANDA filer, Par Pharmaceutical, has been dismissed because the ANDA filer no longer seeks approval of its Gralise ANDA prior to the expiration of our Gralise Orange Book-listed patents. As of March 17, 2014, the defendants in the consolidated lawsuit include: Actavis Elizabeth LLC and Actavis Inc. (collectively, Actavis); Incepta Pharmaceuticals and Abon Pharmaceuticals LLC (collectively, Incepta); and Zydus Pharmaceuticals USA Inc. and Cadila Healthcare Limited (collectively, Zydus). The patents asserted in the lawsuits include U.S. Patent Nos. 6,340,475; 6,635,280; 6,488,962; 6,723,340; 7,438,927; 7,731,989; 8,192,756; 8,252,332; and 8,333,992. The asserted patents expire between September 2016 and February 2024, as set forth above under "PATENTS AND PROPRIETARY RIGHTS".

        We commenced the lawsuits within the 45 days required to automatically stay, or bar, the FDA from approving the ANDAs for 30 months or until a district court decision that is adverse to the asserted patents, whichever may occur earlier. Absent a court order, the 30-month stays are expected to expire in July 2014 (against Actavis), August 2014 (against Incepta) and October 2014 (against Zydus).

        Fact discovery closed in August 2013. The court issued a Markman claim construction ruling on January 28, 2014. Expert discovery is ongoing and the trial has been scheduled for May 2014.

Depomed v. FDA

        In November 2010, the FDA granted Gralise Orphan Drug designation for the management of PHN based on a plausible hypothesis that Gralise is "clinically superior" to immediate release gabapentin due to the incidence of adverse events observed in Gralise clinical trials relative to the incidence of adverse events reported in the package insert for immediate release gabapentin. Generally, an Orphan-designated drug approved for marketing is eligible for seven years of regulatory exclusivity for the Orphan-designated indication. If granted, Orphan Drug exclusivity for Gralise will run for seven years from January 28, 2011. However, the FDA has not granted Orphan Drug exclusivity for Gralise based on the FDA's interpretation of the law and regulations governing Orphan Drug exclusivity. In September 2012, we filed an action in federal district court for the District of Columbia against the FDA seeking an order requiring the FDA to grant Gralise Orphan Drug exclusivity for the management of PHN. We believe Gralise is entitled to Orphan Drug exclusivity as a matter of law, and the FDA's action is not consistent with the statute or the FDA's regulations governing Orphan Drugs. The lawsuit seeks a determination by the court that Gralise is protected by Orphan Drug exclusivity, and an order that the FDA act accordingly. Briefing in the case was completed in March 2013. A hearing on our summary judgment motion was held in August 2013 and we are awaiting a decision.

Depomed v. Purdue

        In January 2013, we filed a complaint in the United States District Court for the District of New Jersey against Purdue Pharma L.P. and affiliated companies (collectively, Purdue) for patent infringement arising from Purdue's commercialization of reformulated OxyContin® (oxycodone hydrochloride controlled-release) in the United States. The patents we asserted in the lawsuit include U.S. Patent Nos. 6,340,475 and 6,635,280, both of which expire in September 2016. Fact discovery in the case is ongoing and no trial date has been set.

Depomed v. Endo Pharmaceuticals

        In April 2013, we filed a complaint in the United States District Court for the District of New Jersey against Endo Pharmaceuticals Inc. (Endo) , a wholly-owned subsidiary of Endo Health Solutions Inc., for infringement of U.S. Patent Nos. 6,340,475; 6,635,280; and 6,723,340 arising from Endo's commercialization of OPANA® ER (oxymorphone hydrochloride extended-release) in the United States. Fact discovery in the case is ongoing and no trial date has been set.

Depomed v. Banner Pharmacaps

        On June 28, 2013, we received from Banner Pharmacaps Inc. (Banner) a Notice of Certification for U.S. Patents Nos. 6,365,180; 7,662,858; 7,884,095; 7,939,518 and 8,110,606 under 21 U.S.C. § 355 (j)(2)(A)(vii)(IV) (Zipsor® Paragraph IV Letter) certifying that Banner has submitted and the FDA has accepted for filing an ANDA for diclofenac potassium capsules, 25mg. The letter states that the Banner ANDA product contains the required bioavailability or bioequivalence data to Zipsor and certifies that Banner intends to obtain FDA approval to engage in commercial manufacture, use or sale of Banner's ANDA product before the expiration of the above identified patents, which are listed for Zipsor in the Orange Book. U.S. Patent No. 6,365,180 expires in 2019 and U.S. Patent Nos. 7,662,858; 7,884,095; 7,939,518; and 8,110,606 expire in 2029. The Zipsor Paragraph IV letter indicates Banner has granted to Watson Laboratories Inc. ("Watson") exclusive rights to Banner's proposed generic Zipsor product.

        On July 26, 2013, we filed a lawsuit in the United States District Court for District of New Jersey against Banner and Watson for infringement of the patents identified above. The lawsuit was commenced within the 45 days required to automatically stay, or bar, the FDA from approving Banner's ANDA for Zipsor for 30 months or until a district court decision that is adverse to Depomed, whichever may occur earlier. Absent a court order, the 30-month stay would be expected to expire in December 2015. Fact discovery in the case is ongoing and no trial date has been set.

        The Company cannot reasonably predict the outcome of these legal proceedings, nor can it estimate the amount of loss, range of loss or other adverse consequence, if any, that may result from these proceedings. As such, the Company is not currently able to estimate the impact of the above litigations on its financial position or results of operations.

XML

Document and Entity Information (USD $)	12 Months Ended
	Dec. 31, 2013	Mar. 14, 2014	Jun. 30, 2013
Document and Entity Information
Entity Registrant Name	DEPOMED INC
Entity Central Index Key	0001005201
Document Type	10-K
Document Period End Date	Dec. 31, 2013
Amendment Flag	false
Current Fiscal Year End Date	--12-31
Entity Well-known Seasoned Issuer	No
Entity Voluntary Filers	No
Entity Current Reporting Status	Yes
Entity Filer Category	Accelerated Filer
Entity Public Float			$ 327,084,838
Entity Common Stock, Shares Outstanding		56,594,409
Document Fiscal Year Focus	2013
Document Fiscal Period Focus	FY

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STOCK-BASED COMPENSATION

12 Months Ended

Dec. 31, 2013

STOCK-BASED COMPENSATION

STOCK-BASED COMPENSATION

NOTE 11. STOCK-BASED COMPENSATION

        The Company uses the Black-Scholes option valuation model to determine the fair value of stock options and employee stock purchase plan (ESPP) shares. The determination of the fair value of stock-based payment awards on the date of grant using an option valuation model is affected by the Company's stock price as well as assumptions, which include the Company's expected term of the award, the expected stock price volatility, risk-free interest rate and expected dividends over the expected term of the award.

        The Company uses historical option exercise data to estimate the expected life of the options. The Company estimates the volatility of its common stock price by using the historical volatility over the expected term of the options. The Company bases the risk-free interest rate on U.S. Treasury zero-coupon issues with terms similar to the expected term of the options as of the date of grant. The Company does not anticipate paying any cash dividends in the foreseeable future and therefore uses an expected dividend yield of zero in the option valuation model.

        The Company used the following assumptions to calculate the fair value of option grants for the years ended December 31, 2013, 2012 and 2011:

	2013	2012	2011
Employee and Director Stock Options
Risk-free interest rate	0.67 - 1.38%	0.51 - 0.78%	0.77 - 1.99%
Dividend yield	None	None	None
Expected option term (in years)	4.48 - 4.51	4.50 - 4.54	4.54 - 4.84
Expected stock price volatility	49.2 - 63.5%	64.1 - 67.5%	73.9 - 76.4%

        The Company used the following assumptions to calculate the fair value of stock purchase rights granted under the ESPP for the years ended December 31, 2013, 2012 and 2011:

	2013	2012	2011
Employee and Director Stock Purchase Rights
Risk-free interest rate	0.08 - 0.10%	0.12 - 0.16%	0.05 - 0.44%
Dividend yield	None	None	None
Expected option term (in years)	0.5	0.5	0.5 - 2.0
Expected stock price volatility	28.8 - 35%	35.6 - 44.3%	60.1 - 76.6%

        The following table presents stock-based compensation expense recognized for stock options, restricted stock units and the ESPP in the Company's Statements of Operations (in thousands):

	2013		2012		2011
Cost of sales	$	42	$	41	$	68
Research and development expense		364		568		668
Selling, general and administrative expense		5,702		4,461		3,133
Total	$	6,108	$	5,070	$	3,869

        Stock-based compensation in 2011 includes approximately $0.4 million in expense associated with the accelerated vesting of stock options in connection with a separation agreement and release with Carl A. Pelzel, the Company's former President and Chief Executive Officer. See Note 13 for further information with regards to the separation agreement and release.

        The weighted-average grant date fair value of options granted during the years ended December 31, 2013, 2012 and 2011 was $3.35, $3.09 and $4.38, respectively. The weighted-average grant date fair value of stock purchase rights granted under the ESPP during the years ended December 31, 2013, 2012 and 2011 was $1.87, $1.44 and $2.67, respectively. The total intrinsic value of options exercised during the years ended December 31, 2013, 2012 and 2011 was $1.7 million, $1.8 million and $12.2 million, respectively. The total fair value of options that vested during the years ended December 31, 2013, 2012 and 2011 was $5.1 million, $4.1 million and $2.4 million, respectively. At December 31, 2013, the Company had $7.9 million of total unrecognized compensation expense, net of estimated forfeitures, related to stock option plans that will be recognized over an average vesting period of 2 years. Cash received from stock option exercises was $2.8 million, $1.8 million and $7.6 million for the years ended December 31, 2013, 2012 and 2011, respectively. There is no stock-based compensation recorded within inventory in any of the years presented.

1995 Stock Option Plan

        The Company's 1995 Stock Option Plan (the 1995 Plan) was adopted by the Board of Directors and approved by the shareholders in September 1995, and has been subsequently amended. The 1995 Plan provided for the grant to employees of the Company, including officers, of incentive stock options, and for the grant of nonstatutory stock options to employees, directors and consultants of the Company. The number of shares authorized under the 1995 Plan is 4,700,000 shares, of which zero are available for future issuance at December 31, 2013. In May 2004, the 1995 Plan was terminated with respect to grants of new stock options and all options which expire or are forfeited will be retired from the pool.

        Generally, the exercise price of all incentive stock options and nonstatutory stock options granted under the 1995 Plan must be at least 100% and 85%, respectively, of the fair value of the common stock of the Company on the grant date. The term of incentive and nonstatutory stock options may not exceed 10 years from the date of grant. An option shall be exercisable on or after each vesting date in accordance with the terms set forth in the option agreement. The right to exercise an option generally vests over four years at the rate of at least 25% by the end of the first year and then ratably in monthly installments over the remaining vesting period of the option.

        The following table summarizes the activity for the three years ended December 31, 2013 under the 1995 Plan:

	Shares			Weighted- Average Exercise Price
Options outstanding at December 31, 2010		341,600		$	4.83
Options exercised		(215,850	)		4.68
Options forfeited		—			—
Options expired		(10,800	)		5.31
Options outstanding at December 31, 2011		114,950		$	5.05
Options exercised		(40,800	)		2.50
Options forfeited		—			—
Options expired		(13,600	)		5.83
Options outstanding at December 31, 2012		60,550		$	6.59
Options exercised		(37,800	)		6.73
Options forfeited		—			—
Options expired		(22,750	)		6.37
Options outstanding at December 31, 2013		—		$	—
Options exercisable and expected to become exercisable at December 31, 2013		—		$	—
Options exercisable at December 31, 2013		—		$	—

2004 Equity Incentive Plan

        The Company's 2004 Equity Incentive Plan (the 2004 Plan) was adopted by the Board of Directors and approved by the shareholders in May 2004. The 2004 Plan provides for the grant to employees of the Company, including officers, of incentive stock options, and for the grant of nonstatutory stock options to employees, directors and consultants of the Company. The number of shares authorized under the 2004 Plan is 14,450,000 shares, of which 3,199,468 were available for future issuance at December 31, 2013.

        Generally, the exercise price of all incentive stock options and nonstatutory stock options granted under the 2004 Plan must be at least 100% and 85%, respectively, of the fair value of the common stock of the Company on the grant date. The term of incentive and nonstatutory stock options may not exceed 10 years from the date of grant. An option shall be exercisable on or after each vesting date in accordance with the terms set forth in the option agreement. The right to exercise an option generally vests over four years at the rate of at least 25% by the end of the first year and then ratably in monthly installments over the remaining vesting period of the option.

        The following tables summarize the activity for the three years ended December 31, 2013 under the 2004 Plan:

	Shares			Weighted- Average Exercise Price
Options outstanding at December 31, 2010		4,940,345		$	3.21
Options granted		2,762,181			7.35
Options exercised		(2,163,266	)		3.04
Options forfeited		(639,043	)		4.51
Options expired		—			—
Options outstanding at December 31, 2011		4,900,217		$	5.44
Options granted		2,006,950			5.86
Options exercised		(587,594	)		2.95
Options forfeited		—			—
Options expired		(557,551	)		6.26
Options outstanding at December 31, 2012		5,762,022		$	5.76
Options granted		1,769,363			6.86
Options exercised		(583,290	)		4.33
Options forfeited		—			—
Options expired		(429,124	)		6.46
Options outstanding at December 31, 2013		6,518,971		$	6.14
Options exercisable and expected to become exercisable at December 31, 2013		5,999,687		$	6.10
Options exercisable at December 31, 2013		3,448,487		$	5.66

	Weighted- Average Remaining Contractual Term (Years)		Aggregate Intrinsic Value (in thousands)
Options outstanding at December 31, 2013		7.47	$	28,933
Options exercisable and expected to become exercisable at December 31, 2013		7.36	$	26,863
Options exercisable at December 31, 2013		6.55	$	16,974

        Information regarding the stock options outstanding at December 31, 2013 under the 2004 Plan is summarized below:

Range of Exercise Prices	Number Outstanding		Weighted- Average Remaining Contractual Term (Years)		Weighted- Average Exercise Price (Outstanding)		Number Exercisable		Weighted- Average Exercise Price (Exercisable)
$1.49 - $3.27		701,650		5.02	$	2.62		692,367	$	2.61
$3.28 - $5.35		730,248		6.18	$	4.58		542,135	$	4.32
$5.56 - $5.91		1,019,548		8.23	$	5.78		454,094	$	5.74
$5.94 - $6.08		667,987		7.93	$	6.03		299,774	$	6.04
$6.11 - $6.29		587,060		6.46	$	6.15		336,790	$	6.17
$6.77 - $6.77		1,085,966		9.02	$	6.77		215,738	$	6.77
$7.02 - $8.36		992,512		7.62	$	7.76		539,862	$	7.88
$8.45 - $8.55		693,000		7.92	$	8.53		356,789	$	8.54
$8.71 - $8.71		26,000		9.17	$	8.71		—	$	0.00
$9.02 - $9.02		15,000		7.22	$	9.02		10,938	$	9.02
		6,518,971		7.47	$	6.14		3,448,487	$	5.66

        Restricted stock units generally vest over four years, with 25% of each award vesting annually.

	Number of Shares			Weighted Average Grant Date Fair Value Per Share		Weighted Average Remaining Contractual Term (In years)
Non-vested restricted stock units at December 31, 2012		137,430		$	6.11
Granted		394,587		$	6.77
Vested		(142,818	)	$	6.56
forfeited		(6,580	)	$	6.77
Non-vested restricted stock units at December 31, 2013		382,619		$	6.61		1.8

        The total fair value of restricted stock vested during 2013 was $0.9 million.

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CONSOLIDATED STATEMENTS OF OPERATIONS (USD $) In Thousands, except Share data, unless otherwise specified	12 Months Ended
	Dec. 31, 2013	Dec. 31, 2012	Dec. 31, 2011
Revenues:
Product sales	$ 58,302	$ 27,483	$ 41,178
Royalties	45,003	44,535	9,997
License and other revenue	12,796	18,798	81,798
Non-cash royalty revenue related to sale of future royalties to PDL	18,104
Total revenues	134,205	90,816	132,973
Costs and expenses:
Cost of sales	7,091	6,039	5,544
Research and development expense	8,073	15,462	15,187
Selling, general and administrative expense:
Promotion fee expense			27,339
Other selling, general and administrative expense	105,176	97,646	54,205
Total selling, general and administrative expense	105,176	97,646	81,544
Amortization of intangible assets	4,548	2,022
Gain on settlement agreement			(40,000)
Total costs and expenses	124,888	121,169	62,275
Income (loss) from operations	9,317	(30,353)	70,698
Other income (expense):
Interest and other income	662	520	557
Interest expense	(911)	(39)	(133)
Non-cash interest expense on liability related to sale of future royalties to PDL	(4,488)
Total other income	(4,737)	481	424
Net income (loss) before income taxes	4,580	(29,872)	71,122
Benefit from (provision for) income taxes	38,733	91	(396)
Net income (loss)	$ 43,313	$ (29,781)	$ 70,726
Basic net income (loss) per share (in dollars per share)	$ 0.76	$ (0.53)	$ 1.30
Diluted net income (loss) per share (in dollars per share)	$ 0.75	$ (0.53)	$ 1.26
Shares used in computing basic net income (loss) per share (in shares)	56,736,009	55,892,563	54,562,820
Shares used in computing diluted net income (loss) per share (in shares)	57,543,979	55,892,563	56,089,796

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PROPERTY AND EQUIPMENT

12 Months Ended

Dec. 31, 2013

PROPERTY AND EQUIPMENT

PROPERTY AND EQUIPMENT

NOTE 5. PROPERTY AND EQUIPMENT

        Property and equipment consists of the following (in thousands):

	December 31, 2013			December 31, 2012
Furniture and office equipment	$	3,547		$	2,169
Laboratory equipment		5,151			4,623
Leasehold improvements		6,045			9,325
Construction in progress		—			196
		14,743			16,313
Less: Accumulated depreciation and amortization		(6,403	)		(8,076	)
Property and equipment, net	$	8,340		$	8,237

        There was no property and equipment included under capitalized leases as of December 31, 2013 or December 31, 2012. Depreciation and amortization expense was $1.6 million, $2.6 million and $0.3 million for the years ended December 31, 2013, 2012 and 2011, respectively.

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INVENTORIES

12 Months Ended

Dec. 31, 2013

INVENTORIES

INVENTORIES

NOTE 4. INVENTORIES

        Inventories consist of finished goods, raw materials and work in process and are stated at the lower of cost or market and consist of the following (in thousands):

	December 31, 2013			December 31, 2012
Raw materials	$	1,951		$	1,927
Work-in-process		181			1,569
Finished goods		9,056			6,787
Less: allowance for obsolescence		(1,043	)		(696	)
Total	$	10,145		$	9,587

        Inventories relate to the manufacturing costs of the Company's Gralise, Zipsor, Lazanda and CAMBIA products at December 31, 2013.

        The fair value of inventories acquired included a step-up in the value of CAMBIA inventories of $3.7 million which is being amortized to cost of sales as the acquired inventories are sold. The cost of sales related to the step-up value of CAMBIA was $0.2 million in 2013. The fair value of inventories acquired included a step-up in the value of Lazanda inventories of $0.6 million which will be amortized to cost of sales as the acquired inventories are sold. The cost of sales related to the step-up value of Lazanda was $0.1 million in 2013. At December 31, 2012, the fair value of inventories acquired related to the Zipsor acquisition in June 2012 included a step-up in the value of Zipsor inventories of $1.2 million, which was amortized to cost of sales through April 2013 as the acquired inventories were sold.

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SUBSEQUENT EVENTS

12 Months Ended

Dec. 31, 2013

SUBSEQUENT EVENTS

SUBSEQUENT EVENTS

NOTE 16. SUBSEQUENT EVENTS

        On March 12, 2014, the FDA approved Mallinckrodt's NDA for XARTEMIS™ XR (oxycodone hydrochloride and acetaminophen) Extended-Release Tablets (CII). The approval of the NDA triggers a $10.0 million milestone payment to the Company under its license agreement with Mallinckrodt, which is payable within 30 days. The Company will recognize the entire milestone payment in the first quarter of 2014. The Company will also receive high single digit royalties on net sales of XARTEMIS XR.

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SHAREHOLDERS' EQUITY

12 Months Ended

Dec. 31, 2013

SHAREHOLDERS' EQUITY

SHAREHOLDERS' EQUITY

NOTE 12. SHAREHOLDERS' EQUITY

Employee Stock Purchase Plan

        In May 2004, the ESPP was approved by the shareholders. The ESPP is qualified under Section 423 of the Internal Revenue Code. The ESPP is designed to allow eligible employees to purchase shares of the Company's common stock through periodic payroll deductions. The price of the common stock purchased under the ESPP must be equal to at least 85% of the lower of the fair market value of the common stock on the commencement date of each offering period or the specified purchase date. The number of shares authorized for issuance under the ESPP as of December 31, 2013 was 2,500,000, of which 713,592 shares were available for future issuance.

        In 2013, the Company sold 222,062 shares of its common stock under the ESPP. The shares were purchased at a weighted-average purchase price of $4.35 with proceeds of approximately $1 million. In 2012, the Company sold 203,389 shares of its common stock under the ESPP. The shares were purchased at a weighted-average purchase price of $4.19 with proceeds of approximately $0.9 million.

Option Exercises

        Employees exercised options to purchase 621,090 shares of the Company's common stock with net proceeds to the Company of approximately $2.8 million during the year ended December 31, 2013. Employees exercised options to purchase 628,394 shares of the Company's common stock with net proceeds to the Company of approximately $1.8 million during the year ended December 31, 2012.

Shareholder Rights Plan

        On April 21, 2005, the Company adopted a shareholder rights plan, (the Rights Plan). Under the Rights Plan, the Company distributed one preferred share purchase right for each share of common stock outstanding at the close of business on May 5, 2005. If a person or group acquires 20% or more of the Company's common stock in a transaction not pre-approved by the Company's Board of Directors, each right will entitle its holder, other than the acquirer, to buy additional shares of the Company's common stock at 50% of its market value, as defined in the Rights Plan. In addition, if an unapproved party acquires more than 20% of the Company's common stock, and the Company is later acquired by the unapproved party or in a transaction in which all shareholders are not treated alike, shareholders with unexercised rights, other than the unapproved party, will be entitled to receive upon exercise of the rights, common stock of the merger party or asset buyer with a value of twice the exercise price of the rights. Each right also becomes exercisable for one one-thousandth of a share of the Company's Series RP preferred stock at the right's then current exercise price ten days after an unapproved third party makes, or announces an intention to make, a tender offer or exchange offer that, if completed, would result in the unapproved party acquiring 20% or more of the Company's common stock. The Board of Directors may redeem the rights for a nominal amount before an event that causes the rights to become exercisable. The rights will expire on April 21, 2015.

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LONG-TERM DEBT

12 Months Ended

Dec. 31, 2013

LONG-TERM DEBT

LONG-TERM DEBT

NOTE 8. LONG-TERM DEBT

        In June 2008, the Company entered into a loan and security agreement with General Electric Capital Corporation, as agent (GECC), and Oxford Finance Corporation (Oxford) that provided the Company with a $15.0 million credit facility. The credit facility was available in up to three tranches. The first tranche of $3.8 million was advanced to the Company upon the closing of the loan agreement. The second tranche of $5.6 million was advanced to the Company in July 2008. The third tranche of $5.6 million was not drawn and is no longer available to the Company, and GECC and Oxford waived the 2% unused line fee related to the unused portion of the credit facility.

        The Company paid interest on the first tranche for the first six months at an interest rate of 11.59%. Thereafter we were required to pay principal on the first tranche, plus interest at such rate, in 30 equal monthly installments. The second tranche was interest-only through December 31, 2008, with principal and interest payable thereafter in 30 equal monthly installments at an interest rate of 11.59%. Interest expense, which includes amortization of the debt issuance costs, was $0.1 million for the year ended December 31, 2011. The credit facility was fully repaid in July 2011.

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SHAREHOLDERS' EQUITY (Details) (USD $) In Millions, except Share data, unless otherwise specified	12 Months Ended		0 Months Ended	12 Months Ended					1 Months Ended
	Dec. 31, 2013	Dec. 31, 2012	May 05, 2005 Rights Plan	Dec. 31, 2013 Rights Plan	Dec. 31, 2013 Rights Plan Series RP preferred stock	Dec. 31, 2013 Rights Plan Minimum	Dec. 31, 2013 ESPP	Dec. 31, 2012 ESPP	May 31, 2004 ESPP Minimum
Shareholders' equity
Purchase price expressed as percentage of fair market value of common stock									85.00%
Number of shares authorized for issuance							2,500,000
Number of shares available for future issuance							713,592
Shares sold	222,062	203,389					222,062	203,389
Weighted average purchase price of shares sold (in dollars per share)							$ 4.35	$ 4.19
Proceeds from shares sold							$ 1.0	$ 0.9
Options exercised during period (in shares)	621,090	628,394
Net proceeds from options exercised during the period	$ 2.8	$ 1.8
Number of preferred share purchase rights distributed for each share of common stock outstanding (in shares)			1
Percentage of common stock to be acquired for rights to become exercisable for the holder, other than the acquirer at 50% of market value						20.00%
Specified percentage of market value at which rights become exercisable for the holder, other than the acquirer who acquires 20% or more of the Company's common stock				50.00%
Percentage of common stock to be acquired by the unapproved party for rights to become exercisable for the shareholders with unexercised rights, other than the unapproved party at a value twice the market value						20.00%
Number of shares that each right entitles the holder to purchase					0.001
Period after which an unapproved third party makes, or announces an intention to make, a tender offer or exchange offer for determination of the exercise price					10 days

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ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

12 Months Ended

Dec. 31, 2013

ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

NOTE 6. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

        Accounts payable and accrued liabilities consist of the following (in thousands):

	December 31, 2013		December 31, 2012
Accounts payable	$	2,232	$	2,360
Accrued compensation		7,077		5,015
Accrued rebates and sales discounts		8,594		4,250
Allowance for product returns		10,278		10,831
Accrued contract sales organization fees		962		420
Accruals for Inventory		87		2,990
Royalty payable to PDL		6,902		—
Other accrued liabilities		5,705		6,712
Total accounts payable and accrued liabilities	$	41,837	$	32,578

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DEFERRED REVENUE

12 Months Ended

Dec. 31, 2013

DEFERRED REVENUE

DEFERRED REVENUE

NOTE 7. DEFERRED REVENUE

        Deferred revenue consists of the following (in thousands):

	December 31, 2013		December 31, 2012
Deferred revenue, current portion:
Deferred license revenue, current portion:
Valeant	$	1,598	$	1,598
Santarus		1,443		1,444
Janssen		—		231
Deferred license revenue, current portion		3,041		3,273
Deferred revenue, current portion	$	3,041	$	3,273
Deferred license revenue, non-current portion:
Valeant		10,905		12,503
Santarus		1,570		3,013
Deferred license revenue, non-current portion		12,475		15,516
Total deferred revenue	$	15,516	$	18,789

        Deferred license revenue relates to upfront payments received by the Company under license and collaborative agreements with its partners. At December 31, 2013 and 2012, deferred license revenue consisted primarily of upfront license fee payments received from Santarus and Valeant.

        In December 2004, the Company received a $25.0 million license fee payment under its agreements with Valeant. The $25.0 million license fee is being recognized as revenue ratably until October 2021, which represents the estimated length of time our obligations exist under the arrangement related to royalties we are obligated to pay Valeant on net sales of Glumetza in the United States and for our obligation and our licensee's (Santarus) obligation to use Valeant as the sole supplier of the 1000mg Glumetza.

        In July 2008, the Company received a $12.0 million upfront payment under its promotion agreement with Santarus. The upfront payment received was originally being amortized as revenue ratably until October 2021, which represented the estimated length of time the Company's obligations existed under the promotion agreement related to manufacturing Glumetza and paying Santarus promotion fees on gross margin of Glumetza. The commercialization agreement in August 2011 superseded the promotion agreement and removed our promotion fee obligations and contemplated removal of our manufacturing obligations. The commercialization agreement included obligations with respect to manufacturing and regulatory transition to Santarus and managing the patent infringement lawsuits against Sun and Lupin. At the time of the commercialization agreement, all of these obligations were estimated to be completed in December 2013. During the fourth quarter of 2012, events occurred relating to the transfer of manufacturing with one of the contract manufacturers of Glumetza that pushed the estimated completion date of the Company's manufacturing obligations to February 2016, which is now the estimated length of time the Company expects it will take to complete its obligations under the commercialization agreement. On the effective date of the commercialization agreement, the amortization period related to remaining deferred revenue on the $12.0 million upfront fee was adjusted, and the remaining deferred revenue of $9.2 million was changed to be recognized ratably until December 2013. During the fourth quarter of 2012, the amortization period related to the remaining deferred revenue on the $12.0 million upfront fee was adjusted again, and the remaining deferred revenue of $4.8 million was changed to be recognized ratably until February 2016.

        In July 2011, Ironwood paid the Company a $0.9 million upfront license fee associated with the collaboration and license agreement. The $0.9 million was amortized ratably through June 2012, which is the estimated length of time Depomed was obligated to perform formulation work under the agreement.

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LIABILITY RELATED TO SALE OF FUTURE ROYALTIES

12 Months Ended

Dec. 31, 2013

LIABILITY RELATED TO SALE OF FUTURE ROYALTIES.

LIABILITY RELATED TO SALE OF FUTURE ROYALTIES

NOTE 9. LIABILITY RELATED TO SALE OF FUTURE ROYALTIES

        In October 2013, the Company sold our interests in royalty and milestone payments under our license agreements in the Type 2 diabetes therapeutic area to PDL for $240.5 million. The Company has significant continuing involvement in the PDL transaction primarily due to an obligation to act as the intermediary for the supply of 1,000 mg Glumetza to Santarus, the licensee of Glumetza. Under the relevant accounting guidance, because of its significant continuing involvement, the PDL transaction has been accounted for as debt that will be amortized using the interest method over the life of the arrangement. In order to determine the amortization of the debt, the Company is required to estimate the total amount of future royalty payments to be received by PDL and payments the Company is required to make to PDL, if any, over the life of the arrangement. The sum of these amounts less the $240.5 million proceeds the Company received will be recorded as interest expense over the life of the debt. Consequently, the Company imputes interest on the unamortized portion of the debt and records interest expense using an estimated interest rate for an arms-length debt transaction. Our estimate of the interest rate under the arrangement is based on the amount of royalty and milestone payments expected to be received by PDL over the life of the arrangement. Our estimate of this total interest expense resulted in an effective annual interest rate of approximately 10%.

        The Company will periodically assess the expected royalty and milestone payments using a combination of historical results, internal projections and forecasts from external sources. To the extent such payments are greater or less than our initial estimates or the timing of such payments is materially different than our original estimates, the Company will prospectively adjust the amortization of the debt and the interest rate.

        The following table shows the activity within the liability account during the year ended December 31, 2013 (in thousands):

Liability related to sale of future royalties—beginning balance	$	—
Proceeds from sale of future royalties		240,500
Non-cash interest expense recognized		4,488
Payments from Depomed to PDL		(17,909	)
Total liability related to sale of future royalties as of December 31, 2013		227,079
Less: current portion		(49,455	)
Liability related to sale of future royalties, less current portion	$	177,624

        As royalties are remitted to PDL from Depo DR Sub as described at Note 1 above, the balance of the debt will be effectively repaid over the life of the agreement. The Company will record non-cash royalty revenues and non-cash interest expense within its consolidated statement of operations over the term of the PDL agreement.

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INCOME TAXES (Details 3) (State, USD $) In Millions, unless otherwise specified	Dec. 31, 2013
Research and development tax credits
Tax credit carryforwards
Tax credit carryforwards	$ 1.2
Alternative minimum tax credit
Tax credit carryforwards
Tax credit carryforwards	$ 0.1

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BUSINESS COMBINATIONS (Details) (USD $)	12 Months Ended		0 Months Ended	12 Months Ended		0 Months Ended		0 Months Ended		12 Months Ended					0 Months Ended								12 Months Ended		0 Months Ended
	Dec. 31, 2013	Dec. 31, 2012	Dec. 17, 2013 CAMBIA	Dec. 31, 2013 CAMBIA	Dec. 31, 2012 CAMBIA	Dec. 17, 2013 CAMBIA Maximum	Dec. 17, 2013 CAMBIA Third party	Dec. 17, 2013 CAMBIA Third party Maximum	Jul. 29, 2013 Lazanda	Dec. 31, 2013 Lazanda	Jul. 29, 2013 Lazanda Net Sales, first year, level one	Jul. 29, 2013 Lazanda Net Sales, first year, level two	Jul. 29, 2013 Lazanda Net Sales, first year, level three	Jul. 29, 2013 Lazanda Net Sales, first year, level four	Jul. 29, 2013 Lazanda Minimum Net Sales, first year, level one	Jul. 29, 2013 Lazanda Minimum Net Sales, first year, level two	Jul. 29, 2013 Lazanda Minimum Net Sales, first year, level three	Jul. 29, 2013 Lazanda Minimum Net Sales, first year, level four	Jul. 29, 2013 Lazanda Maximum	Jul. 29, 2013 Lazanda Third party Minimum	Jul. 29, 2013 Lazanda Third party Maximum	Jun. 21, 2012 Zipsor	Dec. 31, 2013 Zipsor	Dec. 31, 2012 Zipsor	Jun. 21, 2012 Zipsor Net Sales, first year, level one	Jun. 21, 2012 Zipsor Net Sales, first year, level two
Business combinations
Contingent consideration potential payment, minimum			$ 5,000,000																						$ 2,000,000
Contingent consideration potential payment, maximum							10,000,000				1,000,000	2,500,000	5,000,000	7,500,000												3,000,000
Contingent consideration, net sales threshold															20,000,000	45,000,000	75,000,000	100,000,000							30,000,000	60,000,000
Amounts held in escrow to be applied towards indemnification obligations			7,500,000						1,000,000													3,000,000
Initial payments held in escrow, holding period			24 months						18 months													18 months
Royalties as a percentage of net sales in remainder of fiscal year																			5.00%
Royalties as a percentage of net sales in 2014																			5.00%
Royalties as a percentage of net sales after 2014																				13.00%	15.00%
Contingent consideration, net sales threshold triggering milestone payments						100,000,000
Purchase price consideration
Cash for acquired entity, related property, inventories and other assets	52,725,000	26,435,000	48,725,000						4,000,000													26,436,000
Fair Value of contingent consideration			1,010,000						8,004,000													1,303,000
Purchase Price			49,735,000						12,004,000													27,739,000
Royalties as a percentage of net sales								11.00%
Fair values of tangible and identifiable intangible assets acquired and liabilities assumed
Intangible asset - acquired entity product rights			51,360,000						10,450,000													27,100,000
Inventories			3,837,000						1,334,000													2,428,000
Other assets			409,000						116,000													100,000
Sales reserve liabilities			(1,847,000)
Unfavorable contract assumed			(3,540,000)
Property, plant and equipment									356,000													43,000
Current liabilities									(283,000)													(1,840,000)
Goodwill									31,000
Bargain purchase	(484,000)	(92,000)	(484,000)																			(92,000)
Total			49,735,000						12,004,000													27,739,000
Other information
Amortization expense	4,548,000	2,022,000		200,000						500,000													3,800,000	2,000,000
Acquisition related costs				100,000						100,000
Business acquisition step up in value of inventories			3,700,000						600,000													1,900,000		1,200,000
Business acquisition cost of sales related to the step-up value				200,000						100,000													700,000
Pro forma financial information (unaudited)
Net revenue				143,753,000	104,652,000
Net income (loss)				$ 29,821,000	$ (47,717,000)
Net income (loss) per share - basic (in dollars per share)				$ 0.53	$ (0.85)
Net income (loss) per share - diluted (in dollars per share)				$ 0.52	$ (0.85)

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INCOME TAXES (Details 2) (USD $) In Millions, unless otherwise specified	Dec. 31, 2013
Federal
Operating loss carryforwards
Net operating loss carry forwards	$ 11.0
State
Operating loss carryforwards
Net operating loss carry forwards	$ 84.0

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COMMITMENTS AND CONTINGENCIES (Tables)

12 Months Ended

Dec. 31, 2013

COMMITMENTS AND CONTINGENCIES

Schedule of future minimum payments under operating leases for facilities

As of December 31, 2013 future minimum payments under operating leases for facilities were as follows (in thousands):

2014	$	1,178
2015		1,233
2016		1,440
2017		1,485
Thereafter		7,972
Total	$	13,308

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LONG-TERM DEBT (Details) (USD $) In Millions, unless otherwise specified		1 Months Ended
	Jun. 30, 2008 Credit facility	Jun. 30, 2008 Credit facility Maximum Item	Jun. 30, 2008 First tranche Item	Jul. 31, 2008 Second tranche Item	Jul. 31, 2008 Third tranche
Long-term debt
Maximum borrowing capacity	$ 15.0
Number of tranches		3
Proceeds from credit facility			3.8	5.6
Amount of credit facility not drawn					$ 5.6
Percentage of unused line fee related to the unused portion of the credit facility					2.00%
Interest-only payment period			6 months
Interest rate (as a percent)			11.59%	11.59%
Number of equal monthly installments of principal and interest			30	30

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INCOME TAXES

12 Months Ended

Dec. 31, 2013

INCOME TAXES

INCOME TAXES

NOTE 14. INCOME TAXES

        The (benefit from) provision for income taxes consists of the following (in thousands):

	Year Ended December 31,
	2013			2012			2011
Current:
Federal	$	60,874		$	(19	)	$	(466	)
State		3,593			(75	)		858
Foreign		3			3			4
		64,470			(91	)		396
Deferred:
Federal	$	(97,690	)	$	—		$	—
State		(5,512	)		—			—
Foreign		—			—			—
		(103,202	)		—			—
Total (benefit) provision for income taxes	$	(38,733	)	$	(91	)	$	396

        A reconciliation of income taxes at the statutory federal income tax rate to the actual tax rate included in the statements of operations is as follows (in thousands):

	Year Ended December 31,
	2013			2012			2011
Tax at federal statutory rate	$	1,603		$	(10,454	)	$	24,893
State tax, net of federal benefit		(3,177	)		(48	)		558
Foreign tax		3			3			4
Research Credit		(258	)		—			—
Net Operating Losses not benefited (benefited)		(17,510	)		9,094			(25,510	)
Federal—AMT		—			(19	)		(466	)
Stock Based Compensation		923			1,038			774
Non deductible meals and entertainment		442			131			17
Non-deductible other expense		(133	)		164			126
Change in Valuation Allowance		(20,626	)		—			—
Total	$	(38,733	)	$	(91	)	$	396

        During 2013, the Company recognized an income tax benefit of approximately $38.7 million which resulted primarily from our reversal of a valuation allowance on all of our U.S. federal deferred tax assets and most of our state deferred tax assets as more fully described below.

        The Company's tax benefits for the year ended December 31, 2012 was due to Federal and state refundable credits offset by foreign taxes wittheld on royalty revenue related to the Company's agreement with LG by the Republic of Korea .

        On January 2, 2013, the enactment of the American Taxpayer Relief Act of 2013 extended retroactively through the end of calendar 2013 the U.S. federal research and development credit which had expired on December 31, 2011. As a result, an income tax benefit for the year ended December 2013 includes the tax benefit for the reinstatement of the 2012 federal research tax credit.

        The Company's tax provision for 2011 is due to state taxes and foreign taxes withheld on royalty revenue related to the Company's agreement with LG by the Republic of Korea, offset by federal and state refundable credits.

        As of December 31, 2013, the Company had net operating loss carry forwards for federal income tax purposes of approximately $11.0 million, which expire in the years 2021 through 2032. Net operating loss carryforwards for state income tax purposes were approximately $84.0 million, which expire in the years 2017 through 2032 and state research and development tax credits were approximately $1.2 million which have no expiration date. The Company has state alternative minimum tax credit carryforwards of approximately $0.1 million that have no expiration date.

        Utilization of the Company's net operating loss and credit carryforwards may be subject to a substantial annual limitation due to ownership change limitations provided by the Internal Revenue Code of 1986 and similar state provisions. The annual limitation may result in the expiration of net operating losses and credits before utilization.

        Deferred income taxes reflect the net tax effects of net operating loss and tax credit carryovers and temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets are as follows (in thousands):

	Year Ended December 31,
	2013			2012
Deferred Tax Assets:
Net operating loss carryforwards	$	4,237		$	21,500
Tax carryforwards		133			4,700
In-process research and development		665			1,100
Deferred revenue		88,248			7,500
Intangibles		1,363			500
Other, net		11,226			7,200
Total deferred tax assets		105,872			42,500
Valuation allowance for deferred tax assets		(2,670	)		(42,500	)
Deferred tax assets, net	$	103,202		$	—

        Management regularly assesses the ability to realize deferred tax assets based on the weight of all available evidence, including such factors as the history of recent earnings and expected future taxable income on a jurisdiction by jurisdiction basis. Management determined that a valuation allowance was no longer needed for a substantial portion of the deferred tax assets based on an assessment of the relative impact of all positive and negative evidence as of December 31, 2013, including an evaluation of cumulative income in recent years, future sources of taxable income exclusive of reversing temporary differences, and significant risks and uncertainties related to our business. The valuation allowance decreased by $39.8 million, increased by $7.8 million and decreased by $27.6 million during the years ended December 31, 2013, 2012 and 2011 respectively.

        At December 31, 2013, the portion of the federal and state net operating loss carryforwards related to stock option deductions is approximately $11.0 million, which is not included in the Company's gross or net deferred tax assets. Pursuant to ASC 718-740-25-10, the tax effect of the stock option benefit of approximately $4.5 million will be recorded to equity when they reduce cash taxes payable in the future.

        The Company files income tax returns in the United States federal jurisdiction and in various states, and the tax returns filed for the years 1996 through 2013 and the applicable statutes of limitation have not expired with respect to those returns. Because of net operating loss carryovers, substantially all of the Company's tax years remain open to examination.

        Interest and penalties, if any, related to unrecognized tax benefits would be recognized as income tax expense by the Company. As of the date of adoption of authoritative guidance for Accounting for Uncertainty in Income Taxes, the Company did not have any accrued interest or penalties associated with any unrecognized tax benefits.

        The following table summarizes the activity related to our unrecognized tax benefits for the 2 years ended December 31, 2013 (in thousands):

Unrecognized tax benefits—January 1, 2012	$	3,573
Gross increases—current year tax positions		21
Settlements with taxing authorities		—
Expiration of statute of limitations		—
Unrecognized tax benefits—December 31, 2012		3,594
Gross increases—current year tax positions		174
Gross increases—prior year tax positions		111
Unrecognized tax benefits—December 31, 2013	$	3,879

        Though our unrecognized tax benefits may change during the next year for items that arise in the ordinary course of business, we do not expect any such change to be significant.

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ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Policies)

12 Months Ended

Dec. 31, 2013

ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization

Organization

        Depomed, Inc. (Depomed or the Company) is a specialty pharmaceutical company focused on pain and other conditions and diseases of the central nervous system. The products that comprise our current specialty pharmaceutical business are Gralise® (gabapentin), a once-daily product for the management of postherpetic neuralgia (PHN) that we launched in October 2011, Zipsor® (diclofenac potassium) liquid filled capsules, a product for the treatment of mild to moderate acute pain that we acquired in June 2012, Lazanda® (fentanyl) nasal spray, a product for the management of breakthrough pain in cancer patients that we acquired in July 2013, and CAMBIA® (diclofenac potassium for oral solution), a product for the acute treatment of migraine attacks that we acquired in late December 2013.

        The Company also has a portfolio of royalty and milestone producing license agreements based on our proprietary Acuform® gastroretentive drug delivery technology with Mallinckrodt Inc. (Mallinckrodt), Ironwood Pharmaceuticals, Inc. (Ironwood) and Janssen Pharmaceuticals, Inc.

        On October 18, 2013, the Company sold its interests in royalty and milestone payments under its license agreements in the Type 2 diabetes therapeutic area to PDL BioPharma, Inc. (PDL) for $240.5 million (PDL transaction). The interests sold include royalty and milestone payments accruing from and after October 1, 2013: (a) from Santarus with respect to sales of Glumetza® (metformin HCL extended-release tablets) in the United States; (b) from Merck & Co., Inc. (Merck) with respect to sales of Janumet XR® (sitagliptin and metformin HCL extended-release); (c) from Janssen Pharmaceutica N.V. and Janssen Pharmaceuticals, Inc. (collectively, Janssen) with respect to potential future development milestones and sales of Janssen's investigational fixed-dose combination of Invokana® (canagliflozin) and extended-release metformin; (d) from Boehringer Ingelheim International GMBH (Boehringer Ingelheim) with respect to potential future development milestones and sales of the investigational fixed-dose combinations of drugs and extended-release metformin subject to Depomed's license agreement with Boehringer Ingelheim; and (e) from LG Life Sciences Ltd. (LG) and Valeant International Bermuda SRL (Valeant) for sales of extended-release metformin in Korea and Canada, respectively.

        The Company has one product candidate under clinical development, DM-1992 for Parkinson's disease. DM-1992 completed a Phase 2 trial for Parkinson's disease, and the Company announced a summary of the results of that trial in November 2012. The Company continues to evaluate partnering opportunities and monitor competitive developments.

Basis of Preparation

Basis of Preparation

        The Company's consolidated financial statements are prepared in accordance with the Financial Accounting Standards Board Accounting Standards Codification, or the Codification, which is the single source for all authoritative U.S. generally accepted accounting principles, or U.S. GAAP.

Principles of Consolidation

Principles of Consolidation

        The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Depo DR Sub LLC (Depo DR Sub) which was formed to facilitate the PDL transaction in the third quarter of 2013. All intercompany accounts and transactions have been eliminated in consolidation.

        Depo DR Sub was formed in October 2013 for the sole purpose of facilitating the sale of the Company's interests in the royalty and milestone payments under its license agreements in the Type 2 diabetes therapeutic area to PDL. The Company contributed to Depo DR Sub all of its right, title and interest in each of the license agreements to receive royalty payments. Immediately following the transaction, Depo DR Sub sold to PDL, among other things, such right to receive royalty payments, for an upfront cash purchase price of $240.5 million,

        The Company and Depo DR Sub continue to retain the duties and obligations under the specified license agreements. These include the collection of the royalty and milestones amounts due and enforcement of related provisions under the specified license agreements, among others. In addition, the Company and Depo DR Sub must prepare a quarterly distribution report relating to the specified license agreements, containing among other items, the amount of royalty payments received by the Company, reimbursable expenses and set-offs. The Company and Depo DR Sub must also provide PDL with notice of certain communications, events or actions with respect to the specified license agreements and infringement of any underlying intellectual property.

Use of Estimates

Use of Estimates

        The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Although management believes these estimates are based upon reasonable assumptions within the bounds of its knowledge of the Company's business and operations, actual results could differ materially from those estimates.

Revenue Recognition

Revenue Recognition

        The Company recognizes revenue from the sale of its products, royalties earned, and on payments received and services performed under contractual arrangements.

        Revenue is recognized when there is persuasive evidence that an arrangement exists, delivery has occurred and title has passed, the price is fixed or determinable and the Company is reasonably assured of collecting the resulting receivable. Revenue arrangements with multiple elements are evaluated to determine whether the multiple elements met certain criteria for dividing the arrangement into separate units of accounting, including whether the delivered element(s) have stand-alone value to the Company's customer or licensee. Where there are multiple deliverables combined as a single unit of accounting, revenues are deferred and recognized over the period that we remain obligated to perform services.

• •

  Product Sales—The Company sells commercial products to wholesale distributors and retail pharmacies. Products sales revenue is recognized when title has transferred to the customer and the customer has assumed the risks and rewards of ownership, which typically occurs on delivery to the customer.

  •

  Product Sales Allowances—The Company recognizes product sales allowances as a reduction of product sales in the same period the related revenue is recognized. Product sales allowances are based on amounts owed or to be claimed on the related sales. These estimates take into consideration the terms of our agreements with customers, historical product returns, rebates or discounts taken, estimated levels of inventory in the distribution channel, the shelf life of the product and specific known market events, such as competitive pricing and new product introductions. If actual future results vary from our estimates, the Company may need to adjust these estimates, which could have an effect on product sales and earnings in the period of adjustment. The Company's sales allowances include:

  •

  Product Returns—The Company allows customers to return product for credit on returned product that is within six months before and up to 12 months after its product expiration date. The Company estimate product returns on Gralise, Zipsor, CAMBIA and Lazanda. The Company also estimate returns on sales of Glumetza made by the Company through August 2011, as we are financially responsible for return credits on Glumetza product we shipped as part of the Company's commercialization with Santarus in August 2011. Under the terms of the Zipsor Asset Purchase Agreement, the Company also assumed financial responsibility for returns of Zipsor product previously sold by Xanodyne. Under the terms of the CAMBIA Asset Purchase Agreement, the Company also assumed financial responsibility for returns of CAMBIA product previously sold by Nautilus. The Company did not assume financial responsibility for returns of Lazanda product previously sold by Archimedes. See Note 16 of the Notes to Financial Information for further information on the acquisition of Zipsor, CAMBIA and Lazanda.
  

  The shelf life of Gralise is 24 to 36 months from the date of tablet manufacture. The shelf life of Zipsor is 36 months from the date of tablet manufacture. The shelf life of CAMBIA is 24 to 48 months from the manufacture date. The shelf life of Lazanda is 24 to 36 months from the manufacture date. The shelf life of the 500mg Glumetza is 48 months from the date of tablet manufacture and the shelf life of the 1000mg Glumetza is 24 to 36 months from the date of tablet manufacture. The Company monitors actual return history on an individual product lot basis since product launch, which provide it with a basis to reasonably estimate future product returns, taking into consideration the shelf life of product at the time of shipment, shipment and prescription trends, estimated distribution channel inventory levels and consideration of the introduction of competitive products.

  Because of the shelf life of our products and our return policy of issuing credits on returned product that is within six months before and up to 12 months after its product expiration date, there may be a significant period of time between when the product is shipped and when the Company issues credit on a returned product. Accordingly, the Company may have to adjust these estimates, which could have an effect on product sales and earnings in the period of adjustments.

  •

  Wholesaler and Retail Pharmacy Discounts—The Company offers contractually determined discounts to certain wholesale distributors and retail pharmacies that purchase directly from it. These discounts are either taken off-invoice at the time of shipment or paid to the customer on a quarterly basis one to two months after the quarter in which product was shipped to the customer.

  •

  Prompt Pay Discounts—The Company offers cash discounts to its customers, generally 2% of the sales price, as an incentive for prompt payment. Based on the Company's experience, the Company expects its customers to comply with the payment terms to earn the cash discount.

  •

  Patient Discount Programs—The Company offers patient discount co-pay assistance programs in which patients receive certain discounts off their prescriptions at participating retail pharmacies. The discounts are reimbursed by the Company approximately one month after the prescriptions subject to the discount are filled.

  •

  Medicaid Rebates—The Company participates in Medicaid rebate programs, which provide assistance to certain low-income patients based on each individual state's guidelines regarding eligibility and services. Under the Medicaid rebate programs, the Company pays a rebate to each participating state, generally two to three months after the quarter in which prescriptions subject to the rebate are filled.

  •

  Chargebacks—The Company provides discounts to authorized users of the Federal Supply Schedule (FSS) of the General Services Administration under an FSS contract with the Department of Veterans Affairs. These federal entities purchase products from the wholesale distributors at a discounted price, and the wholesale distributors then charge back to the Company the difference between the current retail price and the price the federal entity paid for the product.

  •

  Managed Care Rebates—The Company offers discounts under contracts with certain managed care providers who do not purchase directly from it. The Company generally pays managed care rebates one to two months after the quarter in which prescriptions subject to the rebate are filled.

  •

  Medicare Part D Coverage Gap Rebates—The Company participates in the Medicare Part D Coverage Gap Discount Program under which it provides rebates on prescriptions that fall within the "donut hole" coverage gap. The Company generally pays Medicare Part D Coverage Gap rebates two to three months after the quarter in which prescriptions subject to the rebate are filled.

  •

  Launch Discounts—The Company offered certain discounts in connection with the launch and commercial availability of Gralise in October 2011. These launch discounts include off-invoice discounts to wholesalers and stocking rebates to pharmacies for stocking Gralise that were paid in November 2011.

  •

  Royalties—Royalties are recognized as earned in accordance with the contract terms when royalties from licensees can be reliably measured and collectability is reasonably assured.

• • Under the commercialization agreement between the Company and Santarus, the Company receives royalties on net sales of Glumetza distributed by Santarus in the United States. Santarus commenced distributing and recording product sales on shipments of Glumetza in September 2011. See Note 2 for further information on the Santarus commercialization agreement.

    Royalties received from Santarus on sales of Glumetza, from Merck on sales of Janumet XR and from Janssen on sales of NUCYNTA ER are recognized in the period earned as the royalty amounts can be estimated and collectability is reasonably assured.

    In October 2013, the Company sold its interests in royalty and milestone payments under our license agreements in the Type 2 diabetes therapeutic area to PDL for $240.5 million. This transaction was accounted for as a liability that will be amortized using the interest method over the life of the agreement. As a result of this liability accounting, even though the Company does not retain the related royalties and milestones under the transaction as the amounts are remitted to PDL, the Company will continue to record revenue related to these royalties and milestones.

  •

  License and Collaborative Arrangements—Revenue from license and collaborative arrangements is recognized when the Company has substantially completed its obligations under the terms of the arrangement and the Company's remaining involvement is inconsequential and perfunctory. If the Company has significant continuing involvement under such an arrangement, license and collaborative fees are recognized over the estimated performance period. The Company recognizes milestone payments for its research and development collaborations upon the achievement of specified milestones if (1) the milestone is substantive in nature, and the achievement of the milestone was not reasonably assured at the inception of the agreement; (2) consideration earned relates to past performance and (3) the milestone payment is nonrefundable. A milestone is considered substantive if the consideration earned from the achievement of the milestone is consistent with the Company's performance required to achieve the milestone or consistent with the increase in value to the collaboration resulting from the Company's performance, the consideration earned relates solely to past performance, and the consideration earned is reasonable relative to all of the other deliverables and payments within the arrangement. License, milestones and collaborative fee payments received in excess of amounts earned are classified as deferred revenue until earned.

Stock-Based Compensation

Stock-Based Compensation

        Compensation expense for stock-based compensation is based on the single-option approach, includes an estimate for forfeitures and is recognized over the vesting term of the options using the straight-line method. Depomed estimates forfeitures based on historical experience. Depomed uses historical option exercise data to estimate the expected life of the options.

Research and Development Expense and Accruals

Research and Development Expense and Accruals

        Research and development expenses include salaries, clinical trial costs, consultant fees, supplies, manufacturing costs for research and development programs and allocations of corporate costs. All such costs are charged to research and development expense as incurred. These expenses result from the Company's independent research and development efforts as well as efforts associated with collaborations. The Company reviews and accrues clinical trial expenses based on work performed, which relies on estimates of total costs incurred based on patient enrollment, completion of patient studies and other events. The Company follows this method since reasonably dependable estimates of the costs applicable to various stages of a research agreement or clinical trial can be made. Accrued clinical costs are subject to revisions as trials progress to completion. Revisions are charged to expense in the period in which the facts that give rise to the revision become known.

Shipping and Handling Costs

Shipping and Handling Costs

        Shipping and handling costs incurred for inventory purchases and product shipments are recorded in cost of sales in the Statements of Operations.

Advertising Costs

Advertising Costs

        Costs associated with advertising are expensed on first showing. Advertising expense for the years ended December 31, 2013, 2012 and 2011 were $1.3 million, $1.7 million and $2.1 million, respectively.

Comprehensive Income (Loss)

Comprehensive Income (Loss)

        Comprehensive income (loss) is comprised of net income (loss) and other comprehensive income (loss). Other comprehensive income (loss) includes certain changes in equity of the Company that are excluded from net income (loss). Unrealized gains and losses on the Company's available-for-sale securities are reported separately in shareholders' equity and included in accumulated other comprehensive income (loss). Comprehensive income (loss) for the years ended December 31, 2013, 2012 and 2011 has been reflected in the Consolidated Statements of Comprehensive Income (loss).

Cash, Cash Equivalents and Marketable Securities

Cash, Cash Equivalents and Marketable Securities

        The Company considers all highly liquid investments with an original maturity (at date of purchase) of three months or less to be cash equivalents. Cash and cash equivalents consist of cash on deposit with banks, money market instruments and commercial paper. The Company places its cash, cash equivalents and marketable securities with high quality U.S. government and financial institutions and to date has not experienced material losses on any of its balances. The Company records cash and cash equivalents at amortized cost, which approximates the fair value. All marketable securities are classified as available-for-sale since these instruments are readily marketable. These securities are carried at fair value, which is based on readily available market information, with unrealized gains and losses included in accumulated other comprehensive income (loss) within shareholders' equity. The Company uses the specific identification method to determine the amount of realized gains or losses on sales of marketable securities. We regularly review all of our investments for other-than-temporary declines in fair value. Our review includes the consideration of the cause of the impairment including the creditworthiness of the security issuers, the number of securities in an unrealized loss position and the severity and duration of the unrealized losses. When we determine that the decline in fair value of an investment is below our accounting basis and this decline is other-than-temporary, we reduce the carrying value of the security we hold and record a loss in the amount of such decline. Realized gains or losses have been insignificant and are included in interest and other income in the Consolidated Statements of Operations.

Accounts Receivable

Accounts Receivable

        Trade accounts receivable are recorded net of allowances for cash discounts for prompt payment. To date the Company has not recorded a bad debt allowance due to the fact that the majority of its product revenue comes from sales to a limited number of financially sound companies who have historically paid their balances timely. The need for bad debt allowance is evaluated each reporting period based on our assessment of the credit worthiness of our customers or any other potential circumstances that could result in bad debt.

        Receivables from collaborative partners represent amounts due from Santarus, Merck and Janssen.

Inventories

Inventories

        Inventories are stated at the lower of cost or market with cost determined by specific manufactured lot. Inventories consist of costs of the active pharmaceutical ingredient, contract manufacturing and packaging costs. The Company writes-off the value of inventory for potentially excess, dated or obsolete inventories based on an analysis of inventory on hand and projected demand.

Property and Equipment

Property and Equipment

        Property and equipment are stated at cost, less accumulated depreciation and amortization (See Note 5 of the Notes to the Consolidated Financial Statements). Depreciation is calculated using the straight-line method over the estimated useful lives of the respective assets, as follows:

Furniture and office equipment	3 - 5 years
Laboratory equipment	3 - 5 years
Leasehold improvements	Shorter of estimated useful life or lease term

Intangible Assets

Intangible Assets

        Intangible assets consist of purchased developed technology and trademarks. We determine the fair values of acquired intangible assets as of the acquisition date. Discounted cash flow models are typically used in these valuations, which require the use of significant estimates and assumptions, including but not limited to, developing appropriate discount rates and estimating future cash flows from product sales and related expenses. We evaluate purchased intangibles for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. An impairment loss would be recognized when estimated undiscounted future cash flows expected to result from the use of the asset and its eventual disposition are less than its carrying amount. Estimating future cash flows related to an intangible asset involves significant estimates and assumptions. If our assumptions are not correct, there could be an impairment loss or, in the case of a change in the estimated useful life of the asset, a change in amortization expense.

Net Income (Loss) Per Share

Net Income (Loss) Per Share

        Basic net income (loss) per share is calculated by dividing the net income (loss) by the weighted-average number of shares of common stock outstanding during the period. Diluted net income per share is calculated by dividing the net income by the weighted-average number of shares of common stock outstanding during the period, plus dilutive common shares for the period determined using the treasury stock method. Diluted net loss per share is calculated by dividing the net loss by the weighted-average number of shares of common stock outstanding during the period. For purposes of this calculation, options to purchase stock are considered to be potential common shares and are only included in the calculation of diluted net income (loss) per share when their effect is dilutive. Basic and diluted earnings per share are calculated as follows:

(in thousands, except for per share amounts)	2013		2012			2011
Numerator:
Net income (loss)	$	43,313	$	(29,781	)	$	70,726
Denominator for basic net income (loss) per share		56,736		55,893			54,563
Net effect of dilutive common shares		—		—			1,527
Denominator for diluted net income (loss) per share:		57,544		55,893			56,090
Basic net income (loss) per share	$	0.76	$	(0.53	)	$	1.30
Diluted net income (loss) per share	$	0.75	$	(0.53	)	$	1.26

        For the years ended December 31, 2013, 2012 and 2011, 4.8 million, 6.0 million and 1.5 million dilutive common shares, respectively, were not included in dilutive net income (loss) per share because their effect was anti-dilutive.

Income Taxes

Income Taxes

        The Company's income tax policy is to record the estimated future tax effects of temporary differences between the tax bases of assets and liabilities and amounts reported in the Company's accompanying Consolidated Balance Sheets, as well as operating loss and tax credit carryforwards. The Company follows the guidelines set forth in the applicable accounting guidance regarding the recoverability of any tax assets recorded on the Consolidated Balance Sheet and provides any necessary allowances as required. Determining necessary allowances requires the Company to make assessments about the timing of future events, including the probability of expected future taxable income and available tax planning opportunities.

        The Company is subject to examination of its income tax returns by various tax authorities on a periodic basis. The Company regularly assesses the likelihood of adverse outcomes resulting from such examinations to determine the adequacy of its provision for income taxes. The Company has applied the provisions of the applicable accounting guidance on accounting for uncertainty in income taxes, which requires application of a more-likely-than-not threshold to the recognition and de-recognition of uncertain tax positions. If the recognition threshold is met, the applicable accounting guidance permits the Company to recognize a tax benefit measured at the largest amount of tax benefit that, in the Company's judgment, is more than 50 percent likely to be realized upon settlement. It further requires that a change in judgment related to the expected ultimate resolution of uncertain tax positions be recognized in earnings in the period of such change.

Segment Information

Segment Information

        The Company operates in one operating segment and has operations solely in the United States. To date, all of the Company's revenues from product sales are related to sales of Glumetza, Gralise, Zipsor, Lazanda and CAMBIA in the United States. The Company has recognized license and royalty revenue from license agreements in the territories of the United States, Canada and Korea.

Concentration of Risk

Concentration of Risk

        The Company invests cash that is currently not being used for operational purposes in accordance with its investment policy in low-risk debt securities of the U.S. Treasury, U.S. government sponsored agencies and very highly rated banks and corporations. The Company is exposed to credit risk in the event of a default by the institutions holding the cash equivalents and available-for sale securities to the extent recorded on the balance sheet.

        The Company is subject to credit risk from its accounts receivable related to product sales and royalties. The majority of the Company's trade accounts receivable arises from product sales in the United States. Three wholesale distributors represented 35%, 37% and 21% of product shipments for the year ended December 31, 2013. These three customers individually comprised 23%, 35% and 34%, respectively, of product sales-related accounts receivable as of December 31, 2013. Three wholesale distributors represented 39%, 40% and 14% of product shipments for the year ended December 31, 2012. These three customers individually comprised 46%, 42% and 5%, respectively, of product sales-related accounts receivable as of December 31, 2012. Three wholesale distributors represented 46%, 32% and 17% of product shipments for the year ended December 31, 2011. These three customers individually comprised 54%, 29% and 9%, respectively, of product sales-related accounts receivable as of December 31, 2011.Accounts receivable balances related to product sales were $11.4 million, $3.6 million and $4.4 million for the years ended December 31, 2013, 2012 and 2011, respectively. The Company relies on a single third-party contract manufacturer organization in Puerto Rico to manufacture Gralise and two third-party suppliers for the supply of gabapentin, the active pharmaceutical ingredient in Gralise. The Company also relies on single third-party contract suppliers: Accucaps, DPT Lakewood, Inc., and MiPharm, S.p.A. for supply of Zipsor, Lazanda and CAMBIA respectively.

        Accounts receivable related to royalties was $7.2 million for the year ended December 31, 2013, of which $6.4 million related to Santarus. Accounts receivable related to royalties were $5.1 million for the year ended December 31, 2012, of which $4.4 million related to Santarus.

        To date, the Company has not experienced any losses with respect to the collection of its accounts receivable and believes that its entire accounts receivable balances are collectible.

Recent Accounting Pronouncements

Recent Accounting Pronouncements

        In July 2013, the Financial Accounting Standards Board issued a new accounting standard that will require the presentation of certain unrecognized tax benefits as a reduction to deferred tax assets rather than as a liability when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. This guidance is effective for our interim and annual periods beginning January 1, 2014. We do not believe the adoption of this guidance will have a material impact on our consolidated financial statements.

        In February 2013, the FASB issued Accounting Standards Update No. 2013-02, Comprehensive Income (Topic 220)—Reporting of Amounts Reclassified out of Accumulated Other Comprehensive Income (ASU 2013-02), to improve the reporting of reclassifications out of accumulated other comprehensive income. ASU 2013-02 requires an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under U.S. GAAP to be reclassified in its entirety to net income. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety from accumulated other comprehensive income to net income in the same reporting period, an entity is required to cross-reference other disclosures required under U.S. GAAP that provide additional detail about those amounts. ASU 2013-02 is effective for us during the first quarter of fiscal 2014 with earlier adoption permitted, which should be applied prospectively. The adoption of this standard did not have a material impact on our consolidated financial statements.

        In December 2011, the FASB issued ASU 2011-11, "Balance Sheet: Disclosures about Offsetting Assets and Liabilities." ASU 2011-11 enhances disclosures regarding financial instruments and derivative instruments. Entities are required to provide both net information and gross information for these assets and liabilities in order to enhance comparability between those entities that prepare their financial statements on the basis of U.S. GAAP and those entities that prepare their financial statements on the basis of IFRS. The requirements of ASU 2011-11 are effective for interim and annual periods beginning on or after January 1, 2013 and are to be applied retrospectively. The adoption of this standard did not have a material impact on our consolidated financial statements.

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ACCOUNTS PAYABLE AND ACCRUED LIABILITIES (Details) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2013	Dec. 31, 2012
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable	$ 2,232	$ 2,360
Accrued compensation	7,077	5,015
Accrued rebates and sales discounts	8,594	4,250
Allowance for product returns	10,278	10,831
Accrued contract sales organization fees	962	420
Accruals for Inventory	87	2,990
Royalty payable to PDL	6,902
Other accrued liabilities	5,705	6,712
Total accounts payable and accrued liabilities	$ 41,837	$ 32,578

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ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Details 3) (USD $)	3 Months Ended								12 Months Ended
	Dec. 31, 2013	Sep. 30, 2013	Jun. 30, 2013	Mar. 31, 2013	Dec. 31, 2012	Sep. 30, 2012	Jun. 30, 2012	Mar. 31, 2012	Dec. 31, 2013 Item segment	Dec. 31, 2012 Item	Dec. 31, 2011 Item
Net Income (Loss) Per Common Share
Numerator: Net income (loss)	$ 41,801,000	$ 6,514,000	$ 478,000	$ (5,480,000)	$ (3,704,000)	$ (1,495,000)	$ (15,780,000)	$ (8,804,000)	$ 43,313,000	$ (29,781,000)	$ 70,726,000
Denominator for basic net income (loss) per share (in shares)									56,736,009	55,892,563	54,562,820
Net effect of dilutive common shares (in shares)											1,527,000
Denominator for diluted net income (loss) per share: (in shares)									57,543,979	55,892,563	56,089,796
Basic net income (loss) per share (in dollars per share)	$ 0.73	$ 0.11	$ 0.01	$ (0.10)	$ (0.07)	$ (0.03)	$ (0.28)	$ (0.16)	$ 0.76	$ (0.53)	$ 1.30
Diluted net income (loss) per share (in dollars per share)	$ 0.72	$ 0.11	$ 0.01	$ (0.10)	$ (0.07)	$ (0.03)	$ (0.28)	$ (0.16)	$ 0.75	$ (0.53)	$ 1.26
Total number of antidilutive outstanding common shares excluded from the net income (loss) per share computation (in shares)									4,800,000	6,000,000	1,500,000
Segment Information
Number of operating segments									1
Concentration of Risk
Number of distributors									3	3	3
Accounts receivable related to product sales	11,451,000				3,614,000				11,451,000	3,614,000	4,400,000
Accounts receivable balances related to royalties	7,200,000				5,100,000				7,200,000	5,100,000
Santarus
Concentration of Risk
Accounts receivable balances related to royalties	$ 6,400,000				$ 4,400,000				$ 6,400,000	$ 4,400,000
Supplier concentration risk | Gralise
Concentration of Risk
Number of third-party suppliers for the supply of gabapentin									2
Product shipments | Customer concentration risk | Distributor one
Concentration of Risk
Percentage of concentration risk									35.00%	39.00%	46.00%
Product shipments | Customer concentration risk | Distributor two
Concentration of Risk
Percentage of concentration risk									37.00%	40.00%	32.00%
Product shipments | Customer concentration risk | Distributor three
Concentration of Risk
Percentage of concentration risk									21.00%	14.00%	17.00%
Product sales related accounts receivable | Credit concentration risk | Distributor one
Concentration of Risk
Percentage of concentration risk									23.00%	46.00%	54.00%
Product sales related accounts receivable | Credit concentration risk | Distributor two
Concentration of Risk
Percentage of concentration risk									35.00%	42.00%	29.00%
Product sales related accounts receivable | Credit concentration risk | Distributor three
Concentration of Risk
Percentage of concentration risk									34.00%	5.00%	9.00%

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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2013	Dec. 31, 2012	Dec. 31, 2011
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Net income (loss)	$ 43,313	$ (29,781)	$ 70,726
Unrealized gains (losses) on available-for-sale securities:
Unrealized gains (losses) during period prior to reclassification adjustments, net of taxes	(37)	58	(2)
Less Reclassification adjustments for gains included to net income (loss), net of taxes	1	14	80
Net unrealized gains (losses) on available-for-sale securities	(38)	44	(82)
Comprehensive income (loss)	$ 43,275	$ (29,737)	$ 70,644

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MARKETABLE SECURITIES

12 Months Ended

Dec. 31, 2013

MARKETABLE SECURITIES

MARKETABLE SECURITIES

NOTE 3. MARKETABLE SECURITIES

        Securities classified as cash and cash equivalents and available-for-sale marketable securities as of December 31, 2013 and 2012 are summarized below (in thousands). Estimated fair value is based on quoted market prices for these investments.

December 31, 2013	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Cash and cash equivalents:
Cash	$	26,728	$	—	$	—		$	26,728
Money market funds		217,946		—		—			217,946
Total cash and cash equivalents	$	244,674	$	—	$	—		$	244,674
Available-for-sale securities:
Total maturing within 1 year and included in marketable securities:
Corporate debt securities	$	12,440	$	8	$	(2	)	$	12,446
Government agency debt securities		14,814		3		—			14,817
Total maturing between 1 and 2 years and included in marketable securities:
Corporate debt securities		4,075		5		—			4,080
Total available-for-sale securities	$	31,329	$	16	$	(2	)	$	31,343
Total cash, cash equivalents and marketable securities	$	276,003	$	16	$	(2	)	$	276,017

December 31, 2012	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Cash and cash equivalents:
Cash	$	11,769	$	—	$	—		$	11,769
Money market funds		11,268		—		—			11,268
U.S. corporate debt securities		6,039		—		—			6,039
Total cash and cash equivalents	$	29,076	$	—	$	—		$	29,076
Available-for-sale securities:
Total maturing within 1 year and included in marketable securities:
Corporate debt securities	$	21,662	$	31	$	—		$	21,693
U.S. government agency debt securities		14,027		8		—			14,035
U.S. Treasury securities		2,008		1		—			2,009
Total maturing between 1 and 2 years and included in marketable securities:
Corporate debt securities		7,858		7		(2	)		7,863
U.S. government agency debt securities		3,208		8		—			3,216
Total available-for-sale securities	$	48,763	$	55	$	(2	)	$	48,816
Total cash, cash equivalents and marketable securities	$	77,839	$	55	$	(2	)	$	77,892

        The Company considers all highly liquid investments with a maturity at date of purchase of three months or less to be cash equivalents. Cash and cash equivalents consist of cash on deposit with banks, money market instruments and commercial paper. The Company places its cash, cash equivalents and marketable securities with U.S. Treasury and government agency securities, and high quality securities of U.S. and international financial and commercial institutions and, to date, has not experienced material losses on any of its balances. All marketable securities are classified as available-for-sale since these instruments are readily marketable. These securities are carried at fair value, which is based on readily available market information, with unrealized gains and losses included in accumulated other comprehensive gain (loss) within shareholders' equity. The Company uses the specific identification method to determine the amount of realized gains or losses on sales of marketable securities. Realized gains or losses have been insignificant and are included in "interest and other income" in the consolidated statement of operations.

        At December 31, 2013, the Company had 7 securities in an unrealized loss position. The following table shows the gross unrealized losses and fair value of the Company's investments with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at December 31, 2013 (in thousands):

	Less Than 12 Months					12 Months or Greater				Total
	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses
Corporate debt securities	$	3,438	$	(2	)	$	—	$	—	$	3,438	$	(2	)
Total available-for-sale	$	3,438	$	(2	)	$	—	$	—	$	3,438	$	(2	)

        The gross unrealized losses above were caused by interest rate increases. No significant facts or circumstances have arisen to indicate that there has been any deterioration in the creditworthiness of the issuers of the securities held by the Company. Based on the Company's review of these securities, including the assessment of the duration and severity of the unrealized losses and the Company's ability and intent to hold the investments until maturity, there were no other-than-temporary impairments for these securities at December 31, 2013.

        Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs.

• •

  Level 1: Quoted prices in active markets for identical assets or liabilities.

  •

  Level 2: Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

  •

  Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

        The following table represents the Company's fair value hierarchy for its financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2013 (in thousands):

	Level 1		Level 2		Level 3		Total
Money market funds	$	217,946	$	—	$	—	$	217,946
Corporate debt securities		—		16,526		—		16,526
Government agency debt securities		—		14,817		—		14,817
Total	$	217,946	$	31,343	$	—	$	249,289
Liabilities:
Contingent consideration—Zipsor	$	—	$	—	$	1,638	$	1,638
Contingent consideration—Lazanda		—		—		8,616		8,616
Contingent consideration—CAMBIA		—		—		1,010		1,010
Unfavorable contract assumed		—		—		3,540		3,540
	$	—	$	—	$	14,804	$	14,804

        The fair value measurement of the contingent consideration obligations arises from the Zipsor, CAMBIA and Lazanda acquisitions and relates to the potential future milestone payments and royalties under the respective agreements which are determined using Level 3 inputs. The key assumptions in determining the fair value are the discount rate and the probability assigned to the potential milestones and royalties being achieved. At each reporting date, the Company will re-measure the contingent consideration obligation arising from both acquisitions to its estimated fair value. Changes in the fair value of the contingent consideration obligations are recorded as a component of operating income in our consolidated statement of operations. Changes in fair value included within interest and other expense in the accompanying condensed statement of operations was $0.9 and $0.1 million for the years ended December 31, 2013 and 2012.

        The liability for the unfavorable contract assumed represents an obligation for the Company to make certain payments to a vendor upon the achievement of certain milestones by such vendor. This contract was entered into by Nautilus as part of a legal settlement unrelated to the CAMBIA acquisition. The liability of $3.5 million recorded above represents the fair value of the amounts by which the contract terms are unfavorable compared to the current market pricing and a probability weighted assessment of the likelihood that the stipulated milestones will be achieved by the third party within a specified time frame. The contract may be terminated if the third party fails to achieve these milestones in which case the fair value of the liability as of the date of the termination will be reversed on the balance sheet and reflected in the statement of operations as a credit within interest and other income. The Company will determine the fair value of this liability at each reporting period and record any changes within the consolidated statement of operations.

        The table below provides a summary of the changes in fair value of all financial liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the year ended December 31, 2013 (in thousands):

	Balance at December 31, 2012		Acquisitions 2013		Changes in Fair Value		Balance at December 31, 2013
Liabilities:
Contingent consideration obligations—Zipsor	$	1,342	$	—	$	296	$	1,638
Contingent consideration obligations—Lazanda		—		8,004		612		8,616
Contingent consideration obligations—CAMBIA		—		1,010		—		1,010
Unfavorable contract assumed		—		3,540		—		3,540
Total	$	1,342	$	12,554	$	908	$	14,804

        The following table represents the Company's fair value hierarchy for its financial assets measured at fair value on a recurring basis as of December 31, 2012 (in thousands):

	Level 1		Level 2		Level 3		Total
Money market funds	$	11,268	$	—	$	—	$	11,268
Corporate debt securities		6,039		29,556		—		35,595
Government agency debt securities		—		17,251		—		17,251
U.S. Treasury securities		—		2,009		—		2,009
Total	$	17,307	$	48,816	$	—	$	66,123
Liabilities:
Contingent consideration—Zipsor	$	—	$	—	$	1,342	$	1,342
	$	—	$	—	$	1,342	$	1,342

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STOCK-BASED COMPENSATION (Details 4) (The 2004 Plan, USD $)	12 Months Ended
	Dec. 31, 2013
Stock-based compensation
Number Outstanding (in shares)	6,518,971
Weighted-Average Remaining Contractual Term	7 years 5 months 19 days
Weighted-Average Exercise Price (Outstanding) (in dollars per share)	$ 6.14
Number Exercisable (in shares)	3,448,487
Weighted-Average Exercise Price (Exercisable) (in dollars per share)	$ 5.66
$1.49 - $3.27
Stock-based compensation
Range of Exercise Prices, low end of range (in dollars per share)	$ 1.49
Range of Exercise Prices, high end of range (in dollars per share)	$ 3.27
Number Outstanding (in shares)	701,650
Weighted-Average Remaining Contractual Term	5 years 7 days
Weighted-Average Exercise Price (Outstanding) (in dollars per share)	$ 2.62
Number Exercisable (in shares)	692,367
Weighted-Average Exercise Price (Exercisable) (in dollars per share)	$ 2.61
$3.28 - $5.35
Stock-based compensation
Range of Exercise Prices, low end of range (in dollars per share)	$ 3.28
Range of Exercise Prices, high end of range (in dollars per share)	$ 5.35
Number Outstanding (in shares)	730,248
Weighted-Average Remaining Contractual Term	6 years 2 months 5 days
Weighted-Average Exercise Price (Outstanding) (in dollars per share)	$ 4.58
Number Exercisable (in shares)	542,135
Weighted-Average Exercise Price (Exercisable) (in dollars per share)	$ 4.32
$5.56 - $5.91
Stock-based compensation
Range of Exercise Prices, low end of range (in dollars per share)	$ 5.56
Range of Exercise Prices, high end of range (in dollars per share)	$ 5.91
Number Outstanding (in shares)	1,019,548
Weighted-Average Remaining Contractual Term	8 years 2 months 23 days
Weighted-Average Exercise Price (Outstanding) (in dollars per share)	$ 5.78
Number Exercisable (in shares)	454,094
Weighted-Average Exercise Price (Exercisable) (in dollars per share)	$ 5.74
$5.94 - $6.08
Stock-based compensation
Range of Exercise Prices, low end of range (in dollars per share)	$ 5.94
Range of Exercise Prices, high end of range (in dollars per share)	$ 6.08
Number Outstanding (in shares)	667,987
Weighted-Average Remaining Contractual Term	7 years 11 months 5 days
Weighted-Average Exercise Price (Outstanding) (in dollars per share)	$ 6.03
Number Exercisable (in shares)	299,774
Weighted-Average Exercise Price (Exercisable) (in dollars per share)	$ 6.04
$6.11 - $6.29
Stock-based compensation
Range of Exercise Prices, low end of range (in dollars per share)	$ 6.11
Range of Exercise Prices, high end of range (in dollars per share)	$ 6.29
Number Outstanding (in shares)	587,060
Weighted-Average Remaining Contractual Term	6 years 5 months 16 days
Weighted-Average Exercise Price (Outstanding) (in dollars per share)	$ 6.15
Number Exercisable (in shares)	336,790
Weighted-Average Exercise Price (Exercisable) (in dollars per share)	$ 6.17
$6.77 - $6.77
Stock-based compensation
Range of Exercise Prices, low end of range (in dollars per share)	$ 6.77
Range of Exercise Prices, high end of range (in dollars per share)	$ 6.77
Number Outstanding (in shares)	1,085,966
Weighted-Average Remaining Contractual Term	9 years 7 days
Weighted-Average Exercise Price (Outstanding) (in dollars per share)	$ 6.77
Number Exercisable (in shares)	215,738
Weighted-Average Exercise Price (Exercisable) (in dollars per share)	$ 6.77
$7.02 - $8.36
Stock-based compensation
Range of Exercise Prices, low end of range (in dollars per share)	$ 7.02
Range of Exercise Prices, high end of range (in dollars per share)	$ 8.36
Number Outstanding (in shares)	992,512
Weighted-Average Remaining Contractual Term	7 years 7 months 13 days
Weighted-Average Exercise Price (Outstanding) (in dollars per share)	$ 7.76
Number Exercisable (in shares)	539,862
Weighted-Average Exercise Price (Exercisable) (in dollars per share)	$ 7.88
$8.45 - $8.55
Stock-based compensation
Range of Exercise Prices, low end of range (in dollars per share)	$ 8.45
Range of Exercise Prices, high end of range (in dollars per share)	$ 8.55
Number Outstanding (in shares)	693,000
Weighted-Average Remaining Contractual Term	7 years 11 months 1 day
Weighted-Average Exercise Price (Outstanding) (in dollars per share)	$ 8.53
Number Exercisable (in shares)	356,789
Weighted-Average Exercise Price (Exercisable) (in dollars per share)	$ 8.54
$8.71 - $8.71
Stock-based compensation
Range of Exercise Prices, low end of range (in dollars per share)	$ 8.71
Range of Exercise Prices, high end of range (in dollars per share)	$ 8.71
Number Outstanding (in shares)	26,000
Weighted-Average Remaining Contractual Term	9 years 2 months 1 day
Weighted-Average Exercise Price (Outstanding) (in dollars per share)	$ 8.71
Weighted-Average Exercise Price (Exercisable) (in dollars per share)	$ 0.00
$9.02 - $9.02
Stock-based compensation
Range of Exercise Prices, low end of range (in dollars per share)	$ 9.02
Range of Exercise Prices, high end of range (in dollars per share)	$ 9.02
Number Outstanding (in shares)	15,000
Weighted-Average Remaining Contractual Term	7 years 2 months 19 days
Weighted-Average Exercise Price (Outstanding) (in dollars per share)	$ 9.02
Number Exercisable (in shares)	10,938
Weighted-Average Exercise Price (Exercisable) (in dollars per share)	$ 9.02

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SCHEDULE II: VALUATION AND QUALIFYING ACCOUNTS (Details) (USD $)	12 Months Ended
	Dec. 31, 2013	Dec. 31, 2012	Dec. 31, 2011
Sales and return allowances, discounts, chargebacks and rebates:
Movement in valuation and qualifying accounts
Balance at Beginning of Year	$ 15,159,000	$ 12,559,000	$ 8,092,000
Additions Charged as a Reduction to Revenue	28,743,000	12,872,000	12,960,000
Additions Change in Deferred Revenue		(611,000)	516,000
Deductions	(24,172,000)	(9,661,000)	(9,009,000)
Balance at End of Year	19,730,000	15,159,000	12,559,000
Deferred tax assets valuation allowance:
Movement in valuation and qualifying accounts
Balance at Beginning of Year	42,500,000	34,700,000	62,300,000
Additions Charged as a Reduction to Revenue		7,800,000
Deductions	(39,830,000)		(27,600,000)
Balance at End of Year	2,670,000	42,500,000	34,700,000
Reversed valuation allowance	39,800,000
Valuation allowance reduced due to a reduction in the Company's deferred tax assets			$ 27,600,000

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ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Tables)

12 Months Ended

Dec. 31, 2013

ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Schedule of useful lives of property and equipment

Furniture and office equipment	3 - 5 years
Laboratory equipment	3 - 5 years
Leasehold improvements	Shorter of estimated useful life or lease term

Schedule of calculation of basic and diluted earnings per share

(in thousands, except for per share amounts)	2013		2012			2011
Numerator:
Net income (loss)	$	43,313	$	(29,781	)	$	70,726
Denominator for basic net income (loss) per share		56,736		55,893			54,563
Net effect of dilutive common shares		—		—			1,527
Denominator for diluted net income (loss) per share:		57,544		55,893			56,090
Basic net income (loss) per share	$	0.76	$	(0.53	)	$	1.30
Diluted net income (loss) per share	$	0.75	$	(0.53	)	$	1.26

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SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) (Tables)

12 Months Ended

Dec. 31, 2013

SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

Schedule of selected quarterly financial data (unaudited)

	2013 Quarter Ended
(in thousands)	March 31			June 30		September 30		December 31
Product sales	$	9,129		$	14,106	$	16,278	$	18,789
Total revenues		26,174			29,963		37,460		40,608
Gross margin on product sales		7,645			12,418		14,527		16,621
Income (loss) from operations		(5,533	)		532		6,838		7,480
Net income (loss)		(5,480	)		478		6,514		41,801
Basic net income (loss) per share	$	(0.10	)	$	0.01	$	0.11	$	0.73
Diluted net income (loss) per share	$	(0.10	)	$	0.01	$	0.11	$	0.72

	2012 Quarter Ended
	March 31			June 30			September 30			December 31
Product sales	$	2,109		$	3,201		$	9,684		$	12,489
Total revenues		16,835			14,110			33,282			26,590
Gross margin on product sales		1,591			1,759			7,921			10,173
Income (loss) from operations		(8,938	)		(15,983	)		(1,541	)		(3,891	)
Net income (loss)		(8,804	)		(15,780	)		(1,495	)		(3,704	)
Basic net income (loss) per share	$	(0.16	)	$	(0.28	)	$	(0.03	)	$	(0.07	)
Diluted net income (loss) per share	$	(0.16	)	$	(0.28	)	$	(0.03	)	$	(0.07	)

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RELATED PARTY TRANSACTIONS

12 Months Ended

Dec. 31, 2013

RELATED PARTY TRANSACTIONS

RELATED PARTY TRANSACTIONS

NOTE 13. RELATED PARTY TRANSACTIONS

Carl A. Pelzel

        In April 2011, the Company entered into a separation agreement and release with Carl A. Pelzel, the Company's former President and Chief Executive Officer. Pursuant to the separation agreement, Mr. Pelzel was paid $520,000, which is equivalent to one year of his base salary. Payments were made over one year, and were reduced dollar-for-dollar by any compensation Mr. Pelzel received in connection with employment (or full-time consulting) by another employer (or third party). The Company also paid Mr. Pelzel's health and dental insurance COBRA premiums for 18 months following his separation from the Company. The separation agreement further provided for three months' accelerated vesting of Mr. Pelzel's options to purchase the Company's common stock, and a release of claims in favor of the Company. The Company incurred a one-time severance charge of approximately $1.0 million in the second quarter of 2011 with respect to this separation agreement, consisting of approximately $0.4 million in stock-based compensation related to the accelerated vesting of Mr. Pelzel's awards and approximately $0.6 million of severance expense related to future payments and health care benefits.

Burrill Securities

        Burrill Securities acted as a financial advisor to PDL in the PDL transaction. Burrill Securities is the merchant banking division of Burrill & Company. G. Steven Burrill, a member of the Company's Board of Directors (the "Board"), is the Chief Executive Officer and sole shareholder of Burrill & Company. The Board was aware of Burrill & Company's interest in the transaction and Mr. Burrill recused himself from all deliberations and actions taken by the Board with respect to the transaction. Burrill Securities' engagement with PDL in the transaction was led by Fredrick Frank, the Chairman of Burrill Securities and a former member of the Board of Directors of PDL. The Company has been informed that Burrill Securities will receive a fee of up to $500,000 from PDL in connection with the transaction.