NOTE 15. BUSINESS COMBINATIONS

The CAMBIA® Acquisition

On December 17, 2013, the Company entered into an Asset Purchase Agreement (CAMBIA® 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 CAMBIA® 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 CAMBIA® 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.

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 2014 and 2013 was approximately $5.1 million and $0.2 million, respectively. The Company incurred an aggregate of $0.1 million in acquisition-related costs during 2013. These expenses are included in selling, general and administrative expenses in the Company's consolidated statement of operations.

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. 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 consolidated balance sheet and reflected in the consolidated statement of operations as a credit within interest and other income. The Company determines the fair value of this liability at each reporting period.

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 cost of sales related to the step-up value of CAMBIA® inventories was $3.5 million and $0.2 million in 2014 and 2013, respectively. The bargain purchase amount has been recorded within interest and other income during 2013.

The Lazanda® Acquisition

On July 29, 2013, the Company entered into an Asset Purchase Agreement (Lazanda® 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 Lazanda® 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 Lazanda® 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, cash contingent payments upon the achievement by the Company's 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.

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 2014 and 2013 was approximately $1.2 million and $0.5 million, respectively. The Company incurred an aggregate of $0.1 million in acquisition-related costs in 2013. These expenses are included in selling, general and administrative expenses in the Company's consolidated statement of operations.

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® inventories was $0.3 million and $0.1 million in 2014 and 2013, respectively.

The Zipsor® Acquisition

On June 21, 2012, the Company entered into an Asset Purchase Agreement (Zipsor® 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 the Company'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 the Company's net sales of Zipsor® products exceed $60.0 million.

In accordance with the authoritative guidance for business combinations, the Zipsor® 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 Zipsor® Asset Purchase Agreement, we have $1.0 million in escrow as of December 31, 2014.

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.

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 2014, 2013 and 2012 was approximately $3.9 million, $3.8 million and $2.0 million, respectively.

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 and 2012 was $0.7 million and $1.2 million, respectively. The bargain purchase amount has been recorded within Interest and other income during 2012.