0001104659-15-044382.txt : 20150610 0001104659-15-044382.hdr.sgml : 20150610 20150609204617 ACCESSION NUMBER: 0001104659-15-044382 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20150402 ITEM INFORMATION: Completion of Acquisition or Disposition of Assets ITEM INFORMATION: Financial Statements and Exhibits FILED AS OF DATE: 20150610 DATE AS OF CHANGE: 20150609 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DEPOMED INC CENTRAL INDEX KEY: 0001005201 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 943229046 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 001-13111 FILM NUMBER: 15922154 BUSINESS ADDRESS: STREET 1: 7999 GATEWAY BLVD. STREET 2: SUITE 300 CITY: NEWARK STATE: CA ZIP: 94560 BUSINESS PHONE: 510-744-8000 MAIL ADDRESS: STREET 1: 7999 GATEWAY BLVD. STREET 2: SUITE 300 CITY: NEWARK STATE: CA ZIP: 94560 8-K/A 1 a15-12888_18ka.htm 8-K/A

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 8-K/A

(Amendment No.1)

Current Report

Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Date of Report (Date of earliest event reported): April 2, 2015

DEPOMED, INC.

(Exact name of registrant as specified in its charter)

001-13111

(Commission File Number)

California		94-3229046
(State or other jurisdiction of		(I.R.S. Employer Identification No.)
incorporation)

7999 Gateway Blvd, Suite 300, Newark, California 94560

(Address of principal executive offices, with zip code)

(510) 744-8000

(Registrant’s telephone number, including area code)

Not Applicable

(Former name or former address, if changed since last report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

o Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

o Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

o Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

o Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Item 2.01 Completion of Acquisition or Disposition of Assets

On April 2, 2015, Depomed, Inc., a California corporation (the “Company”) filed a Current Report on Form 8-K (the “Initial Filing”) to report the Company’s acquisition from Janssen Pharmaceuticals, Inc., a Pennsylvania corporation (“Janssen”), and its affiliates of the U.S. rights to the NUCYNTA® franchise of pharmaceutical products (the “U.S. NUCYNTA® business”) as well as certain related assets, for $1.05 billion in cash (collectively, the “NUCYNTA® Acquisition”). The Company is filing this amendment to the Initial Filing to include the financial information required by Item 9.01 of Form 8-K and to file the related consent of the independent auditor.

Item 9.01 Financial Statements and Exhibits.

(a) Financial Statements of Business Acquired.

The Company believes that according to the guidance of Financial Accounting Standards Board, Accounting Standards Codification 805, “Business Combinations”, and Article 11 of Regulation S-X, the NUCYNTA® Acquisition meets the definition of a “business,” and exceeds the conditions of significance set forth in Rule 1-02(w) of Regulation S-X at the 50% level which would require inclusion in the Form 8-K of audited financial statements of the U.S. NUCYNTA® business for three years pursuant to the requirements of Rule 3-05 of Regulation S-X and unaudited financial statements of the U.S. NUCYNTA® business for the applicable interim periods.

Janssen has advised the Company that is impracticable to prepare complete financial statements related to the U.S. NUCYNTA® business in order to enable the Company to file financial statements as required by Rule 3-05 of Regulation S-X in connection with the NUCYNTA® Acquisition. Specifically, Janssen has informed the Company of the following:

· The U.S. NUCYNTA® business was never accounted for as a separate entity, subsidiary or division of Janssen’s business.

· Janssen did not manage the U.S. NUCYNTA® business as a stand-alone business.

· Stand-alone financial statements of the U.S. NUCYNTA® business were never prepared.

· Janssen has never allocated certain indirect corporate expenses to the U.S. NUCYNTA® business, including interest expense, corporate overhead expenses and income taxes, and this information is not otherwise readily available and any allocation would be subjective and may not be relevant due to significant differences in corporate structures between Janssen and the Company.

Pursuant to a letter dated December 19, 2014 (the “Letter”) from the staff of the Division of Corporate Finance (the “Division”) of the Securities and Exchange Commission, the Division stated that it will not object to the Company’s proposal to provide abbreviated financial statements in satisfaction of the requirements of Rule 3-05 of Regulation S-X.

As a result, the Company is filing with this amendment to the Current Report on Form 8-K, the following financial statements and notes thereto related to the U.S. NUCYNTA® business for purposes of complying with the requirements of Rule 3-05 of Regulation S-X (collectively, the “NUCYNTA® Financial Statements”):

· The audited Special Purpose Combined Statements of Assets Acquired and Liabilities Assumed relating to the NUCYNTA® business as of December 28, 2014 and December 29, 2013 and the notes related thereto, and the audited Special Purpose Combined Statements of Revenues and Direct Expenses for the years ended December 28, 2014, December 29, 2013 and December 30, 2012 and the related notes related thereto, which are filed as Exhibit 99.1.

· The unaudited Special Purpose Quarterly Combined Statements of Assets acquired and Liabilities Assumed as of March 29, 2015 and the unaudited Special Purpose Combined Statements of Revenues and Direct Expenses relating to the NUCYNTA® business for the three months ended March 29, 2015 and March 30, 2014 and the notes related thereto, which are filed as Exhibit 99.2.

(b) Pro Forma Financial Information.

The unaudited pro forma condensed combined balance sheets as of March 31, 2015, and the unaudited pro forma condensed combined statements of income (loss) for the year ended December 31, 2014 and the three months ended March 31, 2015, each reflecting the NUCYNTA® Acquisition as well as the issuance of $575.0 million principal amount of the Company’s senior secured notes (the “Notes”) for aggregate gross proceeds of approximately $562.0 million in connection with the consummation of the NUCNYTA® Acquisition, on April 2, 2015 are filed as Exhibit 99.3 to this Current Report. The Company used $550.0 million of the net proceeds received upon the sale of the Notes to fund a portion of the total purchase price of $1.05 billion.

Pursuant to the Letter, the Division further stated that the pro forma statement of operations should be limited to information that is factually supportable, directly attributable to the transaction and expected to have a continuing impact on the Company, and should not include forward-looking information.

Item 9.01 Financial Statements and Exhibits

Exhibit No.		Description

23.1		Consent of PricewaterhouseCoopers LLP.

99.1		The audited Special Purpose Combined Statements of Assets Acquired and Liabilities Assumed relating to the NUCYNTA® business as of December 28, 2014 and December 29, 2013 and the notes related thereto, and the audited Special Purpose Combined Statements of Revenues and Direct Expenses for the years ended December 28, 2014, December 29, 2013 and December 30, 2012 and the related notes related thereto.

99.2		The unaudited Special Purpose Quarterly Combined Statements of Assets acquired and Liabilities Assumed as of March 29, 2015 and the unaudited Special Purpose Combined Statements of Revenues and Direct Expenses relating to the NUCYNTA® business for the three months ended March 29, 2015 and March 30, 2014 and the notes related thereto.

99.3		Unaudited Pro Forma Condensed Combined Balance Sheet and Statements of Income/(Loss).

SIGNATURES

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

	DEPOMED, INC.


Date: June 10, 2015	By:	/s/ August J. Moretti
		August J. Moretti
		Chief Financial Officer

Exhibits

Exhibit No.		Description

23.1		Consent of PricewaterhouseCoopers LLP.

99.1		The audited Special Purpose Combined Statements of Assets Acquired and Liabilities Assumed relating to the NUCYNTA® business as of December 28, 2014 and December 29, 2013 and the notes related thereto, and the audited Special Purpose Combined Statements of Revenues and Direct Expenses for the years ended December 28, 2014, December 29, 2013 and December 30, 2012 and the related notes related thereto.

99.2		The unaudited Special Purpose Quarterly Combined Statements of Assets acquired and Liabilities Assumed as of March 29, 2015 and the unaudited Special Purpose Combined Statements of Revenues and Direct Expenses relating to the NUCYNTA® business for the three months ended March 29, 2015 and March 30, 2014 and the notes related thereto.

99.3		Unaudited Pro Forma Condensed Combined Balance Sheet and Statements of Income/(Loss).

EX-23.1 2 a15-12888_1ex23d1.htm EX-23.1

Exhibit 23.1

CONSENT OF INDEPENDENT ACCOUNTANTS

We hereby consent to the incorporation by reference in the Registration Statements on Forms 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. 333-197433] and S-8 [No. 333-66923, No. 333-85419, No. 333-54982, No. 333-101796, No. 333-105994, No. 333-167015, No. 333-116697, No. 333-145291, No. 333-156538, No. 333-181710, and No. 333-196263] of Depomed, Inc. of our report dated March 3, 2015 relating to the special purpose combined financial statements of the NUCYNTA® Franchise of Janssen Pharmaceuticals, Inc., which appears in this Current Report on Form 8-K of Depomed, Inc.

/s/PricewaterhouseCoopers LLP
Florham Park, New Jersey
June 9, 2015

EX-99.1 3 a15-12888_1ex99d1.htm EX-99.1

Exhibit 99.1

NUCYNTA® Franchise

Special Purpose Combined Financial Statements

December 28, 2014 and December 29, 2013

NUCYNTA® Franchise

Index

	Page(s)

Independent Auditor’s Report	1-2

Special Purpose Combined Financial Statements

Statements of Assets Acquired and Liabilities Assumed
December 28, 2014 and December 29, 2013	3

Statements of Revenues and Direct Expenses
Fiscal Years Ended December 28, 2014, December 29, 2013 and December 30, 2012	4

Notes to Special Purpose Combined Financial Statements
December 28, 2014 and December 29, 2013	5-13

Independent Auditor’s Report

To the Management of

Janssen Pharmaceuticals, Inc.

We have audited the accompanying special purpose combined financial statements of the NUCYNTA® Franchise of Janssen Pharmaceuticals, Inc. (the “Company”), which is a wholly owned subsidiary of Johnson & Johnson, which comprise the special purpose combined statements of assets to be acquired and liabilities to be assumed as of December 28, 2014 and December 29, 2013, and the related special purpose combined statements of revenues and direct expenses for each of the fiscal years ended December 28, 2014, December 29, 2013 and December 30, 2012.

Management’s Responsibility for the Special Purpose Combined Financial Statements

Management is responsible for the preparation and fair presentation of the special purpose combined financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of the special purpose combined financial statements that are free from material misstatement, whether due to fraud or error.

Auditors’ Responsibility

Our responsibility is to express an opinion on the special purpose combined financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the special purpose combined financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the special purpose combined financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the special purpose combined financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the Company’s preparation and fair presentation of the special purpose combined financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the special purpose combined financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the special purpose combined financial statements referred to above present fairly, in all material respects, the assets to be acquired and liabilities to be assumed of the NUCYNTA® Franchise of Janssen Pharmaceuticals, Inc., a wholly-owned subsidiary of Johnson & Johnson, as of December 28, 2014 and December 29 2013 and their revenues and direct expenses for each of the fiscal years ended December 28, 2014, December 29, 2013 and December 30, 2012 in accordance with accounting principles generally accepted in the United States of America.

Emphasis of Matter

The accompanying special purpose combined financial statements were prepared in connection with Johnson & Johnson’s divesture of the NUCYNTA® Franchise of Janssen Pharmaceuticals, Inc., and as described in Note 2, were prepared in accordance with an SEC waiver received by the buyer, for the purposes of the buyer complying with Rule 3-05 of the Securities and Exchange Commission’s Regulation S-X. These special purpose combined financial statements are not intended to be a complete presentation of the financial position, results of operations or cash flows of the NUCYNTA® Franchise of Janssen Pharmaceuticals, Inc. Our opinion is not modified with respect to this matter.

/s/ PricewaterhouseCoopers LLP

Florham Park, New Jersey

March 3, 2015

NUCYNTA® Franchise

Special Purpose Combined Statements of Assets Acquired and Liabilities Assumed

December 28, 2014 and December 29, 2013

(dollars in thousands)

	December 28,		December 29,
	2014		2013

Current assets
Inventories, net	$	2,796	$	2,331
Total current assets	2,796		2,331

Property, plant and equipment, net	8,885		9,603

Intangible assets, net	6,154		9,056

Total assets acquired	$	17,835	$	20,990

The accompanying notes are an integral part of these special purpose combined financial statements.

NUCYNTA® Franchise

Special Purpose Combined Statements of Revenues and Direct Expenses

Fiscal Years Ended December 28, 2014, December 29, 2013, and December 30, 2012

(dollars in thousands)

	Year Ended		Year Ended		Year Ended
	December 28,		December 29,		December 30,
	2014		2013		2012

Product revenues, net	$	172,238	$	173,314	$	180,117

Direct and allocated expenses
Cost of revenue	53,968		54,044		51,549
Selling and marketing	36,664		37,292		150,111
General and administrative	8,148		7,065		7,325
Research and development	24,027		19,407		35,138
Total direct and allocated expenses	122,807		117,808		244,123

Product revenues, net in excess of (less than) direct and allocated expenses	$	49,431	$	55,506	$	(64,006	)

The accompanying notes are an integral part of these special purpose combined financial statements.

NUCYNTA® Franchise

Notes to Special Purpose Combined Financial Statements

December 28, 2014 and December 29, 2013

(dollars in thousands unless otherwise noted)

1. Background

Janssen Pharmaceuticals, Inc. (“Janssen”), a Pennsylvania corporation, has agreed to divest the U.S. license rights to the NUCYNTA® Franchise of pharmaceutical products as well as certain related assets (the “Business”). Janssen is a wholly owned subsidiary of Johnson & Johnson (the “Parent”).

The NUCYNTA® Franchise includes NUCYNTA® ER (tapentadol) extended release tablets indicated for the management of pain, including neuropathic pain associated with diabetic peripheral neuropathy (“DPN”), severe enough to require daily, around-the-clock, long-term opioid treatment, NUCYNTA® (tapentadol), an immediate release version of tapentadol, for management of moderate to severe acute pain in adults, and NUCYNTA® (tapentadol) oral solution, an approved oral form of tapentadol that has not been commercialized.

On January 15, 2015, Janssen entered into an Asset Purchase Agreement with Depomed, Inc. (the “Buyer”) providing for the sale of the Business. Under the terms of the Asset Purchase Agreement, the approximate purchase price is $1.05 billion, subject to customary adjustments.

Upon transaction closing, all U.S. license rights to the NUCYNTA® Franchise previously licensed by Janssen from Grünenthal GmbH (“Grünenthal”) will transfer to the Buyer. The Buyer will acquire two manufacturing lines, both for the manufacture of NUCYNTA® ER. Janssen will manufacture both NUCYNTA® and NUCYNTA® ER and supply finished product to the Buyer for sale and distribution in the U.S. until the Buyer’s manufacturing facilities are approved by all relevant regulatory authorities. Following approval of the Buyer’s manufacturing facilities, Janssen will continue to manufacture and supply the active pharmaceutical ingredient. Any existing finished goods inventory in Janssen’s possession at transaction closing will transfer to the Buyer.

2. Basis of Presentation

These Special Purpose Combined Statements of Assets Acquired and Liabilities Assumed as of December 28, 2014 and December 29, 2013, and the related Special Purpose Combined Statements of Revenues and Direct Expenses for the fiscal years ended December 28, 2014, December 29, 2013 and December 30, 2012 are derived from the historical books and records of Janssen and certain of its affiliates and only present the assets acquired and liabilities assumed and the product revenues and direct expenses, including certain allocated expenses, of the Business. The Buyer will assume no liabilities with the acquisition of the Business. It is impracticable to prepare complete financial statements related to the Business as it was not a separate legal entity of the Parent and was never operated as a stand-alone business, division or subsidiary. The Parent has never prepared full stand-alone or full carve-out financial statements for the Business and has never maintained the distinct and separate accounts necessary to prepare such financial statements.

These Special Purpose Combined Financial Statements have been prepared to reflect the assets acquired and liabilities assumed by the Buyer in accordance with a waiver obtained by the Buyer from the Securities and Exchange Commission which includes all costs directly associated with

NUCYNTA® Franchise

Notes to Special Purpose Combined Financial Statements

December 28, 2014 and December 29, 2013

(dollars in thousands unless otherwise noted)

producing revenues, including a reasonable allocation of expenses, and excludes costs not directly involved in the revenue producing activity, such as corporate overhead, interest and income tax. Therefore, these Special Purpose Combined Financial Statements are not intended to be a complete presentation of the financial position, results of operations or cash flows of the Business in conformity with accounting principles generally accepted in the United States of America. The operations of the Business rely, to varying degrees, on Janssen and certain of its affiliates and other subsidiaries of the Parent for marketing, sales order processing, billing, collection, procurement, customer service, warehousing, information technology, insurance, human resources, accounting, regulatory, treasury, and legal support, and these expenses have been allocated in these Special Purpose Combined Statements of Revenues and Direct Expenses. These Special Purpose Combined Financial Statements are not indicative of the financial condition or results of operations of the acquired Business on a stand-alone basis, because of the reliance of the Business on the Parent and certain of its affiliates.

These Special Purpose Combined Statements of Assets Acquired and Liabilities Assumed include inventories, property, plant and equipment, and intangible assets.

The operations of the Business are included in the consolidated federal income tax return of the Parent, to the extent appropriate, and are included in the foreign, state and local returns of certain other affiliates of the Parent. A provision for income taxes has not been presented in these Special Purpose Combined Financial Statements as the Business has not operated as a stand-alone unit and no allocation of income tax provision/benefit has been made to the Business.

During the fiscal years ended December 28, 2014, December 29, 2013 and December 30, 2012, the Business’ financing requirements were provided by the Parent, and cash generated by the Business was swept to the Parent. As the Business has historically been managed as part of the operations of Janssen and certain of its affiliates and has not been operated as a stand-alone entity, it is not practical to prepare historical cash flow information regarding the Business’ operating, investing, and financing cash flows. As such, statements of cash flows were not prepared for the Business.

3. Allocation of Certain Costs and Expenses

Certain costs and expenses presented in these Special Purpose Combined Financial Statements have been allocated by Janssen and certain of its affiliates to the Business based on a specific identification basis or, when specific identification is not practicable, a proportional cost allocation method (primarily net product revenues or headcount), depending on the nature of the services rendered. Management considers that such allocations have been made on a reasonable basis, but may not necessarily be indicative of the costs that would have been incurred if the Company had been operated on a stand-alone basis for the periods presented.

These Special Purpose Combined Financial Statements reflect a consistent application of methodology each reporting period presented. Allocations of Parent corporate overhead unrelated to the operations of the Business have been excluded from these Special Purpose Combined Financial Statements.

NUCYNTA® Franchise

Notes to Special Purpose Combined Financial Statements

December 28, 2014 and December 29, 2013

(dollars in thousands unless otherwise noted)

Cost of revenue, selling and marketing, and research and development (“R&D”) primarily include allocations for indirect overhead incurred by Janssen on behalf of the Business. General and administrative costs include allocated expenses primarily related to compensation for employees, outside services and shared services incurred. The allocated expenses are included in these Special Purpose Combined Statements of Revenue and Direct Expenses.

The amounts allocated to the Business by Janssen and certain of its affiliates for the periods presented are as follows:

	Year Ended		Year Ended		Year Ended
	December 28,		December 29,		December 30,
	2014		2013		2012

Cost of revenue	$	5,694	$	5,341	$	5,597
Selling and marketing	3,656		4,484		7,394
General and administrative	8,148		7,065		7,325
Research and development	3,766		3,478		5,060
Total allocated expenses	$	21,264	$	20,368	$	25,376

In January 2013, the Business’ selling model changed to a specialty model with a dedicated salesforce targeting a limited number of pain specialists. Prior to 2013, both NUCYNTA® and NUCYNTA® ER were promoted by a larger salesforce that also promoted other Janssen branded products. The changes to the Business’ selling model generated considerable cost savings in 2013 and 2014 compared to 2012. Direct selling costs were $21,287 and $17,961 for the fiscal years ended December 28, 2014 and December 29, 2013, respectively, compared to direct selling costs of $113,533 for the fiscal year ended December 30, 2012.

Costs incurred by the Parent related to the divestiture of the Business have not been included in these Special Purpose Combined Financial Statements. These costs include employee related costs, audit fees and other costs solely related to the divestiture of the Business.

4. Summary of Significant Accounting Policies

Annual Closing Date

The Business follows the concept of a fiscal year, which ends on the Sunday nearest to the end of the month of December. The 2014, 2013 and 2012 fiscal years presented consist of 52 weeks.

Principles of Combination

The accompanying Special Purpose Combined Financial Statements include the results allocated to the Business from Janssen and certain of its affiliates. Intercompany accounts and transactions are eliminated.

Use of Estimates

The preparation of these Special Purpose Combined Financial Statements in conformity with accounting principles generally accepted in the U.S. requires management to make certain estimates and assumptions that affect the amounts reported. The estimates and associated assumptions are based on historical experience, complex judgments and various other factors that are believed to be reasonable under the circumstances but are inherently uncertain and

NUCYNTA® Franchise

Notes to Special Purpose Combined Financial Statements

December 28, 2014 and December 29, 2013

(dollars in thousands unless otherwise noted)

unpredictable. These estimates and underlying assumptions can impact all elements of these Special Purpose Combined Financial Statements, including but not limited to, allocations of costs and expenses from the Parent, and accounting for deductions from revenue (e.g., rebates, sales discounts, allowances and incentives). Actual results may or may not differ from these estimates. Also, as discussed in Note 3, these Special Purpose Combined Financial Statements include allocations and estimates that are not necessarily indicative of the amounts that would have resulted if the Business had been operated as a stand-alone entity.

Inventories

Inventories are stated at the lower of cost or market determined by the first-in, first-out method.

Intangible Assets

Intangible assets have finite lives and are amortized over their useful lives and reviewed for impairment when warranted.

Property, Plant, and Equipment and Depreciation

Property, plant, and equipment are stated at cost. Depreciation expense is recorded on a straight-line basis over the estimated useful lives of the assets, which is 7 years for machinery and equipment.

Long-lived assets are assessed for recoverability using undiscounted cash flows. When certain events or changes in operating or economic conditions occur, an impairment assessment may be performed on the recoverability of the carrying value of these assets. If the asset is determined to be impaired, the loss is measured based on the difference between the asset’s fair value and its carrying value. If quoted market prices are not available, the fair value will be estimated using a discounted value of estimated future cash flows. For the periods ended December 28, 2014 and December 29, 2013 and December 30, 2012 no impairment loss was recognized.

Revenue Recognition

The Business recognizes revenue from product sales when the goods are shipped or delivered and title and risk of loss pass to the customer. Provisions for certain rebates, product returns, and discounts to customers are accounted for as reductions in sales in the same period the related sales are recorded. The impact of these provisions on product revenue was $75,406, $70,767 and $61,343 for the fiscal years ended December 28, 2014, December 29, 2013 and December 30, 2012, respectively.

Product discounts granted are based on the terms of arrangements with direct, indirect and other market participants, as well as market conditions, including prices charged by competitors. Rebates, which include Medicaid, are estimated based on contractual terms, historical experience, patient outcomes, trend analysis and projected market conditions in the various markets served. Market conditions are evaluated primarily through the analysis of wholesaler and other third-party sell-through and market research data, as well as internally generated information.

Sales returns are generally estimated and recorded based on historical sales and returns information.

Shipping and Handling

Shipping and handling costs incurred were $457, $614, and $701 for the fiscal years ended December 28, 2014, December 29, 2013 and December 30, 2012, respectively, and are included

NUCYNTA® Franchise

Notes to Special Purpose Combined Financial Statements

December 28, 2014 and December 29, 2013

(dollars in thousands unless otherwise noted)

in “Selling and marketing” on these Special Purpose Combined Statements of Revenues and Direct Expenses.

Research and Development

R&D expenses are expensed as incurred. Upfront and milestone payments made to third parties in connection with R&D collaborations are expensed as incurred up to the point of regulatory approval. Upfront and milestone payments made to third parties subsequent to regulatory approval are capitalized and amortized over the remaining useful life of the related product. Amounts capitalized for such payments are not transferring to the Buyer and are not included in these Special Purpose Combined Statements of Assets Acquired and Liabilities Assumed.

Janssen has collaborative arrangements with Grünenthal, on behalf of the Business, to develop and commercialize certain drug products and pursue intellectual property protection for those products. Both parties are active participants in the collaborations and are exposed to significant risks and rewards dependent on the commercial success of the activities.

Advertising

Costs associated with advertising, which are not material to the Business, are expensed in the year incurred and are included in “Selling and marketing” on these Special Purpose Combined Statements of Revenues and Direct Expenses.

Benefit Plans/Stock Based Compensation

Certain eligible employees of the Business have been awarded stock option grant or restricted stock units under the Parent’s stock option plans. These stock options and restricted stock grants are accounted for under the fair value method of equity-based compensation accounting principles and have been allocated to the Business in these Special Purpose Combined Financial Statements. Stock based compensation expense allocated to the Business was $579, $706, and $1,265 for the fiscal years ended December 28, 2014, December 29, 2013 and December 30, 2012, respectively. Certain eligible employees of the Business also participated in various other Parent benefit plans, as described in Note 8.

Concentrations

NUCYNTA® and NUCYNTA® ER are primarily sold to customers in the wholesale sector. Product revenues to the three largest pharmaceutical wholesalers in the U.S. as a percentage of total product revenues were approximated as follows:

	Year Ended		Year Ended		Year Ended
	December 28,		December 29,		December 30,
	2014		2013		2012

McKesson Corporation	40	%	39	%	36	%
Cardinal Health, Inc.	30	%	35	%	48	%
AmerisourceBergen Corporation	21	%	17	%	9	%

Commitments and Contingencies

NUCYNTA® Franchise

Notes to Special Purpose Combined Financial Statements

December 28, 2014 and December 29, 2013

(dollars in thousands unless otherwise noted)

product liability claims relating to products sold prior to transaction closing will be retained by the Parent. Management is not aware of any existing matters that would have a material adverse effect on the Business as of the date of these Special Purpose Combined Financial Statements. See Note 10 for further information regarding legal proceedings.

For the fiscal years ended December 28, 2014, December 29, 2013 and December 30, 2012, respectively, royalty expenses relating to U.S. product sales of NUCYNTA® and NUCYNTA® ER were $28,938, $29,890, and $29,630, and are included in “Cost of revenue” on these Special Purpose Combined Statements of Revenues and Direct Expenses. The royalty agreements are summarized as follows:

			Royalty
Licensor	Technology	Product	Expiration

Grünenthal GmbH	Abuse deterrent formulation	Nucynta® and Nucynta® ER	September 2028

Depomed, Inc.	Acuform gastric retentive drug delivery technology	Nucynta® ER	December 2021

NPS Pharmaceuticals, Inc.	Licensing in of technologies used in development of NUCYNTA® and NUCYNTA® ER	Nucynta® and Nucynta® ER	June 2017

5. Inventories, Net

As of December 28, 2014 and December 29, 2013, components of inventory acquired consisted only of finished goods and amounted to $2,796 and $2,331, respectively.

6. Property, Plant and Equipment, Net

	December 28,			December 29,
	2014			2013

Machinery and equipment	$	12,046		$	5,881
Construction in progress	—			5,822
Total property, plant and equipment	12,046			11,703
Less: Accumulated depreciation	(3,161		)	(2,100		)
Property, plant and equipment, net	$	8,885		$	9,603

Depreciation expense incurred related to the property, plant and equipment acquired was $807, $814 and $820 for the fiscal years ended December 28, 2014, December 29, 2013 and December 30, 2012, respectively. Depreciation expense included in these Special Purpose Combined Statements of Revenues and Direct Expenses also includes $989, $1,087 and $880 for the fiscal years ended December 28, 2014, December 29, 2013 and December 30, 2012, respectively, for other property, plant and equipment related to the Business which are not being sold. These Special Purpose Combined Statements of Revenues and Direct Expenses also

NUCYNTA® Franchise

Notes to Special Purpose Combined Financial Statements

December 28, 2014 and December 29, 2013

(dollars in thousands unless otherwise noted)

include additional directly allocable depreciation expense from the Parent related to other property, plant and equipment.

7. Intangible Assets, Net

At the end of December 28, 2014 and December 29, 2013 the gross and net amounts of intangible assets were:

	December 28,			December 29,
	2014			2013

Gross intangible assets	$	15,000		$	15,000
Less: Accumulated amortization	(8,846		)	(5,944		)
Intangible assets, net	$	6,154		$	9,056

The amortization expense was $2,902, $2,902 and $1,501 for the fiscal years ended December 28, 2014, December 29, 2013 and December 30, 2012, respectively, and was included in “Cost of revenue” on these Special Purpose Combined Statements of Revenues and Direct Expenses.

8. Pensions and Other Benefit Plans

These Special Purpose Combined Statements of Revenue and Direct Expenses include certain employee benefit expenses. These include medical, dental, comprehensive and preventive for active employees, pension expense, group life insurance and employer match pursuant to the U.S. 401(k) savings plan, are managed on a centralized basis by the Parent, and are calculated using charge-out rates for these benefits. The costs and charge-out rates are determined annually by the Parent for allocation purposes in the Parent’s consolidated financial statements. Charge-out rates are based on a budgeted rate, which approximates actual costs, that is applied to actual salaries for the operating businesses.

Expenses associated with pension and other benefit plans have been allocated to the Business using the methodologies described in Note 3. For the fiscal years ended December 28, 2014, December 29, 2013 and December 30, 2012, $1,136, $1,095 and $19,453, respectively, are included within these Special Purpose Combined Statements of Revenues and Direct Expenses.

9. Related Parties

The Business has various relationships with the Parent, Janssen and other subsidiaries of the Parent, whereby they provide services to the Business. For each of the periods presented, the Business’ operations were integrated with the Parent based on a shared services concept, including executive services, finance, information technology, treasury, human resources, corporate governance and operational shared services. The Parent charges the Business for these services based on direct and indirect costs. When specific identification is not practicable, a proportional cost allocation method is used (primarily net product revenues or headcount), depending on the nature of the services received.

NUCYNTA® Franchise

Notes to Special Purpose Combined Financial Statements

December 28, 2014 and December 29, 2013

(dollars in thousands unless otherwise noted)

10. Legal Proceedings

Intellectual Property

The following summarizes lawsuits pending against generic companies that have filed Abbreviated New Drug Applications (“ANDAs”) with the United States Food and Drug Administration (the “FDA”) seeking to market generic forms of NUCYNTA® and NUCYNTA® ER prior to expiration of the applicable patents covering those products. In the event these actions are not successful, or the statutory 30-month stays of the ANDAs expire before the United States District Court rulings are obtained, the third-party companies involved will have the ability, upon approval of the FDA, to introduce generic versions of the products at issue to the market, resulting in the potential for substantial market share and revenue losses for the products, and which may result in a non-cash impairment charge in any associated intangible asset.

In July 2013, Janssen filed patent infringement lawsuits in the United States District Court for the District of New Jersey against Actavis Elizabeth LLC, Actavis Inc. and Actavis LLC (collectively, “Actavis”), as well as Alkem Laboratories Limited and Ascend Laboratories, LLC (collectively, “Alkem”). The patent infringement claims against Actavis and Alkem relate to their respective ANDAs seeking approval to market a generic version of NUCYNTA® ER before the expiration of United States Reissue Patent No. 39,593 (the “‘593 patent”), United States Patent No. 7,994,364 (the “‘364 patent”) and, as to Actavis only, United States Patent No. 8,309,060 (the “‘060 patent”). The lawsuit also includes a patent infringement claim against Alkem in response to its ANDA seeking approval to market a generic version of NUCYNTA® before the expiration of the ‘593 and ‘364 patents. In December 2013, Janssen filed an additional complaint in the District Court of New Jersey against Alkem asserting United States Patent No. 8,536,130 related to its ANDA seeking approval to market a generic version of NUCYNTA® ER. In August 2014, Janssen amended the complaint against Alkem to add additional dosage strengths.

In October 2013, Janssen received a Paragraph IV Notice from Sandoz, Inc. (“Sandoz”) with respect to NUCYNTA® related to the ‘364 patent, and a Paragraph IV Notice from Roxane Laboratories, Inc. (“Roxane”) with respect to NUCYNTA® related to the ‘364 and ‘593 patents. In response to those notices, Janssen filed an additional complaint in the United States District Court for the District of New Jersey against Roxane and Sandoz asserting the ‘364 patent against Sandoz and the ‘364 and ‘593 patents against Roxane. In April 2014, Janssen and Sandoz entered into a joint stipulation of dismissal of the case against Sandoz, based on Sandoz’s agreement not to enter the market prior to the expiration of the asserted patents. In June 2014, in response to a Paragraph IV Notice from Roxane with respect to NUCYNTA® ER, Janssen filed a complaint asserting the ‘364 and ‘593 patents against Roxane.

In July 2014, in response to a Paragraph IV Notice from Watson Laboratories, Inc. (“Watson”) with respect to the NUCYNTA® oral solution product and the ‘364 and ‘593 patents, Janssen filed a lawsuit in the United States District Court for the District of New Jersey asserting the ‘364 and ‘593 patents against Watson.

In each of the above lawsuits, Janssen is seeking an Order enjoining the defendants from marketing their generic versions of NUCYNTA® and NUCYNTA® ER before the expiration of the asserted patents.

NUCYNTA® Franchise

Notes to Special Purpose Combined Financial Statements

December 28, 2014 and December 29, 2013

(dollars in thousands unless otherwise noted)

Government Proceedings

Along with other pharmaceutical companies, Janssen has been named in a number of lawsuits alleging claims related to opioid marketing practices. In May 2014, Santa Clara and Orange Counties in California (the “Counties”) filed a complaint in state court in Orange County, California against numerous pharmaceutical manufacturers, including Janssen, alleging claims related to opioid marketing practices, including false advertising, unfair competition, and public nuisance. In June 2014, the City of Chicago filed a complaint in Cook County Circuit Court against several pharmaceutical manufacturers, including Janssen, alleging a number of claims related to opioid marketing practices, including consumer fraud violations and false claims. The case was later removed to the United States District Court for the Northern District of Illinois, and in December 2014, defendants filed a motion to dismiss the City of Chicago’s First Amended Complaint for failure to state a claim. In September 2014, the Tennessee Attorney General Division of Consumer Affairs issued a Request for Information to Janssen related to opioids marketing practices. Because the Parent believes that the potential for an unfavorable outcome is not probable, no amounts have been recorded in these Special Purpose Combined Statements of Revenue and Direct Expenses.

Other

In May 2013, Janssen received a subpoena from the Atlanta Regional Office of the Department of Health and Human Services, Office of Inspector General, seeking production of documents and information regarding: (1) the sales, marketing and promotional practices, including the remuneration of healthcare providers, related to NUCYNTA® and NUCYNTA® ER; and (2) any studies, reports and/or complaints regarding the safety and/or actual or potential side effects of NUCYNTA® and NUCYNTA® ER. In October 2014, the United States Department of Justice (the “DOJ”) informed Janssen that the government’s investigation stemmed from the filing of a qui tam complaint, that the DOJ had formally declined to intervene in the qui tam action, and that the DOJ was closing its investigation related to NUCYNTA® and NUCYNTA® ER. The plaintiff in the qui tam complaint filed a notice of dismissal and the Court dismissed the qui tam action in December 2014.

All liabilities arising out of or relating to legal proceedings and product liability claims relating to products sold prior to transaction closing will be retained by the Parent.

11. Subsequent Events

Subsequent events have been evaluated through March 3, 2015, the date these Special Purpose Combined Financial Statements were issued. On January 15, 2015, Janssen entered into an Asset Purchase Agreement with Depomed, Inc. providing for the sale of the Business. Under the terms of the Asset Purchase Agreement, the approximate purchase price is $1.05 billion, subject to customary closing conditions. There are no other subsequent events which have not been disclosed in these Special Purpose Combined Financial Statements.

EX-99.2 4 a15-12888_1ex99d2.htm EX-99.2

Exhibit 99.2

NUCYNTA® Franchise

Special Purpose Quarterly Combined Financial

Statements (Unaudited)

March 29, 2015

NUCYNTA® Franchise

Index

	Page(s)

Special Purpose Quarterly Combined Financial Statements (Unaudited)

Special Purpose Quarterly Combined Statements of Assets Acquired and Liabilities Assumed March 29, 2015 and December 28, 2014	1

Special Purpose Quarterly Combined Statements of Revenues and Direct Expenses Fiscal First Quarters Ended March 29, 2015 and March 30, 2014	2

Notes to Special Purpose Quarterly Combined Financial Statements	3-11

NUCYNTA® Franchise

Special Purpose Quarterly Combined Statements of Assets Acquired and Liabilities Assumed (Unaudited)

March 29, 2015 and December 28, 2014

(dollars in thousands)

	March 29,		December 28,
	2015		2014

Current assets
Inventories, net	$	3,011	$	2,796
Total current assets	3,011		2,796
Property, plant and equipment, net	8,455		8,885
Intangible assets, net	5,429		6,154
Total assets acquired	$	16,895	$	17,835

The accompanying notes are an integral part of these special purpose quarterly combined financial statements.

NUCYNTA® Franchise

Special Purpose Quarterly Combined Statements of Revenues and Direct Expenses (Unaudited)

Fiscal First Quarters Ended March 29, 2015 and March 30, 2014

(dollars in thousands)

	Fiscal First		Fiscal First
	Quarter Ended		Quarter Ended
	March 29,		March 30,
	2015		2014

Product revenues, net	$	45,286	$	40,898

Direct and allocated expenses
Cost of revenue	13,075		12,285
Selling and marketing	8,142		8,037
General and administrative	1,541		1,410
Research and development	6,105		5,223
Total direct and allocated expenses	28,863		26,955

Product revenues, net in excess of direct and allocated expenses	$	16,423	$	13,943

The accompanying notes are an integral part of these special purpose quarterly combined financial statements.

NUCYNTA® Franchise

Notes to Special Purpose Quarterly Combined Financial Statements (Unaudited)

(dollars in thousands unless otherwise noted)

1. Background

On April 2, 2015, Depomed, Inc. (the “Buyer”) acquired the U.S. license rights to the NUCYNTA® Franchise of pharmaceutical products as well as certain related assets (the “Business”) from Janssen Pharmaceuticals, Inc. (“Janssen”). The purchase price was $1.05 billion, consistent with the Asset Purchase Agreement entered into on January 15, 2015. Janssen, a Pennsylvania corporation, is a wholly owned subsidiary of Johnson & Johnson (the “Parent”). See Note 11 for further information regarding the transaction.

2. Basis of Presentation

The accompanying unaudited Special Purpose Quarterly Combined Financial Statements and related notes should be read in conjunction with the audited Special Purpose Combined Statements of Assets Acquired and Liabilities Assumed as of December 28, 2014 and December 29, 2013, and the related Special Purpose Combined Statements of Revenues and Direct Expenses for the fiscal years ended December 28, 2014, December 29, 2013 and December 30, 2012.

These Special Purpose Quarterly Combined Financial Statements of Assets Acquired and Liabilities Assumed as of March 29, 2015 and December 28, 2014, and the related Special Purpose Quarterly Combined Statements of Revenues and Direct Expenses for the fiscal first quarters ended March 29, 2015 and March 30, 2014 are derived from the historical books and records of Janssen and certain of its affiliates and only present the assets acquired and liabilities assumed and the product revenues and direct expenses, including certain allocated expenses, of the Business. The Buyer will assume no liabilities with the acquisition of the Business. It is impracticable to prepare complete financial statements related to the Business as it was not a separate legal entity of the Parent and was never operated as a stand-alone business, division or subsidiary. The Parent has never prepared full stand-alone or full carve-out financial statements for the Business and has never maintained the distinct and separate accounts necessary to prepare such financial statements.

These Special Purpose Quarterly Combined Financial Statements have been prepared to reflect the assets acquired and liabilities assumed by the Buyer and product revenues and direct expenses in accordance with a waiver obtained by the Buyer from the Securities and Exchange Commission which includes all costs directly associated with producing revenues, including a reasonable allocation of expenses, and excludes costs not directly involved in the revenue producing activity, such as corporate overhead, interest and income tax. Therefore, these Special Purpose Quarterly Combined Financial Statements are not intended to be a complete presentation of the financial position, results of operations or cash flows of the Business in conformity with accounting principles generally accepted in the United States of America. The operations of the Business rely, to varying degrees, on Janssen and certain of its affiliates and other subsidiaries of the Parent for marketing, sales order processing, billing, collection, procurement, customer service, warehousing, information technology, insurance, human resources, accounting, regulatory,

NUCYNTA® Franchise

Notes to Special Purpose Quarterly Combined Financial Statements (Unaudited)

(dollars in thousands unless otherwise noted)

treasury, and legal support, and these expenses have been allocated in these Special Purpose Quarterly Combined Statements of Revenues and Direct Expenses. These Special Purpose Quarterly Combined Financial Statements are not indicative of the financial condition or results of operations of the acquired Business on a stand-alone basis, because of the reliance of the Business on the Parent and certain of its affiliates.

These Special Purpose Quarterly Combined Statements of Assets Acquired and Liabilities Assumed include inventories, property, plant and equipment, and intangible assets.

The operations of the Business are included in the consolidated federal income tax return of the Parent, to the extent appropriate, and are included in the foreign, state and local returns of certain other affiliates of the Parent. A provision for income taxes has not been presented in these Special Purpose Quarterly Combined Financial Statements as the Business has not operated as a standalone unit and no allocation of income tax provision/benefit has been made to the Business.

During the fiscal first quarters ended March 29, 2015 and March 30, 2014, the Business’ financing requirements were provided by the Parent, and cash generated by the Business was swept to the Parent. As the Business has historically been managed as part of the operations of Janssen and certain of its affiliates and has not been operated as a stand-alone entity, it is not practical to prepare historical cash flow information regarding the Business’ operating, investing, and financing cash flows. As such, statements of cash flows were not prepared for the Business.

3. Allocation of Certain Costs and Expenses

Certain costs and expenses presented in these Special Purpose Quarterly Combined Financial Statements have been allocated by Janssen and certain of its affiliates to the Business based on a specific identification basis or, when specific identification is not practicable, a proportional cost allocation method (primarily net product revenues or headcount), depending on the nature of the services rendered. Management considers that such allocations have been made on a reasonable basis, but may not necessarily be indicative of the costs that would have been incurred if the Company had been operated on a stand-alone basis for the periods presented.

These Special Purpose Quarterly Combined Financial Statements reflect a consistent application of methodology each reporting period presented. Allocations of Parent corporate overhead unrelated to the operations of the Business have been excluded from these Special Purpose Quarterly Combined Financial Statements.

Cost of revenue, selling and marketing, and research and development (“R&D”) primarily include allocations for indirect overhead incurred by Janssen on behalf of the Business. General and administrative costs include allocated expenses primarily related to compensation for employees, outside services and shared services incurred. The allocated expenses are included in these Special Purpose Quarterly Combined Statements of Revenue and Direct Expenses.

The amounts allocated to the Business by Janssen and certain of its affiliates for the periods presented are as follows:

NUCYNTA® Franchise

Notes to Special Purpose Quarterly Combined Financial Statements (Unaudited)

(dollars in thousands unless otherwise noted)

	Fiscal First		Fiscal First
	Quarter Ended		Quarter Ended
	March 29,		March 30,
	2015		2014

Cost of revenue	$	764	$	1,339
Selling and marketing	800		868
General and administrative	1,541		1,410
Research and development	1,050		890
Total allocated expenses	$	4,155	$	4,507

Costs incurred by the Parent related to the divestiture of the Business have not been included in these Special Purpose Quarterly Combined Financial Statements. These costs include employee related costs, audit fees and other costs solely related to the divestiture of the Business.

4. Summary of Significant Accounting Policies

Closing Dates

The Business follows the concept of a fiscal quarter, which ends on the Sunday nearest to the end of the month of March. The 2015 and 2014 fiscal first quarters presented consist of 13 weeks.

Principles of Combination

The accompanying Special Purpose Quarterly Combined Financial Statements include the results allocated to the Business from Janssen and certain of its affiliates. Intercompany accounts and transactions are eliminated.

Use of Estimates

The preparation of these Special Purpose Quarterly Combined Financial Statements in conformity with accounting principles generally accepted in the U.S. requires management to make certain estimates and assumptions that affect the amounts reported. The estimates and associated assumptions are based on historical experience, complex judgments and various other factors that are believed to be reasonable under the circumstances but are inherently uncertain and unpredictable. These estimates and underlying assumptions can impact all elements of these Special Purpose Quarterly Combined Financial Statements, including but not limited to, allocations of costs and expenses from the Parent, and accounting for deductions from revenue (e.g., rebates, sales discounts, allowances and incentives). Actual results may or may not differ from these estimates. Also, as discussed in Note 3, these Special Purpose Quarterly Combined Financial Statements include allocations and estimates that are not necessarily indicative of the amounts that would have resulted if the Business had been operated as a stand-alone entity.

Inventories

Inventories are stated at the lower of cost or market determined by the first-in, first-out method.

Intangible Assets

Intangible assets have finite lives and are amortized over their useful lives and reviewed for impairment when warranted.

NUCYNTA® Franchise

Notes to Special Purpose Quarterly Combined Financial Statements (Unaudited)

(dollars in thousands unless otherwise noted)

Property, Plant, and Equipment and Depreciation

Long-lived assets are assessed for recoverability using undiscounted cash flows. When certain events or changes in operating or economic conditions occur, an impairment assessment may be performed on the recoverability of the carrying value of these assets. If the asset is determined to be impaired, the loss is measured based on the difference between the asset’s fair value and its carrying value. If quoted market prices are not available, the fair value will be estimated using a discounted value of estimated future cash flows. For the fiscal first quarters ended March 29, 2015 and March 30, 2014 no impairment loss was recognized.

Revenue Recognition

The Business recognizes revenue from product sales when the goods are shipped or delivered and title and risk of loss pass to the customer. Provisions for certain rebates, product returns, and discounts to customers are accounted for as reductions in sales in the same period the related sales are recorded. The impact of these provisions on product revenue was $20,465 and $15,303 for the fiscal first quarters ended March 29, 2015 and March 30, 2014, respectively. For the fiscal first quarter ended March 29, 2015, product revenue was positively impacted by $1,783 due to an adjustment to previous reserve estimates.

Sales returns are generally estimated and recorded based on historical sales and returns information.

Shipping and Handling

Shipping and handling costs incurred were $127 and $109 for the fiscal first quarters ended March 29, 2015 and March 30, 2014, respectively, and are included in “Selling and marketing” on these Special Purpose Quarterly Combined Statements of Revenues and Direct Expenses.

Research and Development

R&D expenses are expensed as incurred. Upfront and milestone payments made to third parties in connection with R&D collaborations are expensed as incurred up to the point of regulatory approval. Upfront and milestone payments made to third parties subsequent to regulatory approval are capitalized and amortized over the remaining useful life of the related product. Amounts capitalized for such payments have not transferred to the Buyer and are not included in these Special Purpose Quarterly Combined Statements of Assets Acquired and Liabilities Assumed.

NUCYNTA® Franchise

Notes to Special Purpose Quarterly Combined Financial Statements (Unaudited)

(dollars in thousands unless otherwise noted)

Advertising

Costs associated with advertising, which are not material to the Business, are expensed in the year incurred and are included in “Selling and marketing” on these Special Purpose Quarterly Combined Statements of Revenues and Direct Expenses.

Benefit Plans/Stock Based Compensation

Certain eligible employees of the Business have been awarded stock option grant or restricted stock units under the Parent’s stock option plans. These stock options and restricted stock grants are accounted for under the fair value method of equity-based compensation accounting principles and have been allocated to the Business in these Special Purpose Quarterly Combined Financial Statements. Stock based compensation expense allocated to the Business was $156 and $138 for the fiscal first quarters ended March 29, 2015 and March 30, 2014, respectively. Certain eligible employees of the Business also participated in various other Parent benefit plans, as described in Note 8.

Concentrations

	Fiscal First		Fiscal First
	Quarter Ended		Quarter Ended
	March 29,		March 30,
	2015		2014

McKesson Corporation	35	%	38	%
Cardinal Health, Inc.	31	%	31	%
AmerisourceBergen Corporation	17	%	21	%

Commitments and Contingencies

From time to time, the Business is involved in various lawsuits and claims regarding product liability, intellectual property, governmental investigations, and other legal proceedings related to the Business’ activities. The Business was insured through a wholly owned captive insurance company covered by the Parent. All liabilities arising out of or relating to legal proceedings and product liability claims relating to products sold prior to transaction closing will be retained by the Parent. Management is not aware of any existing matters that would have a material adverse effect on the Business as of the date of these Special Purpose Quarterly Combined Financial Statements. See Note 10 for further information regarding legal proceedings.

NUCYNTA® Franchise

Notes to Special Purpose Quarterly Combined Financial Statements (Unaudited)

(dollars in thousands unless otherwise noted)

For the fiscal first quarters ended March 29, 2015 and March 30, 2014, respectively, royalty expenses relating to U.S. product sales of NUCYNTA® and NUCYNTA® ER were $7,416 and $7,217, and are included in “Cost of revenue” on these Special Purpose Quarterly Combined Statements of Revenues and Direct Expenses. The royalty agreements are summarized as follows:

			Royalty
Licensor	Technology	Product	Expiration

Grünenthal GmbH	Abuse deterrent formulation	NUCYNTA® and NUCYNTA® ER	September 2028

Depomed, Inc.	Acuform gastric retentive drug delivery technology	NUCYNTA® ER	December 2021

NPS Pharmaceuticals, Inc.	Licensing in of technologies used in development of NUCYNTA® and NUCYNTA® ER	NUCYNTA® and NUCYNTA® ER	June 2017

5. Inventories, Net

As of March 29, 2015 and December 28, 2014, components of inventory acquired consisted only of finished goods and amounted to $3,011 and $2,796, respectively.

6. Property, Plant and Equipment, Net

	March 29,			December 28,
	2015			2014

Machinery and equipment	$	12,046		$	12,046
Total property, plant and equipment	12,046			12,046
Less: Accumulated depreciation	(3,591		)	(3,161		)
Property, plant and equipment, net	$	8,455		$	8,885

Depreciation expense incurred related to the property, plant and equipment acquired was $393 and $202 for the fiscal first quarters ended March 29, 2015 and March 30, 2014, respectively. Depreciation expense included in these Special Purpose Quarterly Combined Statements of Revenues and Direct Expenses also includes $208 and $246 for the fiscal first quarters ended March 29, 2015 and March 30, 2014, respectively, for other property, plant and equipment related to the Business which are not being sold. These Special Purpose Quarterly Combined Statements of Revenues and Direct Expenses also include additional directly allocable depreciation expense from the Parent related to other property, plant and equipment.

7. Intangible Assets, Net

At March 29, 2015 and December 28, 2014 the gross and net amounts of intangible assets were:

NUCYNTA® Franchise

Notes to Special Purpose Quarterly Combined Financial Statements (Unaudited)

(dollars in thousands unless otherwise noted)

	March 29,			December 28,
	2015			2014

Gross intangible assets	$	15,000		$	15,000
Less: Accumulated amortization	(9,571		)	(8,846		)
Intangible assets, net	$	5,429		$	6,154

The amortization expense was $725 for the fiscal first quarters ended March 29, 2015 and March 30, 2014, and was included in “Cost of revenue” on these Special Purpose Quarterly Combined Statements of Revenues and Direct Expenses.

8. Pensions and Other Benefit Plans

These Special Purpose Quarterly Combined Statements of Revenue and Direct Expenses include certain employee benefit expenses. These include medical, dental, comprehensive and preventive for active employees, pension expense, group life insurance and employer match pursuant to the U.S. 401(k) savings plan, are managed on a centralized basis by the Parent, and are calculated using charge-out rates for these benefits. The costs and charge-out rates are determined annually by the Parent for allocation purposes in the Parent’s consolidated financial statements. Charge-out rates are based on a budgeted rate, which approximates actual costs, that is applied to actual salaries for the operating businesses.

Expenses associated with pension and other benefit plans have been allocated to the Business using the methodologies described in Note 3. For the fiscal first quarters ended March 29, 2015 and March 30, 2014, $306 and $284, respectively, are included within these Special Purpose Quarterly Combined Statements of Revenues and Direct Expenses.

9. Related Parties

10. Legal Proceedings

Intellectual Property

NUCYNTA® Franchise

Notes to Special Purpose Quarterly Combined Financial Statements (Unaudited)

(dollars in thousands unless otherwise noted)

substantial market share and revenue losses for the products, and which may result in a non-cash impairment charge in any associated intangible asset.

In April 2015, Janssen completed the divestiture of its U.S. rights to NUCYNTA®, NUCYNTA® ER and NUCYNTA® oral solution and will thus seek removal from the above cases as plaintiff.

Government Proceedings

Along with other pharmaceutical companies, Janssen has been named in two lawsuits alleging claims related to opioid marketing practices. In May 2014, Santa Clara and Orange Counties in California (the “Counties”) filed a complaint in state court in Orange County, California against numerous pharmaceutical manufacturers, including Janssen, alleging claims related to opioid marketing practices, including false advertising, unfair competition, and public nuisance. The Counties seek injunctive and monetary relief. In February 2015, the defendants filed motions challenging the sufficiency of the complaint.

In June 2014, the City of Chicago filed a complaint in Cook County Circuit Court against the same group of pharmaceutical manufacturers, including Janssen, alleging a number of claims related to opioid marketing practices, including consumer fraud violations and false claims, and seeking injunctive and monetary relief. The case was later removed to the United States District Court for the Northern District of Illinois, and in December 2014, defendants filed a motion to dismiss the City

NUCYNTA® Franchise

Notes to Special Purpose Quarterly Combined Financial Statements (Unaudited)

(dollars in thousands unless otherwise noted)

of Chicago’s First Amended Complaint for failure to state a claim. In May 2015, Janssen’s motion to dismiss the Amended Complaint was granted. The plaintiffs have 30 days to amend the dismissed claims or Janssen’s motion will be granted with prejudice.

In September 2014, the Tennessee Attorney General Division of Consumer Affairs issued a Request for Information to Janssen related to opioids marketing practices.

Because the Parent believes that the potential for an unfavorable outcome is not probable, no amounts have been recorded in these Special Purpose Quarterly Combined Statements of Revenue and Direct Expenses.

All liabilities arising out of or relating to legal proceedings and product liability claims relating to products sold prior to transaction closing will be retained by the Parent.

11. Subsequent Events

Subsequent events have been evaluated through May 22, 2015, the date these Special Purpose Quarterly Combined Financial Statements were issued. On April 2, 2015, the Buyer acquired the U.S. license rights to the NUCYNTA® Franchise of pharmaceutical products as well as certain related assets from Janssen. The purchase price was $1.05 billion, consistent with the Asset Purchase Agreement entered into on January 15, 2015. There are no other subsequent events which have not been disclosed in these Special Purpose Quarterly Combined Financial Statements.

At transaction closing, all U.S. license rights to the NUCYNTA® Franchise previously licensed by Janssen from Grünenthal GmbH (“Grünenthal”) transferred to the Buyer. The Buyer acquired two manufacturing lines, both for the manufacture of NUCYNTA® ER. Janssen will manufacture both NUCYNTA® and NUCYNTA® ER and supply finished product to the Buyer for sale and distribution in the U.S. until the Buyer’s manufacturing facilities are approved by all relevant regulatory authorities. Following approval of the Buyer’s manufacturing facilities, Janssen will continue to manufacture and supply the active pharmaceutical ingredient (“API”) to the Buyer for an initial term of seven years from April 2, 2015 unless either party seeks to terminate the API supply agreement before the initial term expires. Any existing finished goods inventory in Janssen’s possession at transaction closing transferred to the Buyer.

Janssen will retain financial responsibility for any liabilities relating to products sold prior to transaction closing, and the Buyer will assume financial responsibility for any liabilities relating to products sold on or after transaction closing with the exception of certain rebates for which Janssen will retain financial responsibility for a limited period of time after transaction closing.

EX-99.3 5 a15-12888_1ex99d3.htm EX-99.3

EXHIBIT 99.3

UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION

Introductory Note

Description of the Transaction

On January 15, 2015, Depomed, Inc., a California corporation (“Depomed” or the “Company”), entered into an Asset Purchase Agreement (the “Asset Purchase Agreement”) with Janssen Pharmaceuticals, Inc., a Pennsylvania corporation (“Janssen” or the “Seller”), pursuant to which Depomed would acquire from Janssen and its affiliates the U.S. rights to the NUCYNTA® franchise of pharmaceutical products (the “NUCYNTA® U.S. Product Rights”) as well as certain related assets (the “NUCYNTA® Acquisition”) for $1.05 billion in cash (the “Purchase Price”).

The NUCYNTA® franchise includes NUCYNTA® ER (tapentadol) extended release tablets indicated for the management of pain, including neuropathic pain associated with diabetic peripheral neuropathy (DPN), severe enough to require daily, around-the-clock, long-term opioid treatment, NUCYNTA® (tapentadol), an immediate release version of tapentadol, for management of moderate to severe acute pain in adults, and NUCYNTA® (tapentadol) oral solution, an approved oral form of tapentadol that has not been commercialized (collectively, the “Products”).

Upon the consummation of the NUCYNTA® Acquisition on April 2, 2015, Depomed acquired (i) rights to commercialize the Products in the United States, and (ii) certain other assets relating to the Products, including finished goods product inventory and certain manufacturing equipment. In addition, Janssen assigned to Depomed all of its rights and obligations under the License Agreement (U.S.) (the “License Agreement”) by and among Janssen, Janssen Research & Development, LLC and Grünenthal GmbH (“Grünenthal”) pursuant to which Janssen has a royalty-bearing license to certain Grünenthal patents and other intellectual property rights covering the commercialization of the Products in the United States.

In connection with the NUCYNTA® Acquisition, Depomed assumed responsibility for the ongoing legal proceedings relating to certain of the Grünenthal patents licensed under the License Agreement and Janssen’s clinical obligations relating to the Products and will be responsible for the associated post acquisition costs. Other than as set forth in the Asset Purchase Agreement, Janssen retained all liabilities relating to the Products associated with Janssen’s commercialization of the Products prior to the consummation of the Transaction.

In connection with the NUCYNTA® Acquisition, Depomed, Janssen and certain affiliates of Janssen also entered into (i) supply agreements pursuant to which Janssen will manufacture and supply the Products to Depomed until Depomed, or its contract manufacturer, begins commercial production of the Products, following which Depomed will manufacture and supply Janssen for its requirements for NUCYNTA® outside of the United States and (ii) a supply agreement pursuant to which an affiliate of Janssen will manufacture and supply Depomed with the active pharmaceutical ingredient contained in the Products.

In connection with the consummation of the NUCYNTA® Acquisition, on April 2, 2015, the Company issued $575.0 million aggregate principal amount of the Company’s senior secured notes (the “Notes”) for aggregate gross proceeds of approximately $562.0 million. The Company used $550.0 million of the net proceeds received upon the sale of the Notes to fund a portion of the Purchase Price paid to Janssen.

Basis of Presentation

The Company has determined that the NUCYNTA® Acquisition constitutes a business combination as defined by Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC”) 805, “Business Combinations”. Accordingly, the assets acquired and the liabilities assumed are presented at their acquisition-date fair values as required by that statement. Fair values are determined based on the requirements of FASB ASC 820, “Fair Value Measurements and Disclosures”. Management has made a preliminary determination of the fair value of the assets acquired and liabilities assumed based on various estimates, as described in Note 1 to the unaudited pro forma condensed combined balance sheet. Management is continuing to refine those estimates and consequently, the final determination of these estimated fair values may differ materially from those presented.

The following unaudited pro forma condensed combined financial information is presented to illustrate: (i) the NUCYNTA® Acquisition, and (ii) the issuance of the Notes in connection with the NUCYNTA® Acquisition (collectively, the “Transactions”).

The unaudited pro forma condensed combined financial information was prepared using, and should be read in conjunction with, (1) the audited consolidated financial statements of Depomed as of and for the year ended December 31, 2014 as included in Depomed’s Annual Report on Form 10-K (2) the unaudited condensed consolidated financial statements of Depomed as of and for the three months ended March 31, 2015 as included in the Company’s Quarterly Report on Form 10-Q and (3) the audited Special Purpose Combined Statements of Assets Acquired and Liabilities Assumed relating to the NUCYNTA® business as of December 28, 2014 and December 29, 2013 and the notes related thereto, and the audited Special Purpose Combined Statements of Revenues and Direct Expenses for the years ended December 28, 2014, December 29, 2013 and December 30, 2012 and the related notes related thereto, which are filed as Exhibit 99.1 and (4) The unaudited Special Purpose Quarterly Combined Statements of Assets acquired and Liabilities Assumed as of March 29, 2015 and the unaudited Special Purpose Combined Statements of Revenues and Direct Expenses relating to the NUCYNTA® business for the three months ended March 29, 2015 and the notes related thereto, which are filed as Exhibit 99.2 to this Current Report on Form 8-K/A.

The unaudited pro forma condensed combined balance sheet as of March 31, 2015 assumes that the Transactions occurred on March 31, 2015. The unaudited pro forma condensed combined statements of income (loss) for the year ended December 31, 2014 and the three months ended March 31, 2015 assume that the Transactions occurred on January 1, 2014. The unaudited pro forma condensed combined financial information is preliminary and subject to change, is provided for illustrative purposes only and is not necessarily indicative of the results that would have been achieved had the NUCYNTA® acquisition been completed as of the dates indicated or that may be achieved in future periods. The unaudited pro forma condensed combined statements of income (loss) do not include the effects of any non-recurring costs or one-time transaction-related costs. The historical financial information has been adjusted in the accompanying unaudited pro forma condensed combined financial statements to give effect to pro forma events that are directly attributable to the Transactions and are factually supportable.

DEPOMED, INC.

UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEETS

(in thousands)

	Depomed As of March 31, 2015			Nucynta As of March 29, 2015		Adjustments			Pro forma

ASSETS
Current assets:
Cash and cash equivalents	$	52,783		$	—	$	12,063	(a)	$	64,846
Marketable securities	8,310			—		—			8,310
Restricted cash	500,000			—		(500,000		)(b)	—
Accounts receivable, net	23,454			—		—			23,454
Receivables from collaborative partners	1,048			—		—			1,048
Inventories	6,455			3,011		8,579		(c)	18,045
Income taxes receivable	3,424			—		—			3,424
Deferred tax assets, net	9,601			—		—			9,601
Prepaid and other current assets	8,397			—		9,961		(d)	18,358
Total current assets	613,472			3,011		(469,397		)	147,086
Marketable securities, long-term	6,641			—		—			6,641
Property and equipment, net	7,170			8,455		—			15,625
Intangible assets, net	69,822			5,429		1,014,565		(e)	1,089,816
Other assets	7,319			—		—			7,319
	$	704,424		$	16,895	$	545,168		$	1,266,487
LIABILITIES AND SHAREHOLDERS’ EQUITY									—
Current liabilities:									—
Accounts payable and accrued liabilities	$	55,803		$	—	$	—		$	55,803
Income taxes payable	1,281			—		—			1,281
Contingent consideration liability	2,298			—		—			2,298
Other current liabilities	2,338			—		(642		)(f)	1,696
Total current liabilities	61,720			—		—			61,078
Contingent consideration liability	12,422			—		—			12,422
Convertible debt	233,057			—		—			233,057
Senior secured notes	—			—		562,063		(g)	562,063
Deferred tax liabilities, net, non-current	25,924			—		—			25,924
Other long-term liabilities	11,233			—		—			11,233
Commitments
Shareholders’ equity:
Preferred stock	—			—		—			—
Common stock	246,034			—		—			246,034
Additional paid-in capital	77,968			—		—			77,968
Retained earnings	36,081			—		642		(f)	36,723
Accumulated other comprehensive loss, net of tax	(15		)	—		—			(15		)
Total shareholders’ equity	360,068			—		—			360,710
	$	704,424		$	—	$	562,063		$	1,266,487

See notes to unaudited pro forma condensed combined financial statements which are an integral part of these financial statements.

Notes to Adjustments to the Unaudited Pro Forma Condensed Combined Balance Sheets

(a) Represents the net cash received by Depomed, Inc. following the issuance of the Notes for aggregate gross proceeds of approximately $562.0 million offset by funds used to pay the balance of the Purchase Price of $550.0 million.

(b) Represents the use of the cash deposited into an escrow account following the execution of the Asset Purchase Agreement, which was paid to Janssen and credited against the Purchase Price upon consummation of the NUCYNTA® Acquisition. The balance of the purchase price of $550.0 million was funded with the net proceeds from the issuance of the Notes.

(d) Represents the amounts payable by Janssen relating to certain product rebate claims.

(e) Adjustment to reflect the fair value of the acquired NUCYNTA® U.S. Product Rights.

(f) Adjustment to remove accrued NUCYNTA® acquisition costs.

(g) Represents the issuance of the Notes for aggregate gross proceeds of approximately $562.0 million.

DEPOMED, INC.

UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF INCOME (LOSS)

(in thousands, except per share data)

	Depomed Year ended December 31, 2014			Nucynta Year ended December 28, 2014		Adjustments			Pro forma

Total Revenues, net	$	390,363		$	172,238	$	(1,120	)(a)	$	561,481

Cost of sales	15,146			53,968		(2,445		)(b)	66,669
Selling, general and administrative expenses	121,126			44,812		(722		)(c)	165,216
Research and development expense	7,116			24,027		—			31,143
Amortization of intangible assets	10,161			—		99,512		(d)	109,673
Total costs and expenses	153,549			122,807		96,345			372,701

Income (loss) from operations	236,814			49,431		(97,465		)	188,780

Other income (expense):
Interest income and expense	(23,706		)	—		(63,548		)(e)	(87,254		)
Benefit from (provision for) income taxes	(81,346		)	—		42,401		(f)	(38,945		)

Net Income (loss)	$	131,762		$	49,431	$	(118,612	)	$	62,581

Basic net income (loss) per share	$	2.26							$	1.07
Diluted net income (loss) per share	$	2.05							$	1.01

Shares used in computing basic net income (loss) per share	58,292,633								58,292,633
Shares used in computing diluted net income (loss) per share	66,307,364								66,307,364

See notes to unaudited pro forma condensed combined financial statements which are an integral part of these financial statements.

Notes to Adjustments to the Unaudited Pro Forma Condensed Combined Statements of Income (Loss) for the year ended December 31, 2014.

(a) Adjustment to remove the royalties received from Janssen by Depomed on net U.S. sales of NUCYNTA® ER.

(b) The total adjustment to cost of sales is comprised of:

Amounts in thousands
Reclassification of intangible asset amortization to conform with Depomed’s presentation	$	(2,902	)
Reclassification of selling and distribution costs to conform with Depomed’s presentation	457
	$	(2,445	)

The total adjustments to cost of goods sold exclude an adjustment to the fair value of the inventories acquired of $5.9 million which will be amortized to cost of goods sold as the acquired inventory is sold. This adjustment was excluded from the unaudited pro forma condensed combined statement of income (loss) as there is no continuing impact of the acquired inventory adjustment on the combined operating results.

Amounts in thousands
Reclassification of selling and distribution costs to “cost of sales” to conform with Depomed’s presentation	$	(457	)
Removal of acquisition costs recorded within Depomed’s Statement of Income	(265		)
	$	(722	)

(d) Adjustment to record the amortization of the acquired NUCYNTA® U.S. Product Rights on a straight line basis over their estimated useful life of approximately 10 years.

(e) Adjustment to reflect the interest expense, including the amortization of debt issuance costs and original issue discount, on the Notes.

(f) To adjust income tax provision as if NUCYNTA® had been acquired as of January 1, 2014, based on an assumed Federal and State income tax rate of 38%.

DEPOMED, INC.

UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF INCOME (LOSS)

(in thousands, except share and per share data)

	Depomed Three months ended March 31, 2015			Nucynta Three months ended March 29, 2015		Adjustments			Pro forma

Total Revenues, net	$	32,203		$	45,286	$	(328	)(a)	$	77,161

Cost of sales	3,112			13,075		(598		)(b)	15,589
Selling, general and administrative expenses	34,542			9,683		(2,586		)(c)	41,639
Research and development expense	1,858			6,105		—			7,963
Amortization of intangible assets	2,540			—		24,878		(d)	27,418
Total costs and expenses	42,052			28,863		21,694			92,609

Income (loss) from operations	(9,849		)	16,423		(22,022		)	(15,448		)

Other income (expense):
Interest income and expense	(5,965		)	—		(15,734		)(e)	(21,699		)
Benefit from (provision for) income taxes	4,181			—		8,107		(f)	12,288

Net Income (loss)	$	(11,633	)	$	16,423	$	(29,649	)	$	(24,859	)

Basic net income (loss) per share	$	(0.20	)						$	(0.42	)
Diluted net income (loss) per share	$	(0.20	)						$	(0.42	)

Shares used in computing basic net income (loss) per share	59,560,873								59,560,873
Shares used in computing diluted net income (loss) per share	59,560,873								59,560,873

See notes to unaudited pro forma condensed combined financial statements which are an integral part of these financial statements.

Notes to Adjustments to the Unaudited Pro Forma Condensed Combined Statements of Income (Loss) for the three months ended March 31, 2015.

(a) Adjustment to remove the royalties received from Janssen by Depomed on net U.S. sales of NUCYNTA ER.

(b) The total adjustment to cost of sales is comprised of:

Amounts in thousands
Reclassification of intangible asset amortization to conform with Depomed’s presentation	$	(725	)
Reclassification of selling and distribution costs to conform with Depomed’s presentation	127
	$	(598	)

Amounts in thousands
Reclassification of selling and distribution costs to “cost of sales” to conform with Depomed’s presentation	$	(127	)
Removal of acquisition costs recorded within Depomed’s Statement of Income	(2,459		)
	$	(2,586	)

(d) Adjustment to record the amortization of the acquired NUCYNTA® U.S. Product Rights on a straight line basis over their estimated useful life of approximately 10 years.

(e) Adjustment to reflect the interest expense, including the amortization of debt issuance costs and original issue discount, on the Notes.

(f) To adjust income tax provision as if NUCYNTA® had been acquired as of January 1, 2014, based on an assumed Federal and State income tax rate of 38%.

DEPOMED, INC.

NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

(Unaudited)

(amounts in thousands)

Note 1 — Preliminary Determination of the Fair Values of Acquired Assets

The unaudited pro forma condensed consolidated financial information reflects a total purchase price of approximately $1.04 billion which was determined as follows:

(Amounts in thousands)
Cash Paid	$	1,050,000
Rebates payable by Seller	(9,961		)
Total Purchase Consideration	$	1,040,039

The rebates payable by the Seller represent a reduction to the total purchase consideration. The fair value of the rebates payable by Janssen was determined based on estimates that take into consideration the terms of agreements with customers, historical rebates taken, and the estimated amount of time it takes the product to flow through the distribution channel. If actual future results vary from our estimates, we may need to adjust these estimates, which could have an effect on the fair value of the rebates recognized in this preliminary determination of the fair values of assets acquired.

The NUCYNTA® Acquisition was accounted for using the acquisition method of accounting. Under the acquisition method of accounting, we have recognized net tangible and intangible assets acquired based upon their respective estimated fair values as of the acquisition date. The table below shows the preliminary fair values assigned to the assets acquired.

(Amounts in thousands)
NUCYNTA U.S. Product Rights	$	1,019,994
Inventories	11,590
Manufacturing Equipment	8,455
	$	1,040,039

NUCYNTA® U.S. Product Rights

The valuation of the NUCYNTA® US Product Rights was based on management’s estimates, information and reasonable and supportable assumptions. This estimated fair value was determined using the income approach under the discounted cash flow method. Significant assumptions used in valuing the NUCYNTA® US Product Rights included revenue projections based on assumptions relating to pricing and reimbursement rates, market size and market penetration rates, general and administrative expenses, sales and marketing expenses, research and development expenses for clinical and regulatory support and developing an appropriate discount rate. 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. The NUCYNTA® US Product Rights intangible asset is amortized using the straight-line method over an estimated useful life of approximately ten years. The estimated useful life was determined based on the period of time over which the NUCYNTA® US Product Rights are expected to contribute to the Company’s future cash flows.

Note 2 — Financing Transaction

On April 2, 2015, the Company issued $575.0 million aggregate principal amount of senior secured notes (the “Notes”) for aggregate gross proceeds of approximately $562.0 million pursuant to a Note Purchase Agreement dated March 12, 2015 (Note Purchase Agreement) between the Company and Deerfield Private Design Fund III, L.P., Deerfield Partners, L.P., Deerfield International Master Fund, L.P., Deerfield Special Situations Fund, L.P., Deerfield Private Design Fund II, L.P., Deerfield Private Design International II, L.P., BioPharma Secured Investments III Holdings Cayman LP, Inteligo Bank Ltd. and Phemus Corporation (collectively, the Purchasers) and Deerfield Private Design Fund III, L.P., as collateral agent. The Company used $550.0 million of the net proceeds received upon the sale of the Senior Secured Notes to fund a portion of the Purchase Price paid to Janssen Pharma.

The Notes will mature in seven years (unless earlier prepaid or repurchased), are secured by substantially all of the assets of the Company and any subsidiary guarantors, and bear interest at the rate equal to the lesser of (i) 9.75% over the three month London Inter-Bank Offer Rate (LIBOR), subject to a floor of 1.0% and (ii) 11.95% (through the third anniversary of the purchase date) and 12.95% (thereafter). The annual impact on the Company’s Income Statement of an increase or decrease of an 1/8th percent in interest rates would be an increase or decrease of approximately, $0.8 million. The interest rate is determined at the first business day of each fiscal quarter, commencing with the first such date following April 2, 2015. The Notes can be prepaid, at the Company’s option, (i) after the first anniversary of the purchase date but prior to the second anniversary, up to $100.0 million, (ii) before the second anniversary, under certain conditions and (iii) after the second anniversary, at the Company’s discretion. The Company incurred debt issuance costs of $0.5 million during the three months ended March 31, 2015.

Pursuant to the Note Purchase Agreement, upon the consummation of the sale of the Notes on April 2, 2015, the Company and Depo NF Sub, LLC, a Delaware limited liability company and a wholly owned subsidiary of the Company (Depo NF Sub), entered into a Pledge and Security Agreement with the Collateral Agent pursuant to which the Company and Depo NF Sub each granted the Collateral Agent (on behalf of the Purchasers) a security interest in substantially all of their assets, other than specifically excluded assets.

Note 3 — Earnings Per Share

Basic net income (loss) per share is calculated by dividing the net income by the weighted-average number of shares of common stock outstanding during the period. Diluted net income (loss) per share is calculated by dividing the net income by the weighted-average number of shares of common stock outstanding during the period, plus potentially dilutive common shares, consisting of stock options and convertible debt. The Company uses the treasury-stock method to compute diluted earnings per share with respect to its stock options and equivalents. The Company uses the if-converted method to compute diluted earnings per share with respect to its convertible debt. 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. No shares were issued in connection with the NUCYNTA® Acquisition.