10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

___________________________________________

FORM 10-Q

___________________________________________

(Mark One)

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

For the quarterly period ended September 30, 2014

OR

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

For the transition period from              to             

Commission file number: 001-34962

___________________________________________

Zogenix, Inc.

(Exact Name of Registrant as Specified in its Charter)

____________________________________________

Delaware	20-5300780
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)
12400 High Bluff Drive, Suite 650 San Diego, California	92130
(Address of Principal Executive Offices)	(Zip Code)

858-259-1165

(Registrant’s Telephone Number, Including Area Code)

____________________________________________

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    x  Yes    ¨  No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	¨	Accelerated filer	x
Non-accelerated filer	¨ (Do not check if a smaller reporting company)	Smaller reporting company	¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ¨  Yes    x  No

The number of outstanding shares of the registrant’s common stock, par value $0.001 per share, as of November 3, 2014 was 153,040,066.

ZOGENIX, INC.

FORM 10-Q

For the Quarterly Period Ended September 30, 2014

Table of Contents

		Page
PART I. FINANCIAL INFORMATION
Item 1	Consolidated Financial Statements:
	Consolidated Balance Sheets as of September 30, 2014 (unaudited) and December 31, 2013	3
	Consolidated Statements of Operations and Comprehensive Income (Loss) for the three and nine months ended September 30, 214 and 2013 (unaudited)	4
	Consolidated Statements of Cash Flows for the nine months ended September 30, 2014 and 2013 (unaudited)	5
	Notes to the Consolidated Financial Statements (unaudited)	6
Item 2	Management's Discussion and Analysis of Financial Condition and Results of Operations	23
Item 3	Quantitative and Qualitative Disclosures about Market Risk	37
Item 4	Controls and Procedures	37
PART II. OTHER INFORMATION
Item 1	Legal Proceedings	38
Item 1A	Risk Factors	38
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	58
Item 3	Defaults Upon Senior Securities	58
Item 4	Mine Safety Disclosures	58
Item 5	Other Information	58
Item 6	Exhibits	60

2

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

Zogenix, Inc.

Consolidated Balance Sheets

(In Thousands)

	September 30, 2014			December 31, 2013
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	50,527		$	72,021
Restricted cash	8,500			—
Trade accounts receivable, net	5,886			6,665
Inventory	19,271			9,936
Prepaid expenses and other current assets	6,406			4,257
Total current assets	90,590			92,879
Property and equipment, net	10,615			13,011
Other assets	5,821			6,614
Total assets	$	107,026		$	112,504
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	8,177		$	4,622
Accrued expenses	12,650			18,865
Accrued compensation	5,206			3,952
Common stock warrant liabilities	4,007			31,341
Deferred revenue	9,303			—
Total current liabilities	39,343			58,780
Note payable	2,375			—
Long term debt	—			28,802
Deferred revenue, less current portion	7,458			—
Other long-term liabilities	315			6,496
Commitments and contingencies
Stockholders’ equity:
Common stock, $0.001 par value; 200,000 shares authorized at September 30, 2014 and December 31, 2013; 141,045 and 138,927 shares issued and outstanding at September 30, 2014 and December 31, 2013, respectively.	141			139
Additional paid-in capital	438,533			428,534
Accumulated deficit	(381,139		)	(410,247		)
Total stockholders’ equity	57,535			18,426
Total liabilities and stockholders’ equity	$	107,026		$	112,504

See accompanying notes.

3

Zogenix, Inc.

Consolidated Statements of Operations and Comprehensive Income (Loss)

(In Thousands, except Per Share Amounts)

(Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2013			2014			2013
Revenue:
Net product revenue	$	4,125		$	6,897		$	16,675		$	22,693
Contract manufacturing revenue	4,225			—			6,463			—
Service and other revenue	447			271			2,494			398
Total revenue	8,797			7,168			25,632			23,091
Operating (income) expense:
Cost of goods sold	706			5,354			6,463			14,144
Cost of contract manufacturing	3,986			—			5,921			—
Royalty expense	425			281			1,223			901
Research and development	5,289			2,544			12,947			9,358
Selling, general and administrative	19,056			10,011			71,197			36,491
Restructuring	—			—			—			876
Impairment of long-lived assets	—			—			838			—
Net gain on sale of business	—			—			(79,980		)	—
Total operating expense	29,462			18,190			18,609			61,770
Income (loss) from operations	(20,665		)	(11,022		)	7,023			(38,679		)
Other income (expense):
Interest income	6			1			18			12
Interest expense	(84		)	(1,587		)	(2,999		)	(4,795		)
Loss on early extinguishment of debt	—			—			(1,254		)	—
Change in fair value of warrant liabilities	7,948			215			26,418			(2,780		)
Change in fair value of embedded derivatives	—			1,474			(14		)	912
Other income (expense)	15			67			(39		)	90
Total other income (expense)	7,885			170			22,130			(6,561		)
Net income (loss) before income taxes	(12,780		)	(10,852		)	29,153			(45,240		)
Provision for income taxes	(45		)	—			(45		)	—
Net income (loss)	$	(12,825	)	$	(10,852	)	$	29,108		$	(45,240	)
Common share data:
Net income (loss) per share, basic	$	(0.09	)	$	(0.10	)	$	0.21		$	(0.44	)
Net income (loss) per share, diluted	$	(0.09	)	$	(0.10	)	$	0.02		$	(0.44	)
Weighted average shares outstanding, basic	141,045			104,682			140,110			102,136
Weighted average shares outstanding, diluted	141,045			104,682			140,474			102,136
Comprehensive income (loss)	$	(12,825	)	$	(10,852	)	$	29,108		$	(45,240	)

See accompanying notes.

4

Zogenix, Inc.

Consolidated Statements of Cash Flows

(In Thousands)

(Unaudited)

	Nine Months Ended September 30,
	2014			2013
Operating activities:
Net income (loss)	$	29,108		$	(45,240	)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Stock-based compensation	7,334			5,579
Stock-based compensation, restructuring	—			201
Depreciation and amortization	1,227			1,395
Amortization of debt issuance costs and non-cash interest	370			422
Loss on early extinguishment of debt	1,254			—
Net gain on sale of business	(79,980		)	—
Loss on impairment of long-lived assets	838			—
Change in fair value of warrant liabilities	(26,418		)	2,780
Change in fair value of embedded derivatives	14			(912		)
Changes in operating assets and liabilities:
Trade accounts receivable	779			(518		)
Inventory	(9,335		)	797
Prepaid expenses and other current assets	(10,595		)	482
Other assets	(4,978		)	614
Accounts payable and accrued expenses	2,377			205
Restructuring liabilities	—			6
Deferred revenue	16,761			—
Net cash used in operating activities	(71,244		)	(34,189		)
Investing activities:
Purchases of property and equipment	(85		)	(785		)
Proceeds from sale of business	89,624			—
Restricted cash from sale of business	(8,500		)	—
Net cash provided by (used in) investing activities	81,039			(785		)
Financing activities:
Proceeds from note payable	7,000			—
Repayment of debt	(40,041		)	—
Proceeds from exercise of common stock options and warrants	1,508			—
Proceeds from issuance of common stock	244			11,098
Net cash provided by (used in) financing activities	(31,289		)	11,098
Net decrease in cash and cash equivalents	(21,494		)	(23,876		)
Cash and cash equivalents at beginning of period	72,021			41,228
Cash and cash equivalents at end of period	$	50,527		$	17,352

See accompanying notes.

5

Zogenix, Inc.

Notes to Consolidated Financial Statements

1. Organization and Basis of Presentation

Zogenix, Inc. (the Company) is a pharmaceutical company committed to developing and commercializing therapies that address specific clinical needs for people living with pain-related conditions and central nervous system disorders who need innovative treatment alternatives to help them return to normal daily functioning. On October 25, 2013, the Company received marketing approval from the U.S. Food and Drug Administration (FDA) for Zohydro® ER (hydrocodone bitartrate) extended-release capsules, CII, an opioid agonist, extended-release oral formulation of hydrocodone without acetaminophen, for the management of pain severe enough to require daily, around-the-clock, long-term opioid treatment and for which alternative treatment options are inadequate. Zohydro ER is the first extended-release oral formulation of hydrocodone without acetaminophen. The Company launched Zohydro ER in March 2014. On September 30, 2014, the Company submitted a supplemental New Drug Application (sNDA) for a modified formulation of Zohydro ER which was has been designed to have abuse deterrent properties. The new capsule formulation contains additional inactive ingredients that are intended to make the product more difficult to abuse by injection and nasal insufflation. The The FDA assigned a Prescription Drug User Free Act, or PDUFA, target action date on the sNDA of January 30, 2015, and, if approved, we anticipate a transition from the currently marketed product to this new capsule formulation of Zohydro ER in the second quarter of 2015.

The Company’s first commercial product, Sumavel® DosePro® (sumatriptan injection) Needle-free Delivery System, was launched in January 2010. Sumavel DosePro offers fast-acting, easy-to-use, needle-free subcutaneous administration of sumatriptan for the acute treatment of migraine and cluster headache in a pre-filled, single-use delivery system. Sumavel DosePro is the first drug product approved by the FDA that allows for the needle-free, subcutaneous delivery of medication. On April 23, 2014, the Company entered into an asset purchase agreement (Asset Purchase Agreement) with Endo Ventures Bermuda Limited (Endo Ventures Bermuda) and Endo Ventures Limited (Endo Ventures and, together with Endo Ventures Bermuda, Endo), pursuant to which, and on the terms and subject to the conditions thereof, among other things, the Company agreed to sell its Sumavel DosePro business to Endo, including the registered trademarks, certain contracts, the New Drug Application (NDA) and other regulatory approvals, the books and records, marketing materials and product data relating to Sumavel DosePro. The Asset Purchase Agreement closed on May 16, 2014 (the Closing) and in connection with the Closing, the Company and Endo Ventures also entered into a supply agreement (the Supply Agreement), pursuant to which the Company will retain the sole and exclusive right and the obligation to manufacture, have manufactured, supply or have supplied Sumavel DosePro to Endo Ventures, subject to Endo Venture’s right to qualify and maintain a back-up manufacturer. Further, under the Supply Agreement, Endo will support the Company’s Sumavel DosePro manufacturing operations with a working capital advance equivalent to the book value of the inventory of materials and unreleased finished goods held by the Company in connection with the manufacture of Sumavel DosePro minus the accounts payable associated with such materials and unreleased finished goods, capped initially at $7,000,000 and subject to annual adjustment. Upon the Closing, and in addition to the working capital advance, Endo paid the Company $85,000,000, $8,500,000 of which was deposited into escrow to fund potential indemnification claims for a period of 12 months, and $4,624,000 for finished goods inventory on hand at Closing. In addition to the upfront cash payment, the Company is eligible to receive additional cash payments of up to $20,000,000 based on the achievement of pre-determined sales and gross margin milestones (see Note 4).

On October 24, 2014, Zogenix Europe Limited (Zogenix Europe), a wholly-owned subsidiary of the Company, acquired Brabant Pharma Limited, a privately-held company organized under the laws of England and Wales (Brabant), pursuant to the terms of a Sale and Purchase Agreement (the Sale and Purchase Agreement), dated October 24, 2014. Brabant owns worldwide development and commercialization rights to Brabafen, low-dose fenfluramine, for the treatment of Dravet syndrome (also known as Severe Myoclonic Epilepsy of Infancy). Dravet syndrome is a rare and catastrophic form of pediatric epilepsy with life threatening consequences for patients and current treatment options are very limited. Brabafen has recently received orphan drug designation in Europe and the United States for the treatment of Dravet syndrome. Under the terms of the Sale and Purchase Agreement, Zogenix Europe paid consideration of (i) $20,000,000 in cash (plus $8,432,000 which represents the net cash position of Brabant at the closing), of which $2,000,000 was deposited into escrow to fund potential indemnification claims for a period of 6 months, and (ii) 11,995,202 shares of the Company’s common stock. Zogenix Europe also committed to paying up to an aggregate amount of $95,000,000 in connection with the achievement of certain milestones for Brabafen, including $50,000,000 in regulatory milestones and $45,000,000 in sales milestones. The Company has agreed to use commercially reasonable efforts (as defined in the Sale and Purchase Agreement) to develop and commercialize Brabafen and to achieve the milestones (see Note 9).

The Company was incorporated in the state of Delaware on May 11, 2006 as SJ2 Therapeutics, Inc. and commenced operations on August 25, 2006. On August 28, 2006, the Company changed its name to Zogenix, Inc.

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The Company has incurred significant net losses since inception and has relied on its ability to fund its operations through equity financings, debt financings, revenues from the sale of product and proceeds from business collaborations. As the Company continues to incur losses, successful transition to profitability is dependent upon achieving a level of revenues adequate to support the Company’s cost structure. This may not occur and, unless and until it does, the Company will continue to need to raise additional cash. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern and do not include any adjustments that might result from the outcome of this uncertainty. This basis of accounting contemplates the recovery of the Company’s assets and the satisfaction of liabilities in the normal course of business.

Management expects operating losses and negative cash flows to continue for at least the next year as the Company continues to incur costs related to the commercialization of Zohydro ER, the introduction of Zohydro ER with abuse deterrent properties to the market, if approved, the clinical development of Relday and Brabafen, required post-market testing for Zohydro ER, safe use initiatives for Zohydro ER and additional development activities with respect to Zohydro ER, including the development of multiple formulations of extended-release hydrocodone with abuse deterrent properties. Management may pursue additional opportunities to raise further capital, if required, through public or private equity offerings, including through a controlled equity offering program, debt financings, receivables financings or through collaborations or partnerships with other companies to further support its planned operations. There can be no assurance that the Company will be able to obtain any source of financing on acceptable terms, or at all. If the Company is unsuccessful in raising additional required funds, it may be required to significantly delay, reduce the scope of or eliminate one or more of its development programs or its commercialization efforts, or cease operating as a going concern. The Company also may be required to relinquish, license or otherwise dispose of rights to product candidates or products that it would otherwise seek to develop or commercialize itself on terms that are less favorable than might otherwise be available.

On November 6, 2014, the Company entered into a controlled equity offering sales agreement with Cantor Fitzgerald & Co., or Cantor, as sales agent, under which the Company can issue and sell shares of its common stock having an aggregate offering price of up to $25,000,000 from time to time through Cantor. Sales of the Company's common stock made pursuant to the controlled equity offering program, if any, will be made on the Nasdaq Global Market under the Company's shelf registration statement on Form S-3 filed on November 6, 2014, following such time as the registration statement is declared effective by the SEC. However, such registration statement cannot be declared effective until such time as the Company has filed certain financial statements from its recent acquisition of Brabant as required by SEC rules, which must be filed within 71 days of the date of the Company's Current Report on Form 8-K filed with the SEC on October 27, 2014. There can be no assurance that Cantor will be successful in consummating sales under the program based on prevailing market conditions or in the quantities or at the prices that the Company deems appropriate.

2. Summary of Significant Accounting Policies

Financial Statement Preparation and Use of Estimates

The unaudited consolidated financial statements contained in this Quarterly Report on Form 10-Q have been prepared by Zogenix, Inc. according to the rules and regulations of the Securities and Exchange Commission (SEC) and, therefore, certain information and disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (GAAP) have been omitted.

In the opinion of management, the accompanying unaudited consolidated financial statements for the periods presented reflect all adjustments, which are normal and recurring, necessary to fairly state the financial position, results of operations and cash flows. These unaudited consolidated financial statements should be read in conjunction with the audited financial statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013 filed with the SEC on March 7, 2014.

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results may differ from those estimates.

Principles of Consolidation

The unaudited interim consolidated financial statements include the accounts of Zogenix, Inc. and its wholly owned subsidiary Zogenix Europe Limited, which was incorporated under the laws of England and Wales in June 2010. All intercompany transactions and investments have been eliminated in consolidation. Zogenix Europe Limited’s functional currency is the U.S. dollar, the reporting currency of its parent.

7

Restricted Cash

In connection with its sale of the Sumavel DosePro business in May 2014, the Company has $8,500,000 of cash in escrow as of September 30, 2014 to fund potential indemnification claims for a period of 12 months (see Note 4). The Company classifies the cash flow from this restricted cash as an investing activity in the consolidated statement of cash flows as the source of the restricted cash is related to the sale of the Sumavel DosePro business.

Further, in December 2009, the Company issued a line of credit for $200,000 in connection with an operating lease which was collateralized by a certificate of deposit in the same amount and recorded as restricted cash within other assets on the consolidated balance sheet as of December 31, 2013. This line of credit and certificate of deposit were terminated in February 2014 in connection with a renegotiation of the operating lease.

Fair Value Measurements

The carrying amount of financial instruments consisting of cash, restricted cash, trade accounts receivable, prepaid expenses and other current assets, accounts payable, accrued expenses and accrued compensation included in the Company’s consolidated financial statements are reasonable estimates of fair value due to their short maturities. Based on the borrowing rates currently available to the Company for loans with similar terms, management believes the fair value of long-term debt approximates its carrying value. The accrued liability for the annual tail payment due to Astellas Pharma US, Inc. (Astellas) (see Note 5) for the termination of the Company’s co-promotion agreement was measured at fair value in December 2011 using a present value technique, which incorporated the Company’s own credit risk as measured by the most recent round of debt financing with Healthcare Royalty Partners (Healthcare Royalty) (formerly Cowen Healthcare Royalty Partners II, L.P.).

Authoritative guidance establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

Level 1: Observable inputs such as quoted prices in active markets;

Level 2: Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and

Level 3: Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

The Company classifies its cash equivalents within Level 1 of the fair value hierarchy because it values its cash equivalents using quoted market prices. The Company classifies its common stock warrant liabilities and embedded derivative liabilities within Level 3 of the fair value hierarchy because they are valued using valuation models with significant unobservable inputs. Assets and liabilities measured at fair value on a recurring basis at September 30, 2014 and December 31, 2013 are as follows (in thousands):

	Fair Value Measurements at Reporting Date Using
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)	Significant Unobservable Inputs (Level 3)	Total
At September 30, 2014
Assets
Cash equivalents(1)	$	46,919	—	—	$	46,919
Liabilities
Common stock warrant liabilities(2)	$	—	—	4,007	$	4,007
At December 31, 2013
Assets
Cash equivalents(1)	$	69,120	—	—	$	69,120
Liabilities
Common stock warrant liabilities(2)	$	—	—	31,341	$	31,341
Embedded derivative liabilities(3)	$	—	—	233	$	233

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(1) Cash equivalents are comprised of money market fund shares and are included as a component of cash and cash equivalents on the consolidated balance sheets.

(2) Common stock warrant liabilities include liabilities associated with warrants issued in connection with the Company's July 2012 public offering of common stock and warrants (see Note 6) and warrants issued in connection with the Healthcare Royalty financing agreement (see Note 6), which are measured at fair value using the Black-Scholes option pricing valuation model. The assumptions used in the Black-Scholes option pricing valuation model for both common stock warrant liabilities were: (a) a risk-free interest rate based on the rates for U.S. Treasury zero-coupon bonds with maturities similar to those of the remaining contractual term of the warrants; (b) an assumed dividend yield of zero based on the Company’s expectation that it will not pay dividends in the foreseeable future; (c) an expected term based on the remaining contractual term of the warrants; and (d) given the Company’s lack of relevant historical data due to the Company’s limited historical experience, an expected volatility based upon the Company's historical volatility, supplemented with historical volatility of comparable companies whose share prices have been publicly available for a sufficient period of time. The significant unobservable input used in measuring the fair value of the common stock warrant liabilities associated with the Healthcare Royalty financing agreement is the expected volatility. Significant increases in volatility would result in a higher fair value measurement. The following additional assumptions were used in the Black-Scholes option pricing valuation model to measure the fair value of the warrants sold in the July 2012 public offering: (a) management's projections regarding the probability of the occurrence of an extraordinary event and the timing of such event; and for the valuation scenario in which an extraordinary event occurs that is not an all cash transaction or an event whereby a public acquirer would assume the warrants, and (b) an expected volatility rate using the Company's historical volatility, supplemented with historical volatility of comparable companies, through the projected date of public announcement of an extraordinary transaction, blended with a rate equal to the lesser of 40% and the 180-day volatility rate obtained from the HVT function on Bloomberg as of the trading day immediately following the public announcement of an extraordinary transaction. The significant unobservable inputs used in measuring the fair value of the common stock warrant liabilities associated with the July 2012 public offering are the expected volatility and the probability of the occurrence of an extraordinary event. Significant increases in volatility would result in a higher fair value measurement and significant increases in the probability of an extraordinary event occurring would result in a significantly lower fair value measurement. The decrease in the fair value of the common stock warrant liabilities as of September 30, 2014 was primarily driven by the decrease in the Company's stock price at September 30, 2014 as compared against December 31, 2013 measurement dates.

(3) Embedded derivatives were measured at fair value using various discounted cash flow valuation models and were included as a component of other long-term liabilities on the consolidated balance sheet at December 31, 2013. The assumptions used in the discounted cash flow valuation models included: (a) management's revenue projections and a revenue sensitivity analysis based on possible future outcomes; (b) probability weighted net cash flows based on the likelihood of Healthcare Royalty receiving interest payments over the term of the Healthcare Royalty financing agreement; (c) probability of bankruptcy; (d) weighted average cost of capital that included the addition of a company specific risk premium to account for uncertainty associated with the Company achieving future cash flows; (e) the probability of a change in control occurring during the term of the Healthcare Royalty financing agreement; and (f) the probability of an exercise of the embedded derivative instruments. The significant unobservable inputs used in measuring the fair value of the embedded derivatives were management’s revenue projections. Significant decreases in these significant inputs would result in a higher fair value measurement of the liability. The embedded derivatives were derecognized in May 2014 as a result of the early extinguishment of the Healthcare Royalty Financing Agreement (see Note 5).

The following table provides a reconciliation of liabilities measured at fair value using significant unobservable inputs (Level 3) for the nine months ended September 30, 2014 (in thousands):

	Common Stock Warrant Liabilities			Embedded Derivative Liabilities
Balance at December 31, 2013	$	31,341		$	233
Changes in fair value	(26,418		)	14
Derecognition of liability	—			(247		)
Exercises	$	(916	)	$	—
Balance at September 30, 2014	$	4,007		$	—

Changes in fair value of the liabilities shown in the table above are recorded through change in fair value of warrant liabilities and change in fair value of embedded derivatives in other income (expense) in the consolidated statements of

9

operations and comprehensive income (loss). The derecognition of the embedded derivative liabilities was included in the loss on early extinguishment of debt in non-operating expenses in the consolidated statements of operations and comprehensive income (loss).

Net Income (Loss) per Share

Basic net income (loss) per share is calculated by dividing the net income (loss) by the weighted average number of common shares outstanding for the period, reduced by weighted average shares subject to repurchase, without consideration for common stock equivalents. Diluted net loss per share is computed by dividing the net income (loss) by the weighted average number of common share equivalents outstanding for the period determined using the treasury-stock method and as-if converted method, as applicable. For purposes of this calculation, stock options, restricted stock units and warrants are considered to be common stock equivalents and are only included in the calculation of diluted net loss per share when their effect is dilutive.

The following table presents the computation of basic and diluted net income (loss) per share (in thousands, except per share amounts):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2013			2014			2013
Numerator
Net income (loss), basic	(12,825		)	(10,852		)	29,108			(45,240		)
Effect of dilutive securities:
Common stock warrants	$	—		$	—		$	(26,418	)	$	—
Net income (loss), diluted	$	(12,825	)	$	(10,852	)	$	2,690		$	(45,240	)
Denominator
Weighted average common shares outstanding, basic	141,045			104,682			140,110			102,136
Effect of dilutive securities:
Common stock warrants	—			—			364			—
Weighted average common shares outstanding, diluted	141,045			104,682			140,474			102,136
Basic net income (loss) per share	$	(0.09	)	$	(0.10	)	$	0.21		$	(0.44	)
Diluted net income (loss) per share	$	(0.09	)	$	(0.10	)	$	0.02		$	(0.44	)

There were 58,000 and 9,909,000 dilutive securities (in common stock equivalent shares), from common stock options, excluded from the calculation of diluted net loss during the three and nine months ended September 30, 2014, respectively, because to include them would be anti-dilutive. There were 1,776,000 dilutive securities (in common stock equivalent shares), from common stock options and restricted stock units, excluded from the calculation of diluted net loss during the three and nine months ended September 30, 2013 because to include them would be anti-dilutive. All common stock warrants disclosed in Note 6 were excluded from the calculation of diluted net loss during the three months ended September 30, 2014 and 2013, and during the nine months ended September 30, 2013, as the exercise price of the warrants was greater than the Company's average stock price during these periods.

Impairment of Long-Lived Assets

The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. As a result of the sale of its Sumavel DosePro business in May 2014, the Company recorded an impairment charge of $838,000 in the consolidated statement of operations and comprehensive income (loss) during the nine months ended September 30, 2014 related to the disposal of construction in progress that will no longer be placed into service.

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Revenue Recognition

The Company recognizes revenue from the sale of Sumavel DosePro and Zohydro ER, and from contract manufacturing, license fees, milestones and service fees earned on collaborative arrangements. Revenue is recognized when (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred and title has passed, (iii) the price is fixed or determinable and (iv) collectability is reasonably assured. Revenue from sales transactions where the buyer has the right to return the product is recognized at the time of sale only if (a) the Company’s price to the buyer is substantially fixed or determinable at the date of sale, (b) the buyer has paid the Company, or the buyer is obligated to pay the Company and the obligation is not contingent on resale of the product, (c) the buyer’s obligation to the Company would not be changed in the event of theft or physical destruction or damage of the product, (d) the buyer acquiring the product for resale has economic substance apart from that provided by the Company, (e) the Company does not have significant obligations for future performance to directly bring about resale of the product by the buyer, and (f) the amount of future returns can be reasonably estimated. The Company currently defers recognition of revenue on product shipments of Zohydro ER until the right of return no longer exists, as the Company currently cannot reliably estimate expected returns of the product at the time of shipment given the limited sales history of Zohydro ER.

Revenue arrangements with multiple elements are divided into separate units of accounting if certain criteria are met, including whether the delivered element has stand-alone value to the customer. The consideration received is allocated among the separate units based on their respective fair values, and the applicable revenue recognition criteria are applied to each of the separate units. The application of the multiple element guidance requires subjective determinations, and requires the Company to make judgments about the individual deliverables and whether such deliverables are separable from the other aspects of the contractual relationship. Deliverables are considered separate units of accounting provided that: (1) the delivered item(s) has value to the customer on a stand-alone basis and (2) if the arrangement includes a general right of return relative to the delivered item(s), delivery or performance of the undelivered item(s) is considered probable and substantially in the Company's control. In determining the units of accounting, the Company evaluates certain criteria, including whether the deliverables have stand-alone value, based on the consideration of the relevant facts and circumstances for each arrangement. In addition, the Company considers whether the buyer can use the other deliverable(s) for their intended purpose without the receipt of the remaining element(s), whether the value of the deliverable is dependent on the undelivered item(s), and whether there are other vendors that can provide the undelivered element(s).

Arrangement consideration that is fixed or determinable is allocated among the separate units of accounting using the relative selling price method, and the applicable revenue recognition criteria, as described above, are applied to each of the separate units of accounting in determining the appropriate period or pattern of recognition. The Company determines the estimated selling price for deliverables within each agreement using vendor-specific objective evidence (VSOE) of selling price, if available, third-party evidence (TPE) of selling price if VSOE is not available, or management's best estimate of selling price (BESP) if neither VSOE nor TPE is available. Determining the BESP for a unit of accounting requires significant judgment. In developing the BESP for a unit of accounting, the Company considers applicable market conditions and relevant entity-specific factors, including factors that were contemplated in negotiating the agreement with the customer and estimated costs.

Product Revenue, Net

The Company sells Zohydro ER, and sold Sumavel DosePro through May 2014, in the United States to wholesale pharmaceutical distributors and retail pharmacies, or collectively the Company's customers, subject to rights of return within a period beginning six months prior to, and ending 12 months following, product expiration. The Company recognized Sumavel DosePro product sales at the time title transferred to its customer, and reduced product sales for estimated future product returns and sales allowances in the same period the related revenue was recognized.

Given the limited sales history of Zohydro ER, the Company cannot reliably estimate expected returns of the product at the time of shipment. Accordingly, the Company defers recognition of revenue on Zohydro ER product shipments until the right of return no longer exists, which occurs at the earlier of the time Zohydro ER is dispensed through patient prescriptions or expiration of the right of return. The Company estimates Zohydro ER patient prescriptions dispensed using an analysis of third-party syndicated data. Zohydro ER was launched in March 2014 and, accordingly, the Company does not have a significant history estimating the number of patient prescriptions dispensed. If the Company underestimates or overestimates patient prescriptions dispensed for a given period, adjustments to revenue may be necessary in future periods. The deferred revenue balance does not have a direct correlation with future revenue recognition as the Company will record sales deductions at the time the prescription unit is dispensed.

The Company will continue to recognize Zohydro ER revenue upon the earlier to occur of prescription units dispensed or expiration of the right of return until it can reliably estimate product returns, at which time the Company will record a one-time

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increase in revenue related to the recognition of revenue previously deferred, net of estimated future product returns and sales allowances. In addition, the costs of Zohydro ER associated with the deferred revenue are recorded as deferred costs, which are included in inventory, until such time the related deferred revenue is recognized.

Product sales allowances for Zohydro ER and Sumavel DosePro include wholesaler and retail pharmacy distribution fees, prompt pay discounts, chargebacks, rebates and patient discount programs, and are based on amounts owed or to be claimed on the related sales. These estimates take into consideration the terms of the Company's agreements with its customers and third-party payors and the levels of inventory within the distribution and retail channels that may result in future rebates or discounts taken. In certain cases, such as patient support programs, the Company recognizes the cost of patient discounts as a reduction of revenue based on estimated utilization. If actual future results vary, the Company may need to adjust these estimates, which could have an effect on product revenue in the period of adjustment. The Company records product sales deductions in the statement of operations at the time product revenue is recognized.

In connection with the Closing of the Asset Purchase Agreement (APA) in May 2014, whereby Endo acquired the Company's Sumavel DosePro business, Endo purchased the Company's existing finished goods inventory of Sumavel DosePro at standard cost. The Company will be financially responsible for all returns of Sumavel DosePro product distributed by the Company prior to Closing of the APA up to a maximum per unit amount as specified in the agreements. The Company will also be financially responsible for payment of Sumavel DosePro product sales allowances on product distributed by the Company prior to Closing of the APA. Endo will be responsible for payment of all other Sumavel DosePro returns and sales allowances.

Contract Manufacturing Revenue

In connection with the Closing of the APA in May 2014, the Company and Endo Ventures entered into the Supply Agreement, pursuant to which the Company retains the sole and exclusive right and the obligation to manufacture, have manufactured, supply or have supplied Sumavel DosePro to Endo Ventures (see Note 4). The Company recognizes deferred revenue related to its supply of Sumavel DosePro as contract manufacturing revenue when earned on a "proportional performance" basis, as product is delivered. The Company recognizes revenue related to its sale of Sumavel DosePro product, equal to the cost of contract manufacturing plus a 2.5% mark-up, upon the transfer of title to Endo. The Company supplies Sumavel DosePro product based on non-cancellable purchase orders. The Company initially defers revenue for any consideration received in advance of services being performed and product being delivered, and recognizes revenue pursuant to the related pattern of performance, based on total product delivered relative to the total estimated product delivery over the minimum eight year term of the Supply Agreement. The Company continually evaluates the performance period and will adjust the period of revenue recognition if circumstances change.

In addition, the Company follows the authoritative accounting guidance when reporting revenue as gross when the Company acts as a principal versus reporting revenue as net when the Company acts as an agent. For transactions in which the Company acts as a principal, has discretion to choose suppliers, bears credit risk and performs a substantive part of the services, revenue is recorded at the gross amount billed to a customer and costs associated with these reimbursements are reflected as a component of cost of sales for contract manufacturing services.

Segment Reporting

Management has determined that the Company operates in one business segment, which is the development and commercialization of pharmaceutical products for people living with pain-related conditions and central nervous system disorders.

Recent Accounting Pronouncements

In April 2014, the Financial Accounting Standards Board (FASB) issued an accounting update that raises the threshold for disposals to qualify as discontinued operations and allows companies to have significant continuing involvement with and continuing cash flows from or to the discontinued operations. This accounting update also requires additional disclosures for discontinued operations and new disclosures for individually material disposal transactions that do not meet the definition of a discontinued operation. This guidance will be effective for fiscal years beginning after December 15, 2014, with early adoption permitted. The Company does not expect that the adoption of the guidance will have a material impact on the Company's financial statements.

In May 2014, the FASB issued new accounting guidance related to revenue recognition. This new standard will replace all current GAAP guidance on this topic and eliminate all industry-specific guidance. The new revenue recognition standard provides a unified model to determine when and how revenue is recognized. The core principle is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration

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for which the entity expects to be entitled in exchange for those goods or services. This guidance will be effective for fiscal years beginning after December 16, 2016, including interim periods within that reporting period, and can be applied either retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. Early adoption is prohibited. The Company is evaluating the timing and impact of adopting this new accounting standard on its financial statements and related disclosures.

In June 2014, the FASB issued new accounting guidance related to stock compensation. The new standard requires that a performance target that affects vesting, and that could be achieved after the requisite service period, be treated as a performance condition. As such, the performance target should not be reflected in estimating the grant date fair value of the award. This update further clarifies that compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the periods for which the requisite service has already been rendered. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015 and can be applied either prospectively or retrospectively to all awards outstanding as of the beginning of the earliest annual period presented as an adjustment to opening retained earnings. Early adoption is permitted. The Company does not expect that the adoption of the guidance will have a material impact on the Company's financial statements.

In August 2014, the FASB issued new accounting guidance which requires management to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and provide related footnote disclosures. The guidance is effective for annual and interim reporting periods beginning on or after December 15, 2016. Early adoption is permitted. The Company does not expect that the adoption of the guidance will have a material impact on the Company’s financial statements.

3. Inventory (in thousands)

	September 30, 2014		December 31, 2013
Raw materials	$	2,183	$	2,770
Work in process	10,154		6,054
Finished goods	5,901		1,112
Deferred cost of goods sold	1,033		—
	$	19,271	$	9,936

Deferred cost of goods sold consists of the costs of Zohydro ER associated with the deferred revenue, which are included in inventory, until such time the related deferred revenue is recognized.

4. Sale of Sumavel DosePro Business

Endo Ventures Bermuda Limited and Endo Ventures Limited Asset Purchase Agreement

On May 16, 2014, the Company closed the APA with Endo Ventures Bermuda and Endo Ventures, pursuant to which the Company sold its Sumavel DosePro business to Endo, including the registered trademarks, certain contracts, the NDA and other regulatory approvals, the books and records, marketing materials and product data relating to Sumavel DosePro. Upon Closing of the APA, Endo paid the Company $85,000,000 in cash, $8,500,000 of which was deposited into escrow to fund potential indemnification claims for a period of 12 months, and $4,624,000 in cash for the purchase of Sumavel DosePro finished goods inventory on hand at the Company's standard cost. In addition to the upfront cash payments, the Company is eligible to receive additional cash payments of up to $20,000,000 based on the achievement of pre-determined sales and gross margin milestones.

Furthermore, Endo Ventures assumed responsibility for the Company’s royalty obligation to Aradigm Corporation on sales of Sumavel DosePro.

At the Closing, the Company and Endo Ventures Bermuda entered into a license agreement (License Agreement), pursuant to which the Company granted Endo an exclusive, perpetual, sublicensable, irrevocable (unless terminated as set forth in the License Agreement), fully paid-up, royalty-free license to make and have made, use and research, develop and commercialize Sumavel DosePro throughout the world under a specified subset of the Company's technology patents. The Company retained all rights to the DosePro technology patents and know-how for use with other products. Either party may terminate the License Agreement in the event of the other party's uncured material breach.

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At the Closing, the Company and Endo Ventures entered into the Supply Agreement, pursuant to which the Company will retain the sole and exclusive right and the obligation to manufacture, have manufactured, supply or have supplied Sumavel DosePro to Endo, subject to Endo’s right to qualify and maintain a back-up manufacturer. Endo will exclusively purchase all Sumavel DosePro supplied by the Company at the cost of goods sold plus a 2.5% mark-up. The Company will grant Endo a manufacturing license under certain circumstances outlined in the Supply Agreement, if Endo requires the use of a back-up supplier. Representatives from the Company and Endo will participate on a joint supply committee for general oversight and strategic functions regarding the Supply Agreement. Further, under the Supply Agreement, Endo will support the Company’s Sumavel DosePro manufacturing operations with an interest-free working capital advance equivalent to the book value of the inventory of materials and unreleased finished goods held by the Company in connection with the manufacture of the Sumavel DosePro minus the accounts payable associated with such materials and unreleased finished goods, capped initially at $7,000,000 and subject to annual adjustment. The working capital advance is evidenced by a promissory note (the Note) and is secured by liens on materials and unreleased finished Sumavel DosePro inventory.

The Supply Agreement may be terminated by either party upon three years' prior written notice, provided that the notice cannot be given prior to the fifth anniversary of the Closing date. Either party may also terminate the Supply Agreement in the following circumstances: (i) if the other party breaches any material term of the agreement and fails to cure such breach within a specified time period following written notice; or (ii) upon the occurrence of certain financial difficulties. Endo Ventures also may terminate the Supply Agreement in the following circumstances: (i) if Sumavel DosePro has been deemed ineffective or unsafe by the applicable governmental authorities; or (ii) if the Company fails to supply to Endo Ventures a minimum quantity of Sumavel DosePro over the course of a six month period which results in Endo Ventures being unable to supply Sumavel DosePro to its trade customers.

Further upon Closing, the Company and Endo Ventures entered into other ancillary agreements associated with the APA, pursuant to which the Company will help facilitate the transfer of the Sumavel DosePro business to Endo Ventures, which Endo Ventures assumed responsibility for as of the Closing date. The services to be provided by the Company include assistance with co-pay/voucher programs, continuation of Zogenix Product Express services, regulatory support and processing of all payment claims made under the Company's National Drug Code. Services provided by the Company will be provided over various time periods specified in the agreements.

The Company accounted for the agreement for the sale of the Sumavel DosePro business as a sale of a business and, as such, was required to estimate the fair value of the business, including the product rights under the APA, DosePro technology license and Sumavel DosePro finished goods inventory on hand at Closing. The Company estimated the fair value of the product rights using an income approach valuation technique through a discounted cash flow method. The assumptions used in the discounted cash flow method included estimated Sumavel DosePro units to be sold in the market based on current demand forecasts, net selling price of Sumavel DosePro based on current market price, working capital needs estimated by management and a discount rate based on a market participant weighted average cost of capital.

The Company estimated the fair value of the DosePro technology license using a relief from royalty valuation method, whereby the presumed royalty savings from owning the license was estimated. The valuation considered royalty rates involving other injection technologies in the current pharmaceutical space.

The Company estimated the fair value of the Sumavel DosePro finished goods inventory on hand at Closing (which was sold to Endo at standard cost) using a market approach reflecting the estimated costs incurred by the Company in performing monitoring and quality control services on inventory supplied to Endo.

The agreements entered into concurrently with the sale of the Sumavel DosePro business, including the License Agreement and Supply Agreement, contain various elements and, as such, are deemed to be an arrangement with multiple deliverables as defined under authoritative accounting guidance (see Note 2). Several non-contingent deliverables were identified within the agreements. The Company identified the contract manufacturing services, manufacturing license, transition services and performance on joint supply committee as separate non-contingent deliverables within the arrangement. The transition services and manufacturing license have standalone value and qualify as separate units of accounting. Performance on the joint supply committee does not have standalone value from the contract manufacturing services, and as such, these two deliverables qualify as one unit of accounting. The non-contingent consideration received from the Endo agreements was allocated to these separate units of accounting, including the sale of the Sumavel DosePro business, based on their respective fair values, using the relative selling price method.

The Company developed its BESP for each non-contingent deliverable, as VSOE and TPE was not available, in order to allocate the non-contingent arrangement consideration to the three undelivered units of accounting. The Company used a market valuation approach to develop the BESP for contract manufacturing services through the use of market rates available for comparable contract manufacturing services and consideration of internal costs of performing inventory monitoring and

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quality control services. Significant increases in the hours necessary to perform inventory monitoring and quality controls services would result in a significant increase in the fair value of the contract manufacturing services.

The Company developed the BESP for the manufacturing license by estimating the total number of hours required to qualify another manufacturer, the hourly rate of internal regulatory and manufacturing employees that are required to qualify another manufacturer and the market rate for estimated cost of travel required to qualify another manufacturer. The Company developed the BESP for the transition services through use of an estimate of the total number of hours required to complete the services and the hourly rate of an internal employee that performs the services, which was compared to hourly market rates for similar consulting services. The Company developed the BESP for performance on the joint supply committee through use of an estimate of the total number of participation hours required on the committee and the hourly rate of the internal employees that participate on the joint supply committee. Significant increases in the estimated number of hours required to qualify another manufacturer, required to perform transition services, or required for performance on the joint supply committee would significantly increase the fair value of these deliverables.

The Company allocated $9,100,000 of the upfront consideration to contract manufacturing services, which includes a discount valued at $4,748,000 related to the interest free working capital advance, and an immaterial amount of the upfront consideration was allocated to the manufacturing license, transition services and performance on the joint supply committee. Revenue associated with each of the undelivered elements will be recognized when the element is delivered.

As of June 30, 2014, the Company determined that the Sumavel DosePro business, which is comprised of the product rights under the APA, DosePro technology license and Sumavel DosePro finished goods inventory purchased at Closing, had been fully delivered, and, therefore representing control of the business obtained by Endo. As such, a gain on sale of business of $79,980,000, net of $660,000 in related transaction costs, was recognized for the sale of the Sumavel DosePro business in the consolidated statement of operations and comprehensive income (loss) for the three and nine months ended September 30, 2014.

Based on the Sumavel DosePro finished goods inventory delivered and the contract manufacturing services performed, as measured using a proportional performance method, during the three and nine months ended September 30, 2014 a total of $4,225,000 and $6,463,000, respectively, was recognized as contract manufacturing revenue in the statement of operations and comprehensive income (loss). An immaterial amount of revenue was recognized for performance of transition services and performance on the joint supply committee during the three and nine months ended September 30, 2014.

As of September 30, 2014, the Company had $8,863,000 remaining in deferred revenue attributed to the Endo arrangement.

The $79,980,000 gain on sale of Sumavel DosePro business was calculated as the difference between the allocated non-contingent consideration amount for the business and the net carrying amount of the assets transferred to Endo. The following sets forth the net assets and calculation of the gain on sale as of Closing (in thousands):

Non-contingent consideration received	$	89,624
Imputed interest on working capital advance	4,748
Carrying value of Sumavel DosePro inventory on hand at Closing	(4,624		)
Transaction costs	(660		)
Deferred revenue associated with undelivered elements	(9,108		)
Net gain on sale of business	$	79,980

The net gain on sale of business may be adjusted in future periods by the contingent consideration, of up to $20,000,000, based upon the achievement of pre-determined sales and gross margin milestones. Any future adjustment of the net gain on sale of business will be determined through use of the relative selling price method.

Further, as noted above, Endo Ventures provided the Company with an interest-free working capital advance upon Closing. The working capital advance of $7,000,000, which is evidenced by the Note, was recorded as a note payable on the consolidated balance sheet at Closing, net of a $4,748,000 debt discount. The fair value of the debt discount was established using a market approach, including an interest rate reflecting recent term sheets provided to the Company for offerings of debt instruments, interest rates on the Company's most recent debt instruments, and market interest rates on similar debt instruments. The debt discount will be amortized as interest expense using the effective interest method over the minimum eight year term of the Supply Agreement, as the working capital advance must be repaid upon termination of the Supply Agreement. The Company recognized $83,000 and $123,000 of interest expense during the three and nine months ended September 30, 2014, respectively, related to the working capital advance from Endo.

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The sale of the Sumavel DosePro business does not qualify as discontinued operations as the Company will have significant continuing involvement in the business as the exclusive supplier of Sumavel DosePro over the term of the Supply Agreement.

5. Collaboration and Financing Agreements

Daravita Ltd License Agreement

In 2007, the Company entered into a license agreement (the Daravita License Agreement) with Daravita Limited (Daravita), formerly Alkermes Pharma Ireland Limited, which was amended in 2009 and then again on September 12, 2014. Under the terms of the Daravita License Agreement, Daravita granted the Company an exclusive license in the United States and its possessions and territories, with defined sub-license rights to third parties other than certain technological competitors of Daravita, to certain Daravita intellectual property rights related to Zohydro ER. The Daravita License Agreement grants the Company the exclusive right under certain Daravita patents and patent applications to import, use, offer for sale and sell oral controlled-release capsule or tablet formulations of hydrocodone, where hydrocodone is the sole active ingredient, for oral prescriptions in the treatment or relief of pain, pain syndromes or pain associated with medical conditions or procedures in the United States. This right enables the Company to exclusively develop and sell Zohydro ER in the United States. Daravita has retained the exclusive right to take action in the event of infringement or threatened infringement by a third party of Daravita's intellectual property rights under the Daravita License Agreement. The Company has the right to pursue an infringement claim against the alleged infringer should Daravita decline to take or continue an action.

Under the Daravita License Agreement, the Company paid an upfront fee of $500,000 to Daravita, which was recorded as research and development expense. The Company paid additional milestone payments in the amount of $750,000 to Daravita in August 2011 in connection with the completion of the treatment phase of the Company’s pivotal efficacy Phase 3 clinical trial, Study 801, and $1,000,000 upon submission of the first Zohydro ER NDA to the FDA in May 2012, which were recorded as research and development expense. Lastly, the Company paid a milestone payment of $2,750,000 upon the first NDA approval of Zohydro ER in October 2013, which was recorded as other assets in the consolidated balance sheet and is being amortized over the estimated life of the technology, through November 2019.

In addition, the Company is required to pay a mid single-digit percentage royalty on net sales of the product for an initial royalty term equal to the longer of the expiration of Daravita’s patents covering the product in the United States, or 15 years after commercial launch, if Daravita does not have patents covering the product in the United States. After the initial royalty term, the Daravita License Agreement will continue automatically for three-year rolling periods during which the Company will continue to pay royalties to Daravita on net sales of the product at a reduced low single-digit percentage rate in accordance with the terms of the Daravita License Agreement.

Under the terms of the Daravita License Agreement, the Company and Daravita agreed that, subject to a separate commercial manufacturing and supply agreement entered into by the Company and Daravita in November 2012, Daravita is the exclusive manufacturer and supplier to the Company of Zohydro ER, subject to certain exceptions. Daravita also granted to the Company, in the event that Daravita is unwilling or unable to manufacture or supply commercial product to the Company, a non-exclusive license to make product under Daravita's intellectual property rights. This non-exclusive license also includes the right to sublicense product manufacturing to a third party, other than certain technological competitors of Daravita.

On September 12, 2014, the Company and Daravita entered into a third amendment (Third Amendment) to the Daravita License Agreement. Pursuant to the Third Amendment, the Company may exercise its option to obtain an exclusive license to certain abuse-deterrent technology and know-how from Altus Formulation Inc. (Altus) (pursuant to that certain Development and Option Agreement, dated November 1, 2013, by and between the Company and Altus). Following such exercise and the first commercial sale by the Company, its affiliates or any of its permitted sublicensees of any extended-release formulations of hydrocodone using Altus’ abuse-deterrent technology (Altus Product), Daravita will be entitled to receive from the Company a royalty on net sales of Altus Product through the date that is 15 years following the first commercial sale of the Altus Product in the United States and its possessions and territories. Prior to December 31, 2019, such royalty will be (i) in the mid single-digits if Daravita or an affiliate is the manufacturer of the Altus Product or (ii) in the low twenty-percent-range if Daravita or an affiliate is not the manufacturer of the Altus Product. After December 31, 2019, such royalty will be in the high single digits, regardless of whether Daravita or an affiliate is the manufacturer. Neither the Company nor Daravita shall be obligated to have Daravita or an affiliate manufacture commercial supplies of Altus Product for the Company. No monetary value was exchanged in connection with the Third Amendment during the three and nine months ended September 30, 2014.

Either party may terminate the Daravita License Agreement upon a material, uncured default or certain insolvency events of the other party or upon 12 months written notice prior to the end of the initial royalty term or any additional three-year

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rolling period. The Company may also terminate the Daravita License Agreement, with or without cause, at any point in time upon 12 months' prior written notice, or if the sale of Zohydro ER is prohibited by regulatory authorities.

Mallinckrodt LLC Co-Promotion Agreement

On June 6, 2012, the Company and Mallinckrodt LLC (Mallinckrodt) entered into a co-promotion agreement (the Co-Promotion Agreement), which was originally scheduled to terminate on June 30, 2014. Under the terms of the Co-Promotion Agreement, Mallinckrodt was granted a co-exclusive right (with the Company) to promote Sumavel DosePro to a mutually agreed prescriber audience in the United States. Mallinckrodt’s sales team began selling Sumavel DosePro to its customer base of prescribers in August 2012.

In partial consideration of Mallinckrodt’s sales efforts, the Company paid Mallinckrodt a service fee on a quarterly basis through January 31, 2014 that represented a specified fixed percentage of net sales of prescriptions generated from Mallinckrodt’s prescriber audience over a baseline amount of net sales to the same prescriber audience. Amounts payable to Mallinckrodt for service fees are reflected as selling, general and administrative expenses. For the three and nine months ended September 30, 2014, the Company incurred $0 and $100,000, respectively, in service fee expenses under the Co-Promotion Agreement, excluding the tail-payment expense discussed below. For the three and nine months ended September 30, 2013, the Company incurred $249,000 and $618,000, respectively, in service fee expenses under the Co-Promotion Agreement.

In January 2014, the Company entered into an amendment to the Co-Promotion Agreement, whereby the Co-Promotion Agreement terminated on January 31, 2014. The Company assumed full responsibility for the commercialization of Sumavel DosePro in February 2014. In connection with the termination of the Co-Promotion Agreement, the Company is required to make a one-time tail payment to Mallinckrodt, calculated as a fixed percentage of net sales from the Mallinckrodt targeted prescriber audience during the 12 month period ending on January 31, 2015. An initial liability of $491,000 for this estimated tail payment was recorded as service fee expense in selling, general and administrative expenses in the statement of operations upon the Co-Promotion Agreement termination in January 2014. This estimated tail payment liability was adjusted based on actual year-to-date net sales through September 30, 2014, which resulted in a credit of $321,000 to service fee expense in selling, general and administrative expenses in the statement of operations during the three and nine months ended September 30, 2014.

Valeant Pharmaceuticals North America LLC Co-Promotion Agreement

On June 27, 2013, the Company entered into a co-promotion agreement (the Valeant Agreement) with Valeant Pharmaceuticals North America LLC (Valeant). Under the terms of the Valeant Agreement, the Company was granted the exclusive right (with Valeant or any of its affiliates) to promote Migranal® (dihydroergotamine mesylate) Nasal Spray (Migranal) to a prescriber audience of physicians and other health care practitioners in the United States. The Company's sales team began promoting Migranal to prescribers in August 2013. The term of the Valeant Agreement will run through December 31, 2015 (unless otherwise terminated), and can be extended by mutual agreement of the parties in additional 12 month increments. Valeant remains responsible for the manufacture, supply and distribution of Migranal for sale in the United States. In addition, Valeant supplies the Company with a specified amount of product samples every six months, and the Company will reimburse Valeant for the cost of additional samples and any promotional materials ordered by the Company. The cost of any additional samples and any promotional materials ordered by the Company will be recognized as selling, general and administrative expenses.

In partial consideration of the Company's sales efforts, Valeant pays the Company a co-promotion fee on a quarterly basis that represents specified percentages of net sales generated by the Company over defined baseline amounts of net sales (Baseline Forecast or Adjusted Baseline Forecast). In addition, upon completion of the co-promotion term, and only if the Valeant Agreement is not terminated by Valeant due to a bankruptcy event (as defined in the Valeant Agreement) or the inability of the Company to comply with its material obligations under the Valeant Agreement, Valeant will be required to pay the Company an additional tail payment calculated as a fixed percentage of the Company's net sales over the Baseline Forecast (or Adjusted Baseline Forecast) during the first full six months following the last day of the term.

The Company may terminate the Valeant Agreement in the event of a Valeant supply failure (as defined in the Valeant Agreement) or material product recall, or if the net sales price in a fiscal quarter is less than a specified percentage of the net sales price in the immediately preceding quarter, if the reduction in such net sales price would have a material adverse effect on the Company's financial return as a result of performance of its obligation under the Valeant Agreement.

Either party may terminate the Valeant Agreement with six months notice. Either party may terminate the Valeant Agreement with 30 days prior notice if the Company's net sales within a fiscal quarter fall below the Baseline Forecast (or Adjusted Baseline Forecast) for one or more fiscal quarters, or following the commercial introduction of a generic product to

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Migranal promoted or otherwise commercialized by a third party in the United States. In addition, either party may terminate the Valeant Agreement in the event of a change of control of itself or the other party (upon 90 days prior written notice), upon any action taken or objection raised by governmental authority that prevents either party from performing its obligations under the Valeant Agreement, upon the filing of an action alleging patent infringement, in connection with the material breach of the other party's material obligations, or if a bankruptcy event of the other party occurs.

The Company recognizes co-promotion fees received under the Valeant Agreement as service revenue in the period in which its promotional activities generate net sales over the Baseline Forecast or Adjusted Baseline Forecast. For the three and nine months ended September 30, 2014, the Company recognized service revenue of $446,000 and $2,427,000, respectively, under the Valeant Agreement. For the three and nine months ended September 30, 2013, the Company recognized service revenue of $232,000 under the Valeant Agreement.

Astellas Pharma US, Inc. Co-Promotion Agreement

In July 2009, the Company entered into the co-promotion agreement with Astellas (Astellas Co-Promotion Agreement). Under the terms of the agreement, the Company granted Astellas the co-exclusive right (with the Company) to market and sell Sumavel DosePro in the United States until June 30, 2013. Under the Astellas Co-Promotion Agreement, both Astellas and the Company were obligated to collaborate and fund the marketing of Sumavel DosePro and to provide annual minimum levels of sales effort directed at Sumavel DosePro during the term. In December 2011, the Company entered into an amendment to the Astellas Co-Promotion Agreement, or the amended Astellas Co-Promotion Agreement, whereby the agreement terminated on March 31, 2012.

Following completion of the co-promotion term in March 2012, the Company was required to pay Astellas one tail payment in July 2013 and another tail payment in July 2014, calculated as decreasing fixed percentages (ranging from mid-twenties down to a mid-teen percentage) of net sales in the Astellas Segment during the 12 months ended March 31, 2012. The fair value of the tail payments is being accreted through interest expense through the dates of payment in July 2013 and July 2014. The first tail payment of $2,032,000 was made in July 2013 and the second tail payment of $1,218,000 was made in July 2014. The Company recognized $0 and $40,000 of related interest expense during the three months ended September 30, 2014 and 2013, respectively, and recognized $87,000 and $327,000 of related interest expense during the nine months ended September 30, 2014 and 2013, respectively.

Healthcare Royalty Financing Agreement

On July 18, 2011, the Company closed the royalty financing agreement (the Financing Agreement) with Healthcare Royalty. Under the terms of the Financing Agreement, the Company borrowed $30,000,000 from Healthcare Royalty (the Borrowed Amount) and the Company agreed to repay such Borrowed Amount together with a return to Healthcare Royalty, as described below, out of the Company’s direct product sales, co-promotion revenues and out-license revenues (collectively, Revenue Interest) that the Company may record or receive as a result of worldwide commercialization of the Company’s products including Sumavel DosePro, Zohydro ER and other future products. The Financing Agreement was originally scheduled to terminate on March 31, 2018, but Healthcare Royalty exercised its right to early terminate the Financing Agreement on May 16, 2014, as discussed below.

Upon the closing of and in connection with the Financing Agreement, the Company issued and sold to Healthcare Royalty $1,500,000 of the Company’s common stock, or 388,601 shares, at a price of $3.86 per share. The Company also issued to Healthcare Royalty a warrant exercisable for up to 225,000 shares of the Company’s common stock. The warrant is exercisable at $9.00 per share and has a term of 10 years. As the warrant contains covenants where compliance with such covenants may be outside the control of the Company, the warrant was recorded as a current liability and marked to market at each reporting date using the Black-Scholes option pricing valuation model (see Note 2).

Under the Financing Agreement, the Company was obligated to pay to Healthcare Royalty:

• 5% to 5.75% of the first $75,000,000 of Revenue Interest recorded (in the case of net product sales) or received (in the case of co-promotion revenues and license fees) by the Company in a calendar year (initially 5% and then 5.75% after the co-promotion agreement with Astellas terminated on March 31, 2012);

• 2.5% of the next $75,000,000 of Revenue Interest recorded (in the case of net product sales) or received (in the case of co-promotion revenues and license fees) by the Company in a calendar year; and

• 0.5% of Revenue Interest over and above $150,000,000 recorded (in the case of net product sales) or received (in the case of co-promotion revenues and license fees) by the Company in a calendar year.

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Net sales of Sumavel DosePro outside the United States were only included in the Revenue Interest if such net sales exceeded $10,000,000. The Company was also obligated to make three fixed payments of $10,000,000 on (or before, at the option of the Company) each of January 31, 2015, January 31, 2016 and January 31, 2017.

As security for the payment of the Company's obligations under the Financing Agreement, the Company also entered into a security agreement whereby the Company granted to Healthcare Royalty a security interest in all assets of the Company, including intellectual property and other rights of the Company to the extent necessary or used to commercialize the Company products. Healthcare Royalty’s security interest was extinguished upon early termination of the Financing Agreement on May 16, 2014.

The Company had the option to terminate the Financing Agreement at the Company’s election in connection with a change of control of the Company, upon the payment of a base amount of $52,500,000, or, if higher, an amount that generated a 19% internal rate of return on the Borrowed Amount as of the date of prepayment, in each case reduced by the Revenue Interest and principal payments received by Healthcare Royalty up to the date of prepayment.

Healthcare Royalty had the option to terminate the Financing Agreement at its election in connection with a change of control of the Company (which includes the sale, transfer, assignment or licensing of the Company’s rights in the United States to either Sumavel DosePro or Zohydro ER), or an event of default (which includes the occurrence of a bankruptcy event or other material adverse change in the Company’s business), as defined in the Financing Agreement. Healthcare Royalty exercised its option to terminate the Financing Agreement in connection with the Company's sale of the Sumavel DosePro business to Endo on May 16, 2014. Upon termination of the Financing Agreement by Healthcare Royalty, the Company was obligated to make a final payment (Final Payment) of $40,041,000 to Healthcare Royalty, which was an amount that generated a 17% internal rate of return on the Borrowed Amount as of the date of prepayment, reduced by the Revenue Interest and principal payments received by Healthcare Royalty up to the date of Final Payment. The Company no longer has any further payment obligations under the Financing Agreement after the Final Payment was made.

The rights of the Company and Healthcare Royalty to terminate the Financing Agreement early, as well as the change in the Revenue Interest rate from 5% to 5.75% in connection with the early termination of the Astellas Co-Promotion Agreement, met the definition of an embedded derivative. As a result, the Company carved out these embedded derivatives from the Financing Agreement and determined the fair value of each derivative using various discounted cash flow valuation models taking into account the probability of these events occurring and various scenarios surrounding the potential Revenue Interest payments that would be made if these events occurred (see Note 2). The aggregate fair value of the embedded derivatives as of December 31, 2013 was $233,000 and is included in other long-term liabilities. The fair value of the embedded derivatives of $247,000 was derecognized upon termination of the Financing Agreement on May 16, 2014 and is included in the loss on early extinguishment of debt in the statement of operations and comprehensive income (loss) for the nine months ended September 30, 2014.

The Company received aggregate net proceeds of $29,485,000 from the Financing Agreement (including the purchase of common stock). The discounts, which were being amortized using the effective interest method over the term of the arrangement within interest expense, include the fair value of the common stock warrants issued to Healthcare Royalty of $790,000 upon the closing of the Financing Agreement, fees payable to Healthcare Royalty in connection with the execution of the arrangement of $476,000 and the fair value of embedded derivatives of $605,000 upon the closing of the Financing Agreement. The Company has recognized other income (expense) in relation to the change in the fair value of the Healthcare Royalty common stock warrant of $125,000 and $397,000 for the three and nine months ended September 30, 2014, respectively, and $(8,000) and $(43,000) for the three and nine months ended September 30, 2013, respectively, in the statement of operations and comprehensive income (loss). The Company has recognized other income in relation to the change in the fair value of the embedded derivatives of $0 and $14,000 for the three and nine months ended September 30, 2014, respectively, and $1,474,000 and $912,000 for the three and nine months ended September 30, 2013, respectively, in the statement of operations and comprehensive income (loss).

Upon early termination of the Financing Agreement on May 16, 2014, and the Company's Final Payment to Healthcare Royalty, the Company determined that the early termination resulted in an extinguishment of the outstanding debt and recognized a loss on early extinguishment of debt of $1,254,000 which was recorded as non-operating expenses in the statement of operations and comprehensive income (loss). The loss on early extinguishment of debt is related to the write-off of the unamortized balances of the debt discounts (which includes derecognition of the embedded derivative liabilities, as discussed above), debt acquisition costs, and accrued interest expenses related to the Financing Agreement.

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6. Common Stock Warrants

In July 2012, in connection with a public offering of common stock and warrants, the Company sold warrants to purchase 15,784,200 shares of common stock (including over-allotment purchase). The warrants are exercisable at an exercise price of $2.50 per share and will expire on July 27, 2017, which is five years from the date of issuance. As the warrants contain a cash settlement feature upon the occurrence of certain events that may be outside of the Company’s control, the warrants are recorded as a current liability and are marked to market at each reporting period (see Note 2). During the nine months ended September 30, 2014, warrants to purchase 465,250 shares of common stock were exercised, and during the year ended December 31, 2013, warrants to purchase 103,500 shares of common stock were exercised. The Company recognized $1,163,000 and $259,000 in proceeds from the exercise of warrants during the nine months ended September 30, 2014 and during the year ended December 31, 2013, respectively. There were no warrants exercised during the three months ended September 30, 2014. The fair value of the warrants outstanding was approximately $3,912,000 and $30,849,000 as of September 30, 2014 and December 31, 2013, respectively.

In July 2011, upon the closing of and in connection with the Financing Agreement (see Note 5), the Company issued to Healthcare Royalty a warrant exercisable into 225,000 shares of common stock. The warrant is exercisable at $9.00 per share of common stock and has a term of ten years. As the warrant contains covenants where compliance with such covenants may be outside of the Company’s control, the warrant was recorded as a current liability and is marked to market at each reporting date (see Note 2). The fair value of the warrant was approximately $95,000 and $492,000 as of September 30, 2014 and December 31, 2013, respectively.

7. Operating Lease

On August 5, 2014, the Company entered into a new operating lease (the Lease) for approximately 17,361 rentable square feet of office space located in San Diego, California. The Company intends to use the leased premises as its corporate headquarters, and the new lease is expected to commence on December 1, 2014 upon expiration of the Company’s current San Diego office sublease of approximately 13,124 rentable square feet in the same location.

The Lease term will expire 64 months after the Lease commencement date with an option to renew the Lease for an additional five years. The initial base rent will be $73,784 per month, with 100% of rent being abated for the second, third, fourth and fifth months of the Lease term and 50% of rent being abated for the sixth month of the Lease term. The base rent will increase approximately 3.25% on a yearly basis throughout the Lease term. The Lease also requires the Company to pay additional rent consisting of a portion of common area and pass-through expenses in excess of base year amounts. The Company will begin to amortize rent expense related to this operating lease using a straight-line method when it gains access to the new leased space, which had not occurred as of September 30, 2014. Further, under the Lease, the landlord will provide up to $382,000 in a tenant improvements allowance to support interior improvements for the rented space. The tenant improvements will be capitalized by the Company as the improvements are made.

8. Stock-Based Compensation

The Company uses the Black-Scholes option-pricing model for determining the estimated fair value of stock-based compensation for stock-based awards to employees and the board of directors. The assumptions used in the Black-Scholes option-pricing model for the three and nine months ended September 30, 2014 and 2013 are as follows:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2014		2013		2014	2013
Risk free interest rate	2.0%		1.5% to 1.7%		1.6% to 2.0%	0.8% to 1.7%
Expected term	6.1 years		5.1 to 6.0 years		5.1 to 6.1 years	5.0 to 6.1 years
Expected volatility	83.8%		82.8% to 83.9%		83.8% to 84.9%	82.8% to 87.9%
Expected dividend yield	—	%	—	%	—%	—%

The risk-free interest rate assumption was based on the rates for U.S. Treasury zero-coupon bonds with maturities similar to those of the expected term of the award being valued. The assumed dividend yield was based on the Company’s expectation of not paying dividends in the foreseeable future. The weighted average expected term of options was calculated using the simplified method as prescribed by accounting guidance for stock-based compensation. This decision was based on the lack of relevant historical data due to the Company’s limited historical experience. In addition, due to the Company’s limited historical data, the estimated volatility was calculated based upon the Company's historical volatility, supplemented with historical volatility of comparable companies whose share prices are publicly available for a sufficient period of time.

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The Company recognized stock-based compensation expense as follows (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2014		2013		2014		2013
Cost of goods sold	$	101	$	119	$	369	$	227
Research and development	262		316		983		782
Selling, general and administrative	1,679		1,780		5,982		4,570
Restructuring	—		—		—		201
Total	$	2,042	$	2,215	$	7,334	$	5,780

As of September 30, 2014, there was approximately $15,079,000 of total unrecognized compensation costs related to outstanding employee and board of director stock options and restricted stock units, which is expected to be recognized over a weighted average period of 2.6 years.

As of September 30, 2014, there were 181,000 unvested stock options outstanding to consultants, with approximately $151,000 of related unrecognized compensation expense based on a September 30, 2014 measurement date. These unvested stock options outstanding to consultants are expected to vest over a weighted average period of 2.2 years. In accordance with accounting guidance for stock-based compensation, the Company re-measures the fair value of stock option grants to non-employees at each reporting date and recognizes the related income or expense during their vesting period. The income recognized from the valuation of stock options and restricted stock units to consultants was $80,000 and $230,000 for the three and nine months ended September 30, 2014, respectively, and was immaterial for the three and nine months ended September 30, 2013. Stock option expense for awards issued to consultants is included in the consolidated statement of operations and comprehensive income (loss) within selling, general and administrative expense.

9. Subsequent Events

Brabant Pharma Limited Sales and Purchase Agreement

On October 24, 2014, Zogenix Europe acquired Brabant, pursuant to the terms of the Sale and Purchase Agreement dated October 24, 2014, by and among Zogenix Europe, the Company, Brabant and Anthony Clarke, Richard Stewart, Ann Soenen-Darcis, Jennifer Watson, Reyker Nominees Limited and Aquarius Life Science Limited (collectively, the Sellers). In connection with the consummation of the transactions on October 24, 2014 (the closing) contemplated by the Sale and Purchase Agreement, Zogenix Europe purchased the issued share capital of Brabant from the Sellers (the Acquisition) and the Company agreed to guarantee the obligations, commitments, undertakings and warranties of Zogenix Europe. Brabant owns worldwide development and commercialization rights to Brabafen, low-dose fenfluramine, for the treatment of Dravet syndrome (also known as Severe Myoclonic Epilepsy of Infancy). Dravet syndrome is a rare and catastrophic form of pediatric epilepsy with life threatening consequences for patients and current treatment options are very limited. Brabafen has recently received orphan drug designation in Europe and the United States for the treatment of Dravet syndrome.

Under the terms of the Sale and Purchase Agreement, at the closing Zogenix Europe paid to the Sellers consideration of (i) $20,000,000 in cash (plus $8,432,000 which represents the net cash position of Brabant at the closing), of which $2,000,000 (the escrow amount) will be deposited into escrow to fund potential indemnification claims for a period of 6 months, and (ii) 11,995,202 shares (the Shares) of the Company’s common stock. Zogenix Europe also committed to paying up to an aggregate amount of $95,000,000 in connection with the achievement of certain milestones for Brabafen, including $50,000,000 in regulatory milestones and $45,000,000 in sales milestones. The Company has agreed to use commercially reasonable efforts (as defined in the Sale and Purchase Agreement) to develop and commercialize Brabafen and to achieve the milestones.

In September 2012, Brabant entered into a collaboration and license agreement with the Universities of Antwerp and Leuven in Belgium (the Universities), which was amended and restated in October 2014. Under the terms of the agreement, the Universities granted Brabant an exclusive worldwide license to use the data obtained from the study, as well as certain intellectual property related to fenfluramine for the treatment of Dravet syndrome. Brabant is required to pay a mid single-digit percentage royalty on net sales of fenfluramine for the treatment of Dravet syndrome or, in the case of a sublicense of fenfluramine for the treatment of Dravet syndrome, a percentage in the mid-twenties of the sub-licensing revenues. The agreement terminates in September 2020; however, upon the commencement of Phase 3 clinical trials of fenfluramine or marketing approval by a regulatory authority, the agreement will be extended until September 2045. The agreement may be

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terminated by the Universities if Brabant: (a) does not use commercially reasonable efforts to (i) develop and commercialize fenfluramine for the treatment of Dravet syndrome or related conditions stemming from infantile epilepsy, or (ii) seek approval of fenfluramine for the treatment of Dravet syndrome in the United States; or (b) if Brabant becomes insolvent, shall make an assignment for the benefit of creditors, or shall have a petition in bankruptcy filed for or against it or for any similar relief has been filed against it. Brabant can terminate the agreement upon specified prior written notice to the Universities.

Both Zogenix Europe and the Sellers agreed to customary warranties and covenants in the Sale and Purchase Agreement. The Sellers agreed to indemnify Zogenix Europe for certain matters, including breaches of warranties and covenants included in the Sale and Purchase Agreement, up to the escrow amount, subject to limited exceptions.

Pursuant to the Sale and Purchase Agreement, the Company has agreed to prepare and file a registration statement on Form S-3 covering the resale of the Shares issued to the Sellers within 90 days of the closing and to use commercially reasonable efforts to cause such registration statement to be declared effective as promptly as practicable following the filing.

The Company will complete its accounting for this business combination during the fourth quarter of 2014.

Purdue Pharma L.P. Waiver Agreement

On October 29, 2014, the Company entered into a waiver agreement (the Waiver Agreement) with Purdue Pharma L.P. (Purdue) pursuant to which the Company granted a waiver to Purdue of the three-year Hatch-Waxman regulatory exclusivity period with respect to NDA 202880 for Zohydro ER in support of Purdue’s single-entity, extended-release hydrocodone product which is the subject of pending NDA 206627 and any single-entity, once-daily hydrocodone successor products or NDAs filed by Purdue (the Purdue Products). In addition, Purdue granted the Company a waiver of the Hatch-Waxman regulatory exclusivity period with respect to Purdue Products in support of our single-entity, twice-a-day hydrocodone product, including Zohydro ER and any successor products with any abuse deterrent properties or labeling claims. Under the terms of the Waiver Agreement, Purdue will pay to the Company (i) $5,000,000 within fifteen (15) days of the date of the Waiver Agreement, (ii) $5,000,000 on July 1, 2015, and (iii) a percentage royalty in the low single-digits on Purdue’s net sales of Purdue Product commencing on October 1, 2015 and ending on October 25, 2016, only to the extent such royalty payment by Purdue in the aggregate would exceed $5,000,000 and then only with respect to royalties in excess of such amount.

Teva Letter Agreement

On November 5, 2014, the Company entered into a letter agreement (the Letter Agreement) with Teva Pharmaceuticals USA, Inc. (Teva), under which the Comapny granted Teva a right of reference to certain carcinogenicity data generated by the Company for hydrocodone bitrate for use in connection with Teva’s NDA for its extended-release hydrocodone product candidate. Teva is obligated to pay the Company a one-time fee of $3,500,000 within 30 days of the date of the Letter Agreement.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements that involve substantial risks and uncertainties. These forward looking statements include, but are not limited to, statements about:

• our ability to successfully execute our sales and marketing strategy for the commercialization of Zohydro ER;

• the potential for the FDA to approve the sNDA for a modified formulation of Zohydro ER that was designed to have abuse deterrent properties;

• the progress and timing of clinical trials for Relday, Brabafen and our other product candidates;

• our ability to receive contingent milestone payments from the sale of the Sumavel DosePro business to Endo Health Solutions, Inc.;

• adverse side effects or inadequate therapeutic efficacy of Zohydro ER that could result in product recalls, market withdrawals or product liability claims;

• the safety and efficacy of our product candidates;

• the market potential for extended-release/long-acting (ER/LA) opioid products, and our ability to compete within that market;

• the goals of our development activities and estimates of the potential markets for our product candidates, and our ability to compete within those markets;

• the ability to develop an additional formulation of Zohydro ER with abuse deterrent properties;

• estimates of the capacity of manufacturing and other facilities to support our products and product candidates;

• our ability to ensure adequate and continued supply of Zohydro ER to successfully meet anticipated market demand;

• our and our licensors ability to obtain, maintain and successfully enforce adequate patent and other intellectual property protection of our products and product candidates and the ability to operate our business without infringing the intellectual property rights of others;

• our ability to obtain and maintain adequate levels of coverage and reimbursement from third-party payors for Zohydro ER or any of our product candidates that may be approved for sale, the extent of such coverage and reimbursement and the willingness of third-party payors to pay for our products versus less expensive therapies;

• the impact of healthcare reform legislation; and

• projected cash needs and our expected future revenues, operations and expenditures.

The forward-looking statements are contained principally in the sections entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” In some cases, you can identify forward-looking statements by the following words: “may,” “will,” “could,” “would,” “should,” “expect,” “intend,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “project,” “potential,” “continue,” “ongoing” or the negative of these terms or other comparable terminology, although not all forward-looking statements contain these words. These statements relate to future events or our future financial performance or condition and involve known and unknown risks, uncertainties and other factors that could cause our actual results, levels of activity, performance or achievement to differ materially from those expressed or implied by these forward-looking statements. We discuss many of these risks, uncertainties and other factors in this Quarterly Report on Form 10-Q in greater detail under the heading “Item 1A – Risk Factors.”

Given these risks, uncertainties and other factors, we urge you not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. You should read this Quarterly Report on Form 10-Q completely and with the understanding that our actual future results may be materially different from what we expect. For all forward-looking statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. We undertake no obligation to revise or update publicly any forward-looking statements, whether as a result of new information, future events or otherwise, unless required by law.

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DosePro^®, Relday™, Zogenix™, Zohydro^® ER and Brabafen™ are our trademarks. All other trademarks, trade names and service marks appearing in this Quarterly Report on Form 10-Q are the property of their respective owners. Use or display by us of other parties’ trademarks, trade dress or products is not intended to and does not imply a relationship with, or endorsements or sponsorship of, us by the trademark or trade dress owner.

Unless the context requires otherwise, references in this Quarterly Report on Form 10-Q to “Zogenix,” “we,” “us” and “our” refer to Zogenix, Inc., including, its consolidated subsidiaries.

The interim consolidated financial statements and this Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2013 and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations, both of which are contained in our Annual Report on Form 10-K for the year ended December 31, 2013.

Overview

Background

We are a pharmaceutical company committed to developing and commercializing therapies that address specific clinical needs for people living with pain-related conditions and central nervous system disorders who need innovative treatment alternatives to help them return to normal daily functioning. On October 25, 2013, we received marketing approval from the U.S. Food and Drug Administrations, or FDA, for Zohydro® ER (hydrocodone bitartrate) extended-release capsules, an opioid agonist, extended-release oral formulation of hydrocodone without acetaminophen, for the management of pain severe enough to require daily, around-the-clock, long-term opioid treatment and for which alternative treatment options are inadequate. Zohydro ER is the first extended-release oral formulation of hydrocodone without acetaminophen. We launched Zohydro ER in March 2014. Zohydro ER has the potential to address significant unmet medical needs and become an important and widely-used addition to the treatment options available to patients and physicians in the United States’ multi-billion dollar chronic pain market.

Our first commercial product, Sumavel® DosePro® (sumatriptan injection) Needle-free Delivery System, was launched in January 2010. Sumavel DosePro offers fast-acting, easy-to-use, needle-free subcutaneous administration of sumatriptan for the acute treatment of migraine and cluster headache in a pre-filled, single-use delivery system. Sumavel DosePro is the first drug product approved by the FDA that allows for the needle-free, subcutaneous delivery of medication. On April 23, 2014, we entered into an asset purchase agreement, or the APA, with Endo Ventures Bermuda Limited, or Endo Ventures Bermuda, and Endo Ventures Limited, or Endo Ventures and, together with Endo Ventures Bermuda, Endo, pursuant to which, and on the terms and subject to the conditions thereof, among other things, we agreed to sell our Sumavel DosePro business to Endo, including the registered trademarks, certain contracts, the new drug application, or NDA, and other regulatory approvals, the books and records, marketing materials and product data relating to Sumavel DosePro. The APA closed on May 16, 2014 and, in connection with this closing, we and Endo Ventures also entered into a supply agreement pursuant to which we have retained the sole and exclusive right and the obligation to manufacture, have manufactured, supply or have supplied Sumavel DosePro to Endo Ventures, subject to Endo Venture’s right to qualify and maintain a back-up manufacturer.

We are also developing Relday™, a proprietary, long-acting injectable formulation of risperidone using Durect Corporation's SABER™ controlled-release formulation technology through a development and license agreement with Durect. Risperidone is used to treat the symptoms of schizophrenia and bipolar disorder in adults and teenagers 13 years of age and older. If successfully developed and approved, we believe Relday may be the first subcutaneous antipsychotic product that allows for once-monthly dosing. In May 2012, we filed an investigational new drug, or IND, application with the FDA. In July 2012, we initiated our first clinical trial for Relday. This Phase 1 clinical trial was a single-center, open-label, safety and pharmacokinetic trial of 30 patients with chronic, stable schizophrenia or schizoaffective disorder. We announced positive single-dose pharmacokinetic results from the Phase 1 clinical trial in January 2013. Based on the favorable safety and pharmacokinetic profile demonstrated with the 25 mg and 50 mg once-monthly doses tested in the Phase 1 trial, we extended the study to include an additional cohort of 10 patients at a 100 mg dose of the same formulation. We announced positive top-line results from the extended Phase 1 clinical trial in May 2013. The positive results from this study extension position us to begin a multi-dose clinical trial, which we believe will provide the required steady-state pharmacokinetic and safety data prior to initiating Phase 3 development studies. We plan to commence this multi-dose clinical trial in January of 2015.

The development of Relday will first focus on its delivery by conventional needle and syringe in order to allow the administration of different volumes of the same formulation of Relday by a healthcare professional. We anticipate that the introduction of our DosePro needle-free technology for administration of Relday can occur later in development or as part of

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life cycle management after further work involving formulation development, technology enhancements, and applicable regulatory approvals.

We have experienced net losses and negative cash flow from operating activities since inception, and as of September 30, 2014, had an accumulated deficit of $381.1 million. We expect to continue to incur net losses and negative cash flow from operating activities for at least the next year primarily as a result of our efforts to commercialize Zohydro ER, including introduction of Zohydro ER with abuse deterrent properties to the market, if approved, the clinical development for Relday and Brabafen (our recently acquired product candidate), required post-market testing for Zohydro ER, safe use initiatives for Zohydro ER and additional development activities with respect to Zohydro ER, including the development of multiple formulations of extended-release hydrocodone with abuse deterrent properties. As of September 30, 2014, we had cash and cash equivalents of $50.5 million.

Although it is difficult to predict future liquidity requirements, we believe that our cash and cash equivalents as of September 30, 2014, the $8.5 million of the upfront cash payment received from the sale of our Sumavel DosePro business that is included in restricted cash, our projected product revenues from Zohydro ER, the $10.0 million in payments for the waiver granted to Purdue Pharma L.P., or Purdue, due by July 1, 2015, and our projected manufacturing and other service revenues will be sufficient to fund our operations into the thrid quarter of 2015. Our cash and cash equivalents as of September 30, 2014 exclude the $20.0 million cash payment made to the Sellers in connection with our acquisition of Brabant. We may pursue additional opportunities to raise capital, if necessary, through public or private equity offerings, including through our controlled equity offering program, debt financings, receivables financings or through collaborations or partnerships with other companies. If we are unsuccessful in raising additional required funds, we may be required to significantly delay, reduce the scope of or eliminate one or more of our development programs or our commercialization efforts, or cease operating as a going concern. We also may be required to relinquish, license or otherwise dispose of rights to product candidates or products that we would otherwise seek to develop or commercialize ourselves on terms that are less favorable than might otherwise be available. In its report on our consolidated financial statements for the year ended December 31, 2013, our independent registered public accounting firm included an explanatory paragraph expressing substantial doubt regarding our ability to continue as a going concern.

Recent Developments

Brabant Pharma Limited Sales and Purchase Agreement

On October 24, 2014, Zogenix Europe Limited, or Zogenix Europe, our wholly-owned subsidiary, acquired Brabant Pharma Limited, or Brabant, a privately-held company organized under the laws of England and Wales, pursuant to the terms of a Sale and Purchase Agreement, or the Sale and Purchase Agreement, dated October 24, 2014 by and among us, Brabant and Anthony Clarke, Richard Stewart, Ann Soenen-Darcis, Jennifer Watson, Reyker Nominees Limited and Aquarius Life Science Limited (collectively, the Sellers). Brabant owns worldwide development and commercialization rights to Brabafen, low-dose fenfluramine, for the treatment of Dravet syndrome (also known as Severe Myoclonic Epilepsy of Infancy). Dravet syndrome is a rare and catastrophic form of pediatric epilepsy with life threatening consequences for patients and current treatment options are very limited. Brabafen has recently received orphan drug designation in Europe and the United States for the treatment of Dravet syndrome.

Under the terms of the Sale and Purchase Agreement, at the closing we paid to the Sellers consideration of (i) $20.0 million in cash (plus $8.4 million which represents the net cash position of Brabant at the closing), of which $2.0 million (the escrow amount) was deposited into escrow to fund potential indemnification claims for a period of 6 months, and (ii) 11,995,202 shares (the Shares) of our common stock. We also committed to paying up to an aggregate amount of $95.0 million in connection with the achievement of certain milestones for Brabafen, including $50.0 million in regulatory milestones and $45.0 million in sales milestones. We have agreed to use commercially reasonable efforts (as defined in the Sale and Purchase Agreement) to develop and commercialize Brabafen and to achieve the milestones.

The safety and effectiveness of Brabafen has been evaluated in a continuing, long-term, open-label, study in 15 Dravet syndrome patients (the study). The average duration of treatment in the study is currently more than 12 years, with the longest duration of treatment at more than 26 years. More than two-thirds (67%) of patients were seizure free for at least a year after the latest assessment with an average seizure free period of 5.5 years. The majority (87%) of patients had a greater than 75% reduction in seizure frequency. Brabafen was shown to be well tolerated in the study, and treatment side effects were mild and transient for the entire study treatment period. There were no reports of pulmonary hypertension and there were no deaths. Two patients showed sub-clinical evidence of cardiac valve thickening that was judged to be clinically insignificant following detailed investigation by independent cardiologists. Similar findings spontaneously resolved in a third patient. Based upon feedback from the FDA and the European Medicines Agency, we expect to initiate two Phase 3 studies (of 40 to 60 Dravet

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syndrome patients per study) during the second quarter of 2015 in the United States and Europe, with top-line results potentially available in the first half of 2016.

In September 2012, Brabant entered into a collaboration and license agreement with the Universities of Antwerp and Leuven in Belgium (the Universities), which was amended and restated in October 2014. Under the terms of the agreement, the Universities granted Brabant an exclusive worldwide license to use the data obtained from the study, as well as certain intellectual property related to fenfluramine for the treatment of Dravet syndrome. Brabant is required to pay a mid single-digit percentage royalty on net sales of fenfluramine for the treatment of Dravet syndrome or, in the case of a sublicense of fenfluramine for the treatment of Dravet syndrome, a percentage in the mid-twenties of the sub-licensing revenues. The agreement terminates in September 2020; however, upon the commencement of Phase 3 clinical trials of fenfluramine or marketing approval by a regulatory authority, the agreement will be extended until September 2045. The agreement may be terminated by the Universities if Brabant: (a) does not use commercially reasonable efforts to (i) develop and commercialize fenfluramine for the treatment of Dravet syndrome or related conditions stemming from infantile epilepsy, or (ii) seek approval of fenfluramine for the treatment of Dravet syndrome in the United States; or (b) if Brabant becomes insolvent, shall make an assignment for the benefit of creditors, or shall have a petition in bankruptcy filed for or against it or for any similar relief has been filed against it. Brabant can terminate the agreement upon specified prior written notice to the Universities.

Purdue Pharma L.P. Waiver Agreement

On October 29, 2014, we entered into a waiver agreement with Purdue, pursuant to which we granted a waiver to Purdue of the three-year Hatch-Waxman regulatory exclusivity period with respect to NDA 202880 for Zohydro ER in support of Purdue’s single-entity, extended-release hydrocodone product which is the subject of pending NDA 206627 and any single-entity, once-daily hydrocodone successor products or NDAs filed by Purdue, or the Purdue Products. In addition, Purdue granted us a waiver of the Hatch-Waxman regulatory exclusivity period with respect to Purdue Products in support of our single-entity, twice-a-day hydrocodone product, including Zohydro ER and any successor products with any abuse deterrent properties or labeling claims. Under the terms of the Agreement, Purdue will pay to Zogenix (i) $5.0 million within fifteen (15) days of the date of the agreement, (ii) $5.0 million on July 1, 2015, and (iii) a percentage royalty in the low single-digits on Purdue’s net sales of Purdue Product commencing on October 1, 2015 and ending on October 25, 2016, only to the extent such royalty payment by Purdue in the aggregate would exceed $5.0 million and then only with respect to royalties in excess of such amount.

Teva Letter Agreement

On November 5, 2014, we entered into a letter agreement with Teva Pharmaceuticals USA, Inc., or Teva, under which we granted Teva a right of reference to certain carcinogenicity data generated by us for hydrocodone bitrate for use in connection with Teva’s NDA for its extended-release hydrocodone product candidate. Teva is obligated to pay us a one-time fee of $3.5 million within 30 days of the date of the letter agreement.

Cantor Controlled Equity Offering Sales Agreement

On November 6, 2014, we entered into a controlled equity offering sales agreement with Cantor Fitzgerald & Co., or Cantor, as sales agent, under which we can issue and sell shares of our common stock having an aggregate offering price of up to $25.0 million from time to time through Cantor. The sales of common stock made under the controlled equity offering sales agreement will be made in “at-the-market” offerings as defined in Rule 415 of the Securities Act of 1933, as amended, or the Securities Act. However, there can be no assurance that Cantor will be successful in consummating such sales based on prevailing market conditions or in the quantities or at the prices that we deem appropriate.

Daravita Ltd License Agreement

In 2007, we entered into a license agreement, or the License Agreement, with Daravita Limited formerly Alkermes Pharma Ireland Limited, which was amended in 2009 and then again on September 12, 2014. Under the terms of the License Agreement, Daravita granted us an exclusive license in the United States and its possessions and territories, with defined sub-license rights to third parties other than certain technological competitors of Daravita, to certain Daravita intellectual property rights related to Zohydro ER. The License Agreement grants us the exclusive right under certain Daravita patents and patent applications to import, use, offer for sale and sell oral controlled-release capsule or tablet formulations of hydrocodone, where hydrocodone is the sole active ingredient, for oral prescriptions in the treatment or relief of pain, pain syndromes or pain associated with medical conditions or procedures in the United States. This right enables us to exclusively develop and sell Zohydro ER in the United States.

On September 12, 2014, we entered into a third amendment, or the Third Amendment, to the License Agreement with Daravita. Pursuant to the Third Amendment, we may exercise our option to obtain an exclusive license to certain abuse-

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deterrent technology and know-how from Altus Formulation Inc., or Altus, (pursuant to that certain Development and Option Agreement, dated November 1, 2013, by and between us and Altus). Following such exercise and the first commercial sale by us, our affiliates or any of our permitted sublicensees of any extended-release formulations of hydrocodone using Altus’ abuse-deterrent technology, or the Altus Product, Daravita will be entitled to receive from us a royalty on net sales of Altus Product through the date that is 15 years following the first commercial sale of the Altus Product in the United States and its possessions and territories. Prior to December 31, 2019, such royalty will be (i) in the mid single-digits if Daravita or an affiliate is the manufacturer of the Altus Product or (ii) in the low twenty-percent-range if Daravita or an affiliate is not the manufacturer of the Altus Product. After December 31, 2019, such royalty will be in the high single digits, regardless of whether Daravita or an affiliate is the manufacturer. Neither we nor Daravita shall be obligated to have Daravita or an affiliate manufacture commercial supplies of Altus Product for us.

Either party may terminate the License Agreement upon a material, uncured default or certain insolvency events of the other party or upon 12 months written notice prior to the end of the initial royalty term or any additional three-year rolling period. We may also terminate the License Agreement, with or without cause, at any point in time upon 12 months' prior written notice, or if the sale of Zohydro ER is prohibited by regulatory authorities.

Endo Ventures Bermuda Limited and Endo Ventures Limited Asset Purchase Agreement

On April 23, 2014, we entered into the APA with Endo, pursuant to which, and on the terms and subject to the conditions thereof, among other things, we agreed to sell our Sumavel DosePro business to Endo, including the registered trademarks, certain contracts, the NDA and other regulatory approvals, the books and records, marketing materials and product data relating to Sumavel DosePro. Under the terms of the APA, Endo paid us $85.0 million in cash upon closing on May 16, 2014, or the Closing, $8.5 million of which was deposited into escrow to fund potential indemnification claims for a period of 12 months. Further upon the Closing, Endo Ventures purchased from us our finished goods inventory of Sumavel DosePro for $4.6 million. In addition to the upfront cash payment, we are eligible to receive additional cash payments of up to $20.0 million based on the achievement of pre-determined sales and gross margin milestones. Furthermore, Endo Ventures will assume responsibility for our royalty obligation to Aradigm Corporation on sales of Sumavel DosePro and assume other liabilities relating to Sumavel DosePro after the Closing.

Upon the Closing, we and Endo Ventures Bermuda entered into a license agreement, pursuant to which we granted Endo Ventures an exclusive, worldwide, royalty-free license to make and have made, use and research, develop and commercialize Sumavel DosePro. Upon Closing we also entered into a supply agreement with Endo Ventures, pursuant to which we will continue to manufacture Sumavel DosePro, and Endo Ventures will support our Sumavel DosePro manufacturing operations with a working capital advance of $7.0 million. Lastly upon Closing, we entered into other ancillary agreements with Endo Ventures associated with the APA, pursuant to which we will help facilitate the transfer of the Sumavel DosePro business to Endo Ventures, which Endo Ventures will assume responsibility for as of the Closing date.

In connection with the Closing, we were required to extinguish all encumbrances on the assets to be sold to Endo, including those previously granted to Healthcare Royalty Partners, or Healthcare Royalty, pursuant to the financing agreement, dated June 30, 2011, with Healthcare Royalty, or the Healthcare Royalty financing agreement. We eliminated our existing debt obligation to Healthcare Royalty on May 16, 2014 by paying $40.0 million to Healthcare Royalty, consistent with the terms of the Healthcare Royalty financing agreement.

Mallinckrodt LLC Co-Promotion Agreement

In June 2012, we entered into a co-promotion agreement with Mallinckrodt LLC. Under the terms of the co-promotion agreement, Mallinckrodt was granted a co-exclusive right (with us) to promote Sumavel DosePro in the United States. Mallinckrodt's sales team began selling Sumavel DosePro in August 2012. The initial term of the agreement was to run through June 30, 2014. In January 2014, we entered into an amendment to the co-promotion agreement, whereby the agreement terminated on January 31, 2014. We assumed full responsibility for the commercialization of Sumavel DosePro in February 2014.

In partial consideration of Mallinckrodt's sales efforts, we paid Mallinckrodt a service fee on a quarterly basis through January 31, 2014 that represented a specified fixed percentage of net sales of prescriptions generated from Mallinckrodt's prescriber audience over a baseline amount of net sales. In addition, in connection with the termination of the co-promotion agreement, we are required to make a one-time tail payment to Mallinckrodt, calculated as a fixed percentage of net sales from the Mallinckrodt targeted prescriber audience during the 12-month period ending on January 31, 2015. An initial liability of $0.5 million for this estimated tail-payment was recorded as service fee expense upon the co-promotion agreement termination in January 2014. This estimated tail payment liability was adjusted based on actual year-to-date net sales through September 30, 2014, which resulted in a credit of $0.3 million to service fee expense during the three and nine months ended September 30, 2014.

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For the three and nine months ended September 30, 2014, we incurred service fee expenses of $0 and $0.1 million, respectively, excluding the tail-payment expense. For the three and nine months ended September 30, 2013, we incurred service fee expenses of $0.2 million and $0.6 million, respectively.

Valeant Co-Promotion Agreement

In June 2013, we entered into a co-promotion agreement, or the Valeant agreement, with Valeant Pharmaceuticals North America LLC, or Valeant. Under the terms of the Valeant agreement, we were granted the exclusive right (with Valeant or any of its affiliates) to promote Migranal® (dihydroergotamine mesylate) Nasal Spray, or Migranal, to a prescriber audience of physicians and other health care practitioners in the United States. Our sales team began promoting Migranal to prescribers in August 2013. The term of the Valeant agreement will run through December 31, 2015 (unless otherwise terminated), and can be extended by mutual agreement of the parties in additional twelve-month increments. Valeant remains responsible for the manufacture, supply and distribution of Migranal for sale in the United States. In addition, Valeant supplies us with a specified amount of product samples every six months, and we will reimburse Valeant for the cost of additional samples and any promotional materials ordered by us. The cost of any additional samples and any promotional materials ordered by us will be recognized as selling, general and administrative expenses.

In partial consideration of our sales efforts, Valeant pays us a co-promotion fee on a quarterly basis that represents specified percentages of net sales generated by us over defined baseline amounts of net sales, or the Baseline Forecast and Adjusted Baseline Forecast. In addition, upon completion of the co-promotion term, and only if the Valeant agreement is not terminated by Valeant due to a bankruptcy event (as defined in the Valeant agreement) or our inability to comply with our material obligations under the Valeant agreement, Valeant will be required to pay us an additional tail payment calculated as a fixed percentage of our net sales over the Baseline Forecast (or Adjusted Baseline Forecast) during the first full six months following the last day of the term. For the three and nine months ended September 30, 2014, we recognized service revenue of $0.4 million and $2.4 million, respectively, under the Valeant agreement. For the three and nine months ended September 30, 2013, we recognized service revenue of $0.2 million under the Valeant agreement.

Critical Accounting Policies and Estimates

Revenue Recognition

We recognize revenue from the sale of Sumavel DosePro, Zohydro ER and from contract manufacturing, license fees, milestones and service fees earned on collaborative arrangements. Revenue is recognized when (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred and title has passed, (iii) the price is fixed or determinable and (iv) collectability is reasonably assured. Revenue from sales transactions where the buyer has the right to return the product is recognized at the time of sale only if (i) our price to the buyer is substantially fixed or determinable at the date of sale, (ii) the buyer has paid us, or the buyer is obligated to pay us and the obligation is not contingent on resale of the product, (iii) the buyer’s obligation to us would not be changed in the event of theft or physical destruction or damage of the product, (iv) the buyer acquiring the product for resale has economic substance apart from that provided by us, (v) we do not have significant obligations for future performance to directly bring about resale of the product by the buyer, and (vi) the amount of future returns can be reasonably estimated. We currently defer recognition of revenue on product shipments of Zohydro ER until the right of return no longer exists, as we currently cannot reliably estimate expected returns of the product at the time of shipment given the limited sales history of Zohydro ER.

Revenue arrangements with multiple elements are divided into separate units of accounting if certain criteria are met, including whether the delivered element has stand-alone value to the customer. The consideration received is allocated among the separate units based on their respective fair values, and the applicable revenue recognition criteria are applied to each of the separate units. The application of the multiple element guidance requires subjective determinations, and requires us to make judgments about the individual deliverables, and whether such deliverables are separable from the other aspects of the contractual relationship. Deliverables are considered separate units of accounting provided that: (1) the delivered item(s) has value to the customer on a stand-alone basis and (2) if the arrangement includes a general right of return relative to the delivered item(s), delivery or performance of the undelivered item(s) is considered probable and substantially in our control. In determining the units of accounting, we evaluate certain criteria, including whether the deliverables have stand-alone value, based on the consideration of the relevant facts and circumstances for each arrangement, such as the commercialization capabilities of the buyer and the availability of the associated expertise in the general marketplace. In addition, we consider whether the buyer can use the other deliverable(s) for their intended purpose without the receipt of the remaining element(s), whether the value of the deliverable is dependent on the undelivered item(s), and whether there are other vendors that can provide the undelivered element(s).

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Arrangement consideration that is fixed or determinable is allocated among the separate units of accounting using the relative selling price method, and the applicable revenue recognition criteria, as described above, are applied to each of the separate units of accounting in determining the appropriate period or pattern of recognition. We determine the estimated selling price for deliverables within each agreement using vendor-specific objective evidence, or VSOE, of selling price, if available, third-party evidence, or TPE, of selling price if VSOE is not available, or management's best estimate of selling price, or BESP, if neither VSOE nor TPE is available. Determining the BESP for a unit of accounting requires significant judgment. In developing the BESP for a unit of accounting, we consider applicable market conditions and relevant entity-specific factors, including factors that were contemplated in negotiating the agreement with the customer and estimated costs.

Product Revenue, Net

We sell Zohydro ER, and sold Sumavel DosePro through May 2014, in the United States to wholesale pharmaceutical distributors and retail pharmacies, or collectively our customers, subject to rights of return within a period beginning six months prior to, and ending 12 months following, product expiration. We recognized Sumavel DosePro product sales at the time title transferred to our customer, and reduced product sales for estimated future product returns and sales allowances in the same period the related revenue was recognized.

Given the limited sales history of Zohydro ER, we cannot reliably estimate expected returns of the product at the time of shipment. Accordingly, we defer recognition of revenue on Zohydro ER product shipments until the right of return no longer exists, which occurs at the earlier of the time Zohydro ER is dispensed through patient prescriptions or expiration of the right of return. We estimate Zohydro ER patient prescriptions dispensed using an analysis of third-party syndicated data. Zohydro ER was launched in March 2014 and, accordingly, we do not have significant history estimating the number of patient prescriptions dispensed. If we underestimate or overestimate patient prescriptions dispensed for a given period, adjustments to revenue may be necessary in future periods. The deferred revenue balance does not have a direct correlation with future revenue recognition as we will record sales deductions at the time the prescription unit is dispensed.

We will continue to recognize Zohydro ER revenue upon the earlier to occur of prescription units dispensed or expiration of the right of return until we can reliably estimate product returns, at which time we will record a one-time increase in revenue related to the recognition of revenue previously deferred, net of estimated future product returns and sales allowances. In addition, the costs of Zohydro ER associated with the deferred revenue are recorded as deferred costs, which are included in inventory, until such time the related deferred revenue is recognized.

Product sales allowances for Zohydro ER and Sumavel DosePro include wholesaler and retail pharmacy distribution fees, prompt pay discounts, chargebacks, rebates and patient discount programs, and are based on amounts owed or to be claimed on the related sales. These estimates take into consideration the terms of the agreements with our customers and third-party payors and the levels of inventory within the distribution and retail channels that may result in future rebates or discounts taken. In certain cases, such as patient support programs, we recognize the cost of patient discounts as a reduction of revenue based on estimated utilization. If actual future results vary, we may need to adjust these estimates, which could have an effect on product revenue in the period of adjustment. We record product sales deductions in the statement of operations at the time product revenue is recognized.

In connection with the Closing of the APA in May 2014, whereby Endo acquired our Sumavel DosePro business, Endo purchased our existing finished goods inventory of Sumavel DosePro. We will be financially responsible for all returns of Sumavel DosePro product distributed by us prior to the Closing of the APA up to a maximum per unit amount as specified in the agreements. We will also be financially responsible for payment of Sumavel DosePro product sales allowances on product distributed by us prior to the Closing of the APA. Endo will be responsible for payment of all other Sumavel DosePro returns and sales allowances.

Contract Manufacturing Revenue

In connection with the Closing of the APA in May 2014, we and Endo Ventures entered into the Supply Agreement, pursuant to which we retained the sole and exclusive right and the obligation to manufacture, have manufactured, supply or have supplied Sumavel DosePro to Endo Ventures. We recognize deferred revenue related to our supply of Sumavel DosePro as contract manufacturing revenue when earned on a "proportional performance" basis, as product is delivered. We recognize revenue related to our sale of Sumavel DosePro product, equal to the cost of contract manufacturing plus a 2.5% mark-up, upon the transfer of title to Endo. We supply Sumavel DosePro product based on non-cancellable purchase orders. We initially defer revenue for any consideration received in advance of services being performed and product being delivered, and recognize revenue pursuant to the related pattern of performance, based on total product delivered relative to the total estimated product delivery over the minimum eight year term of the Supply Agreement. We continually evaluate the performance period and will adjust the period of revenue recognition if circumstances change.

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In addition, we follow the authoritative accounting guidance when reporting revenue as gross when we act as a principal versus reporting revenue as net when we act as an agent. For transactions in which we act as a principal, have discretion to choose suppliers, bear credit risk and perform a substantive part of the services, revenue is recorded at the gross amount billed to a customer and costs associated with these reimbursements are reflected as a component of cost of sales for contract manufacturing services.

There have been no other significant changes in critical accounting policies during the nine months ended September 30, 2014, as compared to the critical accounting policies described in “Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Estimates” in our Annual Report on Form 10-K for the year ended December 31, 2013.

Results of Operations

Comparison of the three and nine months ended September 30, 2014 and 2013

Revenue. Revenue for the three months ended September 30, 2014 and 2013 was $8.8 million and $7.2 million, respectively. Revenue for the nine months ended September 30, 2014 and 2013 was $25.6 million and $23.1 million, respectively.

Net product revenue for the three months ended September 30, 2014 and 2013 was $4.1 million and $6.9 million, respectively. Net product revenue for the nine months ended September 30, 2014 and 2013 was $16.7 million and $22.7 million, respectively. The aggregate $2.8 million, or 40%, decrease in net product revenue during the three months ended September 30, 2014 compared to 2013, and the aggregate $6.0 million, or 27%, decrease in net product revenue during the nine months ended September 30, 2014 compared to 2013, was primarily due to the decline in Sumavel DosePro sales during the respective periods as we sold our Sumavel DosePro business to Endo in May 2014, offset by our Zohydro ER sales which we launched in March 2014. Further, as we are financially responsible for all returns of Sumavel DosePro product distributed by us prior to the Closing of the APA, up to a maximum per unit amount as specified in the agreements, we increased our product returns reserve by $0.5 million, up to the maximum per unit amount, during the nine months ended September 30, 2014 to account for the increase in net selling price upon sale of the Sumavel DosePro business to Endo.

We currently defer recognition of revenue on product shipments of Zohydro ER to our customers until the right of return no longer exists, which occurs at the earlier of the time Zohydro ER is dispensed through patient prescriptions or expiration of the right of return. As a result of this policy, we had a deferred revenue balance of $7.9 million at September 30, 2014 for Zohydro ER product shipments, which is net of prompt pay discounts and wholesaler distribution fees.

Contract manufacturing revenue for the three and nine months ended September 30, 2014 was $4.2 million and $6.5 million, respectively. Contract manufacturing revenue is recognized for Sumavel DosePro finished goods inventory that has been delivered to Endo Ventures Bermuda under the May 2014 Supply Agreement, and includes a portion of deferred revenue recognized on a proportional performance method. Endo Ventures Bermuda pays us the cost to produce Sumavel DosePro plus a 2.5% mark-up for Sumavel DosePro product delivered.

Service and other revenue for the three months ended September 30, 2014 and 2013 was $0.4 million and $0.3 million, respectively. Service and other revenue for the nine months ended September 30, 2014 and 2013 was $2.5 million and $0.4 million, respectively. Service and other revenue is primarily comprised of the co-promotion fee that is earned for our Migranal sales efforts under the Valeant Agreement.

Cost of Goods Sold and Cost of Contract Manufacturing. Cost of goods sold and cost of manufacturing services consists primarily of materials, third-party manufacturing costs, freight and indirect personnel and other overhead costs associated with product sales and contract manufacturing, as well as write downs for excess, dated or obsolete commercial inventories and production manufacturing variances. The product costs associated with the deferred Zohydro ER product revenues are recorded as deferred costs, which are included in inventory, until such time the deferred revenue is recognized. Deferred cost of goods sold totaled $1.0 million at September 30, 2014.

Cost of goods sold for the three months ended September 30, 2014 and 2013 was $0.7 million and $5.4 million, respectively, and was $6.5 million and $14.1 million for the nine months ended September 30, 2014 and 2013, respectively. The decline in cost of goods sold over these periods is due to the decline in Sumavel DosePro product sold over the respective periods as a result of the sale of our Sumavel DosePro business to Endo in May 2014.

Product gross margin for the three months ended September 30, 2014 and 2013 was 83% and 22%, respectively. The increase in product gross margin for the three months ended September 30, 2014 compared to 2013 was driven by product mix as the only product sold by us during the three months ending September 30, 2014 was Zohydro ER and the only product sold

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by us during the three months ended September 30, 2013 was Sumavel DosePro. Product gross margin for the nine months ended September 30, 2014 and 2013 was 61% and 38%, respectively. The increase in product gross margin for the nine months ended September 30, 2014 compared to 2013 was primarily due to the addition of Zohydro ER sales after our March 2014 product launch, a lower cost per Sumavel DosePro unit in 2014 and a lower net selling price in the first quarter of 2013 due to a $1.2 million adjustment for Sumavel DosePro product returns.

Cost of contract manufacturing for the three and nine months ended September 30, 2014 was $4.0 million and $5.9 million, respectively, related to the Sumavel DosePro product sold to Endo under the May 2014 Supply Agreement. There was no cost of manufacturing revenue for the three and nine months ended September 30, 2013.

Royalty Expense. During the three months ended September 30, 2014 and 2013, we recorded $0.4 million and $0.3 million, respectively, in royalty expense. During the nine months ended September 30, 2014 and 2013, we recorded $1.2 million and $0.9 million, respectively, in royalty expense. Royalty expense consists of (1) royalties payable to Aradigm based on net sales of Sumavel DosePro by us or one of our licensees through May 16, 2014 when we sold our Sumavel DosePro business, (2) the amortization of the $4.0 million milestone payment paid by us to Aradigm upon the first commercial sale of Sumavel DosePro in the United States (which occurred in January 2010), (3) royalties payable to Daravita Limited based on net sales of Zohydro ER by us, and (4) the amortization of the $2.8 million milestone payment paid by us to Daravita upon FDA approval of Zohydro ER (which occurred in October 2013).

We are required to pay to Aradigm a low single-digit royalty on global net sales of Sumavel DosePro, by us or one of our licensees until the expiration of the last valid claim of the transferred patents covering the manufacture, use, or sale of the product. Endo assumed responsibility for our royalty obligation to Aradigm Corporation on sales of Sumavel DosePro upon the Closing of the APA on May 16, 2014.

Further, we are required to pay to Daravita a mid single-digit percentage royalty on net sales of Zohydro ER for an initial royalty term equal to the longer of the expiration of Daravita’s patents covering the product in the United States, or 15 years after commercial launch, if Daravita does not have patents covering the product in the United States. Further, if we exercise our option to obtain an exclusive license to certain abuse deterrent technology and know-how from Altus, we are required to pay Daravita a mid single-digit to low twenty-percent-range royalty on net sales of any product with extended release formulations of hydrocodone using Altus' abuse-deterrent technology from the first commercial sale in the Unites States through the date that is 15 years following the first commercial sale.

Research and Development Expenses. Research and development expenses consist of expenses incurred in developing, testing and seeking marketing approval of our product candidates, including: license and milestone payments; payments made to third-party clinical research organizations, or CROs, and investigational sites, which conduct our trials on our behalf, and consultants; expenses associated with regulatory submissions, pre-clinical development and clinical trials; payments to third-party manufacturers, which produce our active pharmaceutical ingredient and finished product; personnel related expenses, such as salaries, benefits, travel and other related expenses, including stock-based compensation; and facility, maintenance, depreciation and other related expenses. We expense all research and development costs as incurred.

We utilize CROs, contract laboratories and independent contractors for the conduct of pre-clinical studies and clinical trials. We track third-party costs by type of study being conducted. We recognize the expenses associated with the services provided by CROs based on the percentage of each study completed at the end of each reporting period. We coordinate clinical trials through a number of contracted investigational sites and recognize the associated expense based on a number of factors, including actual and estimated subject enrollment and visits, direct pass-through costs and other clinical site fees.

The table below sets forth information regarding our research and development costs for our major development programs. The period over period variances for our major development programs are explained in the narrative beneath the table.

	Three Months Ended September 30,					Nine Months Ended September 30,
	2014			2013		2014		2013
Research and development expenses (in thousands):
Zohydro ER	$	2,377		$	843	$	4,319	$	2,858
Relday	1,616			121		4,210		1,400
DosePro	(13		)	390		199		881
Other(1)	1,309			1,190		4,219		4,219
Total	$	5,289		$	2,544	$	12,947	$	9,358

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(1) Other research and development expenses include development costs incurred for other product candidate development, as well as employee and infrastructure resources that are not tracked on a program-by-program basis.

Research and development expenses increased by $2.7 million for the three months ended September 30, 2014 compared 2013, and increased by $3.6 million for the nine months ended September 30, 2014 compared to 2013, primarily due to increases in expenses for development of formulations of Zohydro ER with abuse deterrent properties and development expenses for Relday.

We use our employee and infrastructure resources across our product and product candidate development programs. Therefore, we have not tracked salaries, other personnel related expenses, facilities or other related costs to our product development activities on a program-by-program basis.

We expect our research and development expenses for the remainder of 2014 to continue to increase over amounts incurred in the same period in 2013 as we prepare for our multi-dose clinical trial for Relday, which we plan to commence in January of 2015, continue development of formulations of Zohydro ER with abuse deterrent properties and prepare for our two Phase 3 studies for Brabafen, which we plan to commence in the second quarter of 2015. We filed an sNDA on September 30, 2014 for a next-generation formulation of Zohydro ER designed to make it more difficult to abuse by injection or nasal insufflation. We also continue the development of a formulation of extended-release hydrocodone with abuse deterrent properties using Altus’ Intellitab™ drug delivery platform.

Selling, General and Administrative Expenses. Selling expenses, which include sales and marketing costs, consists primarily of salaries and benefits of sales and marketing management and sales representatives, marketing and advertising costs, service fees under our co-promotion agreement and sample product costs. General and administrative expenses consist primarily of salaries and related costs for personnel in executive, finance, accounting, business development, medical affairs and internal support functions. In addition, general and administrative expenses include professional fees for legal, consulting and accounting services.

Selling, general and administrative expenses increased to $19.1 million for the three months ended September 30, 2014 compared to $10.0 million for the three months ended September 30, 2013. Selling, general and administrative expenses increased to $71.2 million for the nine months ended September 30, 2014 compared to $36.5 million for the nine months ended September 30, 2013.

Selling expenses were $11.8 million and $6.3 million for the three months ended September 30, 2014 and 2013, respectively, and $47.5 million and $24.9 million for the nine months ended September 30, 2014 and 2013, respectively. General and administrative expenses were $7.3 million and $3.7 million for the three months ended September 30, 2014 and 2013, respectively, and $23.7 million and $11.6 million for the nine months ended September 30, 2014 and 2013, respectively.

The increase of $9.1 million in selling, general and administrative expenses for the three months ended September 30, 2014 compared to 2013 was due to an increase of $5.5 million in sales and marketing expenses, and an increase of $3.6 million in general and administrative expenses.

• The increase in sales and marketing expenses is primarily the result of an increase in salaries, other benefits, and other personnel costs, due to an increase in headcount, as well as an increase in advertising and promotion costs for Zohydro ER, which was launched in March 2014, offset by a decrease in advertising and promotion costs due to the sale of the Sumavel DosePro business in May 2014.

• The increase in general and administrative expenses is primarily the result of the addition of our medical affairs team and implementation of the FDA required ER/LA opioids Risk Evaluation and Mitigation Strategy, or REMS, program and our voluntary safe use initiatives for Zohydro ER, as well as an increase in legal, consulting and public relations costs.

The increase of $34.7 million in selling, general and administrative expenses for the nine months ended September 30, 2014 compared to 2013 was due to an increase of $22.6 million in sales and marketing expenses, and an increase of $12.1 million in general and administrative expenses.

• The increase in sales and marketing expenses is primarily the result of an increase in advertising and promotion costs for Zohydro ER, which was launched in March 2014, and an increase in salaries and other benefits, as well as recruiting costs, due to an increase in headcount. The sales and marketing expenses for the nine months ended September 30, 2014 also included the costs of a comprehensive training and certification program for our sales representatives in connection with the launch of Zohydro ER.

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• The increase in general and administrative expenses is primarily the result of the addition of our medical affairs team and implementation of the FDA required ER/LA opioids Risk Evaluation and Mitigation Strategy, or REMS, program and our voluntary safe use initiatives for Zohydro ER, as well as an increase in legal and public relations costs.

We expect our sales and marketing expenses throughout the remainder of 2014 to be greater than the same period in 2013 due to the increase in our sales and marketing headcount, and we expect general administrative expenses throughout the remainder of 2014 to be greater than the same period in 2013 due to the addition of our medical affairs team, and increased activity related to the FDA required ER/LA opioids REMS program and our voluntary safe use initiatives for Zohydro ER.

Restructuring Expenses. Restructuring expenses of $0.9 million were recorded during the nine months ended September 30, 2013, and consist of the costs incurred in connection with the restructuring of our workforce, which commenced in May 2013. These restructuring expenses primarily consist of cash charges of $0.7 million in severance costs and $0.2 million in non-cash stock-based compensation charges.

Impairment of Long-Lived Assets. Impairment expense of $0.8 million was recorded during the nine months ended September 30, 2014, as we disposed of some construction in progress in connection with the sale of the Sumavel DosePro business to Endo in May 2014.

Gain on Sale of Business. A gain on sale of business of $80.0 million, net of $0.6 million in related transaction costs, was recorded during the nine months ended September 30, 2014, in connection with the sale of the Sumavel DosePro business to Endo in May 2014. See Note 4 to our consolidated financial statements.

Interest Income. During the three months ended September 30, 2014 and 2013, interest income was $6,000 and $1,000, respectively, and during the nine months ended September 30, 2014 and 2013, interest income was $18,000 and $12,000, respectively. The increase in interest income was primarily driven by an increase in average cash and cash equivalent balances during the respective periods.

Interest Expense. During the three months ended September 30, 2014 and 2013, interest expense was $84,000 and $1.6 million, respectively, and during the nine months ended September 30, 2014 and 2013, interest expense was $3.0 million and $4.8 million, respectively. Interest expense primarily consists of interest expense incurred in connection with the Healthcare Royalty financing agreement, which was early terminated on May 16, 2014, and imputed interest from the two annual tail payments owed to Astellas Pharma US, Inc. related to the termination of our co-promotion agreement on March 31, 2012.

We expect interest expense to decrease over the remainder of 2014 compared to 2013 levels during the same period due to the early termination of the Healthcare Royalty financing agreement on May 16, 2014, offset by imputed interest expense recognized on the note payable to Endo.

Loss on Early Extinguishment of Debt. The loss on extinguishment of debt of $1.3 million recorded during the nine months ended September 30, 2014 resulted from the early termination of the Healthcare Royalty financing agreement on May 16, 2014. The loss on early extinguishment of debt is related to the write-off of the unamortized balances of the debt discounts, including the derecognition of the embedded derivative liabilities, the debt acquisition costs, and accrued interest expenses related to the financing agreement. See Note 5 to our consolidated financial statements.

Change in Fair Value of Warrant Liabilities. The change in fair value of warrant liabilities relates to a fair value adjustment recorded on the warrants to purchase common stock issued in connection with our July 2012 public offering and issued in connection with the Healthcare Royalty financing agreement. See Note 6 to our consolidated financial statements. The income generated from the change in fair value of the common stock warrant liabilities during the three and nine months ended September 30, 2014 was primarily driven by the decrease in our stock price at September 30, 2014 as compared against December 31, 2013 measurement dates.

Change in Fair Value of Embedded Derivatives. The change in fair value of embedded derivatives relates to a fair value adjustment recorded on the embedded derivatives associated with the Healthcare Royalty financing agreement. These embedded derivatives were derecognized on May 16, 2014 in connection with the early termination of the Healthcare Royalty financing agreement. See Note 5 to our consolidated financial statements.

Other Income (Expense). Other income (expense) for the three and nine months ended September 30, 2014 and 2013 consists primarily of foreign currency transaction gains and losses.

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Liquidity and Capital Resources

We have experienced net losses and negative cash flow from operations since inception, and as of September 30, 2014, had an accumulated deficit of $381.1 million. We expect to continue to incur net losses and negative cash flow from operating activities for at least the next year as we continue to incur costs related to the commercialization of Zohydro ER, including introduction of Zohydro ER with abuse deterrent properties to the market, if approved, the clinical development for Relday and Brabafen, required post-market testing for Zohydro ER, safe use initiatives for Zohydro ER and additional development activities with respect to Zohydro ER, including the development of multiple formulations of extended-release hydrocodone with abuse deterrent properties. As of September 30, 2014, we had cash and cash equivalents of $50.5 million.

Although it is difficult to predict future liquidity requirements, we believe that our cash and cash equivalents as of September 30, 2014, the $8.5 million of the upfront cash payment received from the sale of our Sumavel DosePro business that is included in restricted cash, our projected product revenues from Zohydro ER, the $10.0 million in payments for the waiver granted to Purdue due by July 1, 2015, and our projected manufacturing and other service revenues will be sufficient to fund our operations into the third quarter of 2015. Our cash and cash equivalents as of September 30, 2014 exclude the $20.0 million cash payment made to the Sellers in connection with our acquisition of Brabant. We may pursue additional opportunities to raise capital, if necessary, through public or private equity offerings, including through a controlled equity offering program, debt financings, receivables financings or through collaborations or partnerships with other companies. If we are unsuccessful in raising additional required funds, we may be required to significantly delay, reduce the scope of or eliminate one or more of our development programs or our commercialization efforts, or cease operating as a going concern. We also may be required to relinquish, license or otherwise dispose of rights to product candidates or products that we would otherwise seek to develop or commercialize ourselves on terms that are less favorable than might otherwise be available.

In its report on our consolidated financial statements for the year ended December 31, 2013, our independent registered public accounting firm included an explanatory paragraph expressing substantial doubt regarding our ability to continue as a going concern. A “going concern” opinion means, in general, that our independent registered public accounting firm has substantial doubt about our ability to continue our operations without continuing infusions of capital from external sources and this opinion could impair our ability to finance our operations through the sale of debt or equity securities or commercial bank loans. Our ability to continue as a going concern depends, in large part, on our ability to generate positive cash flow from operations and obtain additional financing, neither of which is certain. If we are unable to achieve these goals, our business would be jeopardized and we may not be able to continue operations and have to liquidate our assets and may receive less than the value at which those assets were carried on our financial statements, and it is likely that investors will lose all or part of their investment.

Since inception, our operations have been financed primarily through equity and debt financings, the issuance of convertible notes and payments received from Astellas under our Astellas co-promotion agreement. Through September 30, 2014, we received aggregate net cash proceeds of approximately $419.0 million from the sale of shares of our preferred and common stock, including the following recent financing transactions:

• in July 2012, we issued and sold a total of 35,058,300 shares of common stock and warrants to purchase 15,784,200 shares of common stock in a public offering, including the underwriters' over-allotment purchase, for aggregate net proceeds of $65.4 million;

• in 2013, we issued and sold a total of 6,753,104 shares of common stock under our controlled equity offering program (which was terminated in November 2013), resulting in aggregate net proceeds of $10.8 million; and

• in November 2013, we issued and sold a total of 30,666,667 shares of common stock, including shares issued upon the exercise of the underwriters' option to purchase over-allotment shares, in a follow-on public offering, for aggregate net proceeds of $64.5 million.

On July 18, 2011, we closed the financing agreement with Healthcare Royalty. Under the terms of the financing agreement, we borrowed $30.0 million and we were obligated to repay such borrowed amount together with a specified return to Healthcare Royalty. Healthcare Royalty exercised its option to terminate the financing agreement in connection with our sale of our Sumavel DosePro business to Endo on May 16, 2014. Upon termination of the financing agreement, we were obligated to make a final payment of $40.0 million to Healthcare Royalty, which was an amount that generated a 17% internal rate of return on the borrowed amount as of the date of final payment, reduced by the revenue interest and principal payments received by Healthcare Royalty up to the date of final payment.

Further, upon early termination of the Healthcare Royalty financing agreement, we recognized a loss on early extinguishment of debt of $1.3 million which was recorded as non-operating expenses in our statement of operations and comprehensive income (loss). The loss on early extinguishment of debt is related to the write-off of the unamortized balances

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of the debt discounts, including the derecognition of the embedded derivative liabilities, debt acquisition costs, and accrued interest expenses related to the financing agreement. Healthcare Royalty’s security interest in all of our assets was extinguished upon early termination of the financing agreement.

On November 6, 2014, we entered into a controlled equity offering sales agreement, or sales agreement, with Cantor, as sales agent, to create a controlled equity program under which we may, from time to time, sell shares of common stock up to an aggregate offering price of $25.0 million. Sales of our common stock made pursuant to the controlled equity offering program, if any, will be made on the Nasdaq Global Market under our shelf registration statement on Form S-3 filed on November 6, 2014, following such time as the registration statement is declared effective by the SEC. However, such registration statement cannot be declared effective until such time as we have filed certain financial statements from our recent acquisition of Brabant Pharma Limited, or Brabant, or Brabant, as required by SEC rules, which must be filed within 71 days of the date of our Current Report on Form 8-K filed with the SEC on October 27, 2014. There can be no assurance that Cantor will be successful in consummating sales under the program based on prevailing market conditions or in the quantities or at the prices that we deem appropriate. Cantor or we are permitted to terminate the controlled equity offering sales agreement, or sales agreement, at any time upon 10 days' prior written notice, and Cantor is also permitted to terminate the sales agreement at any time in certain circumstances, including the occurrence of a material adverse change in our company.

Cash and Cash Equivalents. Cash and cash equivalents totaled $50.5 million and $72.0 million at September 30, 2014 and December 31, 2013, respectively.

The following table summarizes our cash flows used in operating, investing and financing activities for the nine months ended September 30, 2014 and 2013:

	Nine Months Ended September 30,
	2014			2013
	(In Thousands)
Statement of Cash Flows Data:
Total cash provided by (used in):
Operating activities	$	(71,244	)	(34,189		)
Investing activities	81,039			(785		)
Financing activities	(31,289		)	11,098
Decrease in cash and cash equivalents	$	(21,494	)	$	(23,876	)

Operating Activities: Net cash used in operating activities was $71.2 million and $34.2 million for the nine months ended September 30, 2014 and 2013, respectively. Net cash used for the nine months ended September 30, 2014 primarily reflects the use of cash for operations, adjusted for non-cash charges including the $80.0 million gain on sale of our Sumavel DosePro business, a $26.4 million change in fair value of warrant liabilities and $7.3 million in stock-based compensation. Significant working capital uses of cash for the nine months ended September 30, 2014 include personnel-related costs, research and development costs (primarily for Relday and formulations of Zohydro ER with abuse deterrent properties), sales and marketing expenses for Zohydro ER and Sumavel DosePro, and other professional services, including legal services. Net cash used for the nine months ended September 30, 2013 primarily reflects the use of cash for operations, adjusted for non-cash charges including a $2.8 million change in fair value of warrant liabilities and $5.8 million in stock-based compensation (which includes $0.2 million in stock-based compensation from restructuring), partially offset by a $0.9 million change in fair value of embedded derivatives. Significant working capital uses of cash for the nine months ended September 30, 2013 include personnel-related costs, research and development costs (primarily for employee and infrastructure resources), sales and marketing expenses for Sumavel DosePro, and other professional services.

Investing Activities. Net cash provided by investing activities for the nine months ended September 30, 2014 was $81.0 million, which is primarily attributable to the proceeds from the sale of our Sumavel DosePro business, including the $85.0 million up-front payment and $4.6 million payment for the Sumavel DosePro finished goods inventory on hand at Closing, offset by $8.5 million of the upfront payment that was deposited into escrow. Net cash used in investing activities for the nine months ended September 30, 2013 was $0.8 million related to the purchase of property and equipment primarily for use in manufacturing DosePro.

We expect to incur capital expenditures of approximately $1.0 million in 2014. These planned capital expenditures primarily relate to further investments in our manufacturing operations for DosePro and toward enhancing our existing manufacturing technology and equipment to continue to support the manufacturing and supply agreement with Endo.

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Financing Activities. Net cash used in financing activities was $31.3 million for the nine months ended September 30, 2014, which relates to the $40.0 million repayment of debt for the early extinguishment of our financing agreement with Healthcare Royalty in May 2014, offset by a $7.0 million working capital advance from Endo Ventures pursuant to our May 2014 Supply Agreement, and proceeds from the exercise of stock options and warrants and the issuance of common stock under our employee stock purchase plan. Net cash provided by financing activities was $11.1 million for the nine months ended September 30, 2013, which is primarily from proceeds under our controlled equity offering program (which was terminated in November 2013).

Our sources of liquidity include our cash balances and cash receipts from the sale of Zohydro ER product and contract manufacturing for Sumavel DosePro. Through September 30, 2014, we received aggregate net cash proceeds of approximately $419.0 million from the sale of shares of our preferred and common stock. As of September 30, 2014, we had $50.5 million in cash and cash equivalents. Other potential sources of near-term liquidity include (i) equity offerings, including through our controlled equity program, debt or other financing, (ii) entering into a commercialization agreement for Zohydro ER, or a licensing arrangement for Relday, or (iii) further leveraging our sales force capacity to promote Migranal or another new product.

Successful transition to profitability is dependent upon achieving a level of product revenues adequate to support our cost structure. We will continue to monitor and evaluate our sales progress, the level of our research, development, manufacturing, sales and marketing and general and administrative expenditures and may adjust such expenditures based upon a variety of factors, such as our available cash, our ability to obtain additional cash, the results and progress of our Zohydro ER commercialization efforts, results and progress in our clinical programs, the time and costs related to clinical trials and regulatory decisions, as well as the U.S. economic environment.

We cannot be certain if, when and to what extent we will generate positive cash flow from operations from the commercialization of our products and, if approved, product candidates. We expect our expenses to be substantial and to increase over the next few years as we continue to grow the Zohydro ER brand and as we potentially advance Relday and Brabafen through clinical development.

Off-Balance Sheet Arrangements

We have not engaged in any off-balance sheet activities.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk

Our cash and cash equivalents as of September 30, 2014 consisted of cash and money market funds. Our primary exposure to market risk is interest income sensitivity, which is affected by changes in the general level of U.S. interest rates. The primary objective of our investment activities is to preserve principal. Instruments that meet this objective include commercial paper, money market funds and government and non-government debt securities. Some of the investment securities available-for-sale that we invest in may be subject to market risk. This means that a change in prevailing interest rates may cause the value of the investment securities available-for-sale to fluctuate. To minimize this risk, we intend to continue to maintain our portfolio of cash and money market funds. Due to the short-term nature of our investments and our ability to hold them to maturity, we believe that there is no material exposure to interest rate risk.

Foreign Exchange Risk

All of the revenues we have generated to date have been paid in U.S. dollars and we expect that our revenues will continue to be generated in U.S. dollars for at least the next several years. Payments to our material suppliers and contract manufacturers are denominated in the Euro and U.K. pounds sterling, thereby increasing our exposure to exchange rate gains and losses on non-U.S. currency transactions. Foreign currency gains and losses associated with these expenditures have not been significant to date. However, fluctuations in the rate of exchange between the U.S. dollar and these or other foreign currencies could adversely affect our financial results in the future, particularly to the extent we increase production to support Sumavel DosePro order demands from Endo Ventures Bermuda Limited. For the nine months ended September 30, 2014, approximately $17.1 million (based on exchange rates as of September 30, 2014) of our materials purchased and contract manufacturing costs were denominated in foreign currencies. We do not currently hedge our foreign currency exchange rate risk. As a result, we are exposed to gains and/or losses in our cash flows as the exchange rate of certain foreign currencies fluctuates. A 10% increase or decrease in the average rate of the Euro or the U.K. pound sterling during the nine months ended September 30, 2014 would have resulted in approximately $0.6 million or $1.1 million in gains or losses, respectively. We intend to evaluate various options to mitigate the risk of financial exposure from transacting in foreign currencies in the future.

Item 4. Controls and Procedures

Conclusions Regarding the Effectiveness of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the timelines specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can only provide reasonable assurance of achieving the desired control objectives, and in reaching a reasonable level of assurance, management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

As required by Securities and Exchange Commission Rule 13a-15(b), we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2014 at the reasonable assurance level.

Changes in Disclosure Controls and Procedures

There were no changes in our internal control over financial reporting during the fiscal quarter ended September 30, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II – OTHER INFORMATION

Item 1. Legal Proceedings

We are not currently a party to any material legal proceedings.

Item 1A. Risk Factors

There have been no material changes to the risk factors included in “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013, other than those set forth below, which should be read in conjunction with the risk factors disclosed therein.

Risks Related to Our Business and Industry

We have a history of significant net losses and negative cash flow from operations. We cannot predict if or when we will become profitable and anticipate that our net losses and negative cash flow from operations will continue for at least the next year.

We were organized in 2006, began commercialization of Sumavel DosePro in January 2010 and launched the commercial sale of Zohydro ER in the United States in March 2014. Our business and prospects must be considered in light of the risks and uncertainties frequently encountered by pharmaceutical companies commercializing new products.

We have generated substantial net losses and negative cash flow from operations since our inception in 2006. For example, for the nine months ended September 30, 2014 and the years ended December 31, 2013 and 2012, we incurred net income (loss) of $29.1 million, $(80.9) million and $(47.4) million, respectively, our net cash used in operating activities was $71.2 million, $44.9 million and $52.2 million, respectively, and, at September 30, 2014, our accumulated deficit was $381.1 million. We expect to continue to incur net losses and negative cash flow from operating activities for at least the next year primarily as a result of the expenses incurred in connection with the commercialization of Zohydro ER, including introduction of Zohydro ER with abuse deterrent properties to the market, if approved, the clinical development for Relday and Brabafen (our recently acquired product candidate), required post-market testing for Zohydro ER, safe use initiatives for Zohydro ER and additional development activities with respect to Zohydro ER, including the development of an additional formulation with abuse deterrent properties. Our ability to generate revenues from sales of Zohydro ER, our Sumavel DosePro contract manufacturing services, or any of our product candidates will depend on a number of factors including, in the case of Zohydro ER and Sumavel DosePro contract manufacturing services, the factors described in risk factors below and, in the case of our product candidates, including Relday, Brabafen and multiple formulations of extended-release hydrocodone with abuse deterrent properties, our ability to successfully complete clinical trials, obtain necessary regulatory approvals and negotiate arrangements with third parties to help finance the development of, and market and distribute, any product candidates that receive regulatory approval. In addition, we are subject to the risk that the marketplace will not accept our products.

Because of the numerous risks and uncertainties associated with our commercialization and product development efforts, we are unable to predict the extent of our future losses or when or if we will become profitable and it is possible we will never become profitable. If we do not increase sales of Zohydro ER or any of our product candidates that may receive regulatory approval, there would likely be a material adverse effect on our business, results of operations, financial condition and prospects which could result in our inability to continue operations.

We will require additional funding and may be unable to raise capital when needed, which would force us to delay, reduce or eliminate our product development programs or commercialization efforts.

Our operations have consumed substantial amounts of cash since inception. To date, our operations have been primarily financed through the proceeds from the issuance of our common and preferred stock, including the proceeds from our initial public offering completed in November 2010, our follow-on public offerings completed in September 2011, July 2012 and November 2013, our controlled equity offering program, which was terminated in November 2013, and borrowings under financing agreements. In addition, we may fund our operations through the proceeds from the sales and issuances of our common stock, if any, pursuant to the controlled equity offering program that we established on November 6, 2014 with Cantor Fitzgerald & Co., or Cantor, as sales agent, under which we may, from time to time, sell shares of common stock up to an aggregate offering price of $25.0 million. Sales of our common stock made pursuant to the controlled equity offering program, if any, will be made on the Nasdaq Global Market under our shelf registration statement on Form S-3 filed on November 6, 2014, following such time as the registration statement is declared effective by the SEC. However, such registration statement cannot be declared effective until such time as we have filed certain financial statements from our recent acquisition of Brabant Pharma Limited, or Brabant, or Brabant, as required by SEC rules, which must be filed within 71 days of the date of our Current Report on Form 8-K filed with the SEC on October 27, 2014. There can be no assurance that Cantor will be successful

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in consummating sales under the program based on prevailing market conditions or in the quantities or at the prices that we deem appropriate. Cantor or we are permitted to terminate the controlled equity offering sales agreement, or sales agreement, at any time upon 10 days' prior written notice, and Cantor is also permitted to terminate the sales agreement at any time in certain circumstances, including the occurrence of a material adverse change in our company.

Although it is difficult to predict future liquidity requirements, we believe that our cash and cash equivalents as of September 30, 2014, the $8.5 million of the upfront cash payment received from the sale of our Sumavel DosePro business that is included in restricted cash, our projected product revenues from Zohydro ER, the $10.0 million in payments for the exclusivity waiver granted to Purdue Pharma L.P., or Purdue, due by July 1, 2015, and our projected manufacturing and other service revenues will be sufficient to fund our operations into the third quarter of 2015. Our cash and cash equivalents as of September 30, 2014 exclude the $20.0 million cash payment made to the Sellers in connection with our acquisition of Brabant. We may need to obtain additional funds to finance our operations beyond that point, or possibly earlier, in order to:

• maintain our sales and marketing activities for Zohydro ER;

• fund our operations and fund required post-market testing of Zohydro ER and additional development activities with respect to Zohydro ER, including the development of Zohydro ER with abuse deterrent properties, as well as further development of Relday and Brabafen and development of any other product candidates to support potential regulatory approval; and

• commercialize Zohydro ER with abuse deterrent properties or any of our other product candidates, or any products or product candidates that we may develop, in-license or otherwise acquire, if any such product candidates receive regulatory approval.

In addition, our estimates of the amount of cash necessary to fund our business and development and commercialization activities may prove to be wrong, and we could spend our available financial resources much faster than we currently expect. Our future funding requirements will depend on many factors, including, but not limited to:

• the commercial success of Zohydro ER;

• the costs of maintaining our sales and marketing infrastructure or establishing distribution capabilities;

• the timing of regulatory approval, if granted, of Zohydro ER with abuse deterrent properties and any other product candidates and the commercial success of any approved products;

• the rate of progress and cost of our clinical trials and other product development programs for Relday, Brabafen and our other product candidates and any other product candidates that we may develop, in-license or acquire;

• the receipt of contingent payments from the sale of our Sumavel DosePro business, which are based on the achievement of pre-determined sales and gross margin milestones by Endo Health Solutions Inc., or Endo;

• the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights associated with Zohydro ER, our DosePro technology, Relday, Brabafen and any of our other product candidates;

• the costs and timing of completion of outsourced commercial manufacturing supply arrangements for any product candidate;

• the effect of competing technological and market developments; and

• the terms and timing of any additional collaborative, licensing, co-promotion or other arrangements that we may establish.

In its report on our consolidated financial statements for the year ended December 31, 2013, our independent registered public accounting firm included an explanatory paragraph expressing substantial doubt regarding our ability to continue as a going concern. A “going concern” opinion means, in general, that our independent registered public accounting firm has substantial doubt about our ability to continue our operations without continuing infusions of capital from external sources and this opinion could impair our ability to finance our operations through the sale of debt or equity securities or commercial bank loans.

Until we can generate a sufficient amount of product revenue and cash flow from operations and achieve profitability, we expect to finance future cash needs through public or private equity offerings, debt financings, receivables financings or corporate collaboration and licensing arrangements. We cannot be certain that additional funding will be available on acceptable terms, or at all. If we are unsuccessful in raising additional required funds, we may be required to significantly delay, reduce the scope of or eliminate one or more of our development programs or our commercialization efforts, or cease operating as a going concern. We also may be required to relinquish, license or otherwise dispose of rights to product candidates or products that we would otherwise seek to develop or commercialize ourselves on terms that are less favorable than might otherwise be available. If we raise additional funds by issuing equity securities, substantial dilution to existing stockholders would result. If we raise additional funds by incurring debt financing, the terms of the debt may involve significant cash payment obligations as well as covenants and specific financial ratios that may restrict our ability to operate our business. If we are unable to maintain sufficient financial resources, including by raising additional funds when needed, our business, financial condition and results of operations will be materially and adversely affected and we may be unable to continue as a going concern.

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We are largely dependent on the commercial success of Zohydro ER, and although we have generated revenue from sales of Zohydro ER, it is still early in the commercialization process and we may never significantly increase these sales or become profitable.

Our ability to generate revenues and become profitable will depend in large part on the commercial success of Zohydro ER. We launched the commercial sale of Zohydro ER in the United States in March 2014. The commercial success of Zohydro ER depends on several factors, including our ability to:

• successfully launch and educate prescribers on safe use initiatives for Zohydro ER through our own marketing and sales activities;

• create market demand for Zohydro ER through our own marketing and sales activities, and any other arrangements to promote this product that we may later establish;

• develop and commercialize Zohydro ER with abuse deterrent properties;

• establish and maintain adequate levels of coverage for Zohydro ER from commercial health plans and government health programs, which we refer to collectively as third-party payors, particularly in light of the availability of other branded and generic competitive products;

• maintain compliance with regulatory requirements;

• establish and maintain agreements with wholesalers and distributors on commercially reasonable terms;

• maintain commercial manufacturing arrangements with third-party manufacturers as necessary to meet commercial demand for Zohydro ER and manufacture commercial quantities at acceptable cost levels; and

• successfully maintain intellectual property protection for Zohydro ER.

If we are unable to successfully commercialize Zohydro ER, we may be unable to generate sufficient revenues to grow or sustain our business and we may never become profitable, and our business, financial condition and results of operations will be materially adversely affected.

If Zohydro ER, and, if approved, Zohydro ER with abuse deterrent properties, Relday, Brabafen or any other product candidate for which we receive regulatory approval does not achieve broad market acceptance or coverage by third-party payors, the revenues that we generate will be limited.

The commercial success of Zohydro ER, and, if approved, Zohydro ER with abuse deterrent properties, Relday, Brabafen or any other product candidates for which we obtain marketing approval from the FDA or other regulatory authorities will depend upon the acceptance of these products by physicians, patients, healthcare payors and the medical community. Coverage and reimbursement of our approved product by third-party payors is also necessary for commercial success. The degree of market acceptance of Zohydro ER and any product candidates for which we may receive regulatory approval will depend on a number of factors, including:

•our ability to provide acceptable evidence of safety and efficacy;

•acceptance by physicians and patients of the product as a safe and effective treatment;

•any negative publicity or political action related to our or our competitors’ products;

•the relative convenience and ease of administration;

•the prevalence and severity of adverse side effects;

•limitations or warnings contained in a product’s FDA-approved labeling;

•the clinical indications for which a product is approved;

• in the case of Zohydro ER and product candidates that are controlled substances, the U.S. Drug Enforcement Administration, or DEA, scheduling classification;

•availability and perceived advantages of alternative treatments;

•the effectiveness of our or any current or future collaborators’ sales, marketing and distribution strategies;

•pricing and cost effectiveness;

•our ability to obtain sufficient third-party payor coverage and reimbursement; and

•the willingness of patients to pay out of pocket in the absence of third-party payor coverage.

For example, as part of its own initiatives to address the safety risks associated with opioid analgesics, in September 2013, the FDA announced class-wide safety labeling changes, including required new boxed warnings and new post-market study requirements for all extended-release, or ER, and long-acting, or LA, opioid analgesics intended to treat pain. Because of the risks of addiction, abuse, and misuse, even at recommended doses, and because of the greater risks of overdose and death, the FDA determined that these drugs should be reserved for management of pain severe enough to require daily, around-the-clock, long-term opioid treatment and for which alternative treatment options are inadequate. In addition, the FDA required the drug companies that make these drugs to conduct further studies and clinical trials to assess the known serious risks of misuse, abuse, increased sensitivity to pain (hyperalgesia), addiction, overdose and death. The scope and design of these required additional studies and

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clinical trials are under development and the related cost is currently unknown, which could negatively affect our business. The FDA held a public meeting in May 2014 to obtain stakeholder input on the design and conduct of the post-marketing requirements for ER/LA opioid analgesic drug products and will provide feedback on the requirements after consideration of the input obtained during the meeting. We cannot predict how the results of these post-marketing required studies will effect the commercialization of Zohydro ER and future formulations of Zohydro ER with abuse deterrent properties.

Controlled substances are classified by the DEA as Schedule I through V substances, with Schedule I substances being prohibited for sale in the United States, Schedule II substances considered to present the highest risk of abuse and Schedule V substances being considered to present the lowest relative risk of abuse. Zohydro ER contains hydrocodone and is regulated as a Schedule II controlled substance, and despite the strict regulations on the marketing, prescribing and dispensing of such substances, illicit use and abuse of hydrocodone is well-documented. Thus, the marketing of Zohydro ER may generate public controversy that may adversely affect market acceptance of Zohydro ER. Due to the concerns regarding abuse of opioids like Zohydro ER, we are developing formulations of Zohydro ER with abuse deterrent properties. We filed a supplemental NDA, or sNDA, on September 30, 2014 for a next-generation formulation of Zohydro ER that is designed to make it more difficult to abuse by injection or nasal administration. The The FDA assigned a Prescription Drug User Free Act, or PDUFA, target action date on the sNDA of January 30, 2015, and, if approved, we anticipate a transition from the currently marketed product to this new capsule formulation of Zohydro ER in the second quarter of 2015.

If approved, this new formulation could be available to prescribers in the first half of 2015. Further, we are targeting an NDA submission for a proprietary tablet formulation of Zohydro ER during the first half of 2016 which incorporates multiple features to maintain the extended-release property of the medication when crushed or chewed, reducing one of the ways in which opioids are abused through oral ingestion, as well other features to address abuse by injection or nasal administration.

Our efforts to educate the medical community and third-party payors on the benefits of Zohydro ER and, if approved, formulations of Zohydro ER with abuse deterrent properties, Relday, Brabafen or any of our other product candidates for which we obtain marketing approval from the FDA or other regulatory authorities and gain broad market acceptance may require significant resources and may never be successful. If our products do not achieve an adequate level of acceptance by physicians, third-party payors, pharmacists, and patients, we may not generate sufficient revenue from these products to become or remain profitable.

We may not realize the full economic benefit from the sale of our Sumavel DosePro business.

Pursuant to the asset purchase agreement with Endo that we entered into in April 2014, or the asset purchase agreement, in addition to the $89.6 million upfront cash payment, we may receive contingent payments, based on Endo’s achievement of pre-determined sales and gross margin milestones, in an amount up to $20.0 million. Our ability to receive these contingent payments under our supply agreement with Endo is dependent upon Endo successfully maintaining and increasing market demand for, and sales of, Sumavel DosePro.

In addition, we have agreed to indemnify Endo and its affiliates against losses suffered as a result of our material breach of representations and warranties and our other obligations in the asset purchase agreement, and $8.5 million of the upfront cash payment has been deposited into escrow to fund such potential indemnification claims for a period of 12 months following the closing of the sale. We cannot provide any assurance that we will receive all or any portion of the $8.5 million escrow amount or any of the contingent milestone payments.

Negative publicity and political action regarding Zohydro ER could delay or impair our ability to market this product, present significant distractions to our management and result in the incurrence of significant costs.

Products used to treat and manage pain, especially in the case of opioids like Zohydro ER, are from time to time subject to negative publicity, including political influences, illegal use, overdoses, abuse, diversion, serious injury and death. In November 2013, eight members of Congress submitted a letter to Department of Health and Human Services Secretary, Kathleen Sebelius, urging reconsideration of the FDA’s approval of Zohydro ER, and in December 2013, a bipartisan coalition of attorneys general from 29 states and territories submitted a letter to FDA Commissioner Margaret Hamburg with the same request. In April 2014, Purdue announced that it filed an NDA for its extended-release hydrocodone product candidate that is formulated to incorporate abuse deterrent properties, which was accepted by the FDA in July 2014 for a priority review. On October 29, 2014, we entered into a waiver agreement with Purdue, pursuant to which we granted a waiver to Purdue, of the three-year Hatch-Waxman regulatory exclusivity period with respect to NDA 202880 for Zohydro ER in support of the Purdue Products. In addition, Teva Pharmaceutical Industries Limited recently announced that it has initiated a rolling NDA submission which will be completed by the end of 2014 for its extended-release hydrocodone product candidate that is also formulated to incorporate abuse deterrent properties. Approval of these product candidates or any abuse-deterrent formulation of hydrocodone may drive further negative publicity and political action, or even result in the FDA revoking its approval of our NDA for Zohydro ER. While we do not believe that the FDA will revoke its Zohydro ER approval, and, in any event, the FDA would have to provide us with notice and opportunity for a hearing first, the related negative publicity, political influences and actions by our competitors could negatively affect our abil

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ity to market Zohydro ER and any opioid analgesic product candidates for which we may seek approval in the future. If the FDA did revoke its approval of Zohydro ER, our business, results of operations, financial condition and prospects would be materially and adversely affected.

In addition, in March 2014, the Governor of the Commonwealth of Massachusetts issued an executive order to ban Zohydro ER in Massachusetts. In response, in April 2014 we filed a lawsuit in the U.S. District Court in Massachusetts requesting the court to grant a temporary restraining order against implementation of Governor Patrick’s executive order prohibiting the prescribing and dispensing of Zohydro ER. The lawsuit asserted that the executive order was in direct conflict with the authority of the FDA to determine on behalf of the public whether a drug is safe and effective, and to impose the measures necessary to ensure that such drug will be used safely and appropriately. The U.S. District Court in Massachusetts entered a temporary restraining order preventing the implementation of the Governor’s order on constitutional grounds. On July 8, 2014, the U.S. District Court in Massachusetts issued an order upholding the temporary restraining order. While we believe the FDA has the authority to determine on behalf of the public whether a drug is safe and effective and to impose the measures necessary to ensure that such drug will be used safely and appropriately, and the U.S. District Court in Massachusetts has ruled in our favor, state officials in Massachusetts or elsewhere may nevertheless seek to place additional restrictions on the prescribing and use of Zohydro ER, which could negatively affect our ability to market Zohydro ER.

This negative publicity and political action could also cause a diversion of our management’s time and attention, cause us to incur additional significant costs with respect to litigation, marketing or otherwise, and could also result in an increased number of product liability claims, whether or not these claims have a valid basis.

Our short operating history makes it difficult to evaluate our business and prospects.

We commenced our operations on August 25, 2006. Our operations to date have been limited to organizing and staffing our company, scaling up manufacturing operations with our third-party contract manufacturers, building a sales and marketing organization, conducting product development activities for our products and product candidates, in-licensing rights to Zohydro ER and Relday, acquiring rights to Brabafen and commercializing Sumavel DosePro and Zohydro ER. In January 2010, we launched Sumavel DosePro and began generating revenues. We launched Zohydro ER in March 2014 and sold our Sumavel DosePro business in April 2014. Consequently, any predictions about our future performance may not be as accurate as they would be if we had a longer history of developing and commercializing pharmaceutical products.

We depend on wholesale pharmaceutical distributors for retail distribution of Zohydro ER, and if we lose any of our significant wholesale pharmaceutical distributors, our business could be harmed.

The majority of our sales of Zohydro ER are to wholesale pharmaceutical distributors who, in turn, sell the products to pharmacies, hospitals and other customers. Three wholesale pharmaceutical distributors, AmerisourceBergen Corporation, McKesson Corporation and Cardinal Health, Inc., individually comprised 41.4%, 29.5% and 20.0%, respectively, of our total ex-factory gross product sales of Zohydro ER for the nine months ended September 30, 2014.

Sales to these wholesale pharmaceutical distributors may result in substantial fluctuations in our results of operations from period to period and the loss of any of these wholesale pharmaceutical distributors' accounts or a material reduction in their purchases could have a material adverse effect on our business, results of operations, financial condition and prospects.

In addition, these wholesale customers comprise a significant part of the distribution network for pharmaceutical products in the United States. This distribution network has undergone, and may continue to undergo, significant consolidation marked by mergers and acquisitions. As a result, a small number of large wholesale distributors control a significant share of the market. Consolidation of drug wholesalers has increased, and may continue to increase, competitive and pricing pressures on pharmaceutical products. In addition, at times, wholesaler purchases may exceed customer demand, resulting in reduced wholesaler purchases in later quarters, which may result in substantial fluctuations in our results of operations from period to period. We cannot assure you that we can manage these pricing pressures or that wholesaler purchases will not decrease as a result of this potential excess buying.

Our sales can be greatly affected by the inventory levels our wholesalers carry. We monitor wholesaler inventory of Zohydro ER using a combination of methods. Pursuant to distribution service agreements with our three largest wholesale customers, we receive inventory level reports. For most other wholesalers where we do not receive inventory level reports, however, our estimates of wholesaler inventories may differ significantly from actual inventory levels. Significant differences between actual and estimated inventory levels may result in excessive production (requiring us to hold substantial quantities of unsold inventory), inadequate supplies of products in distribution channels, insufficient product available at the retail level, and unexpected increases or decreases in orders from our wholesalers. These changes may cause our revenues to fluctuate

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significantly from quarter to quarter, and in some cases may cause our operating results for a particular quarter to be below our expectations or the expectations of securities analysts or investors. If our financial results are below expectations for a particular period, the market price of our common stock may drop significantly.

We face intense competition, including from generic products, and if our competitors market and/or develop treatments for pain or psychotic disorders that are marketed more effectively, approved more quickly than our product candidates or demonstrated to be safer or more effective than our products, our commercial opportunities will be reduced or eliminated.

The pharmaceutical industry is characterized by rapidly advancing technologies, intense competition and a strong emphasis on proprietary therapeutics. We face competition from a number of sources, some of which may target the same indications as our products or product candidates, including large pharmaceutical companies, smaller pharmaceutical companies, biotechnology companies, academic institutions, government agencies and private and public research institutions, many of which have greater financial resources, sales and marketing capabilities, including larger, well-established sales forces, manufacturing capabilities, experience in obtaining regulatory approvals for product candidates and other resources than us.

Zohydro ER competes against other marketed branded and generic pain therapeutics. Opioid therapeutics generally fall into two classes: codeines, which include oxycodones and hydrocodones, and morphines. Zohydro ER is a hydrocodone, the most commonly prescribed opioid in the United States, and Zohydro ER competes with therapeutics within both the codeine and morphine classes. These therapeutics include both Schedule II and Schedule III products (meaning that they are considered controlled substances by the DEA) being marketed by companies such as Endo Pharmaceuticals Holdings Inc., Johnson & Johnson, Mallinckrodt Inc., Pfizer, Purdue, Teva Pharmaceutical Industries Limited and Actavis, Inc. On August 22, 2014, the DEA issued a final rule to reschedule hydrocodone combination products from Schedule III to Schedule II. The rescheduling went into effect on October 6, 2014 and requires previously classified Schedule III hydrocodone combination products to comply with more restrictive regulatory requirements under Schedule II classification. Zohydro ER is already a Schedule II product.

Zohydro ER will also compete with a significant number of opioid product candidates under development, including abuse deterrent and tamper resistant formulations of currently available opioids, novel opioids and alternative delivery forms of various opioids under development at other pharmaceutical companies, including single-entity extended-release hydrocodone product candidates, which include abuse deterrent and tamper resistant formulations, being developed by Egalet A/S, Pfizer, Purdue Pharma L.P. and Teva Pharmaceutical Industries Limited. In April 2014, Purdue Pharma L.P. announced that it filed an NDA for its extended-release hydrocodone product candidate that is formulated to incorporate abuse deterrent properties. Purdue’s NDA was accepted for priority review in July 2014. On October 29, 2014, we entered into a waiver agreement with Purdue, pusuant to which we granted a waiver to Purdue of the three-year Hatch-Waxman regulatory exclusivity period with respect to NDA 202880 for Zohydro ER in support of the Purdue Products. In addition, Teva Pharmaceutical Industries Limited recently announced that it plans to submit an NDA by the end of 2014 for its extended-release hydrocodone product candidate that is also formulated to incorporate abuse deterrent properties. These product candidates, if approved, may present enhanced competition for the Zohydro ER brand.

Zohydro ER may also face competition from non-opioid product candidates including new chemical entities, as well as alternative delivery forms of non-steroidal anti-inflammatory drugs. These new opioid and non-opioid product candidates are being developed by companies such as Acura Pharmaceuticals, Inc., Collegium Pharmaceutical, Inc., Eli Lilly and Company, Elite Pharmaceuticals, Inc., Hospira Inc., Inspirion Delivery Technologies, LLC, Intellipharmaceutics International, Inc., Nektar Therapeutics, Pfizer and QRxPharma Ltd.

If approved for the treatment of schizophrenia, we anticipate that Relday will compete against other marketed, branded and generic, typical and atypical antipsychotics, including both long-acting injectable and oral products. Currently marketed long-acting injectable atypical antipsychotic products include Risperdal Consta and Invega Sustenna marketed by Johnson & Johnson, Zyprexa Relprevv marketed by Eli Lilly & Company, and Abilify Maintena (apripiprazole) marketed by Otsuka Pharmaceutical Co., Ltd. and H. Lundbeck A/S. Currently approved and marketed oral atypical antipsychotics include Risperdal (risperidone) and Invega (paliperidone) marketed by Johnson & Johnson, generic risperidone, Zyprexa (olanzapine) marketed by Eli Lilly and Company, Seroquel (quetiapine) marketed by AstraZeneca plc, Abilify (aripiprazole) marketed by BMS/Otsuka Pharmaceutical Co., Ltd., Geodon (ziprasidone) marketed by Pfizer, Fanapt (iloperidone) marketed by Novartis AG, Saphris (asenapine) marketed by Merck & Co., Latuda (lurasidone) marketed by Dainippon Sumitomo Pharma, and generic clozapine. Finally, in addition to these currently marketed products, we may also face competition from additional long-acting injectable product candidates that could be developed by the large companies listed above, as well and by other pharmaceutical companies such as Alkermes, Endo Health Solutions Inc., Laboratorios Farmaceuticos Rovi SA, Novartis AG, and Reckitt Benckiser Group plc, each of which has announced they are developing long-acting antipsychotic product candidates. In May 2014, Janssen Pharmaceuticals, Inc., announced the submission of sNDAs for once-monthly atypical long-

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acting antipsychotic Invega Sustenna (paliperidone palmitate) to the FDA for approval to treat schizoaffective disorder as either monotherapy or adjunctive therapy.

If approved for the treatment of Dravet syndrome, Brabafen may compete against other product candidates. Epidiolex, which is being developed by GW Pharmaceuticals, has received an orphan designation by the EMA and fast track status by the FDA for the treatment of Dravet syndrome. GW Pharmaceuticals is set to initiate a Phase II/III clinical trial for Epidiolex by the end of the year. Sage Therapeutics is developing its lead compound SAGE-547, an allosteric modulator of GABA receptors, for patients with super-refractory status epilepticus, which are initial prolonged seizures in the developing infant that can be associated with Dravet’s syndrome. Further, Insys Therapeutics has advanced its pharmaceutical cannabinoid program, which has received orphan drug designation for use of cannabidiol as a potential treatment for Dravet syndrome.

We expect Zohydro ER and, if approved, Relday, Brabafen and any of our other product candidates to compete on the basis of, among other things, product efficacy and safety, time to market, price, patient reimbursement by third-party payors, extent of adverse side effects and convenience of treatment procedures. One or more of our competitors may develop injectable products, products to address chronic pain or other products that compete with ours, obtain necessary approvals for such products from the FDA, or other agencies, if required, more rapidly than us or develop alternative products or therapies that are safer, more effective and/or more cost effective than any products developed by us. The competition that we will encounter with respect to any of our product candidates that receive the requisite regulatory approval and classification and are marketed will have, and the competition we are currently encountering with Zohydro ER has had and will continue to have, an effect on our product prices, market share and results of operations. We may not be able to differentiate any products that we are able to market from those of our competitors, successfully develop or introduce new products that are less costly or offer better results than those of our competitors, or offer purchasers of our products payment and other commercial terms as favorable as those offered by our competitors.

In addition, competitors may seek to develop alternative formulations of our product candidates and/or alternative drug delivery technologies that address our targeted indications. On August 13 and September 20, 2014, we received separate notices of paragraph IV certifications from Actavis Laboratories FL, Inc., or Actavis, and from Alvogen Pine Brook, Inc., or Alvogen, respectively, advising us of the filing of Abbreviated New Drug Applications, or ANDAs, with the FDA for a generic version of Zohydro ER. These certification notices allege that the two U.S. patents listed in the FDA’s Orange Book for Zohydro ER, each with an expiration date in November 2019, will not be infringed by Actavis' or Alvogen’s proposed products, are invalid and/or are unenforceable. On September 3, 2014, Daravita Limited (formerly Alkermes Science One Limited) filed suit in the United States District Court for the District of Delaware against Actavis, and on November 3, 2014, Daravita filed suit in the United States District Court for the District of Deleware against Alvogen. Daravita has licensed rights to Zohydro ER to us, and, under the Zohydro ER license agreement, Daravita has the right to control the enforcement of patents and related proceedings involving Zohydro ER and any prospective generic entrant. We intend to vigorously enforce the intellectual property rights relating to Zohydro ER, but we cannot predict the outcome of these matters or guarantee the outcome of any litigation.

The commercial opportunity for Zohydro ER and our product candidates could be significantly harmed if competitors are able to develop alternative formulations and/or drug delivery technologies outside the scope of our products. Compared to us, many of our potential competitors have substantially greater:

• capital resources;

• research and development resources and experience, including personnel and technology;

• drug development, clinical trial and regulatory resources and experience;

• sales and marketing resources and experience;

• manufacturing and distribution resources and experience;

• name recognition; and

• resources, experience and expertise in prosecution and enforcement of intellectual property rights.

As a result of these factors, our competitors may obtain regulatory approval of their products more rapidly than we are able to or may obtain patent protection or other intellectual property rights that limit or block us from developing or commercializing our product candidates. Our competitors may also develop drugs that are more effective, more useful, better tolerated, subject to fewer or less severe side effects, more widely prescribed or accepted or less costly than ours and may also be more successful than us in manufacturing and marketing their products. If we are unable to compete effectively with the marketed therapeutics of our competitors or if such competitors are successful in developing products that compete with Zohydro ER or any of our product candidates that are approved, our business, results of operations, financial condition and prospects may be materially adversely affected.

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We may engage in strategic transactions that could impact our liquidity, increase our expenses and present significant distractions to our management.

From time to time we may consider strategic transactions, such as acquisitions of companies, asset purchases and out-licensing or in-licensing of products, product candidates or technologies. For example, in October 2014, we completed the acquisition of Brabant, which owns worldwide development and commercialization rights to Brabafen for the treatment of Dravet syndrome. Additional potential transactions that we may consider include a variety of different business arrangements, including spin-offs, strategic partnerships, joint ventures, restructurings, divestitures, business combinations and investments. Any such transaction may require us to incur non-recurring or other charges, may increase our near and long-term expenditures and may pose significant integration challenges or disrupt our management or business, which could adversely affect our operations and financial results. For example, these transactions may entail numerous operational and financial risks, including:

• exposure to unknown liabilities;

• disruption of our business and diversion of our management’s time and attention in order to develop acquired products, product candidates or technologies;

• incurrence of substantial debt or dilutive issuances of equity securities to pay for acquisitions;

• higher than expected acquisition and integration costs;

• write-downs of assets or goodwill or impairment charges;

• increased amortization expenses;

• difficulty and cost in combining the operations and personnel of any acquired businesses with our operations and personnel;

• impairment of relationships with key suppliers or customers of any acquired businesses due to changes in management and ownership; and

• inability to retain key employees of any acquired businesses.

Accordingly, although there can be no assurance that we will undertake or successfully complete any additional transactions of the nature described above, the Brabant transaction and any additional transactions that we do complete could have a material adverse effect on our business, results of operations, financial condition and prospects.

Although we have been granted three-year Hatch-Waxman exclusivity for Zohydro ER, we have entered into a waiver agreement with Purdue of the three-year Hatch-Waxman regulatory exclusivity period with respect to NDA 202880 for Zohydro ER in support of the Purdue Products and can offer no assurance that such exclusivity will effectively prevent or otherwise limit further competition from other hydrocodone products, either generic or otherwise.

In addition to patent protection, we rely, in part, on Hatch-Waxman marketing exclusivity for the commercialization of Zohydro ER in the United States. Under the Drug Price Competition and Patent Term Restoration Act of 1984, known as the Hatch-Waxman Amendments, newly approved drugs may benefit from certain statutory periods of non-patent marketing exclusivity in the United States. Exclusivity provides the holder of an approved application limited protection from new competition in the marketplace for the innovation represented by its approved drug product.

A three-year period of exclusivity is available for a drug product that contains an active ingredient that has been previously approved and the application contains reports of new clinical investigations (other than bioavailability studies) conducted or sponsored by the applicant that were essential to approval of the application. Changes to an approved drug product that may qualify for this exclusivity include changes that affect the product’s active ingredient(s), strength, dosage form, route of administration, or conditions of use, so long as clinical investigations were essential to approval of the application containing those changes. The exclusivity prevents FDA from approving other applications for the same change for three years from the date of the new product’s approval.

While Zohydro ER has been granted three-year Hatch-Waxman exclusivity as the first single-entity hydrocodone product approved for the treatment of chronic pain on the basis of a comprehensive Phase 3 safety and efficacy program, there can be no assurance that such exclusivity will effectively prevent or otherwise limit competition from other hydrocodone products, either generic or otherwise. On October 29, 2014, we entered into a waiver agreement with Purdue, pursuant to which we granted a waiver to Purdue of the three-year Hatch-Waxman regulatory exclusivity period with respect to NDA 202880 for Zohydro ER in support of the Purdue Products. [On [ ], the FDA approved Purdue’a product Hysingla ER®.] Such competition by the Purdue Products and other hydrocodone products, including other 505(b)(2) applications for different conditions of use or other changes to the hydrocodone products that would not be restricted by the three-year exclusivity, could have a significantly negative impact on our future revenues from Zohydro ER.

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We are dependent on numerous third parties in our supply chain, all of which are currently single source suppliers, for the commercial supply of Sumavel DosePro and Zohydro ER and for the clinical supply of Relday and Brabafen, and if we experience problems with any of these suppliers, the manufacturing of Sumavel DosePro, Zohydro ER, Relday and Brabafen could be delayed.

While we own most of the specialized equipment used to manufacture critical components of Sumavel DosePro, we do not own or operate manufacturing facilities and currently lack the in-house capability to manufacture Sumavel DosePro, Zohydro ER, Relday, Brabafen or any other product candidates. Our DosePro system and Sumavel DosePro are manufactured by contract manufacturers, component fabricators and secondary service providers. Aseptic fill, finish, assembly and packaging of Sumavel DosePro are performed at Patheon UK Limited, Swindon, United Kingdom, or Patheon, a specialist in the aseptic fill/finish of injectables and other sterile pharmaceutical products. In May 2012, Patheon announced plans to wind down or transfer its commercial production capacity for a number of products at this facility over a period of 24 to 36 months. Patheon subsequently notified us that it no longer intends to wind down or transfer its commercial capacity, and as such, at this time we are no longer working to identify alternative suppliers for the services provided to us by Patheon. In addition to Patheon's manufacturing services, Nypro Limited, located in Bray, Ireland, manufactures the actuator assemblies and injection molded components for our DosePro system and Nipro Glass, Germany AG (formerly MGlas AG), located in Münnerstadt, Germany, manufactures the specialized glass capsule (cartridge) that houses the sumatriptan active pharmaceutical ingredient, or API, in our DosePro system. Each of these manufacturers and each other company that supplies, fabricates or manufactures any component used in our DosePro system is currently the only qualified source of their respective components. We currently rely on Dr. Reddy's Laboratories as the only supplier of sumatriptan API for use in Sumavel DosePro. An affiliate of Alkermes, Alkermes Pharma Ireland Limited, or APIL, is the exclusive manufacturer and supplier (subject to certain exceptions) for Zohydro ER. We also outsource all manufacturing and packaging of the clinical trial materials for Relday [and Brabafen] to third parties.

Although we plan to qualify additional manufacturers and suppliers of some of the components used in Sumavel DosePro, there can be no assurance that we will be able to do so and the current manufacturers and suppliers of these components will likely be single source suppliers to us for a significant period of time. Similarly, APIL is the exclusive manufacturer of Zohydro ER and Durect is the exclusive manufacturer of the risperidone formulation using Durect's SABER™ controlled-release technology for all Relday clinical trials through Phase 2 and has the option to supply the same formulation for Phase 3 clinical trials and, if approved, commercial production. Brabafen, if approved, would require a technology transfer to an alternate source to establish commercial supply capabilities, for which there can be no assurance of a successful transfer and validation. We have restrictions on establishing a second source of supply under our agreement with APIL, and we may never be able to establish additional sources of supply for Zohydro ER, Relday's risperidone formulation or Brabafen.

Manufacturers and suppliers are subject to regulatory requirements covering, among other things, manufacturing, testing, quality control and record keeping relating to our products and product candidates, and are subject to ongoing inspections by regulatory agencies. Failure by any of our manufacturers or suppliers to comply with applicable regulations may result in long delays and interruptions to our manufacturing supply, and increase our costs, while we seek to secure another supplier who meets all regulatory requirements, including obtaining regulatory approval to utilize the new manufacturer or supplier. Accordingly, the loss of any of our current third-party manufacturers or suppliers could have a material adverse effect on our business, results of operations, financial condition and prospects.

Reliance on third-party manufacturers and suppliers entails risks to which we would not be subject if we manufactured Sumavel DosePro, Zohydro ER or our product candidates ourselves, including:

• reliance on the third parties for regulatory compliance and quality assurance;

• the possible breach of the manufacturing agreements by the third parties because of factors beyond our control or the insolvency of any of these third parties or other financial difficulties, labor unrest, natural disasters or other factors adversely affecting their ability to conduct their business; and

• the possibility of termination or non-renewal of the agreements by the third parties, at a time that is costly or inconvenient for us, because of our breach of the manufacturing agreement or based on their own business priorities.

Production capacity to support launch and initial forecast demand for Zohydro ER is installed and has received final packaging qualification. In order to meet future anticipated growth in demand for Zohydro ER, APIL has initiated activities to qualify additional production lines and expand the manufacturing capacity for Zohydro ER. However, if APIL or our other contract manufacturers or suppliers are unable to deliver the required commercial quantities of our products and their various components, the quantities of our product candidates required for our clinical trials and, if approved, for commercial sale, on a timely basis and at commercially reasonable prices, and we are unable to find one or more replacement manufacturers or suppliers capable of production at a substantially equivalent cost, in substantially equivalent volumes and quality, and on a timely basis, we would likely be unable to meet demand for our products and would have to delay or terminate our pre-clinical

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or clinical trials, and we would lose potential revenue. It may also take a significant period of time to establish an alternative source of supply for our products, product candidates and components and to have any such new source approved by the FDA or any applicable foreign regulatory authorities. Furthermore, any of the above factors could cause the delay or suspension of initiation or completion of clinical trials, regulatory submissions or required approvals of our product candidates, cause us to incur higher costs and could prevent us from commercializing our product candidates successfully.

Our inability to successfully establish new partnerships with pharmaceutical companies or contract sales organizations to co-promote Zohydro ER and any additional product candidates that may receive regulatory approval may impair our ability to effectively market and sell such product candidates.

Major pharmaceutical companies usually employ groups of sales representatives numbering in the thousands to call on the large number of primary care physicians. Our sales and marketing organization, which as of September 30, 2014 was comprised of approximately 160 personnel, promotes Zohydro ER in the United States, primarily targeting pain specialists. We may seek a co-promotion or other partnering opportunity for Zohydro ER, or may further expand our sales force.

In addition, in order to promote any product candidates that receive regulatory approval, we may need to further expand our sales and marketing personnel and commercial infrastructure and/or establish partnerships with pharmaceutical companies or contract sales organizations to co-promote such additional products. We currently, and on an ongoing basis will have to, compete with other pharmaceutical and biotechnology companies to recruit, hire, train and retain sales and marketing personnel. We also face competition in our search for collaborators and potential co-promoters. To the extent we rely on additional third parties to co-promote or otherwise commercialize any products and/or product candidates that may receive regulatory approval, we are likely to receive less revenue than if we commercialized these products ourselves. Further, by entering into strategic partnerships or similar arrangements, we may rely in part on such third parties for financial and commercialization resources. Even if we are able to identify suitable partners to assist in the commercialization of our products and/or product candidates, they may be unable to devote the resources necessary to realize the full commercial potential of our products.

Further, we may lack the financial and managerial resources to maintain and potentially increase the size of our sales and marketing organization to adequately promote and commercialize Zohydro ER and any product candidates that may be approved. Any increase in our sales force will result in an increase in our expenses, which could be significant before we generate revenues from any newly approved product candidate. Even though we were able to recently expand our sales and marketing personnel, and may be successful in establishing future partnership arrangements, such sales force and marketing teams may not be successful in commercializing our products, which would adversely affect our ability to generate revenue for such products, and could have a material adverse effect on our business, results of operations, financial condition and prospects.

We may encounter delays in the manufacturing of Sumavel DosePro or fail to generate contract manufacturing revenue if our supply of the components of our DosePro drug delivery system is interrupted.

Our DosePro drug delivery system is sourced, manufactured and assembled by multiple third parties across different geographic locations in Europe, including the United Kingdom, Germany and Ireland. All contract manufacturers and component suppliers have been selected for their specific competencies in the manufacturing processes and materials that make up the DosePro system. The components of DosePro include the actuator subassembly, capsule subassembly and the setting mechanism. The actuator subassembly is comprised of nine individual components which are collectively supplied by six different third-party manufacturers. The capsule subassembly that houses the sterile drug formulation sumatriptan is comprised of five different components also supplied by four third-party manufacturers. Each of these third-party manufacturers is currently the single source of their respective components. If any of these manufacturers is unable to supply its respective component for any reason, including due to violations of the FDA’s Quality System Regulation, or QSR, requirements, our ability to manufacture the finished DosePro system will be adversely affected and our ability to meet the distribution requirements for any Sumavel DosePro purchase orders from Endo and the resulting contract manufacturing revenue therefrom will be negatively affected. Accordingly, there can be no assurance that any failure in any part of our supply chain will not have a material adverse effect on our ability to generate contract manufacturing revenue from Sumavel DosePro or our ability to generate revenue from any potential future DosePro products, which in turn could have a material adverse effect on our business, results of operations, financial condition and prospects.

Delays in the commencement or completion of clinical testing for Relday or Brabafen or pre-clinical or clinical testing for any of our other product candidates could result in increased costs to us and delay or limit our ability to pursue regulatory approval for, or generate revenues from, such product candidates.

Clinical trials are very expensive, time consuming and difficult to design and implement. Delays in the commencement or completion of clinical testing for Relday or Brabafen or pre-clinical or clinical testing for any of our other product candidates could significantly affect our product development costs and business plan. We initiated clinical testing for Relday in patients

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with schizophrenia in July 2012 and announced positive single-dose pharmacokinetic results from the Phase 1 clinical trial in January 2013. Based on the favorable safety and pharmacokinetic profile demonstrated in the Phase 1 trial, we extended the study to include an additional dose of the same formulation and announced positive top-line results in May 2013. The positive results from this study extension position us to begin a multi-dose clinical trial, which will provide the required steady-state pharmacokinetic and safety data prior to initiating Phase 3 development studies. We plan to commence this multi-dose clinical trial in January of 2015. The safety and effectiveness of Brabafen has been evaluated in a continuing, long-term, open-label, study in 15 Dravet syndrome patients. Based upon feedback from the FDA and the European Medicines Agency, we expect to initiate two Phase 3 studies (of 40 to 60 Dravet syndrome patients per study) during the second quarter of 2015 in the United States and Europe, with top-line results potentially available in the first half of 2016. We do not know whether any of our other pre-clinical or clinical trials will begin on time or be completed on schedule, if at all. The commencement and completion of clinical trials can be delayed for a number of reasons, including delays related to:

• obtaining regulatory authorization to commence a clinical trial;

• reaching agreement on acceptable terms with prospective clinical research organizations, or CROs, clinical investigators and trial sites, the terms of which can be subject to extensive negotiation and may vary significantly among different CROs, clinical investigators and trial sites;

• manufacturing or obtaining sufficient quantities of a product candidate for use in clinical trials;

• obtaining institutional review board, or IRB, approval to initiate and conduct a clinical trial at a prospective site;

• identifying, recruiting and training suitable clinical investigators;

• identifying, recruiting and enrolling subjects to participate in clinical trials for a variety of reasons, including competition from other clinical trial programs for the treatment of similar indications;

• retaining patients who have initiated a clinical trial but may be prone to withdraw due to side effects from the therapy, lack of efficacy, personal issues, or for any other reason they choose, or who are lost to further follow-up;

• uncertainty regarding proper dosing; and

• scheduling conflicts with participating clinicians and clinical institutions.

In addition, if a significant number of patients fail to stay enrolled in any of our current or future clinical trials of Relday, Brabafen or any of our other product candidates and such failure is not adequately accounted for in our trial design and enrollment assumptions, our clinical development program could be delayed. Clinical trials may also be delayed or repeated as a result of ambiguous or negative interim results or unforeseen complications in testing. In addition, a clinical trial may be suspended or terminated by us, the FDA, the IRB overseeing the clinical trial at issue, any of our clinical trial sites with respect to that site, or other regulatory authorities due to a number of factors, including:

• inability to design appropriate clinical trial protocols;

• inability by us, our employees, our CROs or their employees to conduct the clinical trial in accordance with all applicable FDA, DEA or other regulatory requirements or our clinical protocols;

• inspection of the clinical trial operations or trial sites by the FDA or other regulatory authorities resulting in the imposition of a clinical hold;

• discovery of serious or unexpected toxicities or side effects experienced by study participants or other unforeseen safety issues;

• lack of adequate funding to continue the clinical trial, including the incurrence of unforeseen costs due to enrollment delays, requirements to conduct additional trials and studies and increased expenses associated with the services of our CROs and other third parties;

• lack of effectiveness of any product candidate during clinical trials;

• slower than expected rates of subject recruitment and enrollment rates in clinical trials;

• inability of our CROs or other third-party contractors to comply with all contractual requirements or to perform their services in a timely or acceptable manner;

• inability or unwillingness of medical investigators to follow our clinical protocols; and

• unfavorable results from on-going clinical trials and pre-clinical studies.

Additionally, changes in applicable regulatory requirements and guidance may occur and we may need to amend clinical trial protocols to reflect these changes. Amendments may require us to resubmit our clinical trial protocols to IRBs for reexamination, which may impact the costs, timing or successful completion of a clinical trial. If we experience delays in completion of, or if we terminate, any of our clinical trials, the commercial prospects for Relday, Brabafen and our other product candidates may be harmed, which may have a material adverse effect on our business, results of operations, financial condition and prospects.

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Fluctuations in the value of the Euro or U.K. pound sterling could negatively impact our results of operations and increase our costs.

Payments to our material suppliers and contract manufacturers are denominated in the Euro and U.K. pound sterling. Our reporting currency is the U.S. dollar and to date all of the revenues we have generated have been in U.S. dollars. For the nine months ended September 30, 2014, $17.1 million (based on exchange rates as of September 30, 2014) of our materials, contract manufacturing costs and other manufacturing-related costs were denominated in foreign currencies. As a result, we are exposed to foreign exchange risk, and our results of operations may be negatively impacted by fluctuations in the exchange rate between the U.S. dollar and the Euro or U.K. pound sterling. A significant appreciation in the Euro or U.K. pound sterling relative to the U.S. dollar will result in higher expenses and cause increases in our net losses. Likewise, to the extent that we generate any revenues denominated in foreign currencies, or become required to make payments in other foreign currencies, fluctuations in the exchange rate between the U.S. dollar and those foreign currencies could also negatively impact our results of operations. We currently have not entered into any foreign currency hedging contracts to reduce the effect of changes in foreign currency exchange rates, and foreign currency hedging is inherently risky and may result in unanticipated losses.

If we are unable to achieve and maintain adequate levels of coverage and reimbursement for Zohydro ER or any of our other product candidates for which we may receive regulatory approval on reasonable pricing terms, their commercial success may be severely hindered.

Successful sales of our products depend on the availability of adequate coverage and reimbursement from third-party payors. Patients who are prescribed medicine for the treatment of their conditions generally rely on third-party payors to reimburse all or part of the costs associated with their prescription drugs. Adequate coverage and reimbursement from governmental healthcare programs, such as Medicare and Medicaid, and commercial payors are critical to new product acceptance. Coverage decisions may depend upon clinical and economic standards that disfavor new drug products when more established or lower cost therapeutic alternatives are already available or subsequently become available. Assuming coverage is approved, the resulting reimbursement payment rates might not be adequate or may require co-payments that patients find unacceptably high. Patients are unlikely to use our products unless coverage is provided and reimbursement is adequate to cover a significant portion of the cost of our products.

In addition, the market for our products will depend significantly on access to third-party payors' drug formularies, or lists of medications for which third-party payors provide coverage and reimbursement. The industry competition to be included in such formularies often leads to downward pricing pressures on pharmaceutical companies. Also, third-party payors may refuse to include a particular branded drug in their formularies or otherwise restrict patient access to a branded drug when a less costly generic equivalent or other alternative is available. For example, in August 2014, Express Scripts added Zohydro ER to its list of excluded drugs for their National Preferred Drug formulary for 2015. Express Scripts is the largest U.S. pharmacy benefit manager, and the inclusion of Zohydro ER on its list of excluded drugs for their National Preferred Drug formulary may have a negative impact on prescriptions and sales of Zohydro ER.

In addition, regional healthcare authorities and individual hospitals are increasingly using competitive bidding procedures to determine what pharmaceutical products and which suppliers will be included in their prescription drug and other healthcare programs. This can reduce demand for our products or put pressure on our product pricing, which could negatively affect our business, results of operations, financial condition and prospects.

Third-party payors, whether foreign or domestic, or governmental or commercial, are developing increasingly sophisticated methods of controlling healthcare costs. In addition, in the United States, no uniform policy of coverage and reimbursement for drug products exists among third-party payors. Therefore, coverage and reimbursement for drug products can differ significantly from payor to payor.

Further, we believe that future coverage and reimbursement will likely be subject to increased restrictions both in the United States and in international markets. Third-party coverage and reimbursement for Zohydro ER or any of our product candidates for which we may receive regulatory approval may not be available or adequate in either the United States or international markets, which could have a material adverse effect on our business, results of operations, financial condition and prospects.

We may never receive regulatory approval or commercialize our product candidates outside of the United States.

We intend to market certain of our product candidates outside of the United States. For example, Brabafen has recently received orphan drug designation in Europe, and we expect to initiate two Phase 3 studies during the second quarter of 2015 in both the United States and Europe. In order to market our products outside of the United States, we, or any potential partner, must obtain separate regulatory approvals and comply with numerous and varying regulatory requirements of other countries regarding safety and efficacy and governing, among other things, clinical trials and commercial sales, pricing and distribution

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of our products. The time required to obtain approval in other countries might differ from and be longer than that required to obtain FDA approval. The regulatory approval process in other countries may include all of the risks detailed in these “Risk Factors” regarding FDA approval in the United States, as well as other risks. For example, in the European Economic Area, or EEA (comprised of the 27 European Union, or EU, member states plus Iceland, Liechtenstein, and Norway), we can take advantage of the hybrid application pathway of the EU Centralized Procedure, which is similar to the FDA’s 505(b)(2) pathway. Hybrid applications may rely in part on the results of pre-clinical tests and clinical trials contained in the authorization dossier of the reference product, but must be supplemented with additional data. In territories where data is not freely available, we or our partners may not have the ability to commercialize our products without negotiating rights from third parties to refer to their clinical data in our regulatory applications, which could require the expenditure of significant additional funds. We, or any potential partner, may be unable to obtain rights to the necessary clinical data and may be required to develop our own proprietary safety effectiveness dossiers. Regulatory approval in one country does not ensure regulatory approval in another, but a failure or delay in obtaining regulatory approval in one country may have a negative effect on the regulatory process in others.

Inability to obtain regulatory approval in other countries or any delay or setback in obtaining such approval could have the same adverse effects detailed in these “Risk Factors” regarding FDA approval in the United States. As described above, such effects include the risks that our product candidates may not be approved at all or for all requested indications, which could limit the uses of our product candidates and have an adverse effect on their commercial potential or require costly, post-marketing studies. In addition, we, or any potential partner, may be subject to fines, suspension or withdrawal of regulatory approvals, product recalls, seizure of products, operating restrictions and criminal prosecution if we are unable to comply with applicable foreign regulatory requirements.

Risks Related to Our Financial Position and Capital Requirements

We have never generated net income or positive cash flow from operations and are dependent upon external sources of financing to fund our business and development.

We launched our first approved product, Sumavel DosePro, in January 2010 and subsequently sold the business in April 2014. We launched our recently approved product, Zohydro ER, in March 2014. Given our limited sales history for Zohydro ER, we may not accurately predict future sales, and we may never be able to significantly increase sales. We have financed our operations primarily through the proceeds from the issuance of our common and preferred stock, including the proceeds from our initial public offering completed in November 2010, our follow-on public offerings completed in September 2011, July 2012 and November 2013, our controlled equity offering program, which was terminated in November 2013, and debt, and have incurred losses and negative cash flow from operations in each year since our inception. For the nine months ended September 30, 2014 and the years ended December 31, 2013 and 2012, we incurred net income (loss) of $29.1 million, $(80.9) million and $(47.4) million, respectively, and our cash used in operating activities was $71.2 million, $44.9 million and $52.2 million, respectively. As of September 30, 2014, we had an accumulated deficit of $381.1 million. These losses and negative cash flow from operations have had a material adverse effect on our stockholders' equity and working capital.

We expect to continue to incur net losses and negative cash flow from operating activities for at least the next year primarily as a result of the expenses incurred in connection with the commercialization of Zohydro ER, including introduction of Zohydro ER with abuse deterrent properties to the market, if approved, the clinical development of Relday and Brabafen, required post-market testing for Zohydro ER, safe use initiatives for Zohydro ER and additional development activities with respect to Zohydro ER, including the development of an additional formulation with abuse deterrent properties. As a result, we may remain dependent upon external sources of financing to fund our business and the development and commercialization of our approved products and product candidates. To the extent we need to raise additional capital in the future, we cannot ensure that debt or equity financing will be available to us in amounts, at times or on terms that will be acceptable to us, or at all. Any shortfall in our cash resources could require that we delay or abandon certain development and commercialization activities and could otherwise have a material adverse effect on our business, results of operations, financial condition and prospects.

We may not be able to sell shares of our common stock under our controlled equity offering program with Cantor at times, prices or quantities that we desire, and if such sales do occur, they may result in dilution to our existing stockholders.

On November 6, 2014, we entered into the sales agreement with Cantor. Sales of our common stock made pursuant to the controlled equity offering program, if any, will be made on the Nasdaq Global Market under our shelf registration statement on Form S-3 filed on November 6, 2014, following such time as the registration statement is declared effective by the SEC. However, such registration statement cannot be declared effective until such time as we have filed certain financial statements from our recent acquisition of Brabant as required by SEC rules, which must be filed within 71 days of the date of our Current Report on Form 8-K filed with the SEC on October 27, 2014. Under the terms of the sales agreement, Cantor will use its commercially reasonable efforts, consistent with its normal trading and sales practices and applicable state and federal laws,

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rules and regulations and the rules of the Nasdaq Global Market, to sell shares of our common stock designated by us. However, there can be no assurance that Cantor will be successful in consummating such sales based on prevailing market conditions or in the quantities or at the prices that we deem appropriate. In addition, we will not be able to make sales of our common stock pursuant to the sales agreement unless certain conditions are met, which include the effectiveness of the Form S-3; accuracy of representations and warranties made to Cantor under the sales agreement; compliance with laws; and the continued listing of our stock on the Nasdaq Global Market. In addition, Cantor is permitted to terminate the sales agreement at any time. If we are unable to access funds through sales under the sales agreement, or it is terminated by Cantor, we may be unable to access capital on favorable terms or at all.

To the extent that we sell shares pursuant to the sales agreement, it will dilute the holdings of our existing stockholders, and may result in downward pressure on the price of our common stock. If we sell shares under the sales agreement at a time when our share price is decreasing, we will need to issue more shares to raise the same amount than if our stock price was higher. Issuances in the face of a declining share price will have an even greater dilutive effect than if our share price were stable or increasing, and may further decrease our share price.

Risks Related to Regulation of our Product and Product Candidates

Annual DEA quotas on the amount of hydrocodone allowed to be produced in the United States and our specific allocation of hydrocodone by the DEA could significantly limit the production or sale of Zohydro ER.

The DEA limits the production and availability of all Schedule II substances through a quota system which includes a national aggregate production quota and individual procurement quotas. Because hydrocodone is subject to the DEA's production and procurement quota scheme, the DEA establishes annually an aggregate production quota for how much hydrocodone may be produced in total in the United States based on the DEA's estimate of the quantity needed to meet legitimate scientific and medicinal needs. This limited aggregate amount of hydrocodone that the DEA allows to be produced in the United States each year is allocated among individual companies, who must submit applications annually to the DEA for individual production and procurement quotas. The DEA may adjust individual procurement quotas from time to time during the year, although the DEA has substantial discretion in whether or not to make such adjustments. The DEA requires substantial evidence and documentation of expected legitimate medical and scientific needs before assigning procurement quotas to manufacturers and research organizations. Daravita Limited (formerly Alkermes plc) which has licensed us the right to sell Zohydro ER in the United States, has been granted sufficient procurement quota of hydrocodone by the DEA to support our current demand of Zohydro ER and expected growth through the end of 2015.

We do not know what amounts of hydrocodone other companies manufacturing or developing product candidates containing hydrocodone may request for future years. The DEA, in assessing factors such as medical need, abuse and diversion potential and other policy considerations, may choose to set the aggregate hydrocodone production quota lower than the total amount requested for procurement by the companies. Daravita is permitted to petition the DEA to increase the annual procurement quota after it is initially established, but there is no guarantee that the DEA would act favorably upon such a petition. Daravita's procurement quota of hydrocodone may not be sufficient to meet any future clinical development needs or commercial demand for Zohydro ER. Any delay or refusal by the DEA in establishing the procurement quota or a reduction in Daravita’s procurement quota for hydrocodone or the DEA's failure to increase it over time as we anticipate could delay or stop commercial sale of Zohydro ER or cause us not to achieve our expected operating results, which could have a material adverse effect on our business, results of operations, financial condition and prospects.

We may not be able to maintain orphan drug designation or obtain or maintain orphan drug exclusivity for Brabafen.

We have obtained orphan drug designation for Brabafen in the United States and Europe. In the United States, under the Orphan Drug Act, the FDA may designate a product as an orphan drug if it is intended to treat a rare disease or condition, which is generally defined as a patient population of fewer than 200,000 individuals in the United States.

Generally, if a product with an orphan drug designation subsequently receives the first marketing approval for the indication for which it has such designation, the product is entitled to a period of marketing exclusivity, which precludes the FDA or European Medicines Agency, or EMA, from approving another marketing application for the same drug for that time period. The applicable period is seven years in the United States and ten years in Europe. The European exclusivity period can be reduced to six years if a drug no longer meets the criteria for orphan drug designation or if the drug is sufficiently profitable so that market exclusivity is no longer justified. Orphan drug exclusivity may be lost if the FDA or EMA determines that the request for designation was materially defective or if the manufacturer is unable to assure sufficient quantity of the drug to meet the needs of patients with the rare disease or condition.

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The orphan drug exclusivity may not effectively protect the product from competition because different drugs can be approved for the same condition. Even after an orphan drug is approved, the FDA can subsequently approve the same drug for the same condition if the FDA concludes that the later drug is clinically superior in that it is shown to be safer, more effective or makes a major contribution to patient care.

If we do not comply with federal and state healthcare laws, including fraud and abuse and health information privacy and security laws, we could face substantial penalties and our business, results of operations, financial condition and prospects could be adversely affected.

As a pharmaceutical company, even though we do not and will not control referrals of healthcare services or bill directly to Medicare, Medicaid or other third-party payors, certain federal and state healthcare laws and regulations pertaining to fraud and abuse and patients’ rights are applicable to our business. We could be subject to healthcare fraud and abuse and patient privacy regulation by both the federal government and the states in which we conduct our business. The laws that may affect our ability to operate include:

• the federal Anti-Kickback Statute, which constrains our marketing practices, educational programs, pricing policies, and relationships with healthcare providers or other entities, by prohibiting, among other things, soliciting, receiving, offering or paying remuneration, directly or indirectly, to induce, or in return for, the purchase or recommendation of an item or service reimbursable under a federal healthcare program, such as the Medicare and Medicaid programs;

• federal civil and criminal false claims laws and civil monetary penalty laws, which prohibit, among other things, individuals or entities from knowingly presenting, or causing to be presented, claims for payment from Medicare, Medicaid, or other third-party payors that are false or fraudulent, and which may apply to entities like us which provide coding and billing advice to customers;

• the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, and its implementing regulations, which prohibit executing a scheme to defraud any healthcare benefit program or making false statements relating to healthcare matters;

• HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act, and its implementing regulations, which impose certain requirements relating to the privacy, security and transmission of individually identifiable health information;

• federal “sunshine” requirements that require drug manufacturers to report and disclose any “transfer of value” made or distributed to physicians and teaching hospitals, and any investment or ownership interests held by such physicians and their immediate family members. The period between August 1, 2013 and December 31, 2013 was the first reporting period, and manufacturers were required to report aggregate payment data by March 31, 2014, and will be required to report detailed payment data and submit legal attestation to the accuracy of such data during Phase 2 of the program (which began in May 2014 and extends for at least 30 days). Thereafter, manufacturers must submit reports by the 90th day of each subsequent calendar year; and

• state law equivalents of each of the above federal laws, such as anti-kickback and false claims laws which may apply to items or services reimbursed by any third-party payor, including commercial insurers, and state laws governing the privacy and security of health information in certain circumstances, many of which differ from each other in significant ways and often are not preempted by HIPAA, thus complicating compliance efforts.

Because of the breadth of these laws and the narrowness of the statutory exceptions and safe harbors available under the U.S. federal Anti-Kickback Statute, it is possible that some of our business activities could be subject to challenge under one or more of such laws. In addition, recent health care reform legislation has strengthened these laws. For example, the PPACA, among other things, amends the intent requirement of the federal anti-kickback and criminal healthcare fraud statutes. A person or entity no longer needs to have actual knowledge of this statute or specific intent to violate it. Moreover, the PPACA provides that the government may assert that a claim including items or services resulting from a violation of the federal anti-kickback statute constitutes a false or fraudulent claim for purposes of the False Claims Act.

In addition, there has been a recent trend of increased federal and state regulation of payments made to physicians, including the tracking and reporting of gifts, compensation and other remuneration to physicians. Certain states mandate implementation of commercial compliance programs to ensure compliance with these laws and impose restrictions on drug manufacturer marketing practices and tracking and reporting of gifts, compensation and other remuneration to physicians. The shifting commercial compliance environment and the need to build and maintain robust and expandable systems to comply with multiple jurisdictions with different compliance and/or reporting requirements increases the possibility that a healthcare company may be found out of compliance of one or more of the requirements.

To the extent that any product we make is sold in a foreign country, we may be subject to similar foreign laws and regulations. If we or our operations are found to be in violation of any of the laws described above or any other governmental regulations that apply to us, we may be subject to penalties, including civil and criminal penalties, damages, fines, exclusion

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from participation in U.S. federal or state health care programs, and the curtailment or restructuring of our operations. Any penalties, damages, fines, curtailment or restructuring of our operations could materially adversely affect our ability to operate our business and our financial results. Although compliance programs can mitigate the risk of investigation and prosecution for violations of these laws, the risks cannot be entirely eliminated. Any action against us for violation of these laws, even if we successfully defend against it, could cause us to incur significant legal expenses and divert our management's attention from the operation of our business. Moreover, achieving and sustaining compliance with applicable federal and state privacy, security and fraud laws may prove costly.

Risks Related to Intellectual Property

Our success depends in part on our ability to protect our intellectual property. It is difficult and costly to protect our proprietary rights and technology, and we may not be able to ensure their protection.

Our commercial success depends in large part on obtaining and maintaining patent, trademark and trade secret protection of our product, Zohydro ER, our current product candidates, including Relday and Brabafen, and any future product candidates, their respective components, formulations, methods used to manufacture them and methods of treatment, as well as successfully defending these patents against third-party challenges. Our ability to stop unauthorized third parties from making, using, selling, offering to sell or importing Zohydro ER or our product candidates is dependent upon the extent to which we have rights under valid and enforceable patents or trade secrets that cover these activities.

We in-license certain intellectual property for Zohydro ER from Daravita, and certain intellectual property for Relday from Durect. We rely on these licensors to file and prosecute patent applications and maintain patents and otherwise protect certain of the intellectual property we license from them. We have not had and do not have primary control over these activities or any other intellectual property that may be related to our in-licensed intellectual property. For example, with respect to our license agreements with Daravita and Durect, we cannot be certain that such activities by Daravita and Durect have been or will be conducted in compliance with applicable laws and regulations or will result in valid and enforceable patents and other intellectual property rights. Daravita has retained the first right, but not the obligation, to initiate an infringement proceeding against a third-party infringer of the intellectual property rights that Daravita has licensed to us, and enforcement of our licensed patents or defense of any claims asserting the non-infringement, invalidity or unenforceability of these patents would also be subject to the control or cooperation of Daravita. Similarly, Durect has retained the first right, but not the obligation, to initiate an infringement proceeding against a third-party infringer of certain of the intellectual property rights that Durect has licensed to us, and enforcement of certain of our licensed patents or defense of any claims asserting the non-infringement, invalidity or unenforceability of these patents would also be subject to the control or cooperation of Durect. We are not entitled to control the manner in which Daravita or Durect may defend certain of the intellectual property that is licensed to us and it is possible that their defense activities may be less vigorous than had we conducted the defense ourselves. We also in-license certain data from a continuing, long-term, open-label study in 15 Dravet syndrome patients, as well as certain intellectual property related to fenfluramine for the treatment of Dravet syndrome from the Universities.

On August 13 and September 20, 2014, we received separate notices of paragraph IV certifications from Actavis and from Alvogen, respectively, advising us of the filing of ANDAs with the FDA for a generic version of Zohydro ER. These certification notices allege that the two U.S. patents listed in the FDA’s Orange Book for Zohydro ER, with an expiration date in November 2019, will not be infringed by Actavis' or Alvogen’s proposed products, are invalid and/or are unenforceable. On September 3, 2014, Daravita filed suit in the United States District Court for the District of Delaware against Actavis, and on November 3, 2014, Daravita filed suit in the United States District Court for the District of Delaware against Alvogen. Daravita has licensed rights to Zohydro ER to us, and, under the Zohydro ER license agreement, Daravita has the right to control the enforcement of patents and related proceedings involving Zohydro ER and any prospective generic entrant. We intend to vigorously enforce the intellectual property rights relating to Zohydro ER, but we cannot predict the outcome of these matters or guarantee the outcome of any litigation. An adverse outcome in this litigation could result in one or more generic versions of Zohydro ER being launched in the United States before the expiration of the applicable patents. Since Zohydro ER is currently our only approved product, the introduction of a generic version of Zohydro ER could have a material adverse effect on our business, results of operations, financial condition and prospects.

Most of our patents related to DosePro were acquired from Aradigm, who acquired those patents from a predecessor owner. Our patents related to Zohydro ER are licensed from Daravita, who acquired those patents from a predecessor owner. Thus, most of our patents, as well as many of our pending patent applications, were not written by us or our attorneys, or our licensor or licensors' attorneys, and neither we nor our licensors had control over the drafting and prosecution of these patents. Further, the former patent owners and our licensors might not have given the same attention to the drafting and prosecution of these patents and applications as we would have if we had been the owners of the patents and applications and had control over the drafting and prosecution. In addition, the former patent owners may not have been completely familiar with U.S. patent law,

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possibly resulting in inadequate disclosure and/or claims. This could possibly result in findings of invalidity or unenforceability of the patents we own and in-license, patents issuing with reduced claim scope, or in pending applications not issuing as patents.

In addition, as part of the agreement wherein we acquired patents related to DosePro from Aradigm, Aradigm retained, and we granted to Aradigm, a non-exclusive, worldwide, royalty free license to the acquired patents solely for purposes of the delivery of one or more aerosolized active pharmaceutical ingredients, or APIs, directly into the bronchia or lungs. The agreement with Aradigm also includes a covenant not to compete with us regarding technologies or products for the delivery of one or more APIs via needle free injection. That covenant expired on August 26, 2010, giving Aradigm or its licensees the right to develop and sell other needle-free injection technologies and products.

The patent positions of pharmaceutical, biopharmaceutical and medical device companies can be highly uncertain and involve complex legal and factual questions for which important legal principles remain unresolved. No consistent policy regarding the breadth of claims allowed in patents in these fields has emerged to date in the United States. There have been recent changes regarding how patent laws are interpreted, and both the U.S. Patent and Trademark Office, or PTO, and Congress have recently made significant changes to the patent system. There have been three U.S. Supreme Court decisions that now show a trend of the Supreme Court which is distinctly negative on patents. The trend of these decisions along with resulting changes in patentability requirements being implemented by the U.S. Patent and Trademark Office could make it increasingly difficult for us to obtain and maintain patents on our products. We cannot accurately predict future changes in the interpretation of patent laws or changes to patent laws which might be enacted into law. Those changes may materially affect our patents, our ability to obtain patents and/or the patents and applications of our collaborators and licensors. The patent situation in these fields outside the United States is even more uncertain. Changes in either the patent laws or in interpretations of patent laws in the United States and other countries may diminish the value of our intellectual property or narrow the scope of our patent protection. Accordingly, we cannot predict the breadth of claims that may be allowed or enforced in the patents we own or to which we have a license or third-party patents.

The degree of future protection for our proprietary rights is uncertain because legal means afford only limited protection and may not adequately protect our rights or permit us to gain or keep our competitive advantage. For example:

• others may be able to make or use compounds that are the same or similar to the pharmaceutical compounds used in Zohydro ER and our product candidates but that are not covered by the claims of our patents or our in-licensed patents;

• the APIs in Zohydro ER and Relday are, or will soon become, commercially available in generic drug products, and no patent protection will be available without regard to formulation or method of use;

• we or our licensors, as the case may be, may not be able to detect infringement against our in-licensed patents, which may be especially difficult for manufacturing processes or formulation patents;

• we or our licensors, as the case may be, might not have been the first to make the inventions covered by our owned or in-licensed issued patents or pending patent applications;

• we or our licensors, as the case may be, might not have been the first to file patent applications for these inventions;

• others may independently develop similar or alternative technologies or duplicate any of our technologies;

• it is possible that our pending patent applications will not result in issued patents;

• it is possible that our owned or in-licensed U.S. patents or patent applications are not Orange-Book eligible;

• it is possible that there are dominating patents to Zohydro ER or Relday of which we are not aware;

• it is possible that there are prior public disclosures that could invalidate our or our licensors' inventions, as the case may be, or parts of our or their inventions of which we or they are not aware;

• it is possible that others may circumvent our owned or in-licensed patents;

• it is possible that there are unpublished applications or patent applications maintained in secrecy that may later issue with claims covering our products or technology similar to ours;

• it is possible that the U.S. government may exercise any of its statutory rights to our owned or in-licensed patents or applications that were developed with government funding;

• the laws of foreign countries may not protect our or our licensors', as the case may be, proprietary rights to the same extent as the laws of the United States;

• the claims of our owned or in-licensed issued patents or patent applications, if and when issued, may not cover our system or products or our system or product candidates;

• our owned or in-licensed issued patents may not provide us with any competitive advantages, or may be narrowed in scope, be held invalid or unenforceable as a result of legal administrative challenges by third parties;

•we may not develop additional proprietary technologies for which we can obtain patent protection; or

•the patents of others may have an adverse effect on our business.

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We also may rely on trade secrets to protect our technology, especially where we do not believe patent protection is appropriate or obtainable. However, trade secrets are difficult to protect, and we have limited control over the protection of trade secrets used by our licensors, collaborators and suppliers. Although we use reasonable efforts to protect our trade secrets, our employees, consultants, contractors, outside scientific collaborators and other advisors may unintentionally or willfully disclose our information to competitors. Enforcing a claim that a third party illegally obtained and is using any of our trade secrets is expensive and time consuming, and the outcome is unpredictable. In addition, state laws in the Unites States vary, and their courts as well as courts outside the United States are sometimes less willing to protect trade secrets. Moreover, our competitors may independently develop equivalent knowledge, methods and know-how. If our confidential or proprietary information is divulged to or acquired by third parties, including our competitors, our competitive position in the marketplace will be harmed and our ability to successfully penetrate our target markets could be severely compromised.

If any of our owned or in-licensed patents are found to be invalid or unenforceable, or if we are otherwise unable to adequately protect our rights, it could have a material adverse impact on our business and our ability to commercialize or license our technology and products. Likewise, our patents covering certain technology used in our DosePro system are expected to expire on various dates from 2015 through 2026 and the patents and patent applications licensed to us by Daravita are expected to expire in 2019.

As of September 30, 2014, our patent portfolio included 23 issued U.S. patents, 4 pending U.S. patent applications, 43 issued foreign patents and 7 pending foreign patent applications relating to various aspects of Sumavel DosePro and our DosePro technology. Thirteen of our U.S. patents relating to our DosePro technology, U.S. Patent Nos. 5,957,886, 6,135,979, 7,776,007, 7,901,385, 8,267,903, 8,118,771, 8,241,243, 8,241,244, 8,287,489, 8,343,130, 8,663,158 and 8,715,259 are expected to expire in 2016, 2017, 2026, 2026, 2023, 2023, 2025, 2022, 2024, 2022, 2022 and 2023, respectively. U.S. Patent No. 5,957,886 claims a needleless injector system using a viscous damping medium; U.S. Patent No. 6,135,979 covers the needleless injector with particular safety mechanisms; U.S. Patent Nos. 7,776,007 and 8,287,489 cover systems with a cap and latch mechanism; U.S. Patent Nos. 7,901,385, 8,267,903 and 8,715,259 encompass various embodiments of the casing for enclosing the injection systems; U.S. Patent Nos. 8,118,771, 8,241,243 and 8,241,244 cover a method of reducing breakage of glass capsules; 8,491,524 and 8,663,158 relates to a drug capsule filled with a formulation purged with an inert gas; and 8,343,130 covers a method of reducing the propensity to create a shock wave on firing the system as used in the Sumavel DosePro system. U.S. Patent Nos. 6,902,742 and 6,228,398 relating to Zohydro ER covers a modified release composition containing hydrocodone and are expected to expire in November 2019. Upon the expiration of these patents, we or Daravita, as applicable, will lose the right to exclude others from practicing the claimed inventions. Additionally, eleven of these thirteen patents are the only patents currently listed in the FDA Orange Book for Sumavel DosePro. Two patents are listed for Zohydro ER. The expiration of the Orange Book listed patents will mean that we lose certain advantages that come with Orange Book listing of patents. The expiration of these patents could also have a similar material adverse effect on our business, results of operations, financial condition and prospects. Moreover, if Daravita or Durect decides not to commence or continue any action relating to the defense of the patents they have licensed to us, they are required to notify us and we have the right to initiate proceedings after receiving their notice. Such proceedings will require the assistance of Daravita or Durect, as applicable, and we have limited control over the amount or timing of resources Daravita or Durect devotes on our behalf or the priority they place on enforcing these patent rights.

If we fail to comply with our obligations in our intellectual property licenses with third parties, we could lose license rights that are important to our business.

Our existing licenses with Daravita, Durect and the Universities imposes various diligence, milestone payment, royalty, insurance and other obligations on us. If we fail to comply with these obligations, our licensors may have the right to terminate the license, in which event we would not be able to develop or market the affected products. If we lose such license rights, our business, results of operations, financial condition and prospects may be materially adversely affected. We may enter into additional licenses in the future and if we fail to comply with obligations under those agreements, we could suffer similar consequences.

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Risks Relating to the Securities Markets and an Investment in Our Stock

The market price of our common stock has fluctuated and is likely to continue to fluctuate substantially.

The market prices for securities of biotechnology and pharmaceutical companies have historically been highly volatile, and the market has recently experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies. Since the commencement of trading in connection with our initial public offering in November 2010, the publicly traded shares of our common stock have themselves experienced significant price and volume fluctuations. During the nine months ended September 30, 2014, the price per share for our common stock on the Nasdaq Global Market has ranged from a low sale price of $1.14 to a high sale price of $5.19. This market volatility is likely to continue. These and other factors could reduce the market price of our common stock, regardless of our operating performance. In addition, the trading price of our common stock could change significantly, both over short periods of time and the longer term, due to many factors, including those described elsewhere in this “Risk Factors” section and the following:

• announcements concerning our commercial progress in promoting and selling Zohydro ER, including sales and revenue trends;

• announcements concerning our sNDA for the formulation of Zohydro ER with abuse deterrent properties;

• FDA or international regulatory actions and whether and when we receive regulatory approval for any of our product candidates;

• negative publicity, including political actions and, potentially, court decisions, related to Zohydro ER;

• announcements of the introduction of new products by us or our competitors, including abuse deterrent formulations of hydrocodone products;

• the development status of Relday, Brabafen or any of our other product candidates, including the results from our clinical trials;

• announcements concerning product development results or intellectual property rights of others;

• announcements relating to litigation, intellectual property or our business, and the public's response to press releases or other public announcements by us or third parties;

• variations in the level of expenses related to Relday, Brabafen or any of our other product candidates or clinical development programs, including relating to the timing of invoices from, and other billing practices of, our CROs and clinical trial sites;

• market conditions or trends in the pharmaceutical sector or the economy as a whole;

• changes in operating performance and stock market valuations of other pharmaceutical companies and price and volume fluctuations in the overall stock market;

• litigation or public concern about the safety of Zohydro ER or our product candidates;

• actual and anticipated fluctuations in our quarterly operating results;

• the financial projections we may provide to the public, any changes in these projections or our inability to meet these projections;

• deviations from securities analysts' estimates or the impact of other analyst comments;

• ratings downgrades by any securities analysts who follow our common stock;

• additions or departures of key personnel;

• third-party payor coverage and reimbursement policies;

• developments concerning current or future strategic collaborations, and the timing of payments we may make or receive under these arrangements;

• developments affecting our contract manufacturers, component fabricators and service providers;

• the development and sustainability of an active trading market for our common stock;

• future sales of our common stock by our officers, directors and significant stockholders;

• other events or factors, including those resulting from war, incidents of terrorism, natural disasters, security breaches, system failures or responses to these events;

• changes in accounting principles; and

• discussion of us or our stock price by the financial and scientific press and in online investor communities.

In addition, the stock markets, and in particular the Nasdaq Global Market, have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many pharmaceutical companies. Stock prices of many pharmaceutical companies have fluctuated in a manner unrelated or disproportionate to the operating performance of those companies. The realization of any of the above risks or any of a broad range of other risks, including those described in these “Risk Factors” could have a dramatic and material adverse impact on the market price of our common stock.

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If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, our stock price and trading volume could decline.

The trading market for our common stock will depend in part on the research and reports that securities or industry analysts publish about us or our business. As of September 30, 2014, we had research coverage by only five securities analysts. If these securities analysts cease coverage of our company, the trading price for our stock would be negatively impacted. If one or more of the analysts who covers us downgrades our stock or publishes inaccurate or unfavorable research about our business, our stock price would likely decline. If one or more of these analysts ceases coverage of us or fails to publish reports on us regularly, demand for our stock could decrease, which could cause our stock price and trading volume to decline.

Future sales of our common stock or securities convertible or exchangeable for our common stock may depress our stock price.

Persons who were our stockholders prior to the sale of shares in our initial public offering in November 2010 continue to hold a substantial number of shares of our common stock that they are able to sell in the public market, subject in some cases to certain legal restrictions. Significant portions of these shares are held by a small number of stockholders. If these stockholders sell, or indicate an intention to sell, substantial amounts of our common stock in the public market, the trading price of our common stock could decline. The perception in the market that these sales may occur could also cause the trading price of our common stock to decline. As of September 30, 2014, we had 141,044,864 shares of common stock outstanding. Of these shares, approximately 102,907,400 are freely tradeable, without restriction, in the public market.

In addition, shares of common stock that are either subject to outstanding options or reserved for future issuance under our employee benefit plans are eligible for sale in the public market to the extent permitted by the provisions of various vesting schedules and Rule 144 and Rule 701 under the Securities Act of 1933, as amended, or the Securities Act, and, in any event, we have filed a registration statement permitting shares of common stock issued on exercise of options to be freely sold in the public market. If these additional shares of common stock are sold, or if it is perceived that they will be sold, in the public market, the trading price of our common stock could decline.

We have registered under the Securities Act 15,784,200 shares of our common stock issuable upon the exercise of the warrants we issued in July 2012, which warrants became exercisable on July 27, 2013 at an exercise price of $2.50 per share (subject to restrictions on exercise set forth in such warrants). As of September 30, 2014, warrants were still outstanding to exercise 15,215,450 shares of this registered common stock, which means that upon exercise of warrants, such shares will be freely tradeable without restriction under the Securities Act, except for shares held by our affiliates. Further, certain holders of shares of our common stock are entitled to rights with respect to the registration of their shares under the Securities Act, which, if registered, would also become freely tradeable without restriction under the Securities Act, except for shares held by our affiliates. In addition, our directors and executive officers may establish programmed selling plans under Rule 10b5-1 of the Securities Exchange Act of 1934, as amended, or the Exchange Act, for the purpose of effecting sales of our common stock. Any sales of securities by these stockholders, warrantholders or executive officers and directors, or the perception that those sales may occur, could have a material adverse effect on the trading price of our common stock.

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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Unregistered Sales of Equity Securities

Not applicable.

Use of Proceeds

Not applicable.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

Alvogen Paragraph IV Litigation

On Novemer 3, 2014, Daravita filed suit in the United States District Court for the District of Delaware against Alvogen. Daravita has licensed rights to Zohydro ER to us. Under the license agreement with Daravita, Daravita has the right to control the enforcement of patents and related proceedings involving Zohydro ER and any prospective generic entrant.

As previously reported, on September 29, 2014, we received a notice from Alvogen concerning its filing of an ANDA containing a “Paragraph IV” patent certification with the FDA for a generic version of Zohydro ER. The FDA will determine whether Alvogen may be eligible for the 180-day exclusivity period described in 21 U.S.C. § 355(j)(5)(B)(iv).

The lawsuit filed by Daravita alleges that Alvogen has infringed U.S. Patent Nos. 6,228,398, or the ’398 patent, and 6,902,742, or the ’742 patent, by filing its ANDA seeking approval from the FDA to market a generic version of Zohydro ER prior to the expiration of these patents. The ’398 patent and ’742 patent are listed in the FDA’s Orange Book. The patent infringement lawsuit was filed within 45 days of receipt of the notice letter, thereby triggering a stay of FDA approval of the Alvogen ANDA until the earlier of the expiration of a 30-month period, the expiration of the ’398 patent and ’742 patent, the entry of a settlement order or consent decree stating that the ’398 patent and ’742 patent are invalid or not infringed, a decision in the infringement case that is favorable to Alvogen, or such shorter or longer period as the court may order.

Regardless of the outcome of any litigation, no ANDA can receive final approval from the FDA before expiration of the regulatory exclusivity period for Zohydro ER. Specifically, the FDA has granted Zohydro ER three years of regulatory exclusivity, which expires in October 2016.

We and Daravita intend to vigorously enforce the intellectual property rights relating to Zohydro ER to prevent the marketing of infringing generic products prior to the expiration of their patents. The ’398 patent and the ’742 patent each expire November 1, 2019. However, given the unpredictability inherent in litigation, we cannot predict the outcome of this matter or guarantee the outcome of any litigation.

Teva Letter Agreement

On November 5, 2014, we entered into a letter agreement with Teva Pharmaceuticals USA, Inc., or Teva, under which we granted Teva a right of reference to certain carcinogenicity data generated by us for hydrocodone bitrate for use in connection with Teva’s NDA for its extended-release hydrocodone product candidate. Teva is obligated to pay us a one-time fee of $3.5 million within 30 days of the date of the letter agreement. The foregoing description of the letter agreement is not complete and is qualified in its entirety by reference to the letter agreement. We expect to file the letter agreement with our Annual Report on Form 10-K for the year ended December 31, 2014.

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Cantor Controlled Equity Offering Sales Agreement

On November 6, 2014, we entered into a Controlled Equity Offering Sales Agreement, or the Sales Agreement, with Cantor Fitzgerald & Co., as sales agent, or Cantor, under which we may, from time to time, sell shares of our common stock having an aggregate offering price of up to $25.0 million through Cantor.

Upon delivery of a placement notice and subject to the terms and conditions of the Sales Agreement, Cantor may sell the shares by methods deemed to be an “at-the-market” offering as defined in Rule 415 promulgated under the Securities Act, including sales made directly on the Nasdaq Global Market, on any other existing trading market for the common stock or to or through a market maker. In addition, Cantor may sell the common stock by any other method permitted by law, including in privately negotiated transactions. Subject to the terms and conditions of the Sales Agreement, Cantor will use commercially reasonable efforts, consistent with its normal trading and sales practices and applicable state and federal laws, rules and regulations and the rules of the Nasdaq Global Market, to sell the shares from time to time, based upon our instructions. Sales of our common stock made pursuant to the controlled equity offering program, if any, will be made under our shelf registration statement on Form S-3 filed on November 6, 2014, following such time as the registration statement is declared effective by the SEC. However, such registration statement cannot be declared effective until such time as we have filed certain financial statements from our recent acquisition of Brabant as required by SEC rules, which must be filed within 71 days of the date of our Current Report on Form 8-K filed with the SEC on October 27, 2014.

We are not obligated to, and we cannot provide any assurances that we will, make any sales of the shares under the Sales Agreement. The Sales Agreement will terminate upon the earlier of the termination of the Sales Agreement as permitted therein. The Sales Agreement may be terminated by Cantor or us at any time upon 10 days notice to the other party, or by Cantor at any time in certain circumstances, including the occurrence of a material adverse change in us.

We will pay Cantor commissions for its services in acting as agent in the sale of common stock. Cantor will be a commission in an amount equal to 3% of the gross sales price per share sold up to aggregate gross proceeds of $12.5 million, and 2.5% of the gross sales price per share sold on aggregate gross proceeds above $12.5 million.

The foregoing description of the Sales Agreement is not complete and is qualified in its entirety by reference to the Sales Agreement, a copy of which is filed as Exhibit 1.2 to our Registration Statement on Form S-3 filed on November 6, 2014 with the SEC and is incorporated herein by reference.

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Item 6. Exhibits

EXHIBIT INDEX

Exhibit Number	Description
3.1(2)	Fifth Amended and Restated Certificate of Incorporation of the Registrant
3.2(5)	Certificate of Amendment of Fifth Amended and Restated Certificate of Incorporation of the Registrant
3.3(2)	Amended and Restated Bylaws of the Registrant
4.1(3)	Form of the Registrant’s Common Stock Certificate
4.2(1)	Third Amended and Restated Investors’ Rights Agreement dated December 2, 2009
4.3(1)	Amendment to Third Amended and Restated Investors’ Rights Agreement dated as of July 1, 2010
4.4(4)	Second Amendment to Third Amended and Restated Investors’ Rights Agreement dated June 30, 2011
4.5(1)	Warrant dated March 5, 2007 issued by the Registrant to General Electric Capital Corporation
4.6(1)	Warrant dated June 30, 2008 issued by the Registrant to Oxford Finance Corporation
4.7(1)	Warrant dated June 30, 2008 issued by the Registrant to CIT Healthcare LLC (subsequently transferred to The CIT Group/Equity Investments, Inc.)
4.8(1)	Transfer of Warrant dated March 24, 2009 from CIT Healthcare LLC to The CIT Group/Equity Investments, Inc.
4.9(1)	Warrant dated July 1, 2010 issued by the Registrant to Oxford Finance Corporation
4.10(1)	Warrant dated July 1, 2010 issued by the Registrant to Silicon Valley Bank
4.11(4)	Warrant dated June 30, 2011 issued by the Registrant to Oxford Finance LLC
4.12(4)	Warrant dated June 30, 2011 issued by the Registrant to Silicon Valley Bank
4.13(4)	Warrant dated July 18, 2011 issued by the Registrant to Healthcare Royalty Partners (formerly Cowen Healthcare Royalty Partners II, L.P.)
10.1†	Third Amendment to License Agreement, dated as of September 12, 2014, by and between the Registrant and Daravita Limited
10.2†	First Amendment to Commercial Manufacturing and Supply Agreement, dated as of September 12, 2014, by and between the Registrant and Daravita Limited

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10.3†	Amendment No. 2 - Development & Option Agreement, dated as of September 15, 2014, by and between the Registrant and Altus Formulation, Inc.
10.4†	Waiver Agreement between the Registrant and Purdue Pharma L.P. dated October 29, 2014
10.5†	Collaboration and License Agreement, dated as of October 23, 2014, amount The Katholieke Universiteit Leuven, University Hospital Antwerp and Brabant Pharma Limited
10.6	Office Lease, dated as of August 5, 2014, by and between the Registrant and Kilroy Realty, L.P.
10.7(6)	Sale and Purchase Agreement, dated October 24, 2014, by and among Zogenix Inc. Europe, Zogenix Inc., Brabant Pharma Limited and Anthony Clarke, Richard Stewart, Ann Soenen-Darcis, Jennifer Watson, Reyker Nominees Limited and Aquarius Life Science Limited
10.8(7)	Sales Agreement, dated November 6, 2014, by and between the Registrant and Cantor Fitzgerald & Co.
31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Public Company Accounting Reform and Investor Protection Act of 2002 (18 U.S.C. §1350, as adopted)
31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Public Company Accounting Reform and Investor Protection Act of 2002 (18 U.S.C. §1350, as adopted)
32.1*	Certification of Chief Executive Officer pursuant to Section 906 of the Public Company Accounting Reform and Investor Protection Act of 2002 (18 U.S.C. §1350, as adopted)
32.2*	Certification of Chief Financial Officer pursuant to Section 906 of the Public Company Accounting Reform and Investor Protection Act of 2002 (18 U.S.C. §1350, as adopted)
101	The following financial statements from the Registrant’s Quarterly Report on form 10-Q for the period ended September 30, 2014, formatted in XBRL: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations and Comprehensive Income (Loss), (iii) Consolidated Statements of Cash Flows, and (iv) the Notes to Consolidated Financial Statements.

(1) Filed with the Registrant’s Registration Statement on Form S-1 on September 3, 2010.

(2) Filed with Amendment No. 2 to Registrant’s Registration Statement on Form S-1 on October 27, 2010.

(3) Filed with Amendment No. 3 to the Registrant’s Registration Statement on Form S-1 on November 4, 2010.

(4) Filed with the Registrant’s Quarterly Report on Form 10-Q on August 11, 2011.

(5) Filed with the Registrant's Quarterly Report on Form 10-Q on November 8, 2012.

(6) Filed with the Registrant's Current Report on Form 8-K on October 27, 2014.

(7) Filed with the Registrant's Registration Statement on Form S-3 on November 6, 2014.

† Confidential treatment has been requested for portions of this exhibit. These portions have been omitted and filed separately with the Securities and Exchange Commission

* These certifications are being furnished solely to accompany this quarterly report pursuant to 18 U.S.C. Section 1350, and are not being filed for purposes of Section 18 of the Securities Exchange Act of 1934 and are not subject to the liability of that section. These certifications are not to be incorporated by reference into any filing of Zogenix, Inc., whether made before or after the date hereof, regardless of any general incorporation language in such filing.

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SIGNATURES

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

			ZOGENIX, INC.
Date:	11/6/2014	By:	/s/ Roger L. Hawley
			Chief Executive Officer
			(Principal Executive Officer)
Date:	11/6/2014	By:	/s/ Ann D. Rhoads
			Executive Vice President, Chief Financial Officer, Treasurer and Secretary
			(Principal Financial and Accounting Officer)

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EX-10.1

Exhibit 10.1

CERTAIN MATERIAL (INDICATED BY AN ASTERISK) HAS BEEN OMITTED FROM THIS DOCUMENT PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT. THE OMITTED MATERIAL HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.

THIRD AMENDMENT TO LICENSE AGREEMENT

This Third Amendment to the License Agreement (as defined below) (the "Third Amendment") is made and entered into as of the 12th day of September 2014 (“Third Amendment Effective Date”).

BETWEEN:

(1)    Alkermes Science OneLimited, a company incorporated under the laws of Ireland, having its registered office at Connaught House, 1 Burlington Road, Dublin 4, Ireland, which has changed its name to Daravita Limited (“Daravita”); AND

(2)    Zogenix, Inc., a Delaware corporation, having its principal place of business at 12400 High Bluff Drive, Ste. 650, San Diego, California, USA 92130 (“Zogenix”).

RECITALS:

WHEREAS, Elan Pharma International Limited (“EPIL”) and Zogenix entered into a license agreement on November 27, 2007, which was amended pursuant to the First Amendment to License Agreement dated September 28, 2009 and the Second Amendment to License Agreement dated March 12, 2013 (“License Agreement”), wherein EPIL granted Zogenix a license under Elan Intellectual Property to import, use, offer for sale and sell the Product (as defined in the License Agreement) in the Field (as defined in the License Agreement) in the Territory (as defined in the License Agreement), and, in certain limited circumstances, to make or have made Product in the Field in the Territory, in each case on the terms and conditions set forth in the License Agreement (capitalized terms used in this Third Amendment but not defined herein shall have the meaning set forth in the License Agreement);

WHEREAS, on August 2, 2011, EPIL assigned all of its rights and obligations to the License Agreement to EDT Pharma Holdings Limited, which has subsequently changed its name to Alkermes Pharma Ireland Limited (“APIL”); and

WHEREAS, on May 8, 2014, pursuant to Clause 16.3.1 of the License Agreement, APIL assigned all of its rights and obligations to the License Agreement to its Affiliate, Daravita;

WHEREAS, Zogenix and Daravita desire to amend the License Agreement as set forth herein, subject to the terms and conditions set forth herein.

NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Daravita and Zogenix hereby agree as follows:

1. Amendments. As of the Third Amendment Effective Date, Daravita and Zogenix hereby amend the following sections of the License Agreement:

1

1.1. The following definitions are as set forth below (and to the extent previously defined in the License Agreement, shall supersede such previous definitions):

“ “Altus” means Altus Formulation Inc., and its successors, assigns or transferees under the Altus Agreement.”

“ “Altus Agreement” means (a) as of the Third Amendment Effective Date, the Development and Option Agreement dated November 1, 2013 between Altus and Zogenix, as amended or supplemented pursuant to the terms thereof (the “D&O Agreement”), and (b) following the exercise by Zogenix of the Option under the D&O Agreement, includes the License Agreement (as defined in the D&O Agreement), as amended or supplemented pursuant to the terms thereof (the “Altus License Agreement”).”

“ “Altus Know-How” means scientific, pharmaceutical or technical information, data, discovery, invention (whether patentable or not), know-how, show-how, substances, techniques, processes, systems, formulations, designs and expertise which is not generally known to the public and not included in the Altus Patents that Altus owns, licenses or controls during the Option Period (as defined in the D&O Agreement) and/or throughout the term of the Altus License Agreement that is necessary or useful for the development, manufacture or commercialization of the Altus Product. It is expressly acknowledged by the Parties that Altus Know-How shall not include (i) Zogenix Patents or Zogenix Know-How or (ii) Elan Patents or Elan Know-How.”

“ Altus Patents” means all Patents that Altus owns, licenses or controls during the Option Period (as defined in the D&O Agreement) and/or throughout the term of the Altus License Agreement that claim or cover the development, manufacture or commercialization of the Altus Product. For the avoidance of doubt, Altus Patents do not include (a) the Elan Patents or other patent rights granted to Zogenix by Elan or its Affiliates under this Agreement or any Related Agreement or (b) the Zogenix Patents.”

“ “Altus Product” means Licensed Product (as defined in the Altus Agreement).”

“ “Altus Product NSP” means the total Net Sales of the Altus Product for a given strength of the Altus Product divided by the number of units of such Altus Product sold for the given period.”

“ "Altus Product Regulatory Approval" means the final approval to market the Altus Product in the Territory, including any approval which is required to launch the Altus Product in the normal course of business.”

“ “Competitive Product” means [***].”

***Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions.

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“ “Elan Know-How” means any and all rights owned, licensed or controlled by Elan as of the Effective Date or during the Term to any scientific, pharmaceutical or technical information, data, discovery, invention (whether patentable or not), know-how, show-how, substances, techniques, processes, systems, formulations, designs and expertise which is not generally known to the public and is exclusively related to (a) the Product and/or the Altus Product or (b) the manufacturing processes used in making the Product and/or the Altus Product. It is expressly acknowledged by the Parties that Elan Know-How shall not include (i) Zogenix Patents or Zogenix Know-How or (ii) Altus Patents or Altus Know-How.”

“ “[***]” means [***].”

“ “In Market” means the sale of the Product or the Altus Product, as applicable, in the Territory by Zogenix, a Zogenix Affiliate or, where applicable, by a permitted sublicensee or subcontractor, to an unaffiliated Third Party, such as a wholesaler, distributor, managed care organisation, hospital or pharmacy which effects the final commercial sale to the end-user consumer of the Product or the Altus Product, as the case may be, and shall exclude (a) the transfer of the Product or the Altus Product by one Zogenix Affiliate to another Zogenix Affiliate or a permitted sublicensee or subcontractor, (b) the transfer of the Product in connection with the R&D Program or other clinical studies conducted by or on behalf of Zogenix, a Zogenix Affiliate or permitted sublicensee, or (c) the transfer of the Altus Product in connection with clinical studies conducted by or on behalf of Zogenix, a Zogenix Affiliate or permitted sublicensee.”

“ "Net Sales" means, subject to the provisions of Clause 10.4, the aggregate gross In Market sales amounts billed in accordance with Zogenix's standard accounting principles that are in accordance with US GAAP, calculated separately on a Product and Altus Product basis, less the following deductions determined in accordance with Zogenix's standard accounting principles that are in accordance with US GAAP, with such deductions made separately on a Product and Altus Product basis:

[***]”

“ “Notional Altus Product NSP” means the estimated Altus Product NSP of a given strength of the Altus Product at the applicable time, which shall be provided by Zogenix to Elan, if the Parties have executed an Altus Product Supply Agreement, within [***] prior to commencement of [***] (or, for the launch year of the Altus Product, within [***] prior to the [***]). “

“ “Option” means the option set forth in Section 2.2 of the D&O Agreement.”

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“ “Product” means the oral controlled release capsule or tablet formulation(s) incorporating Elan Intellectual Property and/or the technology of the Elan Oral Controlled Release Patents and Compound where Compound is the sole active ingredient in the formulation. Notwithstanding the foregoing, the Altus Product is not a Product and the Product is not an Altus Product.”

“ “[***]” means [***].”

“ “Zogenix Know-How” means any and all rights owned, licensed or controlled by Zogenix as of the Effective Date or during the Term to any scientific, pharmaceutical or technical information, data, discovery, invention (whether patentable or not), know-how, show-how, substances, techniques, processes, systems, formulations, designs and expertise which is not generally known to the public and is not exclusively related to (a) the Product, (b) the manufacturing processes used in making the Product, (c) Elan Oral Controlled Release Patents or (d) Altus Patents. It is expressly acknowledged by the Parties that Zogenix Know-How shall not include (i) Elan Patents, Elan Know-How or any other license or other rights granted to Zogenix by Elan or its Affiliates under this Agreement or any Related Agreement or (ii) Altus Patents or Altus Know-How.”

“ "Zogenix Patents" means any Patents owned, licensed or controlled by Zogenix as of the Effective Date or during the Term claiming subject matter that is related to the sale or offer for sale of the Compound within the Field or methods of use of the Compound within the Field or packaging of the Product and/or the Altus Product. For the avoidance of doubt, Zogenix Patents do not include (a) the Elan Patents or other patent rights granted to Zogenix by Elan or its Affiliates under this Agreement or any Related Agreement or (b) the Altus Patents. As of the Effective Date, there are no Zogenix Patents.”

1.2. Clause 2.1, by adding the third and fourth sentences set forth below:

“Subject to the terms of this Agreement, Elan hereby grants to Zogenix for the Term (i) an exclusive license to the Elan Know-How to develop, manufacture, use, offer for sale, sell and import the Altus Product in the Field in the Territory, (ii) a non-exclusive license to the Elan Know-How to develop the Altus Product in Canada for manufacture, use, offer for sale, sale and import in the Field in the Territory, and (iii) a non-exclusive license to [***]. This license shall terminate if Zogenix does not exercise the Option under the D&O Agreement or upon the termination of the Altus Agreement. If at any time the license of the [***] for [***] granted by [***], then [***]. For the avoidance of doubt, the license granted pursuant to this Clause 2.1 does not include any right to practice and use the Elan Know-How, [***] outside the parameters explicitly set forth in

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this license grant. In addition, Zogenix agrees that it will amend the Altus Agreement to obligate Altus to use commercially reasonable efforts to negotiate with [***] a license under the Altus Know-How and Altus Patents for the Altus Product in [***] to use commercially reasonable efforts to negotiate such a license with Altus. For clarity, if either Altus or [***] fails to agree to use such commercially reasonable efforts, then the other shall have no obligation to do so.”

1.3. The lead-in of Clause 2.2 as set forth below:

“Sublicensing. Zogenix shall be entitled to grant sublicenses in respect of its rights to the Elan Intellectual Property granted pursuant to Clause 2.1. Sublicenses with respect to Product shall be subject to the conditions set forth in Clauses 2.2.1 and 2.2.2 below. Any sublicense to Altus or other sublicensee with respect to only the Altus Product shall be subject to the conditions set forth in Clause 2.2.2, other than the limitation set forth in Clause 2.2.2.4.1 on granting a sub-sublicense with respect to the Altus Product. Any sub-sublicense with respect to only the Altus Product shall be subject only to the following conditions: (a) Altus or any other sublicensee shall enter into a written agreement with each Altus Product sub-sublicensee which is consistent with the terms of this Agreement insofar as they are applicable, mutatis mutandis (with Altus or such sublicensee permitted to grant a sub-sublicense with respect to the Altus Product), and which contains terms that are no less restrictive than those contained in this Agreement on audit, inspection, and confidentiality; and (b) Altus or any other sublicensee shall ensure that Elan Confidential Information is only disclosed to permitted Altus Product sub-sublicensees to the extent that each such sub-sublicensee needs it to fulfil obligations and exercise rights under its sub-sublicense agreement.”

1.4. Clause 2.3 as set forth below:

“Elan Covenant. Elan covenants for itself and its Affiliates not to assert any claim of Patent infringement (including direct infringement, contributory infringement and inducing infringement) in the Territory against Zogenix, any Affiliate of Zogenix or any permitted sublicensee under [***] as a result of Zogenix, any Affiliate of Zogenix, or any permitted sublicensee exercising the rights granted to Zogenix under this Agreement or any Related Agreement or under the D&O Agreement (as it exists on the Third Amendment Effective Date), for so long as (i) Zogenix and its Affiliates, sublicensees and subcontractors are not in material breach of this Agreement or any Related Agreements and/or (ii) this Agreement has not been terminated.

In addition, Elan covenants for itself and its Affiliates not to enter into an agreement granting rights to a Third Party that would enable said Third Party to assert any claim of Patent infringement (including direct

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infringement, contributory infringement and inducing infringement) in the Territory under [***] against Zogenix, any Affiliate of Zogenix, or any permitted sublicense as a result of Zogenix, any Affiliate of Zogenix or any permitted sublicensee exercising the rights granted to Zogenix under this Agreement or any Related Agreement or under the D&O Agreement (as it exists on the Third Amendment Effective Date), for so long as (i) Zogenix and its Affiliates, sublicensees and subcontractors are not in material breach of this Agreement or any Related Agreements and/or (ii) this Agreement has not been terminated. “

1.5. Clause 3.3.2.1 as set forth below:

“Subject to Clause 3.3.3, Elan shall have the first right to enforce Elan Patents or Elan Know-How against Third Parties (other than the Elan Know-How with respect to the Altus Product) Elan shall keep Zogenix reasonably informed of and shall not settle any administrative proceedings or litigation relating to Elan Patents or such Elan Know-How (the "Proceedings") in a manner which would materially adversely affect the rights licensed to Zogenix under this Agreement without the prior consent of Zogenix, not to be unreasonably withheld, conditioned or delayed.”

1.6. Clause 3.6.2.1 as set forth below:

“At Elan’s request, Zogenix shall prominently display the Elan Trademark on the packaging and labelling of the Product and on promotional materials in relation to the Product to acknowledge that the Elan Intellectual Property has been applied in developing and manufacturing the Product; provided, however, on and after the Third Amendment Effective Date, at Elan’s request, Zogenix shall use Commercially Reasonable Efforts to remove, to the extent permitted by law, the Elan Trademark from the packaging and labelling of the Product and from promotional materials in relation to the Product, taking into account Zogenix’s inventory of such packaging, labelling and promotional materials as of the Third Amendment Effective Date.”

1.7. Clause 4.1 as set forth below:

“Zogenix Obligation. Zogenix shall not, and shall ensure that its Affiliates and permitted sublicensees do not license (except by way of settlement Proceedings in accordance with Clause 3.3.2.2), market or sell any oral prescription only controlled release capsule or tablet formulation (other than the Product or the Altus Product) whose sole active ingredient is the Compound in the Territory for use in the Field during the Term. “

1.8. Clause 6.6 as set forth below:

“Access.

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6.6.1    Upon Elan's prior written notice, Zogenix shall permit Elan to have access to and use of all Regulatory Applications, Regulatory Approvals, all supplements and related filings related thereto and all clinical trial data relating to the Product and to take photocopies of same as may be required by Elan (i) to fulfill reporting requirements or as otherwise may reasonably be required by Elan in connection with this Agreement, and/or (ii) to support the registration, marketing and/or manufacture of the Product for sale outside the Territory. Zogenix shall also permit Elan to have access to and use of the Elan IND, all other INDs that may be filed in relation to the Product during the Term, and all pre-clinical data (including all carcinogenicity data created by or on behalf of Zogenix during the Term) relating to the Product for use in the development and commercialization of other products (other than the Altus Product) both within and outside the Territory. For the avoidance of doubt, Elan's exclusive right to use clinical trial data relating to the Product generated by or on behalf of Zogenix is as set forth in the first sentence of this Clause 6.6.1 and in Clauses 3.2.3, 15.11 and 13.2.4.

6.6.2    During the period from the Third Amendment Effective Date through the earlier of (a) the lapse of the Option under the D&O Agreement without the exercise thereof by Zogenix, or (b) following the exercise of the Option under the D&O Agreement, the expiration or termination of the Altus Agreement, but only during the period during which [***] or the [***] have rights to the Altus Product under the [***], upon Elan's prior written notice, Zogenix shall permit Elan (or, at Elan’s request, [***] or the [***]) to have access to and use of (including taking photocopies of) all INDs relating to the Altus Product, regulatory applications for the Altus Product in the Territory, Altus Product Regulatory Approvals (including all supplements and related filings related thereto), all Development Results (as defined in the D&O Agreement), and all other clinical trial data and pre-clinical data relating to the Altus Product (but only if such clinical trial data and pre-clinical data is owned, licensed or controlled by Zogenix during the Term), in each case which would reasonably be required to support the development and registration of the Altus Product in [***] or the [***]. For the avoidance of doubt, Elan's (or [***] or the [***]) right to use such INDs, regulatory applications, Altus Product Regulatory Approvals (including all supplements and related filings related thereto), Development Results or such other clinical trial data and pre-clinical data relating to the Altus Product is solely as set forth in the first sentence of this Clause 6.6.2 and in Clause 13.2.6 and in Section 4 of the Third Amendment.

6.6.3    Any data, filings or other information provided by Zogenix to Elan under this Clause 6.6 shall be treated as Confidential Information belonging to Zogenix in accordance with Clause 15.”

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1.9. Clause 7.5.1 as set forth below:

“(i) to the extent permitted by law and at Elan’s request, include the Elan Trademark and due acknowledgement that the Product is developed by Elan; provided, however, on and after the Third Amendment Effective Date, at Elan’s request, Zogenix shall use Commercially Reasonable Efforts to remove, to the extent permitted by law, the Elan Trademark and the acknowledgement that the Product is developed by Elan from the package insert and all trade packaging for the Product, taking into account Zogenix’s inventory of such package insert and trade packaging as of the Third Amendment Effective Date, and (ii) to the extent required by law, include due acknowledgement that the Product is manufactured by Elan (or an Elan Affiliate); and”

1.10. Clause 7.7.1 as set forth below:

“Reports. During the Term, Zogenix shall submit to Elan the following reports:

7.7.1.1 within 30 days of the end of each calendar quarter prior to the launch of the Altus Product in the Territory, a report summarizing the development and the regulatory status of the Altus Product in the Territory during such calendar quarter; provided, however, the reporting obligation set forth in this Section 7.7.1.1 shall terminate if Zogenix does not exercise the Option under the D&O Agreement or if the Altus Agreement is otherwise terminated;

7.7.1.2 within 90 days after the filing of the first regulatory application for the Altus Product in the Territory and within 30 days of the end of each calendar quarter thereafter until receipt of the Altus Product Regulatory Approval, a report summarizing the primary promotional activities to be carried out by Zogenix for the period up to the first launch of the Altus Product in the Territory and for a period of 1 year thereafter; provided, however, the reporting obligation set forth in this Section 7.7.1.2 shall terminate if Zogenix does not exercise the Option under the D&O Agreement or if the Altus Agreement is otherwise terminated; and

7.7.1.3 within 90 days of the end of each calendar year subsequent to the receipt of Regulatory Approval until Zogenix ceases selling the Product in the Territory, a report setting forth in reasonable detail Zogenix's objectives for the coming calendar year and performance of the Product in the Territory in the prior calendar year; and

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7.7.1.4 within 90 days of the end of each calendar year subsequent to the receipt of the Altus Product Regulatory Approval until Zogenix ceases selling the Altus Product in the Territory, a report setting forth in reasonable detail Zogenix's objectives for the coming calendar year and performance of the Altus Product in the Territory in the prior calendar year; provided, however, the reporting obligation set forth in this Section 7.7.1.4 shall terminate if Zogenix does not exercise the Option under the D&O Agreement or if the Altus Agreement is otherwise terminated.”

1.11. Clause 7.7.2 as set forth below:

“Meetings. During the Term, the Parties (or their respective Affiliates) shall meet as often as reasonably requested by the other to discuss the status of all development, regulatory and commercialization activities for the Product and the Altus Product. Such meetings shall take place not more than once per calendar quarter. Such meetings may be held by telephone or videoconference. If held in person, each Party shall be responsible for its own costs in respect of travel and accommodation expenses in attending such meetings. “

1.12. Clause 10.3 as set forth below:

“ Royalty on Sales.

10.3.1 In further consideration of the grant of the Elan License, Zogenix shall pay to Elan (i) a royalty of [***] of Net Sales of Product for the Initial Term and (ii) a royalty of [***] of Net Sales of Product for the Extended Term.

10.3.2 In addition, following exercise by Zogenix of the Option under the D&O Agreement and in consideration of the revision of the Zogenix obligation in Clause 4.1, the grant of the license with respect to the Altus Product in Clause 2.1 and/or the covenant with respect to the rights granted to Zogenix under the D&O Agreement in Clause 2.3, Zogenix shall pay to Elan the following royalties with respect to Net Sales of Altus Product:

10.3.2.1 If Elan (or an Affiliate) is manufacturing and supplying the Altus Product to Zogenix, any Affiliate of Zogenix or any permitted Zogenix sublicensee for sale in the Territory: (i) a royalty of [***] of Net Sales of Altus Product through December 31, 2019 and (ii) a royalty of [***] of Net Sales of Altus Product after December 31, 2019 through fifteen (15) years following first commercial sale of the Altus Product in the Territory; or

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10.3.2.2 If a Third Party is manufacturing and supplying the Altus Product to Zogenix, any Affiliate of Zogenix or any permitted Zogenix sublicensee for sale in the Territory: (i) a royalty of [***] of Net Sales of Altus Product through December 31, 2019 and (ii) a royalty of [***] of Net Sales of Altus Product after December 31, 2019 through fifteen (15) years following first commercial sale of the Altus Product in the Territory.

10.3.2.3 If the Altus Product is sold outside the Territory [***]. Zogenix agrees for the benefit of, and at the expense and direction of, Elan (i) to utilize any audit rights it may have pursuant to the Altus Agreement with respect to such payments and (ii) to exercise any other rights it may have pursuant to the Altus Agreement with respect to the collection of any such payments which are late or unpaid.”

1.13. Clause 10.4 as set forth below:

“Bundling. In the event that Zogenix (or a Zogenix Affiliate or permitted sublicensee or subcontractor) shall sell the Product or Altus Product together with other products of Zogenix (or any Zogenix Affiliate) or other products of any such permitted sublicensee or permitted subcontractor, as the case may be, to Third Parties (by the method commonly known in the pharmaceutical industry as "bundling") and the price attributable to the Product or the Altus Product is less than the average price of "arms length" sales to similar customers for the reporting period in which sales occur (such sales to be excluded from the calculation of the average price of "arms length" sales), the sales price for any such sales used in calculating Net Sales shall be the average price of "arms length" sales by Zogenix or a Zogenix Affiliate or a permitted sublicensee or a permitted subcontractor to similar customers during the reporting period in which such sales occur.”

1.14. Clause 11.1 as set forth below:

“Records. Zogenix shall keep true and accurate records of gross sales of the Product, gross sales of the Altus Product, the items deducted from the gross amount in calculating the Net Sales for the Product and for the Altus Product, the Net Sales for the Product and the Altus Product and the royalties payable to Elan under Clause 10.3. Zogenix shall deliver to Elan a written statement (the "Statement") thereof within [***] days following the end of each calendar quarter (or any part thereof in the first or last calendar quarter of this Agreement) for each calendar quarter after the receipt of Regulatory Approval. The Statement shall outline the calculation of the Net Sales from gross revenues during that calendar

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quarter, the applicable percentage rate, and a computation of the sums due to Elan. In addition to Zogenix providing Elan the Statement, Zogenix shall use its Commercially Reasonable Efforts to deliver to Elan a non-binding written sales estimate within [***] days in advance of the start of each calendar year beginning with calendar year 2014, setting forth its estimate of Product and Altus Product sales for such calendar year, which estimate shall be updated by Zogenix within [***] days of [***] of each year thereafter. The Parties' financial officers shall agree upon the format of the Statement and the annual sales estimate. “

1.15. Clause 11.8 as set forth below:

“Audit. For the [***] period following the close of each calendar year of the Agreement, Elan and Zogenix will, in the event that the other Party reasonably requests such access, provide each other's independent certified accountants (reasonably acceptable to the other Party) with access, during regular business hours and subject to the confidentiality provisions as contained in this Agreement, to such Party's books and records relating to the Product and the Altus Product, solely for the purpose of verifying the accuracy and reasonable composition of the calculations under this Agreement for the calendar year then ended.”

1.16. Clause 12.4 as set forth below:

“Additional Elan Termination Rights. In furtherance of and in addition to the rights and termination provided for elsewhere in this Agreement, Elan shall be entitled to terminate:

12.4.1 [intentionally deleted]

12.4.2 this Agreement and all Related Agreements, in the event that Zogenix fails to generate Net Sales of the Product of at least [***] per quarter in [***] consecutive calendar quarters beginning [***] months after the date of first commercial launch of the Product in the Territory until the earlier of (i) the end of the Term or (ii) the commercial launch of the Altus Product by Zogenix in the Territory; provided that sufficient quantities of commercial Product have been made available pursuant to the Commercial Manufacture and Supply Agreement; provided further that Elan shall have a termination right under this Section 12.4.2 only if (a) the Option under the D&O Agreement has expired without Zogenix exercising such Option or (b) Zogenix has exercised the Option under the D&O Agreement and is no longer using Commercially Reasonable Efforts to develop the Altus Product in the Territory; or

12.4.3 this Agreement and all Related Agreements, in the event that Zogenix, its Affiliates or any permitted sublicensees or

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subcontractors in connection with this Agreement knowingly challenges the validity and/or ownership of any of the Elan Patents and/or the scope of any claims therein in a formal proceeding, mediation or binding arbitration; provided, however, that Elan’s termination right under this Clause 12.4.3 may only be exercised with respect to any such challenge by a permitted sublicensee or subcontractor if the applicable agreement with the challenging sublicensee or subcontractor has not been terminated within [***] of receipt by Zogenix of written notice from Elan of such challenge.”

1.17. Clause 12.5 as set forth below:

“Additional Zogenix Termination Rights. In furtherance of and in addition to the rights and termination provided for elsewhere in this Agreement, Zogenix shall be entitled to terminate:

12.5.1 this Agreement and all Related Agreements, where the sale of the Product is prohibited by the Regulatory Authorities in the Territory unless Zogenix has exercised the Option under the D&O Agreement or has an ongoing right to exercise the Option under the D&O Agreement, in which case Zogenix may not terminate this Agreement (but may terminate the Related Agreements) under this Clause 12.5.1;

12.5.2 this Agreement, all Related Agreements and the Altus Product Supply Agreement, if any, if Zogenix has commenced the sale of the Altus Product in the Territory and no longer sells the Product in the Territory, where the sale of the Altus Product is prohibited by the Regulatory Authorities in the Territory;

12.5.3 this Agreement, all Related Agreements and the Altus Product Supply Agreement, if any, at any time without cause upon [***] written notice to Elan, provided,however, that if Zogenix has exercised the Option under the D&O Agreement, or has an ongoing right to exercise the Option under the D&O Agreement, and the sale of the Altus Product is not prohibited by the Regulatory Authorities in the Territory, Zogenix may not terminate this Agreement (but may terminate the Related Agreements and the Altus Product Supply Agreement, if any) under this Clause 12.5.3; or

12.5.4 this Agreement, all Related Agreements and the Altus Product Supply Agreement, if any, in the event that Elan or its Affiliates knowingly challenges (i) the validity and/or ownership in the Territory of any of the Altus Patents (as listed in the D&O Agreement on the Third Amendment Effective Date), and/or the scope of any claims therein in a formal proceeding, mediation or binding arbitration or (ii) the ownership in the Territory of any of

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the Altus Product Patents (as defined in the D&O Agreement),

the validity of any claim of the Altus Product Patents that covers and is exclusively related to the Altus Product and/or the scope of any such claim in a formal proceeding, mediation or binding arbitration.

For the avoidance of doubt, other than pursuant to Clause 12.3 or Clause 12.5.4, Zogenix may not terminate this Agreement, any Related Agreement (except pursuant to the provisions of any such Related Agreement) or the Altus Product Supply Agreement, if any, during the period following Zogenix’s exercise of the Option under the D&O Agreement or while Zogenix has an ongoing right to exercise the Option under the D&O Agreement unless Zogenix is unable to develop and/or commercialize, or has no further intention of developing and/or commercializing and has permanently ceased to sell, either directly or through any Zogenix Affiliate, sublicensee, subcontractor or other intermediate, both the Product and the Altus Product in the Territory.”

1.18. Clause 13.2.4 as set forth below:

“13.2.4 if termination of this Agreement is effected by Elan under Clauses 12.3 or 12.4 or by Zogenix under Clauses 12.5.1, 12.5.2 or 12.5.3:

13.2.4.1 Elan shall be entitled to research, develop and commercialise the Product for its own benefit in the Territory;

13.2.4.2 Elan shall be entitled to file for Regulatory Approval in the Territory;

13.2.4.3 Zogenix shall transfer or procure the transfer to Elan (or such other entity as Elan may specify) of all relevant INDs (including the Elan IND), Regulatory Applications and Regulatory Approvals at no cost to Elan, insofar as such transfer is permitted by applicable laws, and permit Elan to access and/or reference such of its data (including but not limited to Product Data) as is necessary to enable Elan to market the Product in the Territory;

13.2.4.4 Elan shall be granted an irrevocable, perpetual, royalty-free, exclusive license to use the Zogenix Intellectual Property (other than pursuant to a Third Party License which is addressed in Clause 13.2.4.5 hereunder) and the trademark Zogenix has used during the Term to commercialize the Product in the Territory in connection with any subsequent commercialization of the Product in the Territory;

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13.2.4.5 Zogenix shall assign Elan, at Elan’s request (to the extent contractually permitted by such Third Party Licenses), any Third Party Licenses granted to Zogenix in relation to the Product and Elan will be responsible for any payments thereunder in respect of activities related to the Product by Elan following termination or expiration; and

13.2.4.6 Elan shall either:

13.2.4.6.1    give notice to Zogenix that it wishes Zogenix to cease to commercialise the Product in the Territory, in which event Zogenix shall do so except for meeting any uncancellable orders which cannot be transferred to Elan and Elan shall purchase Zogenix’s saleable inventory of Product at cost; or

13.2.4.6.2    permit Zogenix for a period not exceeding [***] months to exhaust its stock of Product –

subject always to the relevant provisions of this Agreement including those as to the use of trademarks and the financial provisions.”

1.19. New Clauses 13.2.6 and 13.2.7 as set forth below:

“13.2.6 In addition to the rights set forth in Clause 13.2.4 above, if termination is effected by Elan under Clauses 12.3 or 12.4 and only if Zogenix (i) has exercised the Option under the D&O Agreement, or (ii) has an ongoing right to exercise the Option under the D&O Agreement:

13.2.6.1 subject to Clause 13.2.6.6, Zogenix shall cease all research, development or commercialization of the Altus Product in the Territory;

13.2.6.2 if Zogenix has an ongoing right to exercise the Option under the D&O Agreement, Zogenix shall not exercise the Option, unless Elan requests Zogenix to do so in connection with an assignment of the Altus Agreement pursuant to Clause 13.2.6.5;

13.2.6.3 Zogenix shall transfer or procure the transfer to Elan (or such other entity as Elan may specify) of all INDs relating to the Altus Product, regulatory applications for the Altus Product in the Territory, Altus Product Regulatory Approvals (including all supplements and related filings related thereto), all Development Results, and all other clinical trial data and pre-clinical data relating to the Altus

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Product (but only if such clinical trial data and pre-clinical data is owned, licensed or controlled by Zogenix during the Term), at no cost to Elan, insofar as such transfer is permitted by applicable laws, and permit Elan to access and/or reference such of its Development Results and such other clinical trial data and pre-clinical data relating to the Altus Product as is necessary to enable Elan to market the Altus Product in the Territory;

13.2.6.4 Elan shall be granted an irrevocable, perpetual, royalty-free, exclusive license to use the Zogenix Intellectual Property (other than pursuant to the Altus Agreement or Third Party intellectual property licenses for the Altus Product which are addressed in Clause 13.2.6.5) and the trademark Zogenix has used during the Term to commercialize the Altus Product in the Territory in connection with any subsequent commercialization of the Altus Product in the Territory;

13.2.6.5 Zogenix shall assign Elan, at Elan’s request, the Altus Agreement and (to the extent contractually permitted by such Third Party licenses) any Third Party intellectual property licenses granted to Zogenix in relation to the Altus Product in the Territory, and Elan will be responsible for any payments thereunder in respect of activities related to the Altus Product by Elan following termination or expiration; and

13.2.6.6 Elan shall either:

13.2.6.6.1    give notice to Zogenix that it wishes Zogenix to cease to commercialise the Altus Product in the Territory, in which event Zogenix shall do so except for meeting any uncancellable orders which cannot be transferred to Elan and Elan shall purchase Zogenix’s saleable inventory of the Altus Product at cost; or

13.2.6.6.2    permit Zogenix for a period not exceeding [***] months to exhaust its stock of the Altus Product.

subject always to the relevant provisions of this Agreement including the financial provisions.

13.2.7 If termination is effected by Zogenix under Clause 12.5.4, at Zogenix’s option:

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13.2.7.1 all rights and licenses under this Agreement, including the Elan License and the Manufacturing License, shall terminate in their entirety and be of no further effect; or

13.2.7.2 if the notice of termination so specifies, this Agreement shall continue in full force and effect, save that the royalty payable under Clause 10.3.2 by Zogenix to Elan shall be reduced to [***] of the amount otherwise payable thereunder for the Net Sales of any Altus Product sold in the Territory by Zogenix, any Affiliate of Zogenix or any permitted Zogenix sublicensee after termination is effected by Zogenix under Clause 12.5.4.”

1.20. Clause 14.6 as set forth below:

“Indemnification (Medical Claims). Zogenix shall indemnify Elan against all Claims made or brought against Elan by a Third Party seeking damages for personal injury (including death) and/or for the cost of medical treatment, caused by or attributed to the use of Product or Altus Product administered or sold by Zogenix, its Affiliates, a permitted sublicensee or a permitted subcontractor in the Territory, but without prejudice to any right of indemnification Zogenix may have against Elan or an Elan Affiliate under the Services Agreement, Commercial Manufacture and Supply Agreement or Altus Product Supply Agreement; provided,however, Zogenix shall not so indemnify Elan or its Affiliates to the extent that Zogenix is entitled to be indemnified by Elan or an Elan Affiliate.”

1.21. Clause 14.9 as set forth below:

“Exclusion of Implied Warranties. EXCEPT AS EXPRESSLY SET FORTH IN THIS AGREEMENT, ZOGENIX ACKNOWLEDGES THAT THE ELAN LICENSE, THE LICENSE FOR THE ALTUS PRODUCT AND THE MANUFACTURING LICENSE ARE GRANTED AND THAT THE ELAN IND SHALL BE TRANSFERRED ON AN "AS IS" BASIS, WITHOUT REPRESENTATION OR WARRANTY WHETHER EXPRESS OR IMPLIED INCLUDING WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, OR INFRINGEMENT OF THIRD PARTY RIGHTS, AND ALL SUCH WARRANTIES ARE EXPRESSLY DISCLAIMED TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAWS.”

1.22. The first sentence of Clause 14.13 as set forth below:

“Zogenix shall maintain comprehensive general liability insurance in respect of all activities conducted by it with respect to the Product or Altus Product appropriate for a company of its size engaged in similar commercial activities,

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including product liability insurance on the Product and Altus Product.”

1.23. The first sentence of Clause 15.1 as set forth below:

“The Parties agree that it will be necessary, from time to time, to disclose to each other confidential and proprietary information, including inventions, trade secrets, specifications, designs, data, know-how and other proprietary information relating to the Product, the Altus Product, processes, services and business of the disclosing Party or its Affiliates.”

1.24. Clause 16.3.4 and a new Clause 16.3.5 (which was Clause 16.3.4 prior to this Third Amendment) as set forth below:

“16.3.4 Notwithstanding Clause 16.3.2 above, following the exercise by Zogenix of the Option under the D&O Agreement, the commercial launch of the Altus Product in the Territory and the discontinuation of the sale of the Product in the Territory, Zogenix may assign this Agreement to any Third Party without Elan’s prior written consent, subject to the conditions set out below:

16.3.4.1 Zogenix must make Elan whole for any tax consequence associated with any such assignment;

16.3.4.2 On or before the date of assignment, Elan shall receive all monies due and owing from Zogenix as of the assignment date;

16.3.4.3 Zogenix must identify all Elan Confidential Information in its possession, and either return to Elan or forward to its assignee, as directed by Elan; and

16.3.4.4 Each Party must cooperate as required with the other Party and Zogenix’s assignee both before and after the assignment to ensure the smooth transition between Zogenix and assignee on all regulatory and operational matters relating to this Agreement and, if applicable, all Related Agreements.

16.3.5 Elan may assign this Agreement along with each of the Related Agreements without Zogenix's consent to any Third Party which (a) succeeds to the ownership of the Elan Patents in their entirety and (b) agrees to fulfil all of Elan’s responsibilities under this Agreement and, if applicable, each of the Related Agreements.”

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2. Additional Amendments to License Agreement.

2.1. Upon and from the commercial launch of the Altus Product in the Territory, Zogenix’s obligations to use Commercially Reasonable Efforts under the License Agreement with respect to the Product shall be deemed to have been satisfied. Following the commercial launch of the Altus Product, Zogenix shall use Commercially Reasonable Efforts to market and promote the Altus Product throughout the Territory.

2.2. Daravita acknowledges that Zogenix intends to enter into an agreement with Halo Pharmaceuticals Inc. and/or one or more of its Affiliates (altogether, "Halo") for the manufacturing development and primary commercial supply of Altus Product. Nonetheless, if at any time during the Term, Zogenix desires and is permitted under its agreement with Halo, if such agreement is in effect, or otherwise if such agreement is not in effect, to (i) qualify a back-up supplier for Altus Product or (ii) switch its primary supply for Altus Product to an alternate supplier, then Zogenix shall notify Daravita of the same and the parties shall evaluate and discuss in good faith an arrangement whereby Daravita (or an Affiliate) would serve as a back-up manufacturer or alternate primary supplier for the commercial supply of Altus Product to Zogenix, any Affiliate of Zogenix or any permitted Zogenix sublicensee for sale in the Territory (the “Altus Product Supply Agreement”). For clarity, neither Zogenix nor Daravita shall be obligated to have Daravita (or an Affiliate) manufacture commercial supplies of Altus Product for Zogenix, any Affiliate of Zogenix or any permitted Zogenix sublicensee. If Daravita and Zogenix agree to the terms of such an arrangement, the Altus Product Supply Agreement shall be negotiated and executed by the Parties. Zogenix shall not enter into any definitive agreement with any Third Party (other than Halo) for manufacture and commercial supply of the Altus Product prior to discussing with Daravita pursuant to this Clause 2.2 an arrangement whereby Daravita (or an Affiliate) would perform such manufacture and commercial supply.

3. Daravita Consent. Daravita acknowledges and agrees that the [***] may be disclosed to Altus pursuant to the D&O Agreement and by its signature on this Third Amendment Daravita provides its written consent to such disclosure, as required pursuant to Clause 2.2.2.5 of the License Agreement. For clarity, the [***] shall be treated as Confidential Information belonging to Elan and shall be subject to Clause 15.

4. [***]. During the period from the Third Amendment Effective Date through the earlier of (a) the lapse of the Option under the D&O Agreement without the exercise thereof by Zogenix, or (b) following the exercise of the Option under the D&O Agreement, the expiration or termination of the Altus Agreement, but only during the period during which [***] or the [***] have rights to the Altus Product under the [***], in addition to the rights set forth in Clause 6.6.2 of the License Agreement, Daravita may request that Zogenix provide (if owned, licensed or controlled by Zogenix), or otherwise use Commercially Reasonable Efforts to require Altus to provide, to Daravita or directly to [***] or the [***]: (i) any data and information relating to post-marketing clinical studies (including investigator sponsored studies), publications, pharmacovigilance, safety monitoring, recalls or seizures with respect

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to the Altus Product and other comparable data and information with respect to the Altus Product, and (ii) at Daravita’s cost and expense, such technical assistance related to the rights and items provided under the License Agreement and this Third Amendment with respect to the development and manufacture of the Altus Product for [***] and the registration and commercialization of the Altus Product in [***] or the [***]. At Daravita’s request, Zogenix shall also use its Commercially Reasonable Efforts to cause any Third Party who may be selected as the manufacturer and supplier of the Altus Product to Zogenix, any Affiliate of Zogenix or any permitted Zogenix sublicensee for sale in the Territory to manufacture and supply the Altus Product to [***] or the [***] for sale in [***], with such manufacture and supply to be on substantially the same terms and conditions as those on which such Third Party so manufactures and supplies the Altus Product to Zogenix, any Affiliate of Zogenix or any permitted Zogenix sublicensee, taking into account volume and other customary discounts that may be applicable to Zogenix (its Affiliates or permitted Zogenix sublicensees) based on quantities or other patterns of ordering the Altus Product.

5. Simultaneous Amendment to Commercial Manufacture and Supply Agreement. In connection with this Third Amendment, Daravita and Zogenix shall enter into an amendment to the Commercial Manufacture and Supply Agreement.

6. Deletion of Schedule 2. Schedule 2 of the License Agreement is hereby deleted in its entirety.

7. Altus Agreement. Zogenix hereby represents and warrants to Daravita, as of the Third Amendment Effective Date, that Zogenix has provided to Daravita a true, complete and correct copy of the Altus Agreement as in effect on the Third Amendment Effective Date (with financial, commercial or proprietary terms redacted, but only to the extent that Daravita is still able to estimate the impact of the Altus Agreement upon Daravita).

8. No Other Amendments. All other terms and conditions of the License Agreement remain unchanged and continue to be in full force and effect.

9. Counterparts; Signatures. This Third Amendment may be executed in any number of counterparts, each of which when so executed shall be deemed to be an original and all of which when taken together shall constitute this Third Amendment. Signatures provided by facsimile transmission or in Adobe™ Portable Document Format (PDF) sent by electronic mail shall be deemed to be original signatures.

10. Governing Law; Jurisdiction. This Third Amendment shall be governed by and construed in accordance with the laws of the State of New York, without regard to its conflict of laws rules, and shall be subject to the exclusive jurisdiction of the State and Federal Courts located in New York, New York.

[Remainder of Page Intentionally Left Blank]

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IN WITNESS WHEREOF Daravita andZogenix have caused this Third Amendment to be executed by their duly authorized representatives to be effective as of the Third Amendment Effective Date.

DARAVITA LIMITED

By: /s/ Tom Riordan            

Title: Director                    

ZOGENIX, INC.

By: /s/ Roger L. Hawley            

Title: CEO                    

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EX-10.2

Exhibit 10.2

CERTAIN MATERIAL (INDICATED BY AN ASTERISK) HAS BEEN OMITTED FROM THIS DOCUMENT PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT. THE OMITTED MATERIAL HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.

FIRST AMENDMENT TO COMMERCIAL MANUFACTURING AND SUPPLY AGREEMENT

This First Amendment to the Commercial Supply Agreement (as defined below) (the "First Amendment") is made and entered into as of 12th day of September 2014 (“First Amendment Effective Date”).

BETWEEN:

(1)    Alkermes Science OneLimited, a company incorporated under the laws of Ireland, having its registered office at Connaught House, 1 Burlington Road, Dublin 4, Ireland, which has changed its name to Daravita Limited (“Daravita”); AND

(2)    Zogenix, Inc., a Delaware corporation, having its principal place of business at 12400 High Bluff Drive, Ste. 650, San Diego, California, USA 92130 (“Zogenix”).

RECITALS:

WHEREAS Alkermes Pharma Ireland Limited (“APIL”) and Zogenix entered into a commercial manufacturing and supply agreement on November 2, 2012 (“Commercial Supply Agreement”), wherein APIL would supply Zogenix commercial quantities of the Commercial Product, on the terms and conditions set forth in the Commercial Supply Agreement (capitalized terms used in this First Amendment but not defined herein shall have the meaning set forth in the Commercial Supply Agreement); and

WHEREAS on May 8, 2014, pursuant to Clause 21.1 of the Commercial Supply Agreement, APIL assigned all of its rights and obligations to the Commercial Supply Agreement to its Affiliate, Daravita; and

WHEREAS Zogenix and Daravita desire to amend the Commercial Supply Agreement as set forth herein, subject to the terms and conditions set forth herein.

NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Daravita and Zogenix hereby agree as follows:

1. Amendments. As of the First Amendment Effective Date, Daravita and Zogenix hereby amend the following sections of the Commercial Supply Agreement:

1.1. The following definitions are as set forth below:

“ “Altus” means Altus Formulation Inc., and its successors, assigns or transferees under the Altus Agreement.”

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“ “Altus Agreement” means (a) as of the First Amendment Effective Date, the Development and Option Agreement dated November 1, 2013 between Altus and Zogenix, as amended or supplemented pursuant to the terms thereof (the “D&O Agreement”), and (b) following the exercise by Zogenix of the Option under the D&O Agreement, includes the License Agreement (as defined in the D&O Agreement), as amended or supplemented pursuant to the terms thereof (the “Altus License Agreement”).”

“ “Altus Product” means Licensed Product (as defined in the Altus Agreement).”

“ “Option” means the option set forth in Section 2.2 of the D&O Agreement.”

1.2. Clause 17.1 as set forth below:

“ Term. This Agreement shall be deemed to have come into force on the Effective Date and, subject to the rights of termination outlined in this Clause 17 and the provisions of applicable laws, will continue in force until the expiry or termination of the License Agreement (the “Term”).

1.3. A new Clause 17.3 as set forth below:

“17.3    Termination by Zogenix. Following initiation of the commercial launch of the Altus Product in the Territory and Zogenix’s decision to cease commercializing the Product in the Territory, Zogenix will be entitled to terminate this Agreement by twelve (12) months prior written notice to Alkermes. For clarity, if Zogenix does not exercise the Option under the D&O Agreement, Zogenix shall not be entitled to terminate this Agreement pursuant to this Clause 17.3.”

1.4. A new Clause 17.4 as set forth below:

“17.4    Termination by Alkermes. Following initiation of the commercial launch of the Altus Product in the Territory, if Zogenix [***] in any given calendar quarter, then Alkermes will be entitled to terminate this Agreement by one hundred eighty (180) days prior written notice to Zogenix.”

1.5. A new Clause 18.3 as set forth below:

“18.3    Additional Consequences of Termination by Zogenix under Clause 17.3. Notwithstanding Clause 18.2.3 above, in the event that Zogenix provides notice of termination of this Agreement under Clause

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17.3, and thereafter, but prior to the effective date of termination of this Agreement (e.g., twelve (12) months thereafter), Zogenix decides to cease commercializing the Product in the Territory, Zogenix may cancel any Confirmed Orders but shall reimburse Alkermes for all costs (including raw material costs) that Alkermes has incurred in connection with any such Confirmed Orders as well as any reasonable costs that Alkermes has incurred in connection with the preparation to manufacture Commercial Products based on forecasts delivered prior to Alkermes’ receipt of the notice of termination pursuant to Clause 17.3. Zogenix shall not be required to pay to Alkermes either the Initial Fee or the Final Fee for any Confirmed Orders which are cancelled pursuant to this Clause 18.3. “

1.6. Clause 21.1 as set forth below:

“The provisions of Clauses 16.2, 16.3, 16.4 and 16.5 of the License Agreement shall apply mutatis mutandis. For clarity, the term “this Agreement” in such provisions shall apply herein to this Agreement. “

2. Good Faith Negotiations. Following exercise by Zogenix of the Option under the D&O Agreement, Zogenix and Daravita shall discuss in good faith, through the Supply Committee, any necessary adjustments to the provisions of Section 5 (Forecasting, Ordering and Capacity) to address the possible commercial sale of the Altus Product in the Territory.

3. Simultaneous Amendment to License Agreement. In connection with this First Amendment, Daravita and Zogenix shall enter into an amendment to the License Agreement.

4. No Other Amendments. All other terms and conditions of the Commercial Supply Agreement remain unchanged and continue to be in full force and effect.

5. Counterparts; Signatures. This First Amendment may be executed in any number of counterparts, each of which when so executed shall be deemed to be an original and all of which when taken together shall constitute this First Amendment. Signatures provided by facsimile transmission or in Adobe™ Portable Document Format (PDF) sent by electronic mail shall be deemed to be original signatures.

6. Governing Law; Jurisdiction. This First Amendment shall be governed by and construed in accordance with the laws of the State of New York, without regard to its conflict of laws rules, and shall be subject to the exclusive jurisdiction of the State and Federal Courts located in New York, New York.

[Remainder of Page Intentionally Left Blank]

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IN WITNESS WHEREOF Daravita andZogenix have caused this First Amendment to be executed by their duly authorized representatives to be effective as of the First Amendment Effective Date.

DARAVITA LIMITED

By: /s/ Tom Riordan

Title: Director

ZOGENIX, INC.

By: /s/ Roger L. Hawley

Title: CEO

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EX-10.3

Exhibit 10.3

CERTAIN MATERIAL (INDICATED BY AN ASTERISK) HAS BEEN OMITTED FROM THIS DOCUMENT PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT. THE OMITTED MATERIAL HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.

AMENDMENT NO. 2 - DEVELOPMENT AND OPTION AGREEMENT

THIS AMENDMENT NO. 2 – DEVELOPMENT AND OPTION AGREEMENT (the “Amendment No. 2”) is made as of September 15th, 2014 (the “Amendment No. 2 Effective Date”), by and between ALTUS FORMULATION INC., a Quebec company, having its principal place of business at 17800 Rue Lapointe, Mirabel Quebec J7J 1P3, Canada (“Altus”), and ZOGENIX, INC., a Delaware corporation, having its principal place of business at 12400 High Bluff Drive, Suite 650, San Diego, CA 92130 USA (“Zogenix”). Each of Altus and Zogenix are sometimes referred to herein individually as a “Party” and together as the “Parties”.

WHEREAS, the Parties entered into a Development and Option Agreement dated as of November 1, 2013 (the “Agreement”), regarding their collaboration on the development of certain licensed products;

WHEREAS, the Parties previously amended the terms of the Agreement pursuant to that certain Amendment No. 1 dated March 10, 2014 ("Amendment No. 1");

WHEREAS, the Parties wish to further amend certain terms of the Agreement and the initial Work Plan (the “Work Plan”), on the terms and subject to the conditions set forth herein.

NOW, THEREFORE, in consideration of the premises and the mutual promises and covenants contained herein, and for good and valuable consideration, the Parties hereby agree as follows:

1.DEFINITIONS. Unless otherwise indicated, capitalized terms used but not defined herein shall have the respective meanings assigned to such terms in the Agreement.

2.AMENDMENT TO WORK PLAN. The Work Plan executed by the Parties shall be amended in accordance with the terms set forth in Exhibit A attached hereto.    

3.AMENDMENT OF THE DEVELOPMENT AND FINANCIAL MILESTONES. Section 4.1 of the Agreement shall be amended and restated in its entirety as follows;

“4.1    Development Milestones. Upon the first achievement of each of the milestones below, Zogenix shall pay to Altus the corresponding non-refundable, non-creditable Development milestone payments set forth below:

Milestone	Milestone Payment
1.    [***]	[***]

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2.    [***]	[***]
3.[***]
a. [***]	[***]
b. [***]	[***]
4.[***]	[***]
5.[***]	[***]

The payments of the amounts set forth opposite each Development milestone in this Section 4.1 shall be payable within [***] after achievement of the applicable milestone. Each of the milestone payments set forth above shall be payable [***], [***]. Development milestone 5 above ([***]) shall be paid, even if [***], if Zogenix has [***].

4.2    Manner and Place of Payment. All payment amounts specified in this Agreement are stated, and all payments hereunder shall be payable, in [***]. All payments owed under this Agreement shall be made by wire transfer to a bank and account designated in writing by Altus, unless otherwise specified in writing by Altus."

4MISCELLANEOUS.

4.1Entire Agreement. Amendment No.1, this Amendment No. 2 and the Agreement, including any and all Work Plans shall constitute the entire agreement between the parties on the subject matter hereof and shall supersede all other written or oral communication, proposals, drafts, amendments, agreements and representations between the Parties hereto with respect to the subject matter hereof.

4.2No Other Changes. Except as expressly amended herein, all other provisions of the Agreement remain unchanged and in full force and effect.

4.3Conflict. In the event of a conflict between the provisions of the Agreement and this Amendment No. 2, the terms of this Amendment No. 2 shall prevail.

4.4Counterparts. This Amendment No. 2 may be executed in counterparts, each of which shall be deemed an original document, and all of which, together with this writing, shall be deemed one instrument. This Amendment No. 2 may be executed by facsimile or PDF signatures, which signatures shall have the same force and effect as original signatures.

[Signature page follows]

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IN WITNESS WHEREOF, the Parties have duly executed this Amendment No. 2 as of the Amendment No. 2 Effective Date.

Zogenix, Inc.	Altus Formulation Inc.
By:/s/ Stephen J. Farr Name: Stephen J. Farr Title: President	By: /s/ Damon Smith Name: Damon Smith Title: CEO

Confidential

Exhibit A

WORK PLAN NO. 2 - DEVELOPMENT AND OPTION AGREEMENT

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Confidential

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Confidential

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EX-10.4

Exhibit 10.4

EXECUTION COPY

CONFIDENTIAL

CERTAIN MATERIAL (INDICATED BY AN ASTERISK) HAS BEEN OMITTED FROM THIS DOCUMENT PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT. THE OMITTED MATERIAL HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.

WAIVER AGREEMENT

This Waiver Agreement, dated as of October 29, 2014 (the “Signing Date”), is by and between Purdue Pharma L.P., a Delaware limited partnership (“Purdue”), and Zogenix, Inc., a Delaware corporation (“Zogenix”). Purdue and Zogenix are sometimes referred to herein individually as a “Party” and collectively as the “Parties”.

W I T N E S S E T H:

WHEREAS, Zogenix currently markets and sells Zohydro ER® pursuant to NDA 202880;

WHEREAS, Purdue intends to market and sell Hysingla ER® pursuant to NDA 206627; and

WHEREAS, the Parties desire to grant each other certain waivers with respect to their products.

NOW, THEREFORE, for good and valuable consideration, the sufficiency and receipt of which are hereby acknowledged, the Parties agree as follows:

1.Waivers of Regulatory Exclusivity.

(a)Zogenix hereby grants to Purdue a permanent, irrevocable, non-transferable and exclusive waiver of regulatory exclusivity under 21 U.S.C. 355(c)(3)(E)(iii) or (iv) with respect to NDA 202880 (the “Zogenix NDA”) for Zohydro ER® capsules in support of Purdue’s single-entity, (i.e., single active ingredient), once-daily extended release hydrocodone product which it intends to market and sell under the name Hysingla ER® and which is the subject of pending NDA 206627 and any single-entity, once-daily hydrocodone successor products or NDAs, filed by Purdue (each, a “Purdue Product”), in the form attached as Exhibit A (the “Zogenix Waiver”) and in such additional copies, letters or forms as may be required in order to effectuate the Zogenix Waiver with respect to any Purdue Product.

(b)Purdue will grant to Zogenix a permanent, irrevocable, non-transferable and exclusive waiver of regulatory exclusivity under 21 U.S.C. 355(c)(3)(E)(iii) or (iv) with respect to Purdue’s single-entity extended release hydrocodone product which it intends to market and sell under the name Hysingla ER® and which is the subject of pending NDA 206627 in support of Zogenix’s single-entity, twice-a-day hydrocodone product, filed by Zogenix, including Zohydro ER® and any single-entity, twice-a-day hydrocodone successor products or NDAs, filed by Zogenix (each, a “Zogenix Product”), in the form attached as Exhibit B with the exclusivity expiration date as published in the Orange Book inserted in the text thereof (the “Purdue Waiver”) and in such additional copies, letters or forms as may be required in order to effectuate the Purdue Waiver with respect to any Zogenix Product.

(c)For purposes of this Waiver Agreement, “Associated Company” means any person, firm, trust, partnership, corporation, company or other entity or combination thereof, which directly or indirectly controls is controlled by or is under common control with such party. The terms “control” and

controlled” mean ownership of fifty percent (50%) or more, including ownership by trusts with substantially the same beneficial interests, of the voting and equity rights of such person, firm, trust, partnership, corporation, company or other entity or combination thereof or the power to direct the management of such person, firm, trust, partnership, corporation, company or other entity or combination thereof.

2.Consideration.

In consideration for the above grant by Zogenix of the Zogenix Waiver to Purdue and provided that the Zogenix Waiver has been executed by Zogenix and delivered to Purdue for filing with the FDA, Purdue will pay to Zogenix a one-time irrevocable, non-refundable amount equal to $5,000,000 payable no later than fifteen (15) days following the Signing Date, an additional one-time irrevocable, non-refundable amount equal to $5,000,000 payable on July 1, 2015 and a royalty equal to [***]% of Purdue’s Net Sales per calendar quarter or part thereof (payable within ten (10) business days after the end of each such quarter and the twenty-five (25) day period ending October 25, 2016) commencing on October 1, 2015 (the “Commencement Date”) and ending on October 25, 2016, provided that the amount of each quarterly royalty payment will be reduced to [***]% from and after the date that a third party receives FDA approval for a single-entity extended release hydrocodone product. Notwithstanding the foregoing, Purdue will not be required to pay any amount in respect of the royalty described above until the amount of such royalty would exceed $5,000,000 and then Purdue will only be required to pay royalties in excess of such amount. “Purdue’s Net Sales” means the gross amount invoiced for sales or other dispositions of the Purdue Product by Purdue, any of its Associated Companies or licensees in bona fide arms-length transaction with third parties less such deductions as are actually taken and are customarily allowed in the calculation of net sales under generally accepted accounting principles in the United States. Each payment will be accompanied by a reasonably detailed report calculating Purdue’s Net Sales. Zogenix shall have the right to have a third party auditor audit Purdue’s Net Sales on an annual basis at Zogenix’s expense upon reasonable notice and during normal business hours.

3.Purdue Representations.

Purdue represents and warrants as of the Signing Date that (a) it has all necessary partnership power and authority to execute and deliver this Waiver Agreement and to perform its obligations hereunder, and (b) the execution, delivery and performance of this Waiver Agreement has been duly and validly authorized by its Board of Directors. Purdue has not received communication from FDA in the form of an action letter (e.g., a tentative approval or complete response letter) or other written communication regarding the conclusion of FDA’s review of whether Purdue's pending NDA 206627 for Hysingla ER is eligible for immediate approval. Purdue has not granted and will not grant (other than to Zogenix ) any waiver or release or other agreement to circumvent Purdue's regulatory exclusivity to any other party with respect to any other hydrocodone product and has not and will not commit to do so. Upon the execution and delivery of this Waiver Agreement by Purdue, this Waiver Agreement shall constitute the legal, valid and binding agreement of Purdue, enforceable against it in accordance with its terms and conditions, subject to bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforceability of creditors’ rights generally and other general equitable principles which may limit the right to obtain certain remedies.

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4.Zogenix Representations.

Zogenix represents and warrants as of the Signing Date that (a) it has all necessary corporate power and authority to execute and deliver the Waiver Agreement and to perform its obligations thereunder, and (b) the execution, delivery and performance of the Waiver Agreement have been duly and validly authorized by its Board of Directors. Zogenix has not received any written communication from FDA regarding the conclusion of FDA’s review of whether Purdue’s pending NDA 206627 for Hysingla ER is eligible for immediate approval. Zogenix has not granted and will not grant (other than to Purdue) any waiver or release or other agreement to circumvent Zogenix’s regulatory exclusivity with respect to any other hydrocodone product and has not and will not commit to do so. Upon execution and delivery of the Waiver Agreement by Zogenix, the Waiver Agreement shall constitute the legal, valid and binding agreements of Zogenix, enforceable against it in accordance with their respective terms and conditions, subject to bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforceability of creditors’ rights generally and other general equitable principles which may limit the right to obtain certain remedies.

5.No Public Announcement.

Except as (a) required by statute, ordinance or regulation, (b) required pursuant to compulsory legal process, (c) necessary for the exercise of the rights granted to the Parties under the Waiver Agreement, or (d) expressly permitted under this paragraph 5 (including as contemplated by the next sentence hereof), or as otherwise agreed to in writing by the Parties, neither Purdue nor Zogenix will publicly announce or otherwise disclose to any third party the existence of or any of the terms of this Waiver Agreement, without the prior written approval of the other Party. The Parties will cooperate with each other to agree upon the text and timing of any press release, public filing or other public announcement or disclosure to any third party by either of the Parties of the existence or terms of this Waiver Agreement. Purdue acknowledges and agrees that Zogenix shall be required by law or regulation to issue a press release, and file an 8-K and a redacted version of this Agreement with the United States Securities and Exchange Commission. In accordance with the foregoing, Zogenix shall provide a proposed draft of any such press release, 8-K and redacted version to Purdue for its timely review and Zogenix shall consider in good faith any comments provided by Purdue prior to Zogenix’s filing and/or publication thereof.

6.No Assignment.

This Waiver Agreement is binding upon and shall inure to the benefit of each Party hereto, and each of its successors and permitted assigns. Neither of the Parties may assign or transfer this Waiver Agreement or any of its respective rights or obligations hereunder (an “Assignment”) without the prior written consent of the other Party, which consent may not be unreasonably withheld. Notwithstanding the foregoing, a Party may transfer or assign all of its rights and obligations under this Waiver Agreement without consent to a successor in interest or acquirer of all or substantially all of its business or assets of the assigning party to which this Waiver Agreement relates, whether by sale, merger, consolidation, acquisition, transfer, operation of law or otherwise (a “Change in Control”). Any Assignment or attempted Assignment of any of a Party’s rights or obligations hereunder in contravention of the provisions of this paragraph 6 shall be void and have no force or effect. If Zogenix is subject to a Change in Control and the acquiring company has filed an Investigational New Drug Application or an NDA for a hydrocodone product which was in development by such company prior to such Change in Control, the waiver granted by Purdue in paragraph 1(b) hereof shall not be applicable to such product. If Purdue is subject to a Change in Control and the

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acquiring company has filed an Investigational New Drug Application or any NDA for a hydrocodone product which was in development by such company prior to such Change in Control, the waiver granted by Zogenix in paragraph 1(a) hereof shall not be applicable to such product.

7.Entire Agreement; Amendments in Writing.

This Waiver Agreement, together with the letter of agreement dated September 12, 2014 between the Parties, sets forth the entire agreement and understanding between the Parties hereto as to the subject matter hereof and supersedes all other documents, oral consents or understandings, if any, made between Purdue and Zogenix before the Signing Date with respect to the subject matter hereof. None of the terms of the Waiver Agreement shall be amended or modified except in a writing signed by each of the Parties hereto. The Parties acknowledge that there have been a number of drafts of the Waiver Agreement exchanged between them prior to the Parties’ agreement on the final version of the Waiver Agreement which have been executed by them. The Parties expressly agree that these drafts have been superseded by the executed Waiver Agreement and shall not be used in any dispute between the Parties as evidence with respect to interpreting the meaning of any provision of this Waiver Agreement.

8.Savings Clause.

Any term or provision of the Waiver Agreement which is invalid or unenforceable in any jurisdiction shall, as to that jurisdiction, be deemed reformed to the extent required to make such term or provision valid or enforceable in the manner most closely reflecting the Parties’ intentions as reflected in the Waiver Agreement (provided that any such reformation can be achieved without material change to the economic value of the transactions contemplated by the Waiver Agreement), and shall not render invalid or unenforceable the remaining terms and provisions of the Waiver Agreement in such jurisdiction or in any other jurisdiction. If for any reason the Zogenix Waiver is determined by a court of competent jurisdiction to be invalid or unenforceable, all of Purdue’s obligations hereunder shall immediately terminate.

9.Governing Law.

This Waiver Agreement, and the rights and obligations created hereunder, shall be governed by and interpreted according to the substantive laws of the State of New York without regard to its choice of law or conflicts of law principles.

10.Notice Provisions.

(a)Any notice required under this Waiver Agreement shall be in writing and shall be given (and shall be deemed to be duly given upon receipt) by delivery in person, by facsimile or by overnight express delivery service to either Party at the following addresses (or at such other address for either Party as shall be specified by like notice):

If to Purdue:
Purdue Pharma L.P.
One Stamford Forum
201 Tresser Boulevard
Stamford, CT 06901-3431
Attention: General Counsel
Fax No.: (203) 588-6272

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with a copy to:
Chadbourne & Parke LLP
30 Rockefeller Plaza
New York, NY 10112
Attention: Stuart D. Baker
Fax No.: (212) 489-7130

If to Zogenix:
Zogenix, Inc.
12400 High Bluff Drive, Suite 650
San Diego, CA 92130
Attention: Chief Financial Officer
Fax No. (858) 259-1166

With a copy to:
Latham & Watkins LLP
12636 High Bluff Drive, Suite 400
San Diego, CA 92130
Attention: Cheston Larson
Fax No. (858) 523-5450

(b)    Notices delivered personally or by overnight express delivery service shall be deemed given as of actual receipt. Notices delivered by facsimile transmission shall be deemed given upon receipt by the sender of the transmission confirmation if transmitted before 5:00 p.m. (recipient’s local time) on a business day, and otherwise on the following business day. If the terms hereof require any notice be given on or by a date that is not a business day, then such notice shall be required to be given hereunder on the next business day.

11.Effect of Waiver.

A waiver by either Party of any term or condition of this Waiver Agreement in any one instance shall not be deemed or construed to be a waiver of such term or condition for any other instance in the future (whether similar or dissimilar) or of any subsequent breach of this Waiver Agreement. All rights, remedies, undertakings, obligations and agreements contained in this Waiver Agreement shall be cumulative and none of them shall be a limitation of any other remedy, right, undertaking, obligation or agreement of either Party.

12.Independent Counsel.

Each Party agrees that it has received independent legal advice from its attorneys with respect to this Waiver Agreement. Each Party further agrees that it and its counsel have had adequate opportunity to make whatever investigation or inquiry they may have deemed necessary or desirable in connection with the subject matter of this Waiver Agreement, prior to the execution hereof.

13.Preliminary Injunction.

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If either Party breaches any of the material terms of this Waiver Agreement, in addition to any other remedy such Party may have at law or in equity, each Party agrees that the other would suffer irreparable harm which would not be adequately compensated by monetary damages as a result of such breach and, solely upon a showing of a likelihood of success of establishing that such a material breach occurred, shall be entitled to seek a preliminary injunction to prevent the continuance of such breach, without the requirement of the posting of a bond.

14.No Other Rights Granted.

Except for the rights specifically granted in paragraphs 1(a) and 1(b) of this Waiver Agreement, no other right, written or oral license or sublicense, covenant not to sue, waiver or release or other written or oral assumption with respect to any intellectual property or regulatory exclusivity is being granted by either Party to the other Party pursuant to this Waiver Agreement.

15.Further Assurances.

Each of the Parties will take all reasonable actions, including without limitation, making all filings and amending existing filings with any applicable governmental authority, reasonably necessary to carry out the purpose and intent of this Waiver Agreement.

16.Counterparts.

This Waiver Agreement may be executed in counterparts (including by facsimile or other electronic transmission), and each fully executed counterpart shall be deemed an original of this Waiver Agreement.

[Remainder of this page intentionally left blank]

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Waiver Agreement Signature Page

IN WITNESS WHEREOF, each of the Parties has caused this Waiver Agreement to be executed as of the date first written above by its duly authorized officer or agent.

PURDUE PHARMA L.P.

By: Purdue Pharma Inc., its general partner

By: /s/ Edward B. Mahoney     
Name: Edward B. Mahoney    
Title: EVP, CFO    

ZOGENIX, INC.

By: /s/ Roger L. Hawley    
Name: Roger L. Hawley    
Title: CEO    

Exhibit AZogenix Waiver

[ZOGENIX LETTERHEAD]

October 29, 2014

Sharon Hertz, M.D.

Acting Director, Division of Anesthesia, Analgesia, and Rheumatology Products (HFD-550)

Center for Drug Evaluation and Research

RE:    NDA 206627 Hysingla ER Tablets

Dear Dr. Hertz:

Zogenix, Inc. (“Zogenix”), hereby authorizes FDA to grant final approval of any once-daily hydrocodone bitartrate extended release tablet product which is now the subject of the above-referenced NDA (and any successor products, NDAs and supplements thereto filed by Purdue for a single entity, once-daily, extended release hydrocodone product), notwithstanding the three-year non-patent exclusivity under 21 U.S.C. 355(c)(3)(E)(iii) or (iv) applicable to NDA 202880 for twice-daily hydrocodone extended release capsules currently held by or granted to Zogenix, including with respect to any abuse deterrent properties or claims. This authorization does not constitute a waiver of the rights under said exclusivity provisions with respect to any other party or any other application for approval of hydrocodone drug products, which rights continue in effect until October 25, 2016. No rights are being waived by this letter with respect to the requirements for the submission of certifications to patents listed in connection with NDA 202880 or any other NDA. This waiver is permanent, and irrevocable.

Sincerely,

Zogenix, Inc.

Exhibit A-1

Exhibit BPurdue Waiver

October 29, 2014

Sharon Hertz, M.D.

Acting Director, Division of Anesthesia, Analgesia, and Rheumatology Products (HFD-550)

Center for Drug Evaluation and Research

RE:    NDA 202880 Zohydro ER Capsules

Dear Dr. Hertz:

Purdue Pharma, L.P. (“Purdue”), hereby authorizes FDA to grant final approval of any twice-a-day hydrocodone bitartrate extended release product submitted by Zogenix, including the above-referenced NDA (and any successor products, NDAs and supplements thereto filed by Zogenix for a single entity, twice-a-day, extended release hydrocodone product), notwithstanding the three-year non-patent exclusivity under 21 U.S.C. 355(c)(3)(E)(iii) or (iv) applicable to NDA 206627 for once-daily hydrocodone extended release tablets held by or granted to Purdue, including with respect to any abuse deterrent properties or claims. This authorization does not constitute a waiver of the rights under said exclusivity provisions with respect to any other party or any other application for approval of hydrocodone drug products, which rights continue in effect until _________. No rights are being waived by this letter with respect to the requirements for the submission of certifications to patents listed in connection with NDA 206627 or any other NDA. This waiver is permanent, and irrevocable.

Sincerely,

Purdue Pharma L.P.

Exhibit B-1

EX-10.5

Exhibit 10.5

CERTAIN MATERIAL (INDICATED BY AN ASTERISK) HAS BEEN OMITTED FROM THIS DOCUMENT PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT. THE OMITTED MATERIAL HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.

DATED 23 October 2014

(1) THE KATHOLIEKE UNIVERSITEIT LEUVEN

(2) UNIVERSITY HOSPITAL ANTWERP

(3) BRABANT PHARMA LIMITED

Collaboration and License Agreement

CONTENTS
		Page
1	GRANT OF LICENSE AND CONSULTING SERVICES	2
2	DEFINITIONS	3
3	INTELLECTUAL PROPERTY AND INVENTIONS	5
4	RESEARCH USES, REPORTS AND PUBLICATIONS	6
5	CONFIDENTIALITY	6
6	TERMINATION OF LICENSE	7
7	TRANSFER OF DATA	8
8	REPRESENTATION, WARRANTIES AND LIABILITY	8
9	FURTHER COVENANTS	9
10	MISCELLANEOUS PROVISIONS	9

THIS COLLABORATION AND LICENSE AGREEMENT (the Agreement") is made 23 October 2014 (the "Effective Date")

BETWEEN:-

(1) The Katholieke Universiteit Leuven, for the purposes of this Agreement represented by its department KU LEUVEN RESEARCH & DEVELOPMENT, having its office in 3000 Leuven, Waaistraat 6 - box 5105, Belgium, VAT number BE 0419.052.173, (hereinafter referred to as "KU LEUVEN R&D" and

UNIVERSITY HOSPITAL ANTWERP, having its offices at Wilrijkstraat 10, 2650 Edegem, Belgium, registered under company number 0874.619.603, and duly represented by Mr. Johnny Van der Straeten, Managing Director, who entrusts the execution of this Agreement to Prof. Dr. B. Ceulemans, Department of Neurology-Child Neurology, hereinafter referred to as "UZA",

UZA and KU LEUVEN R&D jointly referred to as the "Institution"

on one hand, and

(2) BRABANT PHARMA LIMITED of Scotsgrove House, Uxmore Road, Checkendon, Oxfordshire, United Kingdom RG8 0TD ("Brabant")

on the other hand.

Hereinafter collectively referred to as "the Parties" or individually referred to as "a Party"

RECITALS

The Parties entered into a Collaboration and License Agreement on 1 September 2012 which was subsequently amended by a Deed of Amendment dated 5 September 2013 (hereinafter "the Previous Agreement");

Pursuant to the Deed of Amendment dated 1 September 2012 Brabant was granted rights in respect of the Patent Rights;

The Parties wish to amend and restate the Previous Agreement with effect from the Effective Date of this Agreement;

The research team of Prof. Ceulemans at UZA, the research team of Prof. Lagae of KU Leuven R&D and Brabant are continuing to perform an ongoing study on the use of fenfluramine for the treatment of Dravet Syndrome or related conditions stemming from infantile epilepsy (the "Study");

Currently, no regulatory approval in the EU or US has been granted for the use of fenfluramine for the treatment of Dravet Syndrome or related conditions stemming from infantile epilepsy;

Brabant has expressed its interest in the Data;

Brabant is willing to use the Data to obtain regulatory approval for the use of fenfluramine for the treatment of Dravet Syndrome or related conditions stemming from infantile epilepsy;

Brabant is willing to supply the Institution with fenfluramine for the performance of the Study and is willing to receive an exclusive licence to use the Data for Direct Exploitation (as defined below);

Institution is willing to grant such a licence under the terms and conditions set forth herein;

Whereas KU LEUVEN R&D has been designated by the Board of Directors of the Katholieke Universiteit Leuven to enter into agreements relating to services, research and/or intellectual property;

Therefore, the Parties agree as follows:

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1.     GRANT OF LICENSE AND CONSULTING SERVICES

1.1 For a period of thirty six (36) months starting from the 1^st of September, 2012 (the "Term") Institution grants Brabant a worldwide exclusive license for use of Data and the Patent Rights for Direct Exploitation ("the License") and to sub-license (including the grant of any option over a sub-licence) such to Third Parties (the “Sub-licence”). The Licence in respect of the Data and the Patents Rights will terminate on written notice from Institution if none of the following milestones have been achieved within the aforesaid period:

1.1.1 Commencement of work on a new dosage form of fenfluramine;

1.1.2 Submission of an application for marketing approval with a regulatory authority ;

1.1.3 Market approval by a regulatory authority; or

1.1.4 Commencement of a clinical trial as requested by a regulatory authority.

1.2 On completion of any of the milestones in 1.1.1 and 1.1.2 above, the Term of the Licence will be extended for a an additional period of five (5) years (5). On completion of any of the milestones in 1.1.3 and 1.1.4 above, the Term of the License will be extended for a an additional period of twenty five (25) years.

1.3 Upfront consideration for the License of [***] was paid on the commencement of the Previous Agreement.

1.4 Institution and Brabant may agree in writing to extend the Term of the Licence.

1.5 Institution will receive [***]% of the Revenue ([***]%) that Brabant receives from a Third Party, for instance in case Brabant Sublicenses the Patent Rights to a Third Party or in case Brabant lets another organization rely on the Data or New Data to submit an application to a Regulatory Authority. Brabant shall inform Institution fully on any potential and future Revenues of a Sublicense deal.

1.6 Brabant shall pay Institution a royalty of [***]% on Net Sales of fenfluramine. The royalties shall be due and payable in EURO within [***] of the end of each calendar year with respect to the 12 month period ending on the last day of such calendar year by wire-transfer to the accounts specified in writing by Institution ([***]%). Within [***] of the end of each calendar year, Brabant shall send Institution a written report disclosing the Net Sales for the just ended calendar year and the royalties due to Institution, containing at least the following information:

1.6.1 the amount of fenfluramine sold by Brabant, or its Affiliates;

1.6.2 the gross price charged by Brabant, or its Affiliates for fenfluramine in each country;

1.6.3 the calculation of Net Sales, including a detailed and documented listing of applied deductions;

1.6.4 a detail on the applied exchange rates (if applicable);

1.6.5 the total royalties in EURO.

If no amounts are due to Institution for any calendar year, the report shall so state.

An independent certified public or chartered accountant of Institution's choice shall have the right, on reasonable notice, during business hours to, no more than [***], inspect Brabant's, and its Affiliates' books of account and records to verify any reports and payments made under this Agreement up to

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[***] after termination of this Agreement. In the event that any inspection reveals an underpayment in excess of [***]%, Brabant shall bear the full cost of such inspection and shall remit any amounts due to Institution (increased by interest) on Institution's first request.

1.7 Brabant has manufactured up to 1kg of fenfluramine for use in the Study in accordance with current Good Manufacturing Practices and all Applicable Laws (as defined below) and regulations and shall deliver such material to Institution DDP Incoterms 2013.

1.8 Brabant may retain the services of Institution to act as a consultant to Brabant, and Institution agrees to consult with Brabant, with respect to the regulatory approval process of fenfluramine. Institution will carry out consulting services to a maximum of 10 (ten) working days per annum (the "Consultancy"). In full and exclusive compensation for such consulting services provided by Institution under this Agreement, Brabant will pay Institution [***] euro per working day (a working day means eight (8) working hours). Brabant will further reimburse Institution for the reasonable expenses of travel, lodging and meals (where overnight stay is required) that are necessary in providing the consulting services under this Agreement, provided that such expenses are supported by original receipts and that Institution obtains the written authorization of Brabant prior to incurring such expenses. Institution shall send quarterly invoices to Brabant for the amounts that became due under this under this Section 1.8 during the immediately preceding calendar quarter. Invoices shall be addressed for the attention of Rick Stewart, Scotsgrove House, Uxmore Road, Checkendon, Oxfordshire, United Kingdom RG8 OTD. All invoices shall be paid by bank transfer within [***] from the invoice date.

1.9 Brabant shall not disclose the Data to Third Parties, except that Brabant may disclose the Data (i) to its employees, directors, Affiliates, advisors, potential investors, potential sub-licensees, potential purchasers, financing sources, interns, agents, independent contractors and consultants on a need-to-know basis, provided that Brabant has executed appropriate written agreements with each such individual or entity sufficient to enable compliance with all the provisions of this Agreement; or (ii) to a Regulatory Authority for the purposes set out in section 1.1.2.

2. DEFINITIONS.

2.1 For the purposes of this Agreement, "Applicable Laws" shall mean all national and local laws, ordinances, rules and regulations as amended, re-enacted or in force from time to time applicable to this Agreement or activities contemplated hereunder, including the rules and regulations of the relevant Regulatory Authority;

2.2 For the purposes of this Agreement, "Data" shall mean (i) any and all information regarding the use of fenfluramine obtained in the Study and currently in possession of Institution or subsequently obtained in the Study related to treatment of patients, whether provided through physician notes, patient self-reporting, clinical monitoring, prescription history, insurance claims, or other forms reducible to electronic or documentary records (such information constitutes Institution’s Confidential Information) and (ii) the Patent Application (as defined in article 2.4.) and (a) all divisional or continuation, in whole or in part, applications based on the foregoing (b) any continuations-in-part in the USA thereof; (c) any and all issued and unexpired patents and any further applications resulting from any of the applications described above; (d) any and all issued and unexpired reissues, re-examinations, renewals or extensions based on any of the patents described in (c) above and shall also include the Supplementary Protection Certificates (SPCs) and the period of protection provides by SPCs (hereinafter the “Patent Rights”).

2.3 For the purposes of this Agreement "Patent Application" shall mean the patent application in the United States pertaining to fenfluramine for the treatment of Dravet Syndrome (application number 13/887/014).

2.4 For the purposes of this Agreement, "Revenue" shall mean all proceeds and equity received from the Sub-licensing the Data and/or the Patent Rights and/or New Data including but not limited to any of the following: (a) license fees, option fees, documentation fees, lump sum payments, up-front

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payments, signing fees (whether at the stage of development, marketing or otherwise), success, bonus, maintenance and periodic (including annual) payments, royalty and minimum royalty payments, marketing fees, distribution fees, franchise fees, (c) where any sub-licence is to be granted under cross-licensing arrangements, the value of any third party licence obtained under such arrangements; (d) any premium paid over the fair market value of shares, options or other securities in respect of any of the share capital of Brabant; (e) any loan, guarantee or other financial benefit made or given other than on normal market terms; and (f) any Equity Securities, shares, options or other securities obtained from a Third Party in relation to the Data and/or Patent Rights and/or New Data. To avoid any misunderstanding, Revenue does not include compensation for services performed by either Party for a Third Party, sums that, because of the terms under which they are provided, may only be used by Brabant for funding research and which are not available for other distribution or use or sums received from Research Use.

2.5 For the purposes of this Agreement,"Marketing exclusivity" and "Data exclusivity" is a protection granted for achieving market authorization or registration of medicinal products of a "Regulatory Authority" a which have been authorized in accordance with the provisions of the Applicable Laws and for members of the European Medicines Agency REGULATION (EC) No 726/2004 OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL (31 March 2004). "Data exclusivity" is the period of time during which the medicines authorities are not allowed to consult the dossier of an originator to verify the safety and efficacy of the active moiety in the application for marketing authorization of a generic medicine. "Marketing exclusivity" and "Data exclusivity" include similar forms that exist or will occur with other Regulatory Authorities such as FDA (United States), in Japan, China or other countries.

2.6 For the purposes of this Agreement, "Regulatory Authority" shall mean any regulatory authority that has responsibility for granting registrations of fenfluramine, and the following Regulatory Authorities shall be referred to herein as: "FDA", meaning United States Food and Drug Administration and "EMA", meaning European Medicines Agency.

2.7 For the purposes of this Agreement, "Affiliate" shall mean any enterprise (a company, a person, or group of persons whether incorporated or not) entitled to carry on business in any country, which now or hereafter directly or indirectly controls, is controlled by, or is under common control with a Party; "Control" in an affiliate requires ownership of more than fifty percent (50%) of (1) voting stock of a company which has issued voting stock or (2) ownership interest in any other enterprise, or requires (direct or indirect) effective control through board memberships, voting rights, proxies, or similar arrangements.

2.8 For the purposes of this Agreement, "Research Use" shall mean shall mean use of Data and/or Patent Rights and/or New Data for all purposes other than for Direct Exploitation or licensing to Third Parties

2.9 For the purposes of this Agreement "Direct Exploitation" means to Exploit the Data, New Data and/or the Patent Right itself.

2.10 For the purposes of this Agreement, "Exploitation" means the production, reproduction, performance, promotion, publicity, development, manufacture, marketing, advertisement, distribution, licensing, sub-licensing, importation, exportation, translation, localisation, display, rental, lease, lending, sale and any other form of commercial exploitation, submit Data to a regulatory agency for instance to prove safety and efficacy of a drug and to obtain "Marketing exclusivity" and/or "Data exclusivity" of such regulatory agency and to prevent generic drug manufacturers or Third Parties from relying on this Data in their own applications or to prevent generic drug manufacturers or Third Parties from commercializing fenfluramine for certain indications and the authorisation of any Third Party to do any of the foregoing and "to Exploit" shall be interpreted accordingly.

2.11 For the purposes of this Agreement, "Third Party" shall mean any individual, enterprise, authority, or any other organizations or economic entities other than the Parties.

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2.12 For the purposes of this Agreement,"Net Sales" means the gross amount invoiced for fenfluramine by Brabant or its Affiliates to unaffiliated Third Parties, based on the list price for fenfluramine after deduction of:

2.12.1 [***];

2.12.2 [***];

2.12.3 [***]; and

2.12.4 [***].

Sales of fenfluramine between Brabant, or its Affiliates shall not be considered sales to Third Parties and shall be excluded from Net Sales calculations. For clarity, sales of fenfluramine by Brabant, or its Affiliates to a distributor shall be considered sales to Third Parties and shall be included in Net Sales calculations. All deductions from Net Sales set forth above shall be duly documented by Brabant, and its Affiliates in their books of account and to the extent possible be separately stated on purchase orders, invoices, or other documents of sale. No deductions shall be made for commissions paid to individuals whether they be with independent sales agencies or regularly employed by Brabant, Affiliates and sublicensees on their payroll, or for cost of collections. Net Sales shall occur on the date of billing, or, if not billed, when delivered by Brabant, or its Affiliates. Non-monetary consideration shall not be accepted by Brabant without the prior written consent of Institution which shall not be unreasonably withheld.

3.     INTELLECTUAL PROPERTY AND INVENTIONS

3.1 All future intellectual property rights directly related to fenfluramine in the treatment of Dravet Syndrome or related conditions stemming from infantile epilepsy and (i) arising directly from the Study and any information regarding the use of fenfluramine obtained in the Study (ii) created by Brabant and/or the research team of Prof. Lagae of KU Leuven R&D and/or the research team of Prof. Ceulemans at UZA shall be Confidential Information of Institution and Data licensed to Brabant under the terms of this Agreement. For clarity, and without limitation, (a) future intellectual property rights directly related to fenfluramine in the treatment of Dravet Syndrome or related conditions stemming from infantile epilepsy created by Brabant that do not derive directly from the Study or any information regarding the use of fenfluramine obtained in the Study shall belong to Brabant and (b) future intellectual property rights created in any clinical trials regarding fenfluramine other than the Study, in any formulations of fenfluramine or in any regulatory submissions created by or on behalf of Brabant, shall belong to Brabant ((a) and (b) hereinafter jointly referred to as the “New Data”).

3.2 Brabant shall have full responsibility for, and shall exclusively control the preparation, prosecution, any extension (including any supplementary protection certificate) and maintenance of the Patent Application and any and all applicable patent rights in the Data. Brabant shall pay all costs and expenses of filing, prosecuting and maintaining the same. Brabant shall not be in breach of this Agreement if it does not pursue the filing or prosecuting of the same. However, Brabant shall not give up any Patent Rights without prior notice to the Institution who shall be entitled to take over the cost and maintenance of any such and Brabant will have no further rights to such patent application or patent. Brabant shall on an ongoing basis promptly furnish copies of all patent related documents to Institution shall consult with Institution in all aspects of the preparation, filing, prosecution and maintenance of patent applications and patents included within the Licensed Patent Rights and shall provide Institution sufficient opportunity to comment on any document that Brabant intends to file or to cause to be filed with the relevant intellectual property or patent office and shall regularly - or upon request of the Institution - inform the Institution on the status of the patents and patent applications.

3.3 Brabant shall have the exclusive right but not the obligation to institute or defend infringement actions against Third Parties relating to the Data and the Patent Rights (the "Actions") at Brabant's sole cost

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and expense. Brabant shall not be in breach of this Agreement if it does not institute or defend the same. However Brabant shall inform Insititution of any infringement of any of the Patent Rights transferred hereunder forthwith upon such infringement coming to its notice and of any Revenue from a settlement thereon.

3.4 Institution shall promptly:

3.4.1 disclose to Brabant in writing the details of any Actions and any pending Actions; and

3.4.2 provide reasonable assistance to Brabant at its own cost and expense in relation to Section 3.1; and

3.4.3 provide reasonable assistance to Brabant at Brabant’s cost and expense in relation to Section 3.3

4.     RESEARCH USES , REPORTS AND PUBLICATION

4.1 Notwithstanding the License granted in paragraph 1.1 above, Institution retains the rights to use the Data for Research Use and patient care.

4.2 Institution reserves the right to publish findings based upon the Data. However, before publishing or making any public disclosure, Institution will give Brabant an opportunity to review the proposed publication and related illustrations and will consider modifications and/or reasonable delays suggested by Brabant to enable the filing of applications for patents or to remove any Confidential Information received from Brabant.

4.3 Brabant shall have at least [***] within which to review the proposed publication and will either give written concurrence for immediate publication or suggest the above-noted modifications and/or reasonable delays. In any event, such reasonable delays shall not exceed [***] from the date of receipt of the proposed publication by Brabant.

4.4 Publication by either of the Parties to this Agreement shall give proper credit to the other Party, unless one of the Parties to this Agreement requests otherwise.

4.5 Brabant shall grant access to Institution to any and all Brabant originated clinical trial data to the extent it relates to fenfluramine for Institution's non-exclusive use. Publication of Brabant originated clinical trial data shall subject to Brabant's agreement.

4.6 On completion of the Study Institution shall produce a final report in respect of the Study incorporating such details as Brabant may reasonably instruct from time to time.

4.7 The Parties agree, at least once every six months during the term of this Agreement, or at such other intervals and at such locations as may be agreed between them from time to time, to arrange and attend at their own cost (unless otherwise agreed) by their duly authorised representatives, meetings to discuss and review the progress and status of the Study and any other studies concerning fenfluramine or the use of fenfluramine for the treatment of Dravet Syndrome or related conditions stemming from infantile epilepsy undertaken by the Institution and the Institution in relation to the same, and consider proposals and agree actions in relation to the same with a view to ensuring the due and proper completion of the Study or any other studies concerning fenfluramine or the use fenfluramine for the treatment of Dravet Syndrome or related conditions stemming from infantile epilepsy undertaken by the Institution in accordance with such dates and quality standards as may be agreed between the Parties. Such meetings may also be held by conference call.

4.8 The Institution shall, within [***], provide full details to Brabant of any serious adverse event or other key clinical event arising from the Study.

***Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions.

6

5. CONFIDENTIALITY

5.1 Both Parties agree to accept disclosure of Confidential Information (meaning information considered by a reasonable business person as confidential, including but not limited to the Data) from the other Party pursuant to this Agreement in strict confidence and agree to only use such Confidential Information for the purposes envisaged under this Agreement and not to use for their own benefit or for the benefit of others, nor disclose Confidential Information to anyone other than their employees or employees of any of their Affiliates, and then only on a strictly applied “need to know” basis provided that such employees have been informed of the confidential nature of the Confidential Information.

5.2 Any disclosure of Confidential Information in writing shall be marked “confidential”. Any disclosure of Confidential Information by other means will be documented in writing by the Party disclosing Confidential Information within [***] from oral disclosure and an appropriately marked copy shall be delivered forthwith to the other Party. "Confidential Information" also includes any information which due to its character or nature, a reasonable person in a like position to the recipient of such information under this Agreement, and under like circumstances, would treat as confidential.

5.3 For this agreement Confidential Information shall not include, and the above confidentiality undertaking shall in no event restrict or impair both Parties’ right to use or disclose any information which:

5.3.1 at the time of disclosure is in the public domain or thereafter becomes part of the public domain through no fault of the Party receiving Confidential Information;

5.3.2 the Party receiving Confidential Information can conclusively establish that it was in its possession prior to the time of disclosure with no prior duty of confidentiality;

5.3.3 is independently made available to the Party receiving Confidential Information by a Third Party who is not thereby in violation of a confidential relationship;

5.3.4 the Party receiving Confidential Information can conclusively establish that it was independently developed by or for it without use of the Confidential Information of the other Party;

5.3.5 is required to be disclosed by law, regulation, or court of governmental order, provided that the Party that has disclosed such Confidential Information has reasonably notified the other Party prior to such disclosure of such requirement. For the avoidance of doubt, the foregoing will include any submission of Data or New Data to Regulatory Authorities in connection with an application for marketing approval with such a Regulatory Authority.

***Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions.

7

5.4 Both Parties further represent that it will not use Confidential Information of the other Party for filing a patent application or for filing any other proceeding in any patent office or court.

5.5 The obligation of both Parties not to use or disclose each other’s Confidential Information as set forth in the preceding paragraphs, shall extend for a period of [***] from the date of disclosure of such Confidential Information or until an agreement is reached between the Institution and Brabant providing for such use or disclosure, whichever occurs first.

5.6 Parties will not use the other Parties’ name or that of any of the other Parties’ employee, agent or representative nor disclose to any Third Party any details of services being performed by the Institution under this Agreement without the other Party’s prior express written consent such consent not to be unreasonably withheld or delayed.

5.7 Nothing in this Clause 5 or otherwise in this Agreement shall prevent, restrict or impair Brabant from disclosing the Data pursuant to its commercialisation activities following the first grant of Marketing exclusivity/Data exclusivity from a Regulatory Authority to Brabant for fenfluramine.

6. TERMINATION OF LICENSE

6.1 End of term termination: This Agreement and Brabant's right to use the Data and the Patent Rights shall terminate at the end of the Term.

6.2 Termination by cause:

6.2.1 Brabant shall cause one or more of its Affiliates or sub-contractors to, or shall itself use commercially reasonable efforts to: (a) develop and commercialize fenfluramine for the treatment of (i) Dravet Syndrome; or (ii) related conditions stemming from infantile epilepsy , or (iii) any & all other indications in the European Union, or (b) seek approval of fenfluramine for the treatment of Dravet Syndrome in the United States.

6.2.2 Up until the day of submission of an application for marketing approval with a regulatory authority or the commencement of a clinical trial as requested by a regulatory authority, Brabant may terminate this Agreement by giving 180 days written notice to Institution. Thereafter, Brabant shall have no right to terminate this Agreement except under Section 6.3.

6.2.3 If Brabant (a) becomes insolvent, shall make an assignment for the benefit of creditors, or shall have a petition in bankruptcy filed for or against it or for any similar relief has been filed against Brabant, or (b) fails to remedy a material breach of this Agreement within thirty (30) days after written notice by Institution; than Institution may terminate this License forthwith by giving a written notice of termination to Brabant.

6.2.4 Termination by cause returns any and all rights on Data and Patent Rights thereunder to Institution.

6.3 Brabant may terminate this Agreement forthwith upon written notice to Institution, if Institution (a) fails to remedy a material breach of this Agreement within thirty (30) days after written notice by Brabant; or (b) becomes insolvent, or if proceedings are instituted against it for reorganization or other relief under any bankruptcy law, or if any substantial part of its assets come under the jurisdiction of a receiver or trustee in an insolvency proceeding authorized by law.

6.4 Sections 1.9, 2, 5, 8.3, 8.4 and 10.6 of this Agreement shall survive termination.

7. TRANSFER OF DATA

7.1 Data shall be transferred by Institution to Brabant in de-identified form in accordance with Applicable Laws.

***Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions.

8

7.2 Notwithstanding the provisions of Section 7.1, Institution will grant access to all original (non de-identified) data to an independent data monitor appointed by Brabant, for the purposes of data verification using source document verification. It is explicitly understood that all communications regarding data verification issues, from the independent data monitor to Brabant, will be provided in a de-identified format.

7.3 Institution and Brabant agree to transfer Data electronically into the United States from areas that restrict such transfer, including, without limitation, states of the European Union, on legally compliant terms.

8.     REPRESENTATION, WARRANTIES, LIABILITY AND WAIVERS THEREOF

8.1 Warranties. Institution hereby represents that it has the full right and power to enter into this Agreement and to grant the exclusive License set forth in this Agreement.

8.2 Nothing in this Agreement shall be construed:

8.2.1 as a warranty or representation that anything made, used, sold or otherwise disposed of under any license granted in this Agreement is or will be free from infringement by patents, copyrights, trade secrets, trademarks, or other rights of Third Parties;

8.2.2 as a warranty that the Study or Consultancy will be successful in any way or that any specific results will be obtained;

8.2.3 as a warranty as to the condition, originality, patentability, non-infringement or fitness for a particular purpose of the results of the Study or the Consultancy;

8.2.4 as granting by implication, estoppel or otherwise any licenses or rights under patents or other intellectual property rights of Institution other than expressly granted herein; or

8.2.5 as a warranty that Data is patentable or that Brabant will be successful in securing the grant of any patent relating to any technology or any reissue or extensions under this Agreement.

8.3 Limitation of Liability. EXCEPT UNDER THE INDEMNITY SET FORTH HEREINBELOW, IN NO EVENT WILL EITHER PARTY BE LIABLE FOR LOST PROFITS, OR ANY SPECIAL, INDIRECT, INCIDENTAL OR CONSEQUENTIAL DAMAGES, HOWEVER CAUSED AND ON ANY THEORY OF LIABILITY, ARISING IN ANY WAY IN CONNECTION WITH THIS AGREEMENT. THIS LIMITATION WILL APPLY EVEN IF EITHER PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES AND NOTWITHSTANDING ANY FAILURE OF ESSENTIAL PURPOSE OF ANY LIMITED REMEDY.

8.4 Brabant shall at all times during and after the Term indemnify, defend, and hold Institution and its employees harmless from and against any and all liabilities, losses, claims, demands, suits, proceedings, expenses, recoveries and damages, including reasonable attorneys' fees and other costs of litigation, losses or causes of any action arising out of any allegation by Third Parties in connection with Brabant's, its Affiliates ' or sublicensees ' development, manufacturing, marketing or sale of fenfluramine.

8.5 Section 8.3 shall not apply to any liability that cannot be excluded by Applicable Laws (including but not limited to fraud, personal injury or death due to a Party's negligence), or which arises from the fraud or wilful misconduct of a Party, a Party's intentional withholding of material information, and the granting, during the Term, by the Institution to a Third Party of rights to the Data for seeking regulatory approval for the use of fenfluramine for the treatment of Dravet Syndrome or related conditions stemming from infantile epilepsy. For clarity, nothing herein shall limit the liability of either party for death or personal injury arising from negligence.

9

9. FURTHER COVENANTS

9.1 Both Institution and Brabant shall maintain secure systems for storage of patient health information consistent with Applicable Laws.

9.2 Institution and Brabant each recognize that aspects of theLicense, including its exclusivity, could be limited by future government action or court decree. Should a government order or a ruling of a court of competent jurisdiction effectively alter the terms of the License, the Parties agree to reform this Agreement in a manner to preserve its intent, while preserving, to the extent practicable, the timely transfer of Data.

10. MISCELLANEOUS PROVISIONS

10.1 This Agreement represents the whole agreement and understanding between the Parties and supersedes all other agreements and understandings between the Parties or any of them relating to the subject matter of this Agreement, including but not limited to the Previous Agreement.

10.2 No variation of this Agreement shall be effective unless it is in writing and signed by or on behalf of each of the Parties.

10.3 No waiver of any breach of or default under this Agreement shall be effective unless such waiver is in writing and has been signed by the Party against which it is asserted. No delay in exercising, or failure to exercise, any right, power or remedy provided by law or under this Agreement shall affect that right, power or remedy or operate as a waiver thereof.

10.4 Nothing in this Agreement and no action taken by the Parties pursuant to this Agreement shall constitute, or be deemed to constitute, a partnership, association, joint venture or other co-operative entity between the Parties, nor shall either Party act as the agent of the other Party for any purpose.

10.5 This Agreement may be executed in any number of counterparts and by the Parties on separate counterparts, but shall not be effective until each Party has executed at least one counterpart. Each counterpart shall constitute an original of this Agreement, but all the counterparts shall together constitute one and the same agreement.

10.6 This Agreement shall be governed by the laws of [***]. Both parties shall attempt to settle any dispute concerning the interpretation hereof or their performance hereunder in an amicable way. Should such attempts fail, then both Parties hereby agree that said disputes shall be finally settled under the Rules of Arbitration of the [***] by one arbitrator appointed in accordance with the said Rules such arbitration to be held in [***] save that nothing herein shall prevent any of the Parties seeking and obtaining interim injunctive relief in any relevant jurisdiction.

10.7 This Agreement will incur to the benefit of and be binding upon Brabant, its successors, and assigns (including without limitation, any corporate entity which may acquire all or substantially all of the assets or business of Brabant in the field of this Agreement). No assignment of this Agreement, either in whole, or in part, or of any of the rights and obligations hereunder, can be made by Brabant without prior written consent of Institution such consent not to be unreasonably withheld delayed or conditioned. Consent shall not be necessary for any assignment or transfer of this Agreement to a company that is an Affiliate of Brabant or in case of assignment, transfer or sale to a Third Party of all or substantially all of the portion of its business (including any (application for) marketing approval) to which this Agreement relates. Brabant will give Institution at least one month prior written notice of such intended assignment, transfer or sale.

SIGNED by or on behalf of the Parties.

SIGNED by or on behalf of KU LEUVEN R&D:

***Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions.

10

/s/ Koenraad Debackere

Prof. dr. ir. Koenraad Debackere

Managing Director

/s/ Paul Van Dun

Paul Van Dun

General Manager

For Approval

/s/ Lieven Lagae

Prof. dr. Lieven Lagae

Supervisor

SIGNED by or on behalf of UNIVERSITY HOSPITAL ANTWERP

/s/ Johnny Van der Straeten

Mr. Johnny Van der Straeten

Managing Director

For Approval

/s/ B. Ceulemans

Prof. Dr. B. Ceulemans

Department of Neurology-Child Neurology

SIGNED by or on behalf of BRABANT PHARMA LIMITED

Name: /s/ Rick Stewart

Title: Director

11

EX-10.6

OFFICE LEASE

KILROY REALTY

DEL MAR CORPORATE CENTER

KILROY REALTY, L.P.,

a Delaware limited partnership, as Landlord,

and

ZOGENIX, INC.,

a Delaware corporation, as Tenant.

TABLE OF CONTENTS

ARTICLE 1	PREMISES, BUILDING, PROJECT, AND COMMON AREAS	1
ARTICLE 2	LEASE TERM; OPTION TERM(S)	2
ARTICLE 3	BASE RENT	4
ARTICLE 4	ADDITIONAL RENT	5
ARTICLE 5	USE OF PREMISES	6
ARTICLE 6	SERVICES AND UTILITIES	6
ARTICLE 7	REPAIRS	7
ARTICLE 8	ADDITIONS AND ALTERATIONS	8
ARTICLE 9	COVENANT AGAINST LIENS	9
ARTICLE 10	INDEMNIFICATION AND INSURANCE	9
ARTICLE 11	DAMAGE AND DESTRUCTION	11
ARTICLE 12	NONWAIVER	12
ARTICLE 13	CONDEMNATION	12
ARTICLE 14	ASSIGNMENT AND SUBLETTING	12
ARTICLE 15	SURRENDER OF PREMISES; OWNERSHIP AND REMOVAL OF TRADE FIXTURES	14
ARTICLE 16	HOLDING OVER	14
ARTICLE 17	ESTOPPEL CERTIFICATES	15
ARTICLE 18	SUBORDINATION	15
ARTICLE 19	DEFAULTS; REMEDIES	15
ARTICLE 20	COVENANT OF QUIET ENJOYMENT	17
ARTICLE 21	SECURITY DEPOSIT	17
ARTICLE 22	SUBSTITUTION OF OTHER PREMISES	17
ARTICLE 23	SIGNS	17
ARTICLE 24	COMPLIANCE WITH LAW	18
ARTICLE 25	LATE CHARGES	18
ARTICLE 26	LANDLORD'S RIGHT TO CURE DEFAULT; PAYMENTS BY TENANT	19
ARTICLE 27	ENTRY BY LANDLORD	19
ARTICLE 28	TENANT PARKING	19
ARTICLE 29	MISCELLANEOUS PROVISIONS	19

(i)

INDEX

	Page (s)
Abatement Event	7
Accountant	5
Additional Notice	7
Additional Rent	5
Alterations	8
Applicable Laws	19
Audit Period	5
Award	4
Bank Prime Loan	19
Base Building	8
Base Rent	4
Base Year	Exhibit C
BOMA	1
Brokers	22
Building	1
Building Common Areas,	1
Building Hours	6
Business Hours	6
Casualty	11
CC&Rs	6
Common Areas	1
Comparable Area	4
Comparable Buildings	4
Comparable Deals	3
Comparable Term	3
Control,	14
Cosmetic Alterations	8
Demising Work	Exhibit B
Direct Expenses	Exhibit C
Energy Disclosure Requirements	24
Estimate	Exhibit C
Estimate Statement	Exhibit C
Estimated Excess	5
Excess	Exhibit C
Exercise Notice	3
Expense Year	Exhibit C
First Base Rent Abatement	5
First Base Rent Abatement Period	5
Force Majeure	21
Holidays	6
HVAC	6
Identification Requirements	22
Initial Notice	7
Intention to Transfer Notice	13
Interest Rate	19
Landlord	1
Landlord Parties	9
Landlord Repair Notice	11
Landlord Response Date	3
Landlord Response Notice	3
Landlord's Option Rent Calculation	3
Lease	1
Lease Commencement Date	2
Lease Expiration Date	2
Lease Month	2
Lease Term	1

(ii)

Lease Year	2
Lines	22
Market Rent	3
Net Worth	14
Neutral Arbitrator	4
Notices	21
Operating Expenses	Exhibit C
Option Rent	3
Option Term	3
Option Tenant Improvement Allowance	3
Original Improvements	10
Original Tenant	3
Other Improvements	23
Outside Agreement Date	4
Second Base Rent Abatement	4
Second Base Rent Abatement Period	4
Penetrating Work	24
Permitted Transferee	14
Permitted Transferee Assignee	14
Permitted Use	2
Premises	1
Project Common Areas,	1
Project,	1
Proposition 13	Exhibit C
Renovations	22
Rent.	5
Reserved Parking Passes	20
Rules and Regulations	6
Security Deposit	17
Sensor Areas	23
Statement	Exhibit C
Subject Space	13
Summary	1
Tax Expenses	Exhibit C
TCCs	1
Tenant	1
Tenant Delay	3
Tenant Energy Use Disclosure	24
Tenant Parties	9
Tenant's Option Rent Calculation	4
Tenant's Share	Exhibit C
Third Base Rent Abatement	4
Third Base Rent Abatement Period	4
Third Party Contractor	11
Transfer	13
Transfer Premium	13
Transferee	13
Transfers	13
Water Sensors	23
Work Letter	1
EXHIBIT A -OUTLINE OF PREMISES
EXHIBIT B -WORK LEITER
EXHIBIT C -OPERATING EXPENSE DEFINITIONS AND CALCULATION PROCEDURES
EXHIBIT D -RULES AND REGULATIONS
EXHIBIT E -FORM OF TENANTS ESTOPPEL CERTIFICATE EXHIBIT F -NOTICE OF LEASE TERM DATES
EXHIBIT G -OUTLINE OF TENANT PARKING

(iii)

DEL MAR CORPORATE CENTER

OFFICE LEASE

This Office Lease (the "Lease"), dated as of the date set forth in Section 1 of the Summary of Basic Lease Information (the "Summary"), below, is made by and between KILROY REALTY, L.P., a Delaware limited partnership ("Landlord"), and ZOGENIX, INC., a Delaware corporation ("Tenant").

SUMMARY OF BASIC LEASE INFORMATION

	TERMS OF LEASE	DESCRIPTION
1.	Date:	June 25, 2014.
2.	Premises: (Article 1)
	2.1    Building:	That certain six (6)-story, "Class-A" office building (the "Building"), located at 12400 High Bluff Drive, San Diego, California 92130, which Building contains 208,961 rentable (193,766 usable) square feet of space.
	2.2    Premises:	17,361 rentable (approximately 15,920 usable) square feet of space located on the sixth (6th) floor of the Building and commonly known as Suite 650, as further depicted on Exhibit A to the Office Lease.
	2.2    Premises:	The Building is the principal component of an office project known as "Del Mar Corporate Centre," as further set forth in Section 1.1.2 of this Lease.
3.	Lease Term (Article 2):
	3.1    Length of Term:	Approximately five (5) years and four (4) months.
	3.2    Lease Commencement Date:	The later to occur of the date upon which the Premises is "Ready for Occupancy," as that term is set forth in Section 5.1 of the Work Letter attached as Exhibit B to the Lease, or December 1, 2014.
	3.3    Lease Expiration Date:	The last day of the calendar month in which the sixty-fourth (641h) monthly anniversary of the Lease Commencement Date occurrs; provided, however, to the extent the Lease Commencement Date occurs on the first day of a calendar month, then the Lease Expiration Date shall be the day immediately preceding the sixty-fourth (64th) monthly anniversary of the Lease Commencement Date.
	3.4    Option Term(s):	One (1) five (5)-year option(s) to renew, as more particularly set forth in Section 2.2 of this Lease.
4.	Base Rent (Article 3):

Lease Month	Annualized Base Rent*	Monthly Installment of Base Rent*	Monthly Rental Rate per Rentable Square Foot*
1-12	$885,411.00	$73,784.25	$4.25
13-24	$914,186.88	$76,182.24	$4.39**
25-36	$943,897.92	$78,658.16	$4.53°
37-48	$974,574.60	$81,214.55	$4.68**
49-60	$1,006,248.24	$83,854.02	$4.83**
61-64	$1,038,951.36	$86,579.28	$4.99**

* The initial Monthly Installment of Base Rent amount was calculated by multiplying the initial Monthly Rental Rate per Rentable Square Foot amount by the number of rentable square feet of space in the Premises, and the initial Annual

Base Rent amount was calculated by multiplying the initial Monthly Installment of Base Rent amount by twelve (12).

In all subsequent Base Rent payment periods during the Lease Term commencing on the first (151) day of the full

calendar month that is Lease Month 13, the calculation of each Monthly Installment of Base Rent amount reflects an annual increase of three and 25/100 percent (3.25%) and each Annual Base Rent amount was calculated by multiplying the corresponding Monthly Installment of Base Rent amount by twelve (12).

0 Subject to the terms set forth in Section 3.2 below, the Base Rent attributable to the four (4) month period commencing on the first (1st) day of the second (2nd) full calendar month of the Lease Term and ending on the last day of the fifth (5th) full calendar month of the Lease Term shall be abated by one hundred percent (100%). In addition, subject to the terms set forth in Section 3.2 below, the Base Rent attributable to the sixth (6th) full calendar month of the Lease Term (i.e., a one (1) month period) shall be abated by fifty percent (50%). Abatement applicable to months 7 and 8 see section 3.2.

Summary P-1

** The amounts identified in the column entitled "Monthly Rental Rate per Rentable Square Foot" are rounded amounts and are provided for informational purposes only.

5.	Base Year (Article 4 and Exhibit C):	Calendar year 2015; provided, however, electricity is separately metered and directly paid by Tenant to the applicable utility provider or, at Landlord's option, to Landlord.
6.	Tenant's Share	Approximately 8.3082%
	(Article 4 and Exhibit C):
7.	Permitted Use (Article 5):	Tenant shall use the Premises solely for general office use and uses incidental thereto (the "Permitted Use"); provided,
		however, that notwithstanding anything to the contrary set forth
		hereinabove, and as more particularly set forth in the Lease,
		Tenant shall be responsible for operating and maintaining the
		Premises pursuant to, and in no event may Tenant's Permitted
		Use violate, (A) Landlord's "Rules and Regulations," as that
		term is set forth in Article 5 of this Lease, (B) all "Applicable
		Laws," as that term is set forth in Article 24 of this Lease,
		(C) all applicable zoning, building codes and the "CC&Rs," as
		that term is set forth in Article 5 of this Lease, and (D) first­
		class office standards in the market in which the Project is
		located.
8.	Security Deposit
	(Article 21):	$86,579.28.
9.	Parking Pass Ratio (Article 28):	Five (5) unreserved parking passes for every 1,000 usable square feet of the Premises, of which six (6) passes shall each be
		for the use of a reserved parking space, subject to Article 28.
10.	Address of Tenant	Zogenix, Inc.
	(Section 29.16):	12400 High Bluff Drive, Suite 650
		San Diego, California 92130
		Attention: Roger L. Hawley, CEO
		Telephone Number: (858) 436-3385
		E-mail: rhawley@Zogenix.com
		(Prior to Lease Commencement Date)
	and	Zogenix, Inc.
		12400 High Bluff, Suite 650
		San Diego, California 92207
		Attention: Roger L. Hawley, CEO
		Telephone Number: (858) 436-3385
		E-mail: rhawley@Zogenix.com
		(After Lease Commencement Date)
11.	Address of Landlord
	(Section 29.16):	Kilroy Realty, L.P.
		c/o Kilroy Realty Corporation
		12200 West Olympic Boulevard, Suite 200
		Los Angeles, California 90064
		Attention: Legal Department
		with copies to:
		Kilroy Realty Corporation
		12200 West Olympic Boulevard, Suite 200
		Los Angeles, California 90064
		Attention: Mr. John Fucci
12.	Broker(s) (Section 29.20):

Summary P-2

	Representing Tenant:	Representing Landlord:
	Patrick Rohan	CBRE, Inc.
	Cushman and Wakefield of San Diego, Inc.	4365 Executive Drive, Suite 1600
	4747 Executive Drive, Suite 900	San Diego, California 92121
	San Diego, California 92121
13.	Improvement Allowance (Article 2 of Exhibit B):	$22.00 per rentable square foot of the Premises for a total of $381,942.00.

Summary P-3

ARTICLE 1

PREMISES, BUILDING, PROJECT, AND COMMON AREAS

1.1    Premises. Building, Project and Common Areas.

1.1.1    The Premises. Landlord hereby leases to Tenant and Tenant hereby leases from Landlord the premises set forth in Section 2.2 of the Summary (the "Premises"). The outline of the Premises is set forth in Exhibit Aattached hereto and the Premises has approximately the number of rentable square feet as set forth in Section 2.2of the Summary. The parties hereto agree that the lease of the Premises is upon and subject to the terms, covenants and conditions (the "TCCs") herein set forth, and Tenant covenants as a material part of the consideration for this Lease to keep and perform each and all of such TCCs by it to be kept and performed and that this Lease is made upon the condition of such performance. The parties hereto hereby acknowledge that the purpose of Exhibit Ais to show the approximate location of the Premises in the "Building," as that term is defined in Section 1.1.2, below, only, and such Exhibit is not meant to constitute an agreement, representation or warranty as to the construction of the Premises, the precise area thereof or the specific location of the "Common Areas," as that term is defined in Section 1.1.3, below, or the elements thereof or of the access ways to the Premises or the "Project," as that term is defined in Section 1.1.2, below. Except as specifically set forth in this Lease and in the Work Letter attached hereto as Exhibit B(the "Work Letter"), Tenant shall accept the Premises in its existing "as-is" condition and Landlord shall not be obligated to provide or pay for any improvement work or services related to the improvement of the Premises. Tenant also acknowledges that neither Landlord nor any agent of Landlord has made any representation or warranty regarding the condition of the Premises, the Building or the Project or with respect to the suitability of any of the foregoing for the conduct of Tenant's business, except as specifically set forth in this Lease and the Work Letter. The taking of possession of the Premises by Tenant shall conclusively establish that the Premises and the Building were at such time in good and sanitary order, condition and repair.

1.1.2    The Building and the Project. The Premises is a part of the building set forth in Section 2.1 of the Summary (the "Building"). The Building is the principal component of an office project known as "Del Mar Corporate Centre." The term "Project," as used in this Lease, shall mean (i) the Building and the Common Areas, (ii) the land (which is improved with landscaping, parking structures and/or facilities and other improvements) upon which the Building, parking facilities and the Common Areas are located, and (iii) at Landlord's discretion, any additional real property, areas, land, buildings or other improvements added thereto.

1.1.3    Common Areas. Tenant shall have the non-exclusive right to use in common with other tenants in the Project, and subject to the rules and regulations referred to in Article5of this Lease, those portions of the Project which are provided, from time to time, for use in common by Landlord, Tenant and any other tenants of the Project (such areas, together with such other portions of the Project designated by Landlord, in its discretion, including certain areas designated for the exclusive use of certain tenants, or to be shared by Landlord and certain tenants, are collectively referred to herein as the "Common Areas"). The Common Areas shall consist of the "Project Common Areas" and the "Building Common Areas" (as both of those terms are defined below). The term "Project Common Areas," as used in this Lease, shall mean the portion of the Project designated as such by Landlord. The term "Building Common Areas," as used in this Lease, shall mean the portions of the Common Areas located within the Building designated as such by Landlord. The manner in which the Common Areas are maintained and operated shall be at the sole discretion of Landlord and the use thereof shall be subject to such rules, regulations and restrictions as Landlord may make from time to time, provided that such rules, regulations and restrictions do not unreasonably interfere with the rights granted to Tenant under this Lease and the permitted use granted under Article 5, below. Landlord reserves the right to close temporarily, make alterations or additions to, or change the location of elements of the Project and the Common Areas; provided that no such changes shall be permitted which materially reduce Tenant's rights or access hereunder. Except when and where Tenant's right of access is specifically excluded in this Lease, Tenant shall have the right of access to the Premises, the Building, and the Project parking facility twenty-four (24) hours per day, seven (7) days per week during the "Lease Term," as that term is defined in Article 2, Section 2.1, below.

1.2    Verification of Rentable Sq uare Feet of Premises and Building. For purposes of this Lease, "rentable square feet" and "usable square feet" shall be calculated pursuant to the Office Buildings: Standard Methods of Measurement and Calculating Rentable Area - 2010 (Method A) , and its accompanying guidelines (collectively, "BOMA"); provided, however, in no event shall the rentable square feet for the Premises, for purposes of this Lease, total an amount which is more or less than twenty-five (25) square feet of the anticipated square footage identified in Section 2.2 of the Summary. Within thirty (30) days after completion of the "Demising Work" (as that term is defined in Section 1.2 of this Work Letter), Landlord's space planner/architect shall measure the rentable and usable square feet of the Premises. The determination of Landlord's space planner/architect shall be conclusive and binding upon the parties. In the event that Landlord's space planner/architect determines that the amounts thereof shall be different from those set forth in this Lease (subject to the maximum value limits pursuant to the first sentence), all amounts, percentages and figures appearing or referred to in this Lease based upon such incorrect amount (including, without limitation, the amount of the "Rent" and any "Security Deposit,'' as those terms are defined in Section 4.1and Article 21 of this Lease, respectively, and any improvement allowance as set forth in Article 1of Exhibit B) shall be modified in accordance with such determination. If such determination is made, it will be confirmed in writing by Landlord to Tenant.

1.3    Right of First Refusal. Landlord hereby grants to the Tenant originally named herein (the "Original Tenant") and its "Permitted Transferees" (as that term is defined in Section 14.8of this Lease), an ongoing right of first refusal during the initial Lease Term only, with respect to the remaining contiguous space on the sixth (61h) floor of the Building containing approximately 15,784 rentable square feet of space and commonly known as Suite 600 (the "First Refusal Space").

1.3.l    Procedure for Lease.

1.3.1.1    Procedure for Offer. Landlord shall notify Tenant (the "First Refusal Notice") from time-to-time when and if Landlord receives a "bona-fide third-party offer" for the First Refusal Space. Pursuant to such First Refusal Notice, Landlord shall offer to lease to Tenant the applicable First Refusal Space. The First Refusal Notice shall describe the First Refusal Space, and the lease term, rent and other fundamental economic terms and conditions upon which Landlord proposes to lease such First Refusal Space pursuant to the bona-fide third-party offer. For purposes of this Section 1.3.a "bona-fide third-party offer" shall mean an ofter or a counter-offer received by Landlord to lease first Kefusal Space from an unaffiliated and qualified third party which Landlord would otherwise be willing to accept (but for Tenant's superior rights hereunder). For purposes of example only, the following would each constitute a bona-fide third-party offer:

1.3.1.1.1    Landlord receives a request for proposal from an unaffiliated and qualified third

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party. Landlord responds to the request for proposal with a lease proposal and subsequently receives a written bona-fide counter proposal from the unaffiliated and qualified third party.

1.3.1.1.2    Landlord receives a written offer to lease from an unaffiliated and qualified third party. Landlord responds to the offer with a written counter offer and subsequently receives a bona-fide counter to Landlord's counter offer from the unaffiliated and qualified third party.

1.3.1.2    Procedure for Acceptance. If Tenant wishes to exercise Tenant's right of first refusal with respect to the First Refusal Space described in the First Refusal Notice, then within seven (7) days of delivery of the First Refusal Notice to Tenant (the "Election Period"), Tenant shall deliver to Landlord written notice (an "Election Notice") of Tenant's exercise of its right of first refusal with respect to all of the First Refusal Space described in the First Refusal Notice at the rent, for the term and upon the other fundamental economic terms and conditions contained in such First Refusal Notice, including, but not limited to rental concessions and improvement allowances. If Tenant does not so notify Landlord within such Election Period of Tenant's exercise of its first refusal right, or Tenant affirmatively elects not to exercise such first refusal right (either of the foregoing being referred to herein as a "First Refusal Rejection"), then Landlord shall be free to negotiate and enter into a lease for the First Refusal Space to anyone whom it desires on any terms it desires. Notwithstanding the foregoing, Tenant's ongoing right of first refusal shall commence only following the expiration or earlier termination of any existing lease of the First Refusal Space (or portion thereof), including any renewal, extension or expansion rights set forth in such leases, regardless of whether such renewal, extension or expansion rights are executed strictly in accordance with their terms, or pursuant to a lease amendment or a new lease, and such right of first refusal shall further be subordinate to (A) all rights of the then-existing tenants in the First Refusal Space (i.e., at the time any applicable First Refusal Notice is delivered (or would otherwise be scheduled to be delivered)), (B) all rights of first offer, first refusal, expansion or other similar rights with respect to such First Refusal Space granted to AMN Healthcare, Inc., and Relational Investors LLC, and (C) all rights of extension (regardless of whether such renewal, extension or expansion rights are executed strictly in accordance with their terms, or pursuant to a lease amendment or a new lease), first offer, first refusal, expansion or other similar rights with respect to such First Offer Space contained in Landlord's lease with AMN Healthcare, Inc., and/or in any "Intervening Lease," as that term is defined below (each, a "ROFR Superior Right Holder"). For purposes hereof, an "Intervening Lease" shall mean any lease to a third-party of First Refusal Space identified in a particular First Refusal Notice following Tenant's election (or deemed election) not to exercise its right to lease such space pursuant to the terms of Section 1.3 of this Lease.

1.3.2    Amendment to Lease. If Tenant timely exercises Tenant's right of first refusal to lease First Refusal Space as set forth herein, Landlord and Tenant shall within thirty (30) days thereafter execute an amendment to this Lease (the "First Refusal Space Amendment") for such First Refusal Space upon the terms set forth in the First Refusal Notice, including, but not limited to rent (the "First Refusal Space Rent"), but otherwise upon the TCCs set forth in this Lease and this Section 1.3. Notwithstanding the foregoing, Landlord may, at its sole option, require that a separate lease be executed by Landlord and Tenant in connection with Tenant's lease of the First Refusal Space, in which event such lease (the "First Refusal Space Lease") shall be on the same TCCs as this Lease, except as provided in this Section 1.3 and specifically in this Lease to the contrary. The First Refusal Space Lease, if applicable, shall be executed by Landlord and Tenant within thirty

(30) days following Tenant's exercise of its right to lease the First Refusal Space. Notwithstanding the foregoing documentation obligations, Landlord and Tenant hereby acknowledge and agree that Tenant's timely delivery of the Election Notice shall, in and of itself, conclusively establish Tenant's obligation to lease the subject First Refusal Space on the express TCCs set forth in the corresponding First Refusal Notice.

1.3.3    No Defaults; Required Financial Condition of Tenant. The rights contained in this Section 1.3 shall be personal to the Original Tenant and its Permitted Transferees and may only be exercised by the Original Tenant or a Permitted Transferee (and not any other assignee, sublessee or other transferee of the Original Tenant's interest in this Lease) if the Original Tenant and/or a Permitted Transferee occupies not less than the entire then existing Premises. The right to lease the First Refusal Space as provided in this Section 1.3may not be exercised if, as of the date Tenant attempts to exercise its right of first refusal with respect to the First Refusal Space described in the First Refusal Notice, or as of the scheduled date of delivery of such First Refusal Space to Tenant, (A) Tenant is in default pursuant to the terms of this Lease (beyond the applicable notice and cure periods), and (B) Tenant has previously been in default under this Lease (beyond the applicable notice and cure periods) during the previous twenty-four (24) month period.

1.3.4    First Refusal Space Commencement Date; Construction in First Refusal Space. The commencement date for the First Refusal Space shall be the applicable date specified inthe applicable First Refusal Notice (the "First Refusal Space Commencement Date") and the term of Tenant's lease of such First Refusal Space shall expire on the applicable date set forth in the First Refusal Notice (the "First Refusal Space Expiration Date"). The term of Tenant's occupancy of the First Refusal Space shall be referred to herein as a "First Refusal Space Lease Term." Except as otherwise expressly identified in the First Refusal Notice, Tenant shall take the First Refusal Space in its "as is" condition, and the construction of improvements in the First Refusal Space shall comply with the terms of Article 8 of this Lease.

1.3.5    Termination of First Refusal Right. Tenant's right of first refusal set forth in this Section 1.3 shall apply to any extension of the Lease Term (as defined below) as provided in Section 2.2.

ARTICLE 2

LEASE TERM; OPTION TERMS

2.1    Initial Lease Term. The TCCs and provisions of this Lease shall be effective as of the date of this Lease. The term of this Lease (the "Lease Term") shall be as set forth in Section 3.1 of the Summary, shall commence on the date set forth in Section 3.2of the Summary (the "Lease Commencement Date"), and shall terminate on the date set forth in Section 3.3 of the Summary (the "Lease Expiration Date") unless this Lease is sooner terminated as hereinafter provided.

Tenant hereby acknowledges that the Premises are currently occupied by another tenant of the Building. If Landlord is unable for any reason to deliver possession of the Premises to Tenant on any specific date, then Landlord shall not be subject to any liability for its failure to do so, and such failure shall not affect the validity of this Lease or the obligations of Tenant hereunder. For purposes of this Lease, the term "Lease Year" shall mean each consecutive twelve (12) calendar month period during the Lease Term; provided, however, that the first Lease Year shall commence on the Lease Commencement Date and end on the last day of the month in which the first anniversary of the Lease

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Commencement Date occurs (or if the Lease Commencement Date is the first day of a calendar month, then the first Lease Year shall commence on the Lease Commencement Date and end on the day immediately preceding the first anniversary of the Lease Commencement Date), and the second and each succeeding Lease Year shall commence on the first day of the next calendar month; and further provided that the last Lease Year shall end on the Lease Expiration Date. For purposes of this Lease, the term "Lease Month" shall mean each succeeding calendar month during the Lease Term; provided that the first Lease Month shall commence on the Lease Commencement Date and shall end on the last day of the first full calendar month of the Lease Term and that the last Lease Month shall expire on the Lease Expiration Date. At any time during the Lease Term, Landlord may deliver to Tenant a notice in the form as set forth in Exhibit F, attached hereto, as a confirmation only of the information set forth therein, which Tenant shall execute and return to Landlord within five (5) days of receipt thereof.

2.2 Option Term.

2.2.l Option Right. Landlord hereby grants the tenant originally named herein (the "Original Tenant") and its "Permitted Transferee Assignee," as that term is set forth in Section 14.8of this Lease, one (1) option to extend the Lease Term for the entire Premises by a period of five (5) years (the "Option Term"). Such option shall be exercisable only by "Notice" (as that term is defmed in Section 29.16 of this Lease) delivered by Tenant to Landlord as provided below, provided that, as of the date of delivery of such Notice, (i) Tenant is not then in economic or material, non-economic default under this Lease (beyond the applicable notice and cure periods), (ii) Tenant has not been in economic or material, non­ economic default under this Lease (beyond the applicable notice and cure periods) more than once during the prior twelve (12) month period or more than two (2) times during the prior Lease Term, and (iii) there has been no material adverse change in Tenant's financial condition during the prior twenty-four (24)-month period. Upon the proper exercise of such option to extend (and provided that, at Landlord's election, as of the end of the Lease Term, (A) Tenant is not in economic or material, non­ economic default under this Lease (beyond the applicable notice and cure periods), (B) Tenant has not been in economic or material, non-economic default under this Lease (beyond the applicable notice and cure periods) more than once during the prior twelve (12) month period or more than two (2) times during the prior Lease Term, and (C) there has been no material adverse change in Tenant's financial condition during the prior twenty-four (24)-month period), then the Lease Term, as it applies to the entire Premises, shall be extended for a period of five (5) years. The rights contained in this Section 2.2shall only be exercised by the Original Tenant or its Permitted Transferee Assignee (and not any other assignee, sublessee or other transferee of the Original Tenant's interest in this Lease) if Original Tenant and/or its Permitted Transferee Assignee is in occupancy of the entire then-existing Premises.

2.2.2    Option Rent. The Rent payable by Tenant during the Option Term (the "Option Rent") shall be equal to the "Market Rent" as set forth below. For purposes of this Lease, the term "Market Rent" shall mean rent (including additional rent, and considering (x) any "base year" or "expense stop" applicable thereto, as well as (y) the inclusion of any utility expenses as a part thereof), including all escalations, at which tenants, as of the commencement of the term are, pursuant to transactions completed within the twelve (12) months prior to the first day of the Option Term, provided that timing adjustments shall be made to reflect any changes in the Market Rent following the date of any particular Comparable Deal up to the date of the commencement of the Option Term, leasing non-sublease, non-encumbered, non-synthetic, non-equity, non­ expansion space (unless such space was leased pursuant to a definition of "fair market" comparable to the definition of Market Rent) comparable in size, location and quality to the Premises for a "Comparable Term," as that term is defined in this Section 2.2.2 (the "Comparable Deals"), which comparable space is located in the "Comparable Buildings," as that term is defined in this Section 2.2.2, giving appropriate consideration to the annual rental rates per rentable square foot, the standard of measurement by which the rentable square footage is measured, the ratio of rentable square feet to usable square feet, and taking into consideration only, and granting only, the following concessions (provided that the rent payable in Comparable Deals in which the terms of such Comparable Deals are determined by use of a discounted fair market rate formula shall be equitably increased in order that such Comparable Deals will not reflect a discounted rate): (a) rental abatement concessions, if any, being granted such tenants in connection with such comparable spaces; (b) landlord improvements or allowances provided or to be provided for such comparable space, taking into account the value of the existing improvements in the Premises, such value to be based upon the age, quality and layout of the improvements and the extent to which the same could be utilized by general office users as contrasted with this specific Tenant, (c) Proposition 13 protection, and (d) all other monetary concessions, if any, being granted such tenants in connection with such comparable space; provided, however, that notwithstanding anything to the contrary herein, no consideration shall be given to the (I) any period of rental abatement, if any, granted to tenants in Comparable Deals in connection with the design, permitting and construction of improvements, or (II) fact that Landlord is or is not required to pay a real estate brokerage commission in connection with the applicable term or the fact that the Comparable Deals do or do not involve the payment of real estate brokerage commissions. The term "Comparable Term" shall refer to the length of the lease term, without consideration of options to extend such term, for the space in question. In addition, the determination of the Market Rent shall include a determination as to whether, and if so to what extent, Tenant must provide Landlord with financial security, such as a letter of credit or guaranty, for Tenant's rent obligations during any Option Term. Such determination shall be made by reviewing the extent of financial security then generally being imposed in Comparable Deals upon tenants of comparable financial condition and credit history to the then existing financial condition and credit history of Tenant (with appropriate adjustments to account for differences in the then­ existing financial condition of Tenant and such other tenants). If in determining the Market Rent, Tenant is entitled to a improvement or comparable allowance for the improvement of the Premises (the "Option Term Improvement Allowance"), Landlord may, at Landlord's sole option, elect any or a portion of the following: (A) to grant some or all of the Option Term Improvement Allowance to Tenant in the form as described aboye (i.e., as an improvement allowance), and/or (B) to reduce the rental rate component of the Market Rent to be an effective rental rate which takes into consideration that Tenant will not receive the total dollar value of such excess Option Term Improvement Allowance (in which case the Option Term Improvement Allowance eYidenced in the effective rental rate shall not be granted to Tenant). The term "Comparable Buildings" shall mean the Building, and other first-class institutionally-owned office buildings which are comparable to the Building in terms of tenant mix, age (based upon the date of completion of construction or major renovation as to the building containing the portion of the Premises in question), quality of construction, level of services and amenities (including the type ( e.g., surface, covered, subterranean) and amount of parking), size and appearance, and are located in the "Comparable Area," which is "Del Mar Heights."

2.2.3    Exercise of Option. The option contained in this Section 2.2shall be exercised by Tenant, if at all, only in the manner set forth in this Section 2.2.3. Tenant shall deliver notice (the "Exercise Notice") to Landlord not more than twelve (12) months nor less than nine (9) months prior to the expiration of the initial Lease Term, stating that Tenant is exercising its option. Concurrently with such Exercise Notice, Tenant shall deliver to Landlord Tenant's calculation of the Market Rent (the "Tenant's Option Rent Calculation"). Landlord shall deliver notice (the "Landlord Response Notice") to Tenant on or before the date which is thirty (30) days after Landlord's receipt of the Exercise Notice and Tenant's Option Rent Calculation (the "Landlord Response Date"), stating that (A) Landlord is accepting Tenant's Option Rent Calculation as the Market Rent, or (B) rejecting Tenant's Option Rent Calculation and setting forth Landlord's calculation of the Market Rent (the "Landlord's Option Rent Calculation"). Within ten (10) business days of its receipt of the Landlord Response Notice, Tenant may, at its option, accept the Market Rent contained in the Landlord's Option Rent

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Calculation. If Tenant does not affirmatively accept or Tenant rejects the Market Rent specified in the Landlord's Option Rent Calculation, the parties shall follow the procedure set forth in Section 2.2.4 below, and the Market Rent shall be determined in accordance with the terms of Section 2.2.4below.

2.2.4    Determination of Market Rent. In the event Tenant objects or is deemed to have objected to the Market Rent, Landlord and Tenant shall attempt to agree upon the Market Rent using reasonable good-faith efforts. If Landlord and Tenant fail to reach agreement within thirty (30) days following Tenant's objection or deemed objection to the Landlord's Option Rent Calculation (the "Outside Agreement Date"), then, within two (2) business days following such Outside Agreement Date, (x) Landlord may reestablish the Landlord's Option Rent Calculation by delivering written notice thereof to Tenant, and (y) Tenant may reestablish the Tenant's Option Rent Calculation by delivering written notice thereof to Landlord. If Landlord and Tenant thereafter fail to reach agreement within seven (7) business days of the Outside Agreement Date, then in connection with the Option Rent, Landlord's Option Rent Calculation and Tenant's Option Rent Calculation, each as most recently delivered to the other party pursuant to the TCCs of this Section 2.2, shall be submitted to the "Neutral Arbitrator," as that term is defined in Section 2.2.4.1of this Lease, pursuant to the TCCs of this Section 2.2.4. The submittals shall be made concurrently with the selection of the Neutral Arbitrator pursuant to this Section 2.2.4and shall be submitted to arbitration in accordance with Section 2.2.4.1 through 2.2.4.5 of this Lease, but subject to the conditions, when appropriate, of Section 2.2.3.

2.2.4.l Landlord and Tenant shall mutually, reasonably appoint one (1) arbitrator who shall by profession be a real estate broker, appraiser or attorney who shall have been active over the five (5) year period ending on the date of such appointment in the leasing (or appraisal, as the case may be) of first-class institutionally-owned, mid-rise commercial properties in the Comparable Area (the "Neutral Arbitrator"). The determination of the Neutral Arbitrator shall be limited solely to the issue of whether Landlord's Option Rent Calculation or Tenant's Option Rent Calculation, each as submitted to the Neutral Arbitrator pursuant to Section 2.2.4, above, is the closest to the actual Market Rent as determined by such Neutral Arbitrator, taking into account the requirements of Section 2.2.2 of this Lease. Such Neutral Arbitrator shall be appointed within fifteen (15) days after the applicable Outside Agreement Date. Neither the Landlord nor Tenant may, directly or indirectly, consult with the Neutral Arbitrator prior to, or subsequent to, his or her appearance. The Neutral Arbitrator shall be retained via an engagement letter jointly prepared by Landlord's counsel and Tenant's counsel.

2.2.4.2    The Neutral Arbitrator shall, within thirty (30) days of his/her appointment, reach a decision as to Market Rent and determine whether the Landlord's Option Rent Calculation or Tenant's Option Rent Calculation, each as submitted to the Neutral Arbitrator pursuant to Section 2.2.4, above, is closest to Market Rent as determined by such Neutral Arbitrator and simultaneously publish a ruling ("Award") indicating whether Landlord's Option Rent Calculation or Tenant's Option Rent Calculation is closest to the Market Rent as determined by such Neutral Arbitrator. Following notification of the Award, the Landlord's Option Rent Calculation or Tenant's Option Rent Calculation, whichever is selected by the Neutral Arbitrator as being closest to Market Rent, shall become the then applicable Option Rent.

2.2.4.3 The Award issued by such Neutral Arbitrator shall be binding upon Landlord and Tenant.

2.2.4.4    If Landlord and Tenant fail to appoint the Neutral Arbitrator within fifteen (15) days after the applicable Outside Agreement Date, either party may petition the presiding judge of the Superior Court of San Diego County to appoint such Neutral Arbitrator subject to the criteria in Section 2.2.4.1of this Lease, or if he or she refuses to act, either party may petition any judge having jurisdiction over the parties to appoint such Neutral Arbitrator.

2.2.4.5 The cost of arbitration shall be paid by Landlord and Tenant equally.

ARTICLE 3

BASE RENT

3.1    In General. Tenant shall pay, without prior notice or demand, to Landlord or Landlord's agent at the management office of the Project, or, at Landlord's option, at such other place as Landlord may from time to time designate in writing, by a check for currency which, at the time of payment, is legal tender for private or public debts in the United States of America, base rent ("Base Rent") as set forth in Section 4 of the Summary, payable in equal monthly installments as set forth in Section 4 of the Summary in advance on or before the first day of each and every calendar month during the Lease Term, without any setoff or deduction whatsoever in accordance with Section 4 of the Summary, any increases in Base Rent shall occur on the first day of the applicable Lease Month. The parties acknowledge, however, that Tenant shall pay Base Rent for each "calendar month" of the Lease Term (or a prorated portion of a ''calendar month", as applicable), even though the first "Lease Month" may pertain to a period longer than one (1) calendar month. The Base Rent for the first month of the Lease Term and the Base Rent for the forty-ninth full month of the Lease Term shall be paid at the time of Tenant's execution of this Lease. If any payment of Rent is for a period which is shorter than one month, the Rent for any such fractional month shall accrue on a daily basis during such fractional month and shall total an amount equal to the product of (i) a fraction, the numerator of which is the number of days in such fractional month and the denominator of which is the actual number of days occurring in such calendar month, and (ii) the then-applicable Monthly Installment of Base Rent. All other payments or adjustments required to be made under the TCCs of this Lease that require proration on a time basis shall be prorated on the same basis.

3.2 Abated Base Rent. Provided that no event of default is occurring during the four (4) month period commencing on the first (151) day of the second (2nd) full calendar month of the Lease Term and ending on the last day of the fifth (5th) full calendar month of the Lease Term (the "First Base Rent Abatement Period"), Tenant shall not be obligated to pay any Base Rent otherwise attributable to the Premises during such First Base Rent Abatement Period (the "First Base Rent Abatement"). In addition, provided that no event of default is occurring during the sixth (6th) month of the Lease Term (the "Second Base Rent Abatement Period"), Tenant shall not be obligated to pay fifty percent (50%) of the Base Rent otherwise attributable to the Premises during such Second Base Rent Abatement Period (the "Second Base Rent Abatement"). Furthermore, provided that no event of default is occurring during the two (2) month period commencing on the first (1^st) day of the seventh (7^th ) full calendar month of the Lease Term and ending on the last day of the eighth (8th) full calendar month of the Lease Term (the "Third Base Rent Abatement Period"), Tenant shall not be obligated to pay Base Rent otherwise attributable to 4,213 rentable square feet of the Premises during such Third Base Rent Abatement Period (the "Third Base Rent Abatement"). The First Base Rent Abatement Period, the Second Base Rent Abatement Period and the Third Base Rent Abatement Period shall be referred to collectively as the "Base Rent

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Abatement Period". The First Base Rent Abatement, the Second Base Rent Abatement and the Third Base Rent Abatement shall be referred to collectively as the "Base Rent Abatement". Landlord and Tenant acknowledge that the aggregate amount of the First Base Rent Abatement, Second Base Rent Abatement, and Third Base Rent Abatement equals Three Hundred Sixty-Seven Thousand Eight Hundred Thirty-Nine and 63/100 Dollars ($367,839.63) (i.e., $73,784.25 per month during Lease Months 2 - 5, $36,892.13 per month during Lease Month 6, and $17,905.25 per month during Lease Months 7 - 8). Tenant acknowledges and agrees that during such Base Rent Abatement Period, such abatement of Base Rent for the Premises shall have no effect on the calculation of any future increases in Base Rent or Direct Expenses payable by Tenant pursuant to the terms of this Lease, which increases shall be calculated without regard to such Base Rent Abatement. Additionally, Tenant shall be obligated to pay all "Additional Rent" (as that term is defined in Section 4.1of this Lease) during the Base Rent Abatement Period. Tenant acknowledges and agrees that the foregoing Base Rent Abatement has been granted to Tenant as additional consideration for entering into this Lease, and for agreeing to pay the Base Rent and perform the terms and conditions otherwise required under this Lease. If Tenant shall be in default under this Lease and shall fail to cure such default within the notice and cure period, if any, permitted for cure pursuant to this Lease, or if this Lease, is terminated for any reason other than Landlord's breach of this Lease, then the dollar amount of the unapplied portion of the Base Rent Abatement as of the date of such default or termination, as the case may be, shall be converted to a credit to be applied to the Base Rent applicable at the end of the Lease Term and Tenant shall immediately be obligated to begin paying Base Rent for the Premises in full. The foregoing Base Rent Abatement right set forth in this Section shall be personal to the Original Tenant and shall only apply to the extent that the Original Tenant (and not any assignee, or any sublessee or other transferee of the Original Tenant's interest in this Lease) is the Tenant under this Lease during such Base Rent Abatement Period.

ARTICLE 4

ADDITIONAL RENT

4.1    In General. In addition to paying the Base Rent specified in Article 3of this Lease, Tenant shall pay "Tenant's Share" of the annual "Direct Expenses," as those terms are defined in Sections 1.1.6 and 1.1.2, respectively, of Exhibit C attached to this Lease. Such payments by Tenant, together with any and all other amounts payable by Tenant to Landlord pursuant to the TCCs of this Lease, are hereinafter collectively referred to as the "Additional Rent," and the Base Rent and the Additional Rent are herein collectively referred to as "Rent." All amounts due under this Article 4 and ExhibitC as Additional Rent shall be payable for the same periods and in the same manner as the Base Rent; provided, however, the parties hereby acknowledge that the first monthly installment of Tenant's Share of any "Estimated Excess," as that term is set forth in, and pursuant to the terms and conditions of, Section 1 . 3.2of Exhibit C, shall first be due and payable for the calendar month occurring immediately following the expiration of the Base Year. Without limitation on other obligations of Tenant which survive the expiration of the Lease Term, the obligations of Tenant to pay the Additional Rent provided for in this Article 4 and Exhibit C shall survive the expiration of the Lease Term.

4.2 Taxes and Other Charges for Which Tenant Is Directly Responsible.

4.2.l     Tenant shall be liable for and shall pay ten (10) days before delinquency, taxes levied against Tenant's equipment, furniture, fixtures and any other personal property located in or about the Premises. If any such taxes on Tenant's equipment, furniture, fixtures and any other personal property are levied against Landlord or Landlord's property or if the assessed value of Landlord's property is increased by the inclusion therein of a value placed upon such equipment, furniture, fixtures or any other personal property and if Landlord pays the taxes based upon such increased assessment, which Landlord shall have the right to do regardless of the validity thereof but only under proper protest if requested by Tenant, Tenant shall upon demand repay to Landlord the taxes so levied against Landlord or the proportion of such taxes resulting from such increase in the assessment, as the case may be.

4.2.2    If the improvements in the Premises, whether installed and/or paid for by Landlord or Tenant and whether or not affixed to the real property so as to become a part thereof, are assessed for real property tax purposes at a valuation higher than the valuation at which improvements conforming to Landlord's "building standard" in other space in the Building are assessed, then the Tax Expenses levied against Landlord or the property by reason of such excess assessed valuation shall be deemed to be taxes levied against personal property of Tenant and shall be governed by the provisions of Section 4.2.1, above.

4.2.3    Notwithstanding any contrary provision herein, Tenant shall pay prior to delinquency any (i) rent tax or sales tax, service tax, transfer tax or value added tax, or any other applicable tax on the rent or services herein or otherwise respecting this Lease, (ii) taxes assessed upon or with respect to the possession, leasing, operation, management, maintenance, alteration, repair, use or occupancy by Tenant of the Premises or any portion of the Project, including the Project parking facility; or (iii) taxes assessed upon this transaction or any document to which Tenant is a party creating or transferring an interest or an estate in the Premises.

4.3    Landlord's Records. Upon Tenant's written request given not more than ninety (90) days after Tenant's receipt of a "Statement" (as that term is defined in Section 1.3.1of Exhibit C) for a particular Expense Year, and provided that Tenant is not then in default under this Lease beyond the applicable notice and cure period provided in this Lease, specifically including, but not limited to, the timely payment of Additional Rent (whether or not a component thereof is the subject of the audit contemplated herein), Landlord shall furnish Tenant with such reasonable supporting documentation pertaining to the calculation of the "Excess" (as that term is defined in Section 1.3 of Exhibit C) set forth in the Statement as Tenant may reasonably request. Landlord shall provide said documentation pertaining to the relevant Excess to Tenant within sixty (60) days after Tenant's written request therefor. Within one hundred eighty (180) days after receipt of a Statement by Tenant (the "Audit Period"), if Tenant disputes the amount of the Excess set forth in the Statement, an independent certified public accountant (which accountant (A) is a member of a certified public accounting firm which has previous experience in auditing financial operating records of landlords of office buildings, (B) shall not already be providing primary accounting and/or lease administration services to Tenant and shall not have provided primary accounting and/or lease administration services to Tenant in the past three (3) years, (C) is not working on a contingency fee basis [i.e., Tenant must be billed based on the actual time and materials that are incurred by the certified public accounting firm in the performance of the audit], and (D) shall not currently or in the future be providing accounting and/or lease administration services to another tenant in the Building and/or the Project in connection with a review or audit by such other tenant of similar expense records), designated and paid for by Tenant, may, after reasonable notice to Landlord and at reasonable times, audit Landlord's records with respect to the Excess set forth in the Statement at Landlord's corporate offices, provided that (z) Tenant is not then in default under this Lease (beyond the applicable notice and cure periods provided under this Lease), (il)Tenant has paid all amounts required to be paid under the applicable "Estimate Statement" (as that term is defined in Section

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1.3.2of Exhibit C) and Statement, and (iii) a copy of the audit agreement between Tenant and its particular certified public accounting firm has been delivered to Landlord prior to the commencement of the audit. In connection with such audit, Tenant and Tenant's certified public accounting firm must agree in advance to follow Landlord's reasonable rules and procedures regarding an audit of the aforementioned Landlord records, and shall execute a commercially reasonable confidentiality agreement regarding such audit. Any audit report prepared by Tenant's certified public accounting firm shall be delivered concurrently to Landlord and Tenant within the Audit Period. Tenant's failure to audit the amount of the Excess set forth in any Statement within the Audit Period shall be deemed to be Tenant's approval of such Statement and Tenant, thereafter, waives the right or ability to audit the amounts set forth in such Statement. If after such audit, Tenant still disputes such Excess, an audit to determine the proper amount shall be made, at Tenant's expense, by an independent certified public accountant (the "Accountant") mutually and reasonably selected by Landlord and Tenant; provided that if such audit by the Accountant proves that the Direct Expenses in the subject Expense Year were overstated by more than five percent (5%), then the cost of the Accountant and the cost of such audit shall be paid for by Landlord. Tenant hereby acknowledges that Tenant's sole right to audit Landlord's records and to contest the amount of Direct Expenses payable by Tenant shall be as set forth in this Section 4.3, and Tenant hereby waives any and all other rights pursuant to applicable law to audit such records and/'or to contest the amount of Direct Expenses payable by Tenant.

ARTICLE 5

USE OF PREMISES

Tenant shall use the Premises solely for the "Permitted Use," as that term is defined in Section 7of the Summary, and Tenant shall not use or permit the Premises to be used for any other purpose or purposes whatsoever without the prior written consent of Landlord, which may be withheld in Landlord's sole and absolute discretion. Tenant shall not allow occupancy density of use of the Premises which is greater than the total number of parking passes granted to Tenant under this Lease (i.e., as more particularly set forth in Section 9 of the Summary). Tenant further covenants and agrees that it shall not use, or suffer or permit any person or persons to use, the Premises or any part thereof for any use or purpose contrary to the rules and regulations promulgated by Landlord from time to time ("Rules and Regulations"), the current set of which (as of the date of this Lease) is attached to this Lease as Exhibit D;or in violation of the laws of the United States of America, the State of California, or the ordinances, regulations or requirements of the local municipal or county governing body or other lawful authorities having jurisdiction over the Building, or in a manner otherwise inconsistent with the character of the Project as a first-class office building Project. Tenant shall faithfully observe and comply with the Rules and Regulations. Tenant shall comply with all recorded covenants, conditions, and restrictions currently affecting the Project. Additionally, Tenant acknowledges that the Project may be subject to any future covenants, conditions and restrictions (the "CC&Rs") which Landlord, in Landlord's discretion, deems reasonably necessary or desirable, and Tenant agrees that this Lease shall be subject and subordinate to such CC&Rs and Tenant shall promptly recognize such CC&Rs by executing a commercially reasonable form of recognition, so long as such CC&Rs do not diminish Tenant's rights under this Lease and/or increase Tenant's obligations or costs under this Lease so as to have more than a de minimus impact on such foregoing obligations and rights.

ARTICLE 6

SERVICES AND UTILITIES

6.1    Standard Tenant Services. Landlord shall provide the following services on all days (unless otherwise stated below) during the Lease Term.

6.1.1    Subject to reasonable changes implemented by Landlord and all governmental rules, regulations and guidelines applicable thereto, Landlord shall provide heating, Ventilation and air conditioning ("BVAC") when necessary for normal comfort for normal office use in the Premises from 7:00 A.M. to 6:00 P.M. Monday through Friday, and from 9:00 A.M. to 1:00 P.M. on Saturday (collectively, the "Building Hours"), except for the date of observation of New Year's Day, President's Day, Memorial Day, Independence Day, Labor Day, Thanksgiving Day, Christmas Day and, at Landlord's discretion, other locally or nationally recognized holidays (collectively, the "Holidays"). The daily time periods identified hereinabove are sometimes referred to as the "Business Hours."

6.1.2    Subject to the other terms of this Lease, Landlord shall provide adequate electrical wiring and facilities and power for normal general office use as determined by Landlord. Tenant will design Tenant's electrical system serving any equipment producing nonlinear electrical loads to accommodate such nonlinear electrical loads, including, but not limited to, oversizing neutral conductors, derating transformers and/or providing power-line filters. Engineering plans shall include a calculation of Tenant's fully connected electrical design load with and without demand factors and shall indicate the number of watts of unmetered and submetered loads. Notwithstanding any provision to the contrary contained in this Lease, Tenant shall pay directly to the utility company pursuant to the utility company's separate meters (or to Landlord in the event Landlord provides submeters instead of the utility company's meters), the cost of all electricity, gas, water and sewer services provided to and/or consumed in the Premises (including normal and excess consumption and including the cost of electricity to operate the HVAC air handlers), which electricity, gas, water and sewer services shall be separately metered (as described above or otherwise equitably allocated and directly charged by Landlord to Tenant and other tenants of the Building). Tenant shall pay such cost (including the cost of such meters or submeters) within ten (10) days after demand and as Additional Rent under this Lease (and not as part of the Operating Expenses). Landlord shall designate the electricity utility provider from time to time; provided, however, (i) in connection with any such voluntary designation by Landlord, any associated capital expenditures shall only be included in Operating Expenses to the extent permitted pursuant to item (xiii) of Section 1.1.4of Exhibit C, and (ii) in the event that Tenant incurs third party fees and expenses in connection with the foregoing, Landlord shall reimburse Tenant to the extent such fees and expenses exceed Two Hundred Fifty and No/100 Dollars ($250.00).

6.1.3    As part of Operating Expenses, Landlord shall replace lamps, starters and ballasts for Building standard lighting fixtures within the Premises. In addition, Tenant shall bear the cost of replacement of lamps, starters and ballasts for non-Building standard lighting fixtures within the Premises.

6.1.4 Landlord shall provide city water from the regular Building outlets for drinking, lavatory and toilet purposes.

6.1.5    Landlord shall provide a level of janitorial services five (5) days per week in a manner consistent

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with Comparable Buildings, except the date of observation of the Holidays, in and about the Premises and window washing services in a manner consistent with the Comparable Buildings.

6.1.6    Landlord shall provide nonexclusive, non-attended automatic passenger elevator service during the Building Hours, and shall have at least one elevator available at all other times. Landlord shall provide nonexclusive freight eleYator service subject to scheduling by Landlord.

Tenant shall cooperate fully with Landlord at all times and abide by all regulations and requirements that Landlord may reasonably prescribe for the proper functioning and protection of the HVAC, electrical, mechanical and plumbing systems.

6.2    Overstandard Tenant Use. Tenant shall not, without Landlord's prior written consent, use heat-generating machines, machines other than normal fractional horsepower office machines, or equipment or lighting other than Building standard lights in the Premises, which may affect the temperature otherwise maintained by the air conditioning system or increase the water normally furnished for the Premises by Landlord pursuant to the terms of Section 6.1of this Lease. If such consent is when Landlord shall have the right to require installation of supplementary air conditioning units or other facilities in the Premises, including supplementary or additional metering devices, and the cost thereof, including the cost of installation, operation and maintenance, increased wear and tear on existing equipment and other similar charges, shall be paid by Tenant to Landlord upon billing by Landlord. If Tenant uses water, electricity, heat or air conditioning in excess of that supplied by Landlord pursuant to Section 6.1 of this Lease, Tenant shall pay to Landlord, upon billing, the cost of such excess consumption, the cost of the installation, operation, and maintenance of equipment which is installed in order to supply such excess consumption, and the cost of the increased wear and tear on existing equipment caused by such excess consumption; and Landlord may install devices to separately meter any increased use and in such event Tenant shall pay the increased cost directly to Landlord, including the cost of such additional metering devices. Tenant's use of electricity shall never exceed the capacity of the feeders to the Project or the risers or wiring installation, and subject to the terms of Section 29.26, below, Tenant shall not install or use or permit the installation or use of any computer or electronic data processing equipment in the Premises, without the prior written consent of Landlord. If Tenant desires to use heat, ventilation or air conditioning during hours other than those for which Landlord is obligated to supply such utilities pursuant to the terms of Section 6.1of this Lease, Tenant shall give Landlord such prior notice, if any, as Landlord shall from time to time establish as appropriate, of Tenant's desired use in order to supply such utilities, and Landlord shall supply such utilities to Tenant at such hourly cost to Tenant (which shall be treated as Additional Rent) as Landlord shall from time to time establish. Landlord and Tenant acknowledge and agree that Landlord's prevailing rate as of the date of this Lease for Tenant's use of the HVAC during hours other than those for which Landlord is obligated to supply such utilities pursuant to the terms of Section 6.1 of this Lease is $50.00 per hour for the Premises.

6.3    Interruption of Use. Subject to Section 6.4below, Tenant agrees that Landlord shall not be liable for damages, by abatement of Rent or otherwise, for failure to furnish or delay in furnishing any service (including telephone and telecommunication services), or for any diminution in the quality or quantity thereof, when such failure or delay or diminution is occasioned, in whole or in part, by breakage, repairs, replacements, or improvements, by any strike, lockout or other labor trouble, by inability to secure electricity, gas, water, or other fuel at the Building or Project after reasonable effort to do so, by any riot or other dangerous condition, emergency, accident or casualty whatsoever, by act or default of Tenant or other parties, or by any other cause beyond Landlord's reasonable control; and such failures or delays or diminution shall never be deemed to constitute an eviction or disturbance of Tenant's use and possession of the Premises or relieve Tenant from paying Rent or performing any of its obligations under this Lease. Furthermore, Landlord shall not be liable under any circumstances for a loss of, or injury to, property or for injury to, or interference with, Tenant's business, including, without limitation, loss of profits, however occurring, through or in connection with or incidental to a failure to furnish any of the services or utilities as set forth in this Article 6.

6.4    Abatement Event. If (i) Landlord fails to perform the obligations required of Landlord under the TCCs of this Lease, (ii) such failure causes all or a portion of the Premises to be untenantable and unusable by Tenant, and (iii) such failure relates to (A) the nonfunctioning of the heat, ventilation, and air conditioning system in the Premises, the electricity in the Premises, the nonfunctioning of the elevator service to the Premises, or (B) a failure to provide access to the Premises, Tenant shall give Landlord notice (the "Initial Notice"), specifying such failure to perform by Landlord (the "Abatement Event"). If Landlord has not cured such Abatement Event within five (5) business days after the receipt of the Initial Notice, Tenant may deliver an additional notice to Landlord (the "Additional Notice"), specifying such Abatement Event and Tenant's intention to abate the payment of Rent under this Lease. If Landlord does not cure such Abatement Event within three (3) business days of receipt of the Additional Notice, Tenant may, upon written notice to Landlord, immediately abate Rent payable under this Lease for that portion of the Premises rendered untenantable and not used by Tenant, for the period beginning on the date three (3) business days after the Initial Notice to the earlier of the date Landlord cures such Abatement Event or the date Tenant recommences the use of such portion of the Premises. Such right to abate Rent shall be Tenant's sole and exclusive remedy at law or in equity for an Abatement Event. Except as provided in this Section 6.4, nothing contained herein shall be interpreted to mean that Tenant is excused from paying Rent due hereunder.

ARTICLE 7

REPAIRS

Tenant shall, at Tenant's own expense, keep the Premises, including all improvements, fixtures, equipment, interior window coverings, and furnishings therein, and the floor or floors of the Building on which the Premises is located, in good order, repair and condition at all times during the Lease Term. In addition, Tenant shall, at Tenant's own expense, but under the supervision and subject to the prior approval of Landlord, and within any reasonable period of time specified by Landlord, promptly and adequately repair all damage to the Premises and replace or repair all damaged, broken, or worn fixtures and appurtenances, except for damage caused by ordinary wear and tear or beyond the reasonable control of Tenant; provided however, that, at Landlord's option, or if Tenant fails to make such repairs, Landlord may, after written notice to Tenant and Tenant's failure to repair ·within five (5) days thereafter (unless more than five (5) business days is required to effectuate such repair, in which case Tenant shall have the time reasonably required to complete the repair, so long as Tenant commences the repair during the five (5) business day period and diligently completes such repair), but need not, make such repairs and replacements, and Tenant shall pay Landlord the cost thereof, including a percentage of the cost thereof (to be uniformly established for the Building and/or the Project) sufficient to reimburse Landlord for all overhead, general conditions, fees and other costs or expenses arising from Landlord's involvement with such repairs and replacements forthwith upon being billed for same. Notwithstanding the foregoing, Landlord shall be responsible for repairs to the exterior walls, foundation and roof of the Building, the structural portions of the floors of the Building, the systems and equipment of the Building, and any resultant damage to the extent caused by Landlord in performing the

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foregoing repairs, except to the extent that such repairs are required due to the negligence or willful misconduct of Tenant; provided, however, that if such repairs are due to the negligence or willful misconduct of Tenant, Landlord shall nevertheless make such repairs at Tenant's expense, or, if covered by Landlord's insurance, Tenant shall only be obligated to pay any deductible in connection therewith. Landlord may, but shall not be required to, enter the Premises at all reasonable times to make such repairs, alterations, improvements or additions to the Premises or to the Project or to any equipment located in the Project as Landlord shall desire or deem necessary or as Landlord may be required to do by governmental or quasi-governmental authority or court order or decree; provided, however, except for (i) emergencies, (ii) repairs, alterations, improvements or additions required by governmental or quasi-governmental authorities or court order or decree, or (iii) repairs which are the obligation of Tenant hereunder, any such entry into the Premises by Landlord shall be performed in a manner so as not to materially interfere with Tenant's use of, or access to, the Premises; provided that, with respect to items (ii) and (iii) above, Landlord shall use commercially reasonable efforts to not materially interfere with Tenant's use of, or access to, the Premises. Tenant hereby waives any and all rights under and benefits of subsection l of Section 1932 and Sections 1941 and 1942 of the California Civil Code or under any similar law, statute, or ordinance now or hereafter in effect.

ARTICLE 8

ADDITIONS AND ALTERATIONS

8.1    Landlord' s Consent to Alterations. Tenant may not make any improvements, alterations, additions or changes to the Premises or any mechanical, plumbing or HVAC facilities or systems pertaining to the Premises (collectively, the "Alterations"} without first procuring the prior written consent of Landlord to such Alterations, which consent shall be requested by Tenant not less than fifteen (15) business days prior to the commencement thereof, and which consent shall not be unreasonably withheld by Landlord, provided it shall be deemed reasonable for Landlord to withhold its consent to any Alteration which adversely affects the structural portions or the systems or equipment of the Building or is visible from the exterior of the Building. Notwithstanding the foregoing, Tenant shall be permitted to make Alterations following ten (10) business days notice to Landlord, but without Landlord's prior consent, to the extent that such Alterations do not (i) adversely affect the systems and equipment of the Building, exterior appearance of the Building, or structural aspects of the Building, (ii) adversely affect the value of the Premises or Building, (iii) require a building or construction permit, or (iv) cost more than Twenty Thousand and 00/100 Dollars ($20,000.00) for a particular job of work (the "Cosmetic Alterations"). The construction of the initial improvements to the Premises shall be governed by the terms of the Work Letter and not the terms of this Article 8. Landlord may impose, as a condition of its consent to any and all Alterations or repairs of the Premises or about the Premises, such requirements as Landlord in its reasonable discretion may deem desirable, including, but not limited to, the requirement that Tenant utilize for such purposes only contractors reasonably approved by Landlord, and any removal and/or restoration obligations required to be performed pursuant to the TCCs of Section8.4of this Lease. If Landlord shall give its consent, the consent shall be deemed conditioned upon Tenant acquiring a permit to do the work from appropriate governmental agencies, the furnishing of a copy of such permit to Landlord prior to the commencement of the work, and the compliance by Tenant with all conditions of said permit in a prompt and expeditious manner. If such Alterations will involve the use of or disturb hazardous materials or substances existing in the Premises, Tenant shall comply with Landlord's rules and regulations concerning such hazardous materials or substances. Tenant shall construct such Alterations and perform such repairs in a good and workmanlike manner, in conformance with any and all applicable federal, state, county or municipal laws, rules and regulations and pursuant to a valid building permit, issued by the city in which the Building is located (or other applicable governmental authority), all in conformance with Landlord's construction rules and regulations; provided, however, that prior to commencing to construct any Alteration, Tenant shall meet with Landlord to discuss Landlord's design parameters and code compliance issues. In the event Tenant performs any Alterations in the Premises which require or give rise to governmentally required changes to the "Base Building," as that term is defined below, then Landlord shall, at Tenant's expense, make such changes to the Base Building. Since all or a portion of the Project is or may become in the future certified under the LEED (as that term is defined in Section U .4 of Exhibit C) rating system (or other applicable certification standard) (all in Landlord's sole and absolute discretion), Tenant expressly acknowledges and agrees that without limitation as to other grounds for Landlord withholding its consent to any proposed Alteration, Landlord shall have the right to withhold its consent to any proposed Alteration in the event that such Alteration is not compatible with such certification or recertification of the Project under such LEED rating system (or other applicable certification standard). The "Base Building" shall include the structural portions of the Building, and the public restrooms, elevators, exit stairwells and the systems and equipment located in the internal core of the Building on the floor or floors on which the Premises is located. In performing the work of any such Alterations, Tenant shall have the work performed in such manner so as not to obstruct access to the Project or any portion thereof, by any other tenant of the Project. and so as not to obstruct the business of Landlord or other tenants in the Project Tenant shall retain any union trades to the extent designated by Landlord. Further, Tenant shall not use (and upon notice from Landlord shall cease using) contractors, services, workmen, labor, materials or equipment that, in Landlord's reasonable judgment, would disturb labor harmony with the workforce or trades engaged in performing other work, labor or services in or about the Building or the Common Areas. In addition to Tenant's obligations under Article 9of this Lease, upon completion of any Alterations, Tenant agrees to cause a Notice of Completion to be recorded in the office of the Recorder of the County of San Diego in accordance with Section 8182 of the Chil Code of the State of California or any successor statute, and as a condition precedent to the enforceability and validity of Landlord's consent, Tenant shall deliver to the management office for the Project a reproducible copy of the "as built" and CAD drawings of the Alterations, to the extent applicable, as well as all permits, approvals and other documents issued by any governmental agency in connection with the Alterations.

8.2    Payment for Improvements. With respect to payments to be made to Tenant's contractors for any Alterations, Tenant shall (i) comply with Landlord's commercially reasonable requirements for final lien releases and waivers in connection with Tenant's payment for work to contractors, and (ii) sign Landlord's commercially reasonable standard contractor's rules and regulations. In addition, in connection with all Alterations, Tenant shall reimburse Landlord for Landlord's reasonable, actual, out-of-pocket costs and expenses actually incurred in connection with Landlord's review of such work.

8.3    Construction Insurance. In addition to the requirements of Article 10 of this Lease, in the event that Tenant makes any Alterations, prior to the commencement of such Alterations, Tenant shall provide Landlord with evidence that Tenant carries "Builder's Risk" insurance in an amount reasonably approved by Landlord covering the construction of such Alterations, and such other insurance as Landlord may reasonably require, it being understood and agreed that all of such Alterations shall be insured by Tenant pursuant to Article 10 of this Lease immediately upon completion thereof. In addition, Landlord may, in its reasonable discretion, require Tenant to obtain a lien and completion bond or some alternate form of security satisfactory to Landlord in an amount sufficient to ensure the lien-free completion of such Alterations and naming Landlord as a co-obligee.

8.4    Landlord's Property. Landlord and Tenant hereby acknowledge and agree that (i) all Alterations, improvements,

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fixtures, equipment and/or appurtenances which may be installed or placed in or about the Premises (excluding Tenant's removable trade fixtures, furniture or non-affixed office equipment), from time to time, shall be at the sole cost of Tenant and shall be and become part of the Premises and the property of Landlord, and (ii) the "Improvements" (as that term is defined in Section 1.3 of the Work Letter} to be constructed in the Premises pursuant to the TCCs of the Work Letter shall, upon completion of the same, be and become a part of the Premises and the property of Landlord. Furthermore, Landlord may, by written notice to Tenant prior to the end of the Lease Term, or given following any earlier termination of this Lease, require Tenant, at Tenant's expense, to remove any Alterations or improvements in the Premises (but excluding the Improvements), and to repair any damage to the Premises and Building caused by such removal and return the affected portion of the Premises to a building standard improved condition as determined by Landlord; provided, however, if, in connection with its notice to Landlord with respect to any such Alterations or Cosmetic Alterations, (x) Tenant requests Landlord's decision with regard to the removal of such Alterations or Cosmetic Alterations, and (y) Landlord thereafter agrees in writing to waive the removal requirement with regard to such Alterations or Cosmetic Alterations, then Tenant shall not be required to so remove such Alterations or Cosmetic Alterations ; provided further, however, that if Tenant requests such a determination from Landlord and Landlord, within ten (10) business days following Landlord 's receipt of such request from Tenant with respect to Alterations or Cosmetic Alterations, fails to address the removal requirement with regard to such Alterations or Cosmetic Alterations, Landlord shall be deemed to have agreed to waive the removal requirement with regard to such Alterations or Cosmetic Alterations. IfTenant fails to complete such removal and/or to repair any damage caused by the removal of any Alterations or improvements in the Premises, and/or to return the affected portion of the Premises to a building standard improved condition as determined by Landlord, then at Landlord's option, either (A) Tenant shall be deemed to be holding over in the Premises and Rent shall continue to accrue in accordance with the terms of Article16, below, until such work shall be completed, and/or (B) Landlord may do so and may charge the cost thereof to Tenant. Tenant hereby protects, defends, indemnifies and holds Landlord harmless from any liability, cost, obligation, expense or claim of lien in any manner relating to the installation, placement, removal or financing of any such Alterations, improvements, fixtures and/or equipment in, on or about the Premises, which obligations of Tenant shall survive the expiration or earlier termination of this Lease.

ARTICLE 9

COVENANT AGAINST LIENS

Tenant shall keep the Project and Premises free from any liens or encumbrances arising out of the work performed, materials furnished or obligations incurred by or on behalf of Tenant, and shall protect, defend, indemnify and hold Landlord harmless from and against any claims, liabilities, judgments or costs (including, without limitation, reasonable attorneys' fees and costs) arising out of same or in connection therewith. Tenant shall give Landlord notice at least twenty (20) days prior to the commencement of any such work on the Premises (or such additional time as may be necessary under applicable laws) to afford Landlord the opportunity of posting and recording appropriate notices of non-responsibility. Tenant shall remove any such lien or encumbrance by bond or otherwise within five (5) days after notice by Landlord, and if Tenant shall fail to do so, Landlord may pay the amount necessary to remove such lien or encumbrance, without being responsible for investigating the validity thereof. The amount so paid shall be deemed Additional Rent under this Lease payable upon demand, without limitation as to other remedies available to Landlord under this Lease. Nothing contained in this Lease shall authorize Tenant to do any act which shall subject Landlord's title to the Building or Premises to any liens or encumbrances whether claimed by operation of law or express or implied contract. Any claim to a lien or encumbrance upon the Building or Premises arising in connection with any such work or respecting the Premises not performed by or at the request of Landlord shall be null and void, or at Landlord's option shall attach only against Tenant's interest in the Premises and shall in all respects be subordinate to Landlord's title to the Project, Building and Premises.

ARTICLE 10

INDEMNIFICATION AND INSURANCE

I0.1 Indemnification and Waiver. Tenant hereby assumes all risk of damage to property or injury to persons in, upon or about the Premises from any cause whatsoever and agrees that Landlord, its partners, subpartners and their respective officers, agents, servants, employees, and independent contractors (collectively, "Landlord Parties") shall not be liable for, and are hereby released from any responsibility for, any damage either to person or property or resulting from the loss of use thereof, which damage is sustained by Tenant or by other persons claiming through Tenant. Tenant shall indemnify, defend, protect, and hold harmless the Landlord Parties from and against any and all loss, cost, damage, expense and liability (including without limitation court costs and reasonable attorneys' fees) incurred in connection with or arising from: (a) any causes in, on or about the Premises; (b) the use or occupancy of the Premises by Tenant or any person claiming under Tenant; (c) any activity, work, or thing done, or permitted or suffered by Tenant in or about the Premises; (d) any acts, omission, or negligence of Tenant or any person claiming under Tenant, or the contractors, agents, employees, invitees, or visitors of Tenant or any such person, in, on or about the Project (collectively, "Tenant Parties"); (e) any breach, violation, or non-performance by Tenant or any person claiming under Tenant or the employees, agents, contractors, invitees, or visitors of Tenant or any such person of any term, covenant, or provision of this Lease or any law, ordinance, or governmental requirement of any kind; (t) any injury or damage to the person, property, or business of Tenant, its employees, agents, contractors, invitees, visitors, or any other person entering upon the Premises under the express or implied invitation of Tenant; or (g) the placement of any personal property or other items within the Premises. However, notwithstanding the foregoing, Tenant shall not be required to indemnify and/or hold Landlord harmless from any loss, cost, liability, damage or expense, including, but not limited to, penalties, fines, attorneys' fees or costs (collectively, "Claims"), to any person, property or entity to the extent resulting from the negligence or willful misconduct of Landlord or its agents, contractors, or employees. Should Landlord be named as a defendant in any suit brought against Tenant in connection with or arising out of Tenant's occupancy of the Premises, Tenant shall pay to Landlord its costs and expenses incurred in such suit, including without limitation, its actual professional fees such as appraisers', accountants' and attorneys' fees. Further, Tenant's agreement to indemnify Landlord pursuant to this Section l0.1 is not intended and shall not relieve any insurance carrier of its obligations under policies required to be carried by Tenant pursuant to the provisions of this Lease, to the extent such policies cover the matters subject to Tenant's indemnification obligations; nor shall they supersede any inconsistent agreement of the parties set forth in any other provision of this Lease. The provisions of this Section 10.1 shall survive the expiration or sooner termination of this Lease with respect to any claims or liability arising in connection with any event occurring prior to such expiration or termination.

10.2    Tenant's Compliance WithLandlord'sFire and Casualty Insurance. Tenant shall, at Tenant's expense, comply with Landlord's insurance company requirements pertaining to the use of the Premises. If Tenant's conduct or use of the

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Premises causes any increase in the premium for such insurance policies then Tenant shall reimburse Landlord for any such increase. Tenant, at Tenant's expense, shall comply with all rules, orders, regulations or requirements of the American Insurance Association (formerly the National Board of Fire Underwriters) and with any similar body.

10.3    Tenant's Insurance. Throughout the Lease Term, Tenant shall maintain the following coverages in the following amounts. The required evidence of coverage must be delivered to Landlord on or before the date required under Section 10.4(D sub-sections (x) and (y}, or Section 10.4CTI) below (as applicable). Such policies shall be for a term of at least one (1) year, or the length of the remaining term of this Lease, whichever is less.

10.3.l Commercial General Liability Insurance (not including products liability insurance), including Broad Form contractual liability covering the insured against claims of bodily injury, personal injury and property damage (including loss of use thereof) based upon or arising out of Tenant's operations, occupancy or maintenance of the Project and all areas appurtenant thereto. Such insurance shall be written on an "occurrence" basis. Landlord and any other party the Landlord so specifies that has a material financial interest in the Project, including Landlord 's managing agent, ground lessor and/or lender, if any, shall be named as additional insureds as their interests may appear using Insurance Service Organization's form CG2011 or a comparable form approved by Landlord. Tenant shall provide an endorsement or policy excerpt showing that Tenant's coverage is primary and any insurance carried by Landlord shall be excess and non-contributing .The coverage shall also be extended to include damage caused by heat, smoke or fumes from a hostile fire. The policy shall not contain any intra-insured exclusions as between insured persons or organizations. This policy shall include coverage for all liabilities assumed under this Lease as an insured contract for the performance of all of Tenant's indemnity obligations under this Lease. The limits of said insurance shall not, however, limit the liability of Tenant nor relieve Tenant of any obligation hereunder. Limits of liability insurance shall not be less than the following; provided, however, such limits may be achieved through the use of an Umbrella/Excess Policy:

Bodily Injury and	$5,000,000 each occurrence
Property Damage Liability	$5,000,000 each occurrence
Personal Injury and Advertising Liability	$1,000,000.00
Tenant Legal Liability/Damage to Rented
Premises Liability

10.3.2 Property Insurance covering (i) all office furniture, personal property, business and trade fixtures, office equipment, free-standing cabinet work, movable partitions, merchandise and all other items of Tenant's business personal property on the Premises installed by, for, or at the expense of Tenant, (ii) the Improvements, and any other improvements which exist in the Premises as of the Lease Commencement Date (excluding the Base Building) (the "Original Improvements"), and (iii) all Alterations performed inthe Premises. Such insurance shall be written on a Special Form basis, for the full replacement cost value (subject to reasonable deductible amounts), without deduction for depreciation of the covered items and in amounts that meet any co-insurance clauses of the policies of insurance and shall include coverage for (a) all perils included in the CP 10 30 04 02 Coverage Special Form, (b) water damage from any cause whatsoever occurring within the Building, including, but not limited to, sprinkler leakage, bursting, leaking or stoppage of any pipes, explosion, roof leakage, and backup or overflow from sewers or drains (as opposed to natural hazard-type t1ood insurance), and (c) terrorism (to the extent such terrorism insurance is available as a result of the Terrorism Risk Insurance Act of 2002 (Pub. L. 107-297, 116 Stat. 2322), the Terrorism Risk Insurance Program Reauthorization Act of 2005 (Pub. 1. 109-144), and the Terrorism Risk Insurance Program Reauthorization Act of 2007 (Pub. L. 110-160, 121 Stat. 183), any successor statute or regulation, or is otherwise available at commercially reasonable rates).

10.3.2.1    Increase in Project's Property Insurance. Tenant shall pay for any increase in the premiums for the property insurance of the Project if said increase is caused by Tenant's acts, omissions, use or occupancy of the Premises.

10.3.2.2    Property Damage. Tenant shall use the proceeds from any such insurance for the replacement of personal property, trade fixtures, Improvements, Original Improvements and Alterations.

10.3.2.3    No Representation of Adequate Coverage. Landlord makes no representation that the limits or forms of coverage of insurance specified herein are adequate to cover Tenant's property, business operations or obligations under this Lease.

10.3.2.4    Property Insurance Subrogation. Landlord and Tenant intend that their respective property loss risks shall be borne by insurance carriers to the extent above provided (and, in the case of Tenant, by an insurance carrier satisfying the requirements of Section 10.4(i) below), and Landlord and Tenant hereby agree to look solely to, and seek recovery only from, their respective insurance carriers in the ev·ent of a property loss to the extent that such coverage is agreed to be provided hereunder. The parties each hereby waive all rights and claims against each other for such losses, and waive all rights of subrogation of their respective insurers. Landlord and Tenant hereby represent and warrant that their respective "all risk" property insurance policies include a waiver of (i) subrogation by the insurers, and (ii) all rights based upon an assignment from its insured, against Landlord and/or any of the Landlord Parties or Tenant and/or any of the Tenant Parties (as the case may be) in connection with any property loss risk thereby insured against. Tenant will cause all subtenants and licensees of the Premises claiming by, under, or through Tenant to execute and deliver to Landlord a waiver of claims similar to the waiver in this Section 10.3.2.4 and to obtain such waiver of subrogation rights endorsements. If either party hereto fails to maintain the waivers set forth in items (i) and (ii) above, the party not maintaining the requisite waivers shall indemnify, defend, protect, and hold harmless the other party for, from and against any and all claims, losses, costs, damages, expenses and liabilities (including, without limitation, court costs and reasonable attorneys' fees) arising out of, resulting from, or relating to, such failure.

10.3.3    Business Income Interruption for one year (1) plus Extra Expense insurance in such amounts as will reimburse Tenant for actual direct or indirect loss of earnings attributable to the risks outlined in Section 10.3.2above.

10.3.4    Worker's Compensation or other similar insurance pursuant to all applicable state and local statutes and regulations, and Employer's Liability with minimum limits of not less than $1,000,000 each accident/employee/disease.

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10.3.5    Commercial Automobile Liability Insurance covering all Owned (if any), Hired, or Non-owned vehicles with limits not less than $1,000,000 combined single limit for bodily injury and property damage.

10.4    Form of Policies. The minimum limits of policies of insurance required of Tenant under this Lease shall in no event limit the liability of Tenant under this Lease. Such insurance shall (i) be issued by an insurance company having an AM Best rating of not less than A-, VII (or to the extent AM Best ratings are no longer available, then a similar rating from another comparable rating agency), or which is otherwise acceptable to Landlord and legally authorized to do business in the State of California, (ii) be in form and content reasonably acceptable to Landlord and complying with the requirements of Section 10.3 (including, Sections 10.3.1 through 10.3.5), and (iii) Tenant shall not do or permit to be done anything which invalidates the required insurance policies. Tenant shall deliver said policy or policies or certificates thereof and applicable endorsements which meet the requirements of this Article 10 to Landlord on or before (I) the earlier to occur of: (x) the Lease Commencement Date, and (y) the date Tenant and/or its employees, contractors and/or agents first enter the Premises for occupancy, construction of improvements, alterations, or any other move-in activities, and (II) five (5) business days after the renewal of such policies. In the event Tenant shall fail to procure such insurance, or to deliver such policies or certificates and applicable endorsements, Landlord may, at its option, after written notice to Tenant and Tenant's failure to obtain such insurance within five (5) days thereafter, procure such policies for the account of Tenant and the sole benefit of Landlord, and the cost thereof shall be paid to Landlord after delivery to Tenant of bills therefor.

10.5    Additional Insurance Obligations. Tenant shall carry and maintain during the entire Lease Term, at Tenant's sole cost and expense, increased amounts of the insurance required to be carried by Tenant pursuant to this Article 10 and such other reasonable types of insurance coverage and in such reasonable amounts covering the Premises and Tenant's operations therein, as may be reasonably requested by Landlord.

10.6    Third-Party Contractors. Tenant shall obtain and deliver to Landlord, Third Party Contractor's certificates of insurance and applicable endorsements at least seven (7) business days prior to the commencement of work in or about the Premises by any vendor or any other third-party contractor (collectively, a "Third Party Contractor"). All such insurance shall (a) name Landlord as an additional insured under such party's liability policies as required by Section 10.3.1above and this Section 10.6, (b) provide a waiver of subrogation in favor of Landlord under such Third Party Contractor's commercial general liability insurance, (c) be primary and any insurance carried by Landlord shall be excess and non-contributing, and (d) comply with Landlord's minimum insurance requirements.

ARTICLE 11

DAMAGE AND DESTRUCTION

11.1    Repair of Damage to Premises by Landlord. If the Base Building or any Common Areas serving or providing access to the Premises shall be damaged by a fire or any other casualty (collectively, a "Casualty"), Landlord shall promptly and diligently, subject to reasonable delays for insurance adjustment or other matters beyond Landlord's reasonable control, and subject to all other terms of this Article 11, restore the Base Building and such Common Areas. Such restoration shall be to substantially the same condition of the Base Building and the Common Areas prior to the Casualty, except for modifications required by zoning and building codes and other laws or by the holder of a mortgage on the Building or Project or any other modifications to the Common Areas deemed desirable by Landlord, provided access to the Premises and any common restrooms serving the Premises shall not be materially impaired. Tenant shall promptly notify Landlord upon the occurrence of any damage to the Premises resulting from a Casualty, and Tenant shall promptly inform its insurance carrier of any such damage. Upon notice (the "Landlord Repair Notice") to Tenant from Landlord, Tenant shall assign to Landlord (or to any party designated by Landlord) all insurance proceeds payable to Tenant under Tenant's insurance required to be carried under Section 10.3 of this Lease, and Landlord shall repair any injury or damage to the Improvements and the Original Improvements installed in the Premises and shall return such Improvements and the Original Improvements to their original condition; provided that if the cost of such repair by Landlord exceeds the amount of insurance proceeds received by Landlord from Tenant's insurance carrier, as assigned by Tenant, the cost of such repairs shall be paid by Tenant to Landlord prior to Landlord's repair of the damage. In the event that Landlord does not deliver the Landlord Repair Notice within sixty (60) days following the date the Casualty becomes known to Landlord, Tenant shall, at its sole cost and expense, repair any injury or damage to the Improvements and the Original Improvements installed in the Premises and shall return such Improvements and Original Improvements to their original condition. Whether or not Landlord delivers a Landlord Repair Notice, Tenant shall, prior to the commencement of construction, submit to Landlord, for Landlord's review and approval, all plans, specifications and working drawings relating thereto, and Landlord shall select the contractors to perform such improvement work. Landlord shall not be liable for any inconvenience or annoyance to Tenant or its visitors, or injury to Tenant's business resulting in any way from such damage or the repair thereof; provided however, that if such Casualty shall have damaged the Premises or Common Areas necessary to Tenant's occupancy, and if such damage is not the result of the willful misconduct of Tenant or Tenant's employees, contractors, licensees, or invitees, Landlord shall allow Tenant a proportionate abatement of Rent, during the time and to the extent the Premises are unfit for occupancy for the purposes permitted under this Lease, and not occupied by Tenant as a result thereof. In the event that Landlord shall not deliver the Landlord Repair Notice, Tenant's right to rent abatement pursuant to the preceding sentence shall terminate as of the date which is reasonably determined by Landlord to be the date Tenant should have completed repairs to the Premises assuming Tenant used reasonable due diligence in connection therewith.

11.2    Landlord's Option to Repair. Notwithstanding the terms of Section11.lof this Lease, Landlord may elect not to rebuild and/or restore the Premises, Building and/or Project, and instead terminate this Lease by notifying Tenant in writing of such termination within sixty (60) days after the date of discovery of the damage, such notice to include a termination date giving Tenant sixty (60) days to vacate the Premises, but Landlord may so elect only if the Building or Project shall be damaged by Casualty, whether or not the Premises is affected, and one or more of the following conditions is present: (i) in Landlord's reasonable judgment, repairs cannot reasonably be completed within one hundred eighty (180) days after the date of discovery of the damage (when such repairs are made without the payment of overtime or other premiums); (ii) the holder of any mortgage on the Building or Project or ground lessor with respect to the Building or Project shall require that the insurance proceeds or any portion thereof be used to retire the mortgage debt, or shall terminate the ground lease, as the case may be; (iii) the damage is not fully covered by Landlord's insurance policies; (iv) Landlord decides to rebuild the Building or Common Areas so that they will be substantially different structurally or architecturally; (v) the damage occurs during the last twelve (12) months of the Lease Term; or (vi) any owner of any other portion of the Project, other than Landlord, does not intend to repair the damage to such portion of

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the Project. Upon any such termination of this Lease pursuant to this Section 11.2, Tenant shall pay the Base Rent and Additional Rent, properly apportioned up to such date of termination, and both parties hereto shall thereafter be freed and discharged of all further obligations hereunder, except as provided for in provisions of this Lease which by their terms survive the expiration or earlier termination of the Lease Tenn.

11.3    Waiver of Statutory Provisions.The provisions of this Lease, including this Article 11, constitute an express agreement between Landlord and Tenant with respect to any and all damage to, or destruction of, all or any part of the Premises, the Building or the Project, and any statute or regulation of the state in which the Building is located, including, without limitation, Sections 1932(2) and 1933(4) of the California Civil Code, with respect to any rights or obligations concerning damage or destruction in the absence of an express agreement between the parties, and any other statute or regulation, now or hereafter in effect, shall have no application to this Lease or any damage or destruction to all or any part of the Premises, the Building or the Project.

ARTICLE 12

NONWAIVER

No waiver of any provision of this Lease shall be implied by any failure of Landlord to enforce any remedy on account of the violation of such provision, even if such violation shall continue or be repeated subsequently, any waiver by Landlord of any provision of this Lease may only be in writing, and no express waiver shall affect any provision other than the one specified in such waiver and that one only for the time and in the manner specifically stated. No receipt of monies by Landlord from Tenant after the termination of this Lease shall in any way alter the length of the Lease Term or of Tenant's right of possession hereunder or after the giving of any notice shall reinstate, continue or extend the Lease Term or affect any notice given Tenant prior to the receipt of such monies, it being agreed that after the service of notice or the commencement of a suit or after final judgment for possession of the Premises, Landlord may receive and collect any Rent due, and the payment of said Rent shall not waive or affect said notice, suit or judgment.

ARTICLE 13

CONDEMNATION

If the whole or any material part of the Premises, Building or Project shall be taken by power of eminent domain or condemned by any competent authority for any public or quasi-public use or purpose, or if any adjacent property or street shall be so taken or condemned, or reconfigured or yacated by such authority in such manner as to require the use, reconstruction or remodeling of any part of the Premises, Building or Project, or if Landlord shall grant a deed or other instrument in lieu of such taking by eminent domain or condemnation, Landlord shall have the option to terminate this Lease effective as of the date possession is required to be surrendered to the applicable authority. Tenant shall not because of such taking assert any claim against Landlord or the authority for any compensation because of such taking and Landlord shall be entitled to the entire award or payment in connection therewith, except that Tenant shall have the right to file any separate claim available to Tenant for any taking of Tenant's personal property and fixtures belonging to Tenant and removable by Tenant upon expiration of the Lease Term pursuant to the terms of this Lease, and for moving expenses, so long as such claims do not diminish the award available to Landlord, its ground lessor with respect to the Building or Project or its mortgagee, and such claim is payable separately to Tenant. All Rent shall be apportioned as of the date of such termination. Tenant hereby waives any and all rights it might otherwise have pursuant to Section 1265.130 of The California Code of Civil Procedure.

ARTICLE 14

ASSIGNMENT AND SUBLETTING

14.1    Transfers. Tenant shall not, without the prior written consent of Landlord, assign, mortgage, pledge, hypothecate, encumber, or permit any lien to attach to, or otherwise transfer, this Lease or any interest hereunder, permit any assignment, or other transfer of this Lease or any interest hereunder by operation of law, sublet the Premises or any part thereof, or enter into any license or concession agreements or otherwise permit the occupancy or use of the Premises or any part thereof by any persons other than Tenant and its employees and contractors (all of the foregoing are hereinafter sometimes referred to collectively as "Transfers" and any person or entity to whom any Transfer is made or sought to be made is hereinafter sometimes referred to as a "Transferee"). In connection with any such Transfer contemplated by Tenant, Tenant shall submit a written request for consent notice to Landlord, together with any information reasonably required by Landlord which will enable Landlord to determine (i) the financial responsibility, character, and reputation of the proposed Transferee, (ii) the nature of such Transferee's business, (iii) the proposed use of the applicable portion of the Premises (w:hich applicable portion of the Premises to which the proposed Transfer relates shall be known as the "Subject Space"), and (iv) any other reasonable consent parameters. Any Transfer made without Landlord's prior written consent shall, at Landlord's option, be null, void and of no effect, and shall, at Landlord's option, constitute a default by Tenant under this Lease. Whether or not Landlord consents to any proposed Transfer, Tenant shall pay Landlord's reasonable review and processing fees, as well as any actual, reasonable professional fees (including, without limitation, attorneys', accountants', architects', engineers' and consultants' fees) incurred by Landlord, within thirty (30) days after written request by Landlord, in a combined amount for Landlord's review and processing fees and the actual reasonable professional fees not to exceed Two Thousand Five Hundred and No/100 Dollars ($2,500.00) in total for a Transfer in the ordinary course of business. Landlord and Tenant hereby agree that a proposed Transfer shall not be considered ''in the ordinary course of business" if a particular Transfer involves the review of documentation by Landlord for such particular Transfer on more than two (2) occasions.

14.2    Landlord's Consent. Landlord shall not unreasonably withhold its consent to any proposed Transfer of the Subject Space to the Transferee on the terms specified in Tenant's notice pertaining to the particular Transfer and agrees to provide Tenant with Landlord's written notice of consent or refusal to consent within ten (10) business days following Landlord's receipt of the Transfer Notice. Without limitation as to other reasonable grounds for withholding consent, the parties hereby agree that it shall be reasonable under this Lease and under any applicable law for Landlord to withhold consent to any proposed Transfer where one or more of the following apply: (i) Transferee is of a character or reputation or engaged in a business which is not consistent with the quality of the Building or the Project; (ii) Transferee is not a party of reasonable financial worth and1or financial stability in light of the responsibilities to be undertaken in connection with the Transfer on the date consent is requested;

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(iii) Transferee intends to use the Subject Space for purposes which are not permitted under this Lease; (iv) Transferee is either a governmental agency or instrumentality thereof; or (v) the proposed Transfer would cause a violation of another lease for space in the Project, or would give an occupant of the Project a right to cancel its lease. Notv.ithstanding anything to the contrary in this Lease, if Tenant or any proposed Transferee claims that Landlord has unreasonably withheld or delayed its consent under this Section 14.2or otherwise has breached or acted unreasonably under this Article 14, their sole remedies shall be a declaratory judgment and an injunction for the relief sought without any monetary damages, and Tenant hereby waives the provisions of Section 1995.310 of the California Civil Code, or any successor statute, and all other remedies, including, without limitation, any right at law or equity to terminate this Lease, on its own behalf and, to the extent permitted under all applicable laws, on behalf of the proposed Transferee. Tenant shall indemnify, defend and hold harmless Landlord from any and all liability, losses, claims, damages, costs, expenses, causes of action and proceedings involving any third party or parties (including without limitation Tenant's proposed subtenant or assignee) who claim they were damaged by Landlord's wrongful withholding or conditioning of Landlord's consent.

14.3    Transfer Premium. If Landlord consents to a Transfer, as a condition thereto which the parties hereby agree is reasonable, Tenant shall pay to Landlord fifty percent (50%) of any "Transfer Premium," as that term is defined in this Section 14.3, received by Tenant from such Transferee. "Transfer Premium" shall mean all rent, additional rent or other consideration payable by such Transferee in connection with the Transfer in excess of the Rent and Additional Rent payable by Tenant under this Lease during the term of the Transfer (on a per rentable square foot basis if less than all of the Premises is transferred), after deducting the reasonable expenses incurred by Tenant for (i) any changes, alterations and improvements to the Premises in connection with the Transfer, (ii) any free base rent or other economic concessions reasonably provided to the Transferee, and (iii) any brokerage commissions in connection with the Transfer. "Transfer Premium" shall also include, but not be limited to, key money, bonus money or other cash consideration paid by Transferee to Tenant in connection with such Transfer, and any payment in excess of fair market value for services rendered by Tenant to Transferee or for assets, fixtures, inventory, equipment, or furniture transferred by Tenant to Transferee in connection with such Transfer. For purposes of calculating any such effective rent, all such concessions and consideration shall be amortized on a straight-line basis over the relevant term.

14.4    Landlord's Option as to Subject Space. Notwithstanding anything to the contrary contained in this Article 14, if at any time Tenant contemplates a Transfer of all or a portion of the Premises for which Landlord's consent is required, then Tenant shall give Landlord notice ("Intention to Transfer Notice") of such contemplated Transfer. The Intention to Transfer Notice shall specify the portion of and amount of rentable square feet of the Premises which Tenant intends to Transfer (the "Contemplated Transfer Space"), the contemplated date of commencement of the Contemplated Transfer (the "Contemplated Effective Date"), and the contemplated length of the term of such contemplated Transfer, and shall specify that such Intention to Transfer Notice is delivered to Landlord pursuant to this Section 14.4 in order to allow Landlord to elect to recapture the Contemplated Transfer Space for the term set forth in the Intention to Transfer Notice. In the event Tenant delivers an Intention to Transfer Notice to Landlord, Landlord shall have the option, by giving written notice (the "Recapture Notice") to Tenant within fifteen (15) days after receipt of Tenant's written request for consent to such Transfer, to recapture the Subject Space. Such recapture notice shall cancel and terminate this Lease with respect to the Contemplated Transfer Space as of the date stated in the intention to Transter Notice as the effective date of the proposed Transfer until the last day of the term of the Transfer as set forth in the Intention to Transfer Notice (or at Landlord's option, shall cause the Transfer to be made to Landlord or its agent, in which case the parties shall execute the Transfer documentation promptly thereafter). . In the event of a recapture by Landlord, if this Lease shall be canceled with respect to less than the entire Premises, the Rent reserved herein shall be prorated on the basis of the number of rentable square feet retained by Tenant in proportion to the number of rentable square feet contained in the Subject Space, and this Lease as so amended shall continue thereafter in full force and effect, and upon request of either party, the parties shall execute written confirmation of the same. However, if Landlord delivers a recapture notice to Tenant, Tenant may, within ten (10) business days after Tenant's receipt of such recapture notice, deliver written notice to Landlord indicating that Tenant is rescinding its request for consent to the proposed transfer, in which case such Transfer shall not be consummated and this Lease shall remain in full force and effect as to the portion of the Premises that was the subject of the proposed Transfer. If Landlord declines, or fails to elect in a timely manner to recapture the Subject Space under this Section 14.4, then, subject to the other terms of this Article 14, for a period of nine (9) months (the "Nine Month Period") commencing on the last day of such thirty (30) day period, Landlord shall not have any right to recapture the Contemplated Transfer Space with respect to any Transfer made during the Nine Month Period, provided that any such Transfer is substantially on the terms set forth in the Intention to Transfer Notice, and provided further that any such Transfer shall be subject to the remaining terms of this Article 14. If such a Transfer is not so consummated within the Nine Month Period (or if a Transfer is so consummated, then upon the expiration of the term of any Transfer of such Contemplated Transfer Space consummated within such Nine Month Period), Tenant shall again be required to submit a new Intention to Transfer Notice to Landlord with respect any contemplated Transfer, as provided above in this Section 14.4.

14.5    Effect of Transfer.If Landlord consents to a Transfer, (i) the TCCs of this Lease shall in no way be deemed to have been waived or modified, (ii) such consent shall not be deemed consent to any further Transfer by either Tenant or a Transferee, (iii) Tenant shall deliver to Landlord, promptly after execution, an original executed copy of all documentation pertaining to the Transfer in form reasonably acceptable to Landlord, (iv) Tenant shall furnish upon Landlord's request a complete statement, certified by an independent certified public accountant, or Tenant's chief financial officer, setting forth in detail the computation of any Transfer Premium Tenant has derived and shall derive from such Transfer, and (v) no Transfer relating to this Lease or agreement entered into with respect thereto, whether with or without Landlord's consent, shall relieve Tenant or any guarantor of the Lease from any liability under this Lease, including, without limitation, in connection with the Subject Space. Landlord or its authorized representatives shall have the right at all reasonable times to audit the books, records and papers of Tenant relating to any Transfer, and shall have the right to make copies thereof. If the Transfer Premium respecting any Transfer shall be found understated, Tenant shall, within thirty (30) days after demand, pay the deficiency, and if understated by more than two percent (2%), Tenant shall pay Landlord's costs of such audit.

14.6    AdditionalTransfers. For purposes of this Lease, the term "Transfer" shall also include (i) if Tenant is a partnership, the withdrawal or change, voluntary, involuntary or by operation of law, of more than fifty percent (50%) or more of the partners, or transfer of more than fifty percent (50%) or more of partnership interests, within a twelve (12)-month period, or the dissolution of the partnership without immediate reconstitution thereof, and (ii) if Tenant is a closely held corporation (i.e., whose stock is not publicly held and not traded through an exchange or over the counter), (A) the dissolution, merger, consolidation or other reorganization of Tenant or (B) the sale or other transfer of an aggregate of more than fifty percent (50%) or more of the voting shares of Tenant (other than to immediate family members by reason of gift or death), within a twelve (12}-month period, or (C) the sale, mortgage, hypothecation or pledge of an aggregate of more than fifty percent (50%) or more of the value of the unencumbered assets of Tenant within a twelve (12)-month period.

14.7    Occurrence of Default. Any Transfer hereunder shall be subordinate and subject to the provisions of this Lease, and if

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this Lease shall be terminated during the term of any Transfer, Landlord shall have the right to: (i) treat such Transfer as cancelled and repossess the Subject Space by any lawful means, or (ii) require that such Transferee attorn to and recognize Landlord as its landlord under any such Transfer. If Tenant shall be in default under this Lease, Landlord is hereby irrevocably authorized, as Tenant's agent and attorney-in-fact, to direct any Transferee to make all payments under or in connection with the Transfer directly to Landlord (which Landlord shall apply towards Tenant's obligations under this Lease) until such default is cured. Such Transferee shall rely on any representation by Landlord that Tenant is in default hereunder, without any need for confirmation thereof by Tenant. Upon any assignment, the assignee shall assume in writing all obligations and covenants of Tenant thereafter to be performed or observed under this Lease. No collection or acceptance of rent by Landlord from any Transferee shall be deemed a waiver of any provision of this Article 14 or the approval of any Transferee or a release of Tenant from any obligation under this Lease, whether theretofore or thereafter accruing. In no event shall Landlord's enforcement of any provision of this Lease against any Transferee be deemed a waiver of Landlord's right to enforce any term of this Lease against Tenant or any other person. If Tenant's obligations hereunder have been guaranteed, Landlord's consent to any Transfer shall not be effective unless the guarantor also consents to such Transfer.

14.8    Deemed Consent Transfers. Notwithstanding anything to the contrary contained in this Lease, (A) an assignment or subletting of all or a portion of the Premises to an affiliate of Tenant (an entity which is controlled by, controls, or is under common control with, Tenant as of the date of this Lease), (B) a sale of corporate shares of capital stock in Tenant in connection with an initial public offering of Tenant's stock on a nationally-recognized stock exchange, (C) an assignment of the Lease to an entity which acquires all or substantially all of the stock or assets of Tenant, or (D) an assignment of the Lease to an entity which is the resulting entity of a merger or consolidation of Tenant during the Lease Term, shall not be deemed a Transfer requiring Landlord's consent under this Article 14 (any such assignee or sublessee described in items (A) through (D) of this Section 14.8is hereinafter referred to as a "Permitted Transferee"), provided that (i) Tenant notifies Landlord at least thirty (30) days prior to the effective date of any such assignment or sublease and promptly supplies Landlord with any documents or information reasonably requested by Landlord regarding such Transfer or Permitted Transferee as set forth above, (ii) Tenant is not in default, beyond the applicable notice and cure period, more than once in any previous twelve (12) month period or more than twice during the entire Lease Term, and such assignment or sublease is not a subterfuge by Tenant to avoid its obligations under this Lease, (iii) such Permitted Transferee shall be of a character and reputation consistent with the quality of the Building, (iv) such Permitted Transferee shall have a tangible net worth (not including goodwill as an asset) computed in accordance with generally accepted accounting principles ("Net Worth") at least equal to the greater of (1) the Net Worth of Original Tenant on the date of this Lease, and (2) the Net Worth of Tenant on the day immediately preceding the effective date of such assignment or sublease, (v) no assignment or sublease relating to this Lease, whether with or without Landlord's consent, shall relieve Tenant from any liability under this Lease, and (vi) the liability of such Permitted Transferee under either an assignment or sublease shall be joint and several with Tenant. An assignee of Tenant's entire interest in this Lease who qualifies as a Permitted Transferee may also be referred to herein as a "Permitted Transferee Assignee." "Control," as used in this Section 14.8, shall mean the ownership, directly or indirectly, of more than fifty percent (50%) of the voting securities of, or possession of the right to vote, in the ordinary direction of its affairs, of more than fifty percent (50%) of the voting interest in, any person or entity.

ARTICLE 15

SURRENDER OF PREMISES; OWNERSHIP AND

REMOVAL OF TRADE FIXTURES

15.1    Surrender of Premises. No act or thing done by Landlord or any agent or employee of Landlord during the Lease Term shall be deemed to constitute an acceptance by Landlord of a surrender of the Premises unless such intent is specifically acknowledged in writing by Landlord. The delivery of keys to the Premises to Landlord or any agent or employee of Landlord shall not constitute a surrender of the Premises or effect a termination of this Lease, whether or not the keys are thereafter retained by Landlord, and notwithstanding such delivery Tenant shall be entitled to the return of such keys at any reasonable time upon request until this Lease shall have been properly terminated. The voluntary or other surrender of this Lease by Tenant. whether accepted by Landlord or not, or a mutual termination hereof, shall not work a merger, and at the option of Landlord shall operate as an assignment to Landlord of all subleases or subtenancies affecting the Premises or terminate any or all such sublessees or subtenancies.

15.2    Removal ofTenantProperty by Tenant. Upon the expiration of the Lease Term, or upon any earlier termination of this Lease, Tenant shall, subject to the provisions of this Article 15, quit and surrender possession of the Premises to Landlord in as good order and condition as when Tenant took possession and as thereafter improved by Landlord and/or Tenant, reasonable wear and tear and repairs which are specifically made the responsibility of Landlord hereunder excepted. Upon such expiration or termination, in addition to Tenant's obligations under Section 29.26,below, Tenant shall, without expense to Landlord, remove or cause to be removed from the Premises all debris and rubbish, and such items of furniture, equipment, business and trade fixtures, free-standing cabinet work, server and telephone equipment, movable partitions and other articles of personal property owned by Tenant or installed or placed by Tenant at its expense in the Premises, and such similar articles of any other persons claiming under Tenant, as Landlord may, in its sole discretion, require to be removed, and Tenant shall repair at its own expense all damage to the Premises and Building resulting from such removal.

ARTICLE 16

HOLDING OVER

If Tenant holds over after the expiration of the Lease Term with the express written consent of Landlord, such tenancy shall be from month-to-month only, and shall not constitute a renewal hereof or an extension for any further term, and in such case Base Rent shall be payable at a monthly rate of one hundred twenty-five percent (125%) of the Base Rent applicable during the last rental period of the Lease Term under this Lease. Such month-to-month tenancy shall be subject to every other applicable term, covenant and agreement contained herein. If Tenant holds over after the expiration of the Lease Term without the express written consent of Landlord, such tenancy shall be a tenancy at sufferance, and shall not constitute a renewal hereof or an extension for any further term, and in such case daily damages in any action to recover possession of the Premises shall be calculated at a daily rate equal to the greater of (i) one hundred fifty percent (150%) of the Base Rent applicable during the last rental period of the Lease Term under this Lease (calculated on a per diem basis) or (ii) the fair

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market rental rate for the Premises as of the commencement of such holdover period . Nothing contained in this Article 16shall be construed as consent by Landlord to any holding over by Tenant, and Landlord expressly reserves the right to require Tenant to vacate and deliver possession of the Premises to Landlord as provided in this Lease upon the expiration or other termination of this Lease. The provisions of this Article 16 shall not be deemed to limit or constitute a waiver of any other rights or remedies of Landlord provided herein or at law. If Tenant holds over without Landlord's express written consent, and tenders payment of rent for any period beyond the expiration of the Lease Term by way of check (whether directly to Landlord, its agents, or to a lock box) or wire transfer, Tenant acknowledges and agrees that the cashing of such check or acceptance of such wire shall be considered inadvertent and not be construed as creating a month-to-month tenancy, provided Landlord refunds such payment to Tenant promptly upon learning that such check has been cashed or wire transfer received. Tenant acknowledges that any holding over without Landlord's express written consent may compromise or otherwise affect Landlord's ability to enter into new leases with prospective tenants regarding the Premises. Therefore, if Tenant fails to vacate and deliver the Premises upon the termination or expiration of this Lease, in addition to any other liabilities to Landlord accruing therefrom, Tenant shall protect, defend, indemnify and hold Landlord harmless from and against all claims made by any succeeding tenant founded upon such failure to vacate and deliver, and any losses suffered by Landlord, including lost profits, resulting from such failure to vacate and deliver. Tenant agrees that any proceedings necessary to recover possession of the Premises, whether before or after expiration of the Lease Term, shall be considered an action to enforce the terms of this Lease for purposes of the awarding of any attorney's fees in connection therewith.

ARTICLE 1 7

ESTOPPEL CERTIFICATES

Within ten (10) days following a request in writing by Landlord, Tenant shall execute, acknowledge and deliver to Landlord an estoppel certificate, which, as submitted by Landlord, shall be substantially in the form of Exhibit E, attached hereto (or such other form as may be required by any prospective mortgagee or purchaser of the Project, or any portion thereof), indicating therein any exceptions thereto that may exist at that time, and shall also contain any other information reasonably requested by Landlord or Landlord's mortgagee or prospective mortgagee. Any such certificate may be relied upon by any prospective mortgagee or purchaser of all or any portion of the Project. Tenant shall execute and deliver whatever other instruments may be reasonably required for such purposes. At any time during the Lease Term, Landlord may require Tenant to provide Landlord with a current financial statement and financial statements of the two (2) years prior to the current financial statement year. Such statements shall be prepared in accordance with generally accepted accounting principles and, if such is the normal practice of Tenant, shall be audited by an independent certified public accountant. Failure of Tenant to timely execute, acknowledge and deliver such estoppel certificate or other instruments shall constitute an acceptance of the Premises and an acknowledgment by Tenant that statements included in the estoppel certificate are true and correct, without exception. Notwithstanding the foregoing, in the event that (i) stock in the entity which constitutes Tenant under this Lease (as opposed to an entity that "controls" Tenant, as that term is defined in Section 14.8 of this Lease, or is under common control with Tenant) is publicly traded on a national stock exchange, and (ii) Tenant has its own, separate and distinct 10K and 10Q filing requirements (as opposed to joint filings with an entity that controls Tenant or is under common control with Tenant), then Tenant's obligation to provide Landlord with a copy of its most recent current financial statement shall be deemed satisfied.

ARTICLE 18

SUBORDINATION

This Lease shall be subject and subordinate to all present and future ground or underlying leases of the Building or Project and to the lien of any mortgage, trust deed or other encumbrances now or hereafter in force against the Building or Project or any part thereof, if any, and to all renewals, extensions, modifications, consolidations and replacements thereof, and to all advances made or hereafter to be made upon the security of such mortgages or trust deeds, unless the holders of such mortgages, trust deeds or other encumbrances, or the lessors under such ground lease or underlying leases, require in writing that this Lease be superior thereto. Tenant covenants and agrees in the event any proceedings are brought for the foreclosure of any such mortgage or deed in lieu thereof (or if any ground lease is terminated), to attorn, without any deductions or set-offs whatsoever, to the lienholder or purchaser or any successors thereto upon any such foreclosure sale or deed in lieu thereof (or to the ground lessor), if so requested to do so by such purchaser or lienholder or ground lessor, and to recognize such purchaser or lienholder or ground lessor as the lessor under this Lease, provided such lienholder or purchaser or ground lessor shall agree to accept this Lease and not disturb Tenant's occupancy, so long as Tenant timely pays the rent and observes and performs the TCCs of this Lease to be observed and performed by Tenant. Landlord's interest herein may be assigned as security at any time to any lienholder. Tenant shall, within five (5) days of request by Landlord, execute such further instruments or assurances as Landlord may reasonably deem necessary to evidence or confirm the subordination or superiority of this Lease to any such mortgages, trust deeds, ground leases or underlying leases. Tenant waives the provisions of any current or future statute, rule or law which may give or purport to give Tenant any right or election to terminate or otherwise adversely affect this Lease and the obligations of the Tenant hereunder in the event of any foreclosure proceeding or sale.

ARTICLE 19

DEFAULTS; REMEDIES

19.1    Events of Default. The occurrence of any of the following shall constitute a default of this Lease by Tenant:

19.1.1    Any failure by Tenant to pay any Rent or any other charge required to be paid under this Lease, or any part thereof, when due unless such failure is cured within five (5) business days after notice; or

19.1.2    Except where a specific time period is otherwise set forth for Tenant's performance in this Lease, in which event the failure to perform by Tenant within such time period shall be a default by Tenant under this Section 19.1.2, any failure by Tenant to observe or perform any other provision, covenant or condition of this Lease to be observed or performed by Tenant where such failure continues for thirty (30) days after written notice thereof from Landlord to Tenant; provided that if the nature of such default is such that the same cannot reasonably be cured within a thirty (30) day period, Tenant shall not be deemed to be in default if it diligently commences such cure within such period and thereafter diligently proceeds to rectify and cure such default, but in no

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event exceeding a period of time in excess of sixty (60) days after written notice thereof from Landlord to Tenant; or

19.1.3    To the extent permitted by law, (i) Tenant or any guarantor of this Lease being placed into receivership or conservatorship, or becoming subject to similar proceedings under Federal or State law, or (ii) a general assignment by Tenant or any guarantor of this Lease for the benefit of creditors, or (iii) the taking of any corporate action in furtherance of bankruptcy or dissolution whether or not there exists any proceeding under an insolvency or bankruptcy law, or (iv) the filing by or against Tenant or any guarantor of any proceeding under an insolvency or bankruptcy law, unless in the case of such a proceeding filed against Tenant or any guarantor the same is dismissed within sixty (60) days, or (v) the appointment of a trustee or receiver to take possession of all or substantially all of the assets of Tenant or any guarantor, unless possession is restored to Tenant or such guarantor within thirty (30) days, or (vi) any execution or other judicially authorized seizure of all or substantially all of Tenant's assets located upon the Premises or of Tenant's interest in this Lease, unless such seizure is discharged within thirty (30) days; or

19.1.4    Abandonment or Vacation of all or a substantial portion of the Premises by Tenant; or

19.1.5    The failure by Tenant to observe or perform according to the provisions of Articles 5, 14, 17 or 18 of this Lease where such failure continues for more than two (2) business days after notice from Landlord; or

19.1.6    Tenant's failure to occupy the Premises within ninety (90) days after the Lease Commencement Date.

The notice periods provided herein are in lieu of, and not in addition to, any notice periods provided by law.

19.2    Remedies Upon Default. Upon the occurrence of any event of default by Tenant, Landlord shall have, in addition to any other remedies available to Landlord at law or in equity (all of which remedies shall be distinct, separate and cumulative), the option to pursue any one or more of the following remedies, each and all of which shall be cumulative and nonexclusive, without any notice or demand whatsoever.

19.2.1    Terminate this Lease, in which event Tenant shall immediately surrender the Premises to Landlord, and if Tenant fails to do so, Landlord may, without prejudice to any other remedy which it may have for possession or arrearages in rent, enter upon and take possession of the Premises and expel or remove Tenant and any other person who may be occupying the Premises or any part thereof, without being liable for prosecution or any claim for damages therefor; and Landlord may recover from Tenant the following:

19.2.1.1    The worth at the time of award of any unpaid rent which has been earned at the time of such termination; plus

19.2.1.2    The worth at the time of award of the amount by which the unpaid rent which would have

been earned after termination until the time of award exceeds the amount of such rental loss that Tenant proves could have been reasonably avoided; plus

19.2.1.3    The worth at the time of award of the amount by which the unpaid rent for the balance of the Lease Term after the time of award exceeds the amount of such rental loss that Tenant proves could have been reasonably avoided; plus

19.2.1.4    Any other amount necessary to compensate Landlord for all the detriment proximately caused by Tenant's failure to perform its obligations under this Lease or which in the ordinary course of things would be likely to result therefrom, specifically including but not limited to, brokerage commissions and advertising expenses incurred, expenses of remodeling the Premises or any portion thereof for a new tenant, whether for the same or a different use, and any special concessions made to obtain a new tenant; and

19.2.1.5    At Landlord's election, such other amounts in addition to or in lieu of the foregoing as may be permitted from time to time by applicable law.

The term "rent" as used in this Section 19.2 shall be deemed to be and to mean all sums of every nature required to be paid by Tenant pursuant to the terms of this Lease, whether to Landlord or to others. As used in Sections 19.2.l(a) and (Q}, above, the "worth at the time of award" shall be computed by allowing interest at the Interest Rate. As used in Section 19.2.Hc), above, the "worth at the time of award" shall be computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of award plus one percent (1%).

19.2.2    Landlord shall have the remedy described in California Civil Code Section 1951.4 (lessor may continue lease in effect after lessee's breach and abandonment and recover rent as it becomes due, if lessee has the right to sublet or assign, subject only to reasonable limitations). Accordingly, if Landlord does not elect to terminate this Lease on account of any default by Tenant, Landlord may, from time to time, without terminating this Lease, enforce all of its rights and remedies under this Lease, including the right to recover all rent as it becomes due.

19.2.3    Landlord shall at all times have the rights and remedies (which shall be cumulative with each other and cumulative and in addition to those rights and remedies available under Sections 19.2.1 and 19.2.2, above, or any law or other provision of this Lease), without prior demand or notice except as required by applicable law, to seek any declaratory, injunctive or other equitable relief, and specifically enforce this Lease, or restrain or enjoin a violation or breach of any provision hereof.

19.3    Subleases of Tenant. Whether or not Landlord elects to terminate this Lease on account of any default by Tenant, as set forth in this Article 19, Landlord shall have the right to terminate any and all subleases, licenses, concessions or other consensual arrangements for possession entered into by Tenant and affecting the Premises or may, in Landlord's sole discretion, succeed to Tenant's interest in such subleases, licenses, concessions or arrangements. In the event of Landlord's election to succeed to Tenant's interest in any such subleases, licenses, concessions or arrangements, Tenant shall, as of the date of notice by Landlord of such election, have no further right to or interest in the rent or other consideration receivable thereunder.

19.4    Form of Payment After Default. Following the occurrence of an event of default by Tenant, Landlord shall have the right to require that any or all subsequent amounts paid by Tenant to Landlord hereunder, whether to cure the default in question or otherwise, be paid in the form of cash, money order, cashier's or certified check drawn on an institution acceptable to Landlord, or by

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other means approved by Landlord, notwithstanding any prior practice of accepting payments in any different form.

19.5    Efforts to Relet. No re-entry or repossession, repairs, maintenance, changes, alterations and additions, reletting, appointment of a receiver to protect Landlord's interests hereunder, or any other action or omission by Landlord shall be construed as an election by Landlord to terminate this Lease or Tenant's right to possession, or to accept a surrender of the Premises, nor shall same operate to release Tenant in whole or in part from any of Tenant's obligations hereunder, unless express written notice of such intention is sent by Landlord to Tenant. Tenant hereby irrevocably waives any right otherwise available under any law to redeem or reinstate this Lease.

19.6    Landlord Default. Notwithstanding anything to the contrary set forth in this Lease, Landlord shall be in default in the performance of any obligation required to be performed by Landlord pursuant to this Lease if Landlord fails to perform such obligation within thirty (30) days after the receipt of notice from Tenant specifying in detail Landlord's failure to perform; provided, however, if the nature of Landlord's obligation is such that more than thirty (30) days are required for its performance, then Landlord shall not be in default under this Lease if it shall commence such performance within such thirty (30) day period and thereafter diligently pursues the same to completion. Upon any such default by Landlord under this Lease, Tenant may, except as otherwise specifically provided in this Lease to the contrary, exercise any of its rights provided at law or in equity. Any award from a court or arbitrator in favor of Tenant requiring payment by Landlord which is not paid by Landlord within the time period directed by such award, may be offset by Tenant from Rent next due and payable under this Lease; provided, however, Tenant may not deduct the amount of the award against more than fifty percent (50%) of Base Rent next due and owing (until such time as the entire amount of such judgment is deducted) to the extent following a foreclosure or a deed-in-lieu of foreclosure.

ARTICLE 20

COVENANT OFQUIET ENJOYMENT

Landlord covenants that Tenant, on paying the Rent, charges for services and other payments herein reserved and on keeping, observing and performing all the other TCCs, provisions and agreements herein contained on the part of Tenant to be kept, observed and performed, shall, during the Lease Term, peaceably and quietly have, hold and enjoy the Premises subject to the TCCs, provisions and agreements hereof without interference by any persons lawfully claiming by or through Landlord. The foregoing covenant is in lieu of any other covenant express or implied.

ARTICLE 21

SECURITY DEPOSIT

Concurrent with Tenant's execution of this Lease, Tenant shall deposit with Landlord a security deposit (the ''Security Deposit") in the amount set forth in Section 8 of the Summary, as security for the faithful performance by Tenant of all of its obligations under this Lease. If Tenant defaults with respect to any provisions of this Lease, including, but not limited to, the provisions relating to the payment of Rent, the removal of property and the repair of resultant damage, Landlord may, without advance notice to Tenant, but shall not be required to apply all or any part of the Security Deposit for the payment of any Rent or any other sum in default and Tenant shall, upon demand therefor, restore the Security Deposit to its original amount; provided, however, if Landlord elects to make such an application Landlord shall promptly notify Tenant of the same in writing, identifying with reasonable specificity the reason therefor. Any unapplied portion of the Security Deposit shall be returned to Tenant, or, at Landlord's option, to the last assignee of Tenant's interest hereunder, within sixty (60) days following the expiration of the Lease Term. Tenant shall not be entitled to any interest on the Security Deposit. Tenant hereby irrevocably waives and relinquishes any and all rights, benefits, or protections, if any, Tenant now has, or in the future may have, under Section 1950.7 of the California Civil Code, any successor statute, and all other provisions of law, now or hereafter in effect, including, but not limited to, any provision of law which (i) establishes the time frame by which a landlord must refund a security deposit under a lease, or (ii) provides that a landlord may claim from a security deposit only those sums reasonably necessary to remedy defaults in the payment of rent, to repair damage caused by a tenant, or to clean the subject premises. Tenant acknowledges and agrees that (A) any statutory time frames for the return of a security deposit are superseded by the express period identified in this Article 21,above, and (B) rather than be so limited, Landlord may claim from the Security Deposit (i) any and all sums expressly identified in this Article 21, above, and (ii) any additional sums reasonably necessary to compensate Landlord for any and all losses or damages caused by Tenant's default of this Lease, including, but not limited to, all damages or rent due upon termination of this Lease pursuant to Section 1951.2 of the California Civil Code.

ARTICLE 22

INTENTIONALLY OMITTED

ARTICLE 23

SIGNS

23.1    Full Floors. Subject to Landlord's prior written approval, in its sole discretion, and provided all signs are in keeping with the quality, design and style of the Building and Project, Tenant, if the Premises comprise an entire floor of the Building, at its sole cost and expense, may install identification signage anywhere in the Premises including in the elevator lobby of the Premises, provided that such signs must not be visible from the exterior of the Building.

23.2    Multi-Tenant Floors. If other tenants occupy space on the floor on which the Premises is located, Tenant's identifying signage shall be provided by Landlord, at Tenant's cost (provided that Tenant may apply Additional Improvement Allowance, as defined in Section 1.3of the Work Letter, to pay for such Tenant signage), and such signage shall be comparable to that used by Landlord for other similar floors in the Building and shall comply with Landlord's Building standard signage program.

23.3    Building Directory. A building directory is located in the lobby of the Building. Tenant shall have the right, at Landlord's sole cost and expense as to Tenant's initial name strip, to designate one (1) name strip on such directory, and any subsequent changes to Tenant's name strip shall be at Tenant's sole cost and expense following Tenant's receipt of Landlord's consent thereto (which

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consent may be withheld in Landlord's sole and absolute discretion).

23.4    Prohibited Signage and Other Items. Any signs, notices, logos, pictures, names or advertisements which are installed and that have not been separately approved by Landlord may be removed without notice by Landlord at the sole expense of Tenant. Tenant may not install any signs on the exterior or roof of the Project or the Common Areas. Any signs, window coverings, or blinds (even if the same are located behind the Landlord-approved window coverings for the Building), or other items visible from the exterior of the Premises or Building, shall be subject to the prior approval of Landlord, in its sole discretion.

23.5    Building Monument Signage. Provided that (i) Tenant is not then in default of this Lease and has not previously been in default of this Lease and (ii) the Original Tenant or its Permitted Transferee Assignee then occupies the entire Premises, then the Original Tenant or its Permitted Transferee Assignee shall have the non-exclusive right to elect to have installed (in a location designated by Landlord in Landlord's sole discretion), at Tenant's sole cost and expense, in accordance with the terms of this Section 23.5below, one (1) identity sign (the "Identity Sign") identifying the Original Tenant's or its Permitted Transferee Assignee's name on one (1) line of the existing Building monument located at the Building (the "Monument"). Should Tenant comply with the foregoing conditions and validly exercise its non-exclusive right to cause its Identity Sign to be displayed on the Monument, the terms and conditions contained in this Section 23.5 shall apply with respect thereto. The name set forth on the Identity Sign to be installed on the Monument, if at all, shall in no event include, identify or otherwise refer to a name which relates to an entity which is of a character or reputation, or is associated with a political faction or orientation, which is inconsistent with the quality of the Project, or which would otherwise reasonably offend a landlord of a Comparable Building (an "Objectionable Name") and any changes in such name shall be subject to the terms of this Section 23.5 below and Landlord's prior written approval. The parties hereby agree that the name "Zogenix, Inc." or any reasonable derivation thereof, shall not be deemed an Objectionable Name. The graphics, materials, color, design, lettering, size, quality, specifications and all other aspects of the Identity Sign shall be subject to the prior written approval of Landlord, in Landlord's sole discretion, shall be consistent with the identity signs of the other tenants of the Building and the Project, and shall also comply with and be subject to all "Applicable Laws" (as defined below), including, but not limited to, all requirements of the City of San Diego ("City") (and other applicable governmental authorities); provided, however, that in no event shall the approval by the City (or other applicable governmental authority) of the Identity Sign be deemed a condition precedent to the effectiveness of this Lease. The Identity Sign shall be installed by Landlord, provided that Tenant shall pay for all costs incurred by Landlord in the installation of the Identity Sign. Landlord shall maintain and repair the Identity Sign and the Monument in accordance with Landlord's signage maintenance program, provided that Tenant shall pay for all costs incurred by Landlord in connection with such maintenance and repair, prorated based on the number of tenants identified on the Monument. At the expiration or earlier termination of this Lease (or within five (5) days following Tenant's receipt of written notice from Landlord that Tenant's rights to the Identity Sign have terminated as a result of a default by Tenant under this Lease, beyond any applicable notice and cure period set forth in the Lease or in accordance with the other terms of this Section 23.5), Tenant shall, at Tenant's sole cost and expense, cause (a) the Identity Sign to be removed from the Monument and (b) the Monument to be restored to its condition existing prior to the installation of the Identity Sign (provided that Landlord shall have the right to perform such work and charge Tenant all cost therefor). If Tenant fails to timely remove any Identity Sign and restore the Monument as provided in this Section23.5, then Landlord may (but shall not be obligated to) perform such work at Tenant's sole cost and expense. All costs and expenses incurred by Landlord in connection with this Section 23.5 shall constitute Rent under this Lease and shall be paid by Tenant to Landlord within ten (10) days following Tenant's receipt of an invoice therefor. The signage rights granted to Tenant under this Section 23.5are personal to the Original Tenant and any Permitted Transferee Assignee, and may only be exercised by the Original Tenant or its Permitted Transferee Assignee (and not any other assignee, or any sublessee or other transferee of the Original Tenant's interest in this Lease) if the Original Tenant or its Permitted Transferee Assignee continually occupies the entire Premises. In no event shall Tenant have any right to install or maintain any Identity Sign at any time during the Lease Term that Tenant is in default under this Lease, beyond any applicable notice and cure period set forth in this Lease.

ARTICLE 24

COMPLIANCE WITH LAW

Landlord shall comply with all Applicable Laws relating to the Base Building, provided that compliance with such Applicable Laws is not the responsibility of Tenant under this Lease, and provided further that Landlord's failure to comply therewith would prohibit Tenant from obtaining or maintaining a certificate of occupancy for the Premises, or would unreasonably and materially affect the safety of Tenant's employees or create a significant health hazard for Tenant's employees. Landlord shall be permitted to include in Operating Expenses any costs or expenses incurred by Landlord under this Article 24 to the extent not prohibited by the terms of Section 1.1.4of Exhibit C. For purposes of Section 1938 of the California Civil Code, Landlord hereby discloses to Tenant, and Tenant hereby acknowledges, that the Premises have not undergone inspection by a Certified Access Specialist (CASp). Tenant shall not do anything or suffer anything to be done in or about the Premises which will in any way conflict with any law, statute, ordinance or other governmental rule, regulation or requirement now in force or which may hereafter be enacted or promulgated, including, without limitation, any such governmental regulations related to disabled access (collectively, "Applicable Laws"). At its sole cost and expense, Tenant shall promptly comply with all Applicable Laws (including the making of any alterations to the Premises required by Applicable Laws). Should any standard or regulation now or hereafter be imposed on Landlord or Tenant by a state, federal or local governmental body charged with the establishment, regulation and enforcement of occupational, health or safety standards for employers, employees, landlords or tenants, then Tenant agrees, at its sole cost and expense, to comply promptly with such standards or regulations. The judgment of any court of competent jurisdiction or the admission of Tenant in any judicial action, regardless of whether Landlord is a party thereto, that Tenant has violated any of said governmental measures, shall be conclusive of that fact as between Landlord and Tenant.

ARTICLE 25

LATE CHARGES

If any installment of rent or any other sum due from tenant shall not be received by Landlord or Landlord's designee when due, then Tenant shall pay to Landlord a late charge equal to five percent (5%) of the overdue amount plus any attorneys' fees incurred by Landlord by reason of Tenant's failure to pay Rent and/or other charges when due hereunder; provided, however, with regard to the first such failure in any twelve (12) month period, Landlord will waive such late charge to the extent Tenant cures such failure within five (5) business days following Tenant's receipt of written notice from Landlord that the same was not received when due. The late charge shall be deemed Additional Rent and the right to require it shall be in addition to all of Landlord's other rights and remedies hereunder or at law and shall not be construed as liquidated damages or as limiting Landlord's remedies in any manner. In addition to the late charge described above, any

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Rent or other amounts owing hereunder which are not paid within ten (10) days after the date they are due shall bear interest from the date when due until paid at the "Interest Rate." For purposes of this Lease, the "Interest Rate" shall be an annual rate equal to the lesser of

(i) the annual "Bank Prime Loan" rate cited in the Federal Reserve Statistical Release Publication H.15(519), published weekly (or such other comparable index as Landlord and Tenant shall reasonably agree upon if such rate ceases to be published), plus four (4) percentage points, and (ii) the highest rate permitted by applicable law.

ARTICLE 26

LANDLORD'S RIGHT TO CURE DEFAULT; PAYMENTS BY TENANT

All covenants and agreements to be kept or performed by Tenant under this Lease shall be performed by Tenant at Tenant's sole cost and expense and without any reduction of Rent. If Tenant shall fail to perform any of its obligations under this Lease, within a reasonable time after such performance is required by the terms of this Lease, Landlord may, but shall not be obligated to, after reasonable prior notice to Tenant, make any such payment or perform any such act on Tenant's part without waiving its right based upon any default of Tenant and without releasing Tenant from any obligations hereunder. Except as may be specifically provided to the contrary in this Lease, Tenant shall pay to Landlord, within fifteen (15) days after delivery by Landlord to Tenant of statements therefor: (i) sums equal to expenditures reasonably made and obligations incurred by Landlord in connection with the remedying by Landlord of Tenant's defaults pursuant to the provisions of this Article 26; (ii) sums equal to all losses, costs, liabilities, damages and expenses referred to in Article 10of this Lease; and (iii) sums equal to all expenditures made and obligations incurred by Landlord in collecting or attempting to collect the Rent or in enforcing or attempting to enforce any rights of Landlord under this Lease or pursuant to law, including, without limitation, all legal fees and other amounts so expended. Tenant's obligations under this Article 26shall survive the expiration or sooner termination of the Lease Term.

ARTICLE 27

ENTRY BY LANDLORD

Landlord reserves the right at all reasonable times and upon reasonable notice to the Tenant to enter the Premises to

(i) inspect them; (ii) show the Premises to prospective purchasers, mortgagees or tenants, or to the ground or underlying lessors; (iii) post notices of non-responsibility; or (iv) alter, improve or repair the Premises or the Building if necessary to comply with current building codes or other applicable laws, or for structural alterations, repairs or improvements to the Building. Notwithstanding anything to the contrary contained in this Article 27, Landlord may enter the Premises at any time to (A) perform services required of Landlord; (B) take possession due to any breach of this Lease in the manner provided herein; and (C) perform any covenants of Tenant which Tenant fails to perform. Any such entries shall be without the abatement of Rent and shall include the right to take such reasonable steps as required to accomplish the stated purposes. Tenant hereby waives any claims for damages or for any injuries or inconvenience to or interference with Tenant's business, lost profits, any loss of occupancy or quiet enjoyment of the Premises, and any other loss occasioned thereby. For each of the above purposes, Landlord shall at all times have a key with which to unlock all the doors in the Premises, excluding Tenant's vaults, safes and special security areas designated in advance by Tenant. In an emergency, Landlord shall have the right to use any means that Landlord may deem proper to open the doors in and to the Premises. Any entry into the Premises in the manner hereinbefore described shall not be deemed to be a forcible or unlawful entry into, or a detainer of, the Premises, or an actual or constructive eviction of Tenant from any portion of the Premises.

ARTICLE 28

TENANT PARKING

Tenant shall be entitled to rent, on a monthly basis throughout the Lease Term commencing on the Lease Commencement Date, the amount of unreserved parking passes set forth in Section 9 of the Summary, all of which parking passes shall pertain to the Project parking structure, provided that, subject to the terms hereof, six (6) of such parking passes shall be reserved contiguous spaces located in the Project's covered parking structure (the "Reserved Parking Passes"). The location of the Reserved Parking Passes shall be as set forth on Exhibit G, subject to relocation to reasonably equivalent spaces in connection with any reconfiguration, modification, or other improvements to the Building or Project (and not to accommodate another tenant of the Building) to the extent Landlord requires in its commercially reasonable judgment. Tenant shall pay to Landlord (or its designee) for the Reserved Parking Passes on a monthly basis at the rate identified below, and Tenant's unreserved parking passes shall be without charge for the initial Lease Term only (excepting only any parking taxes or other charges imposed by governmental authorities in connection with the use of such parking). The rate for the Reserved Parking Passes shall be $100.00 per month per space for the first twenty-four (24) months of the initial Lease Term and shall thereafter be $150.00 per month per space for the remainder of the initial Lease Term. In addition to any fees that may be charged to Tenant in connection with its parking of automobiles in the Project parking structure, Tenant shall be responsible for the full amount of any taxes imposed by any governmental authority in connection with the renting of such parking passes by Tenant or the use of the parking facility by Tenant. Tenant's continued right to use the parking passes is conditioned upon Tenant abiding by all rules and regulations which are prescribed from time to time for the orderly operation and use of the parking facility where the parking passes are located, including any sticker or other identification system established by Landlord, Tenant's cooperation in seeing that Tenant's employees and visitors also comply with such rules and regulations and Tenant not being in default under this Lease. Landlord specifically reserves the right to change the size, configuration, design, layout and all other aspects of the Project parking facility at any time and Tenant acknowledges and agrees that Landlord may, without incurring any liability to Tenant and without any abatement of Rent under this Lease, from time to time, temporarily close-off or restrict access to the Project parking facility for purposes of permitting or facilitating any such construction, alteration or improvements. Landlord may delegate its responsibilities hereunder to a parking operator in which case such parking operator shall have all the rights of control attributed hereby to the Landlord. The parking passes rented by Tenant pursuant to this Article 28are provided to Tenant solely for use by Tenant's own personnel and such passes may not be transferred, assigned, subleased or otherwise alienated by Tenant without Landlord's prior approval. Tenant may validate visitor parking by such method or methods as the Landlord may establish, at the validation rate from time to time generally applicable to visitor parking, provided that such visitor passes shall be free of charge during the initial Lease Term only (excepting only any parking taxes or other charges imposed by govemmental authorities in connection with the use of such parking).

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ARTICLE 29

MISCELLANEOUS PROVISIONS

29.1    Binding Effect. Subject to all other provisions of this Lease, each of the covenants, conditions and provisions of this Lease shall extend to and shall, as the case may require, bind or inure to the benefit not only of Landlord and of Tenant, but also of their respective heirs, personal representatives, successors or assigns, provided this clause shall not permit any assignment by Tenant contrary to the provisions of Article 14 of this Lease.

29.2    No Air Rights. No rights to any view or to light or air over any property, whether belonging to Landlord or any other person, are granted to Tenant by this Lease. If at any time any windows of the Premises are temporarily darkened or the light or view therefrom is obstructed by reason of any repairs, improvements, maintenance or cleaning in or about the Project, the same shall be without liability to Landlord and without any reduction or diminution of Tenant's obligations under this Lease.

29.3    Modification of Lease. Should any current or prospective mortgagee or ground lessor for the Building or Project require a modification of this Lease, which modification will not cause an increased cost or expense to Tenant or in any other way materially and adversely change the rights and obligations of Tenant hereunder, then and in such event, Tenant agrees that this Lease may be so modified and agrees to execute whatever documents are reasonably required therefor and to deliver the same to Landlord within ten (l0) days following a request therefor. At the request of Landlord or any mortgagee or ground lessor, Tenant agrees to execute a short form of Lease and deliver the same to Landlord within ten (10) days following the request therefor.

29.4    Transfer of Landlord's Interest. Tenant acknowledges that Landlord has the right to transfer all or any portion of its interest in the Project or Building and in this Lease, and Tenant agrees that in the event of any such transfer, Landlord shall automatically be released from all liability under this Lease and Tenant agrees to look solely to such transferee for the performance of Landlord's obligations hereunder after the date of transfer and such transferee shall be deemed to have fully assumed and be liable for all obligations of this Lease to be performed by Landlord, including the return of any Security Deposit, and Tenant shall attorn to such transferee. Tenant further acknowledges that Landlord may assign its interest in this Lease to a mortgage lender as additional security and agrees that such an assignment shall not release Landlord from its obligations hereunder and that Tenant shall continue to look to Landlord for the performance of its obligations hereunder.

29.5    Prohibition Against Recording or Publication. Neither this Lease, nor any memorandum, affidavit or other writing with respect thereto, shall be recorded or otherwise published by Tenant or by anyone acting through, under or on behalf of Tenant.

29.6    Landlord's Title. Landlord's title is and always shall be paramount to the title of Tenant. Nothing herein contained shall empower Tenant to do any act which can, shall or may encumber the title of Landlord.

29.7    Application of Payments. Landlord shall have the right to apply payments received from Tenant pursuant to this Lease, regardless of Tenant's designation of such payments, to satisfy any obligations of Tenant hereunder, in such order and amounts as Landlord, in its sole discretion, may elect.

29.8    Time of Essence. Time is of the essence with respect to the performance of every provision of this Lease in which time of performance is a factor.

29.9    Partial Invalidity. If any term, provision or condition contained in this Lease shall, to any extent, be invalid or unenforceable, the remainder of this Lease, or the application of such term, provision or condition to persons or circumstances other than those with respect to which it is invalid or unenforceable, shall not be affected thereby, and each and every other term, provision and condition of this Lease shall be valid and enforceable to the fullest extent possible permitted by law.

29.10    No Warranty. In executing and delivering this Lease, Tenant has not relied on any representations, including, but not limited to, any representation as to the amount of any item comprising Additional Rent or the amount of the Additional Rent in the aggregate or that Landlord is furnishing the same services to other tenants, at all, on the same level or on the same basis, or any warranty or any statement of Landlord which is not set forth herein or in one or more of the exhibits attached hereto. Tenant agrees that neither Landlord nor any agent of Landlord has made any representation or warranty with respect to the physical condition of the Building, the Project, the land upon which the Building or the Project are located, or the Premises, or the expenses of operation of the Premises, the Building or the Project, or any other matter or thing affecting or related to the Premises, except as herein expressly set forth in the provisions of this Lease.

29.11    Landlord Exculpation. The liability of Landlord or the Landlord Parties to Tenant for any default by Landlord under this Lease or arising in connection herewith or with Landlord's operation, management, leasing, repair, renovation, alteration or any other matter relating to the Project or the Premises shall be limited solely and exclusively to an amount which is equal to the net interest of Landlord in the Building (following payment of any outstanding liens and/or mortgages, whether attributable to sales or insurance proceeds or otherwise), including any insurance or rental proceeds which Landlord receives. Neither Landlord, nor any of the Landlord Parties shall have any personal liability therefor, and Tenant hereby expressly waives and releases such personal liability on behalf of itself and all persons claiming by, through or under Tenant. The limitations of liability contained in this Section 29 .11shall inure to the benefit of Landlord's and the Landlord Parties' present and future partners, beneficiaries, officers, directors, trustees, shareholders, agents and employees, and their respective partners, heirs, successors and assigns. Under no circumstances shall any present or future partner of Landlord (if Landlord is a partnership), or trustee or beneficiary (if Landlord or any partner of Landlord is a trust), have any liability for the performance of Landlord's obligations under this Lease. Notwithstanding any contrary provision herein, neither Landlord nor the Landlord Parties shall be liable under any circumstances for injury or damage to, or interference with, Tenant's business, including but not limited to, loss of profits, loss of rents or other revenues, loss of business opportunity, loss of goodwill or loss of use, in each case, however occurring.

29.12    Entire Agreement.It is understood and acknowledged that there are no oral agreements between the parties hereto affecting this Lease and this Lease constitutes the parties' entire agreement with respect to the leasing of the Premises and supersedes and cancels any and all previous negotiations, arrangements, brochures, agreements and understandings, if any, between the parties hereto (including, without limitation, any confidentiality agreement, letter of intent, or request for proposal, or similar agreement previously entered into between Landlord and Tenant in anticipation of this Lease) or displayed by Landlord to Tenant with respect to the subject matter thereof, and none thereof shall be used to interpret or construe this Lease. None of the terms, covenants, conditions or provisions of this Lease can be modified, deleted or added to except in writing signed by the parties

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hereto.

29.13    Right to Lease. Landlord reserves the absolute right to effect such other tenancies in the Project as Landlord in the exercise of its sole business judgment shall determine to best promote the interests of the Building or Project. Tenant does not rely on the fact, nor does Landlord represent, that any specific tenant or type or number of tenants shall, during the Lease Term, occupy any space in the Building or Project.

29.14    Force Majeure. Any prevention, delay or stoppage due to strikes, lockouts, labor disputes, acts of God, inability to obtain services, labor, or materials or reasonable substitutes therefor, governmental actions, civil commotions, fire or other casualty, and other causes beyond the reasonable control of the party obligated to perform, except with respect to the obligations imposed with regard to Rent and other charges to be paid by Tenant pursuant to this Lease and except as to Tenant's obligations under Articles 5 and 24 of this Lease (collectively, a "Force Majeure"), notwithstanding anything to the contrary contained in this Lease, shall excuse the performance of such party for a period equal to any such prevention, delay or stoppage and, therefore, if this Lease specifies a time period for performance of an obligation of either party (with the exception of those time periods in Articles 11and .Ll..) ,such time period shall be extended by the period of any delay in such party's performance caused by a Force Majeure.

29.15    Waiver of Redemption by Tenant. Tenant hereby waives, for Tenant and for all those claiming under Tenant, any and all rights now or hereafter existing to redeem by order or judgment of any court or by any legal process or writ, Tenant's right of occupancy of the Premises after any termination of this Lease.

29.16    Notices. All notices, demands, statements or communications (collectively, "Notices") given or required to be given by either party to the other hereunder shall be in writing, shall be (A) delivered by a nationally recognized overnight courier, or (B) delivered personally. Any such Notice shall be delivered (i) to Tenant at the appropriate address set forth in Section 10of the Summary, or to such other place as Tenant may from time to time designate in a Notice to Landlord; or (ii) to Landlord at the addresses set forth in Section 11of the Summary, or to such other firm or to such other place as Landlord may from time to time designate in a Notice to Tenant. Any Notice will be deemed given on the date of receipted delivery, of refusal to accept delivery, or when delivery is first attempted but cannot be made due to a change of address for which no Notice was given. If Tenant is notified of the identity and address of Landlord's mortgagee or ground or underlying lessor, Tenant shall give to such mortgagee or ground or underlying lessor written notice of any default by Landlord under the terms of this Lease by registered or certified mail, and such mortgagee or ground or underlying lessor shall be given a reasonable opportunity to cure such default prior to Tenant's exercising any remedy available to Tenant. The party delivering Notice shall use commercially reasonable efforts to provide a courtesy copy of each such Notice to the receiving party via electronic mail.

29.17    Authority. If Tenant is a corporation, trust or partnership, each individual executing this Lease on behalf of Tenant hereby represents and warrants that Tenant is a duly formed and existing entity qualified to do business in California and that Tenant has full right and authority to execute and deliver this Lease and that each person signing on behalf of Tenant is authorized to do so. In such event, Tenant shall, within ten (10) days after execution of this Lease, deliver to Landlord satisfactory evidence of such authority and:, if a corporation, upon demand by Landlord, also deliver to Landlord satisfactory evidence of (i) good standing in Tenant's state of incorporation and (ii) qualification to do business in California.

29.18    Attorneys' Fees. In the event that either Landlord or Tenant should bring suit for the possession of the Premises, for the recovery of any sum due under this Lease, or because of the breach of any provision of this Lease or for any other relief against the other, then all costs and expenses, including reasonable attorneys' fees, incurred by the prevailing party therein shall be paid by the other party, which obligation on the part of the other party shall be deemed to have accrued on the date of the commencement of such action and shall be enforceable whether or not the action is prosecuted to judgment.

29.19    Governing Law; WAIVER OFTRIALBY .JURY. This Lease shall be construed and enforced in accordance with the laws of the State of California. IN ANY ACTION OR PROCEEDING ARISING HEREFROM, LANDLORD AND TENANT HEREBY CONSENT TO (I) THE JURISDICTION OF ANY COMPETENT COURT WITHIN THE STATE OF CALIFORNIA, (II) SERVICE OF PROCESS BY ANY MEANS AUTHORIZED BY CALIFORNIA LAW, AND (III) IN THE INTEREST OF SAVING TIME AND EXPENSE, TRIAL WITHOUT A JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM BROUGHT BY EITHER OF THE PARTIES HERETO AGAINST THE OTHER OR THEIR SUCCESSORS IN RESPECT OF ANY MATTER ARISING OUT OF OR IN CONNECTION WITH THIS LEASE, THE RELATIONSHIP OF LANDLORD AND TENANT, TENANT'S USE OR OCCUPANCY OF THE PREMISES, AND/OR ANY CLAIM FOR INJURY OR DAMAGE, OR ANY EMERGENCY OR STATUTORY REMEDY. IN THE EVENT LANDLORD COMMENCES ANY SUMMARY PROCEEDINGS OR ACTION FOR NONPAYMENT OF BASE RENT OR ADDITIONAL RENT, TENANT SHALL NOT INTERPOSE ANY COUNTERCLAIM OF ANY NATURE OR DESCRIPTION (UNLESS SUCH COUNTERCLAIM SHALL BE MANDATORY) IN ANY SUCH PROCEEDING OR ACTION, BUT SHALL BE RELEGATED TO AN INDEPENDENT ACTION AT LAW.

29.20    Brokers. Landlord and Tenant hereby warrant to each other that they have had no dealings with any real estate broker or agent in connection with the negotiation of this Lease, excepting only the real estate brokers or agents specified in Section 12 of the Summary (the "Brokers"), and that they know of no other real estate broker or agent who is entitled to a commission in connection with this Lease. Landlord shall pay the Brokers pursuant to the terms of separate commission agreements. Each party agrees to indemnify and defend the other party against and hold the other party harmless from any and all claims, demands, losses, liabilities, lawsuits, judgments, costs and expenses (including without limitation reasonable attorneys' fees) with respect to any leasing commission or equivalent compensation alleged to be owing on account of any dealings with any real estate broker or agent, other than the Brokers, occurring by, through, or under the indemnifying party.

29.21    Independent Covenants. This Lease shall be construed as though the covenants herein between Landlord and Tenant are independent and not dependent and Tenant hereby expressly waives the benefit of any statute to the contrary and agrees that if Landlord fails to perform its obligations set forth herein, Tenant shall not be entitled to make any repairs or perform any acts hereunder at Landlord's expense or to any setoff of the Rent or other amounts owing hereunder against Landlord.

29.22    Counterparts. This Lease may be executed in counterparts with the same effect as if both parties hereto had executed the same document. Both counterparts shall be construed together and shall constitute a single lease.

29.23    Confidentialitv. Tenant acknowledges that the content of this Lease and any related documents are confidential information. Tenant shall keep such confidential information strictly confidential and shall not disclose such confidential information to any person or entity other than Tenant's financial, legal, and space planning consultants.

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29.24    Building Renovations. It is specifically understood and agreed that Landlord has made no representation or warranty to Tenant and has no obligation and has made no promises to alter, remodel, improve, renovate, repair or decorate the Premises, Building, or any part thereof and that no representations respecting the condition of the Premises or the Building have been made by Landlord to Tenant except as specifically set forth herein or in the Work Letter. However, Tenant hereby acknowledges that Landlord is currently renovating or may during the Lease Term renovate, improve, alter, or modify (collectively, the "Renovations") the Project, the Building and/or the Premises including without limitation the parking structure, common areas, systems and equipment, roof, and structural portions of the same, which Renovations may include, without limitation, (i) installing sprinklers in the Building common areas and tenant spaces, (ii) modifying the common areas and tenant spaces to comply with applicable laws and regulations, including regulations relating to the physically disabled, seismic conditions, and building safety and security, and (iii) installing new floor covering, lighting, and wall coverings in the Building common areas, and in connection with any Renovations, Landlord may, among other things, erect scaffolding or other necessary structures in the Building, limit or eliminate access to portions of the Project, including portions of the common areas, or perform work in the Building, which work may create noise, dust or leave debris in the Building. Tenant hereby agrees that such Renovations and Landlord's actions in connection with such Renovations shall in no way constitute a constructive eviction of Tenant nor entitle Tenant to any abatement of Rent. Landlord shall have no responsibility or for any reason be liable to Tenant for any direct or indirect injury to or interference with Tenant's business arising from the Renovations, nor shall Tenant be entitled to any compensation or damages from Landlord for loss of the use of the whole or any part of the Premises or of Tenant's personal property or improvements resulting from the Renovations or Landlord's actions in connection with such Renovations, or for any inconvenience or annoyance occasioned by such Renovations or Landlord's actions.

29.25    No Violation. Tenant hereby warrants and represents that neither its execution of nor performance under this Lease shall cause Tenant to be in violation of any agreement, instrument, contract, law, rule or regulation by which Tenant is bound, and Tenant shall protect, defend, indemnify and hold Landlord harmless against any claims, demands, losses, damages, liabilities, costs and expenses, including, without limitation, reasonable attorneys' fees and costs, arising from Tenant's breach of this warranty and representation.

29.26    Communications and Computer Lines. Tenant may install, maintain, replace, remove or use any communications or computer wires and cables (collectively, the "Lines") at the Project in or serving the Premises, provided that {i) Tenant shall obtain Landlord's prior written consent, use at Tenant's option either Landlord's designated contractor for provision of cabling and riser management services (or, if Landlord does not have a designated contractor, then an experienced

and qualified contractor chosen by Tenant that is reasonably acceptable to Landlord), and comply with all of the other provisions of Articles 7 and 8 of this Lease, (ii) an acceptable number of spare Lines and space for additional Lines shall be maintained for existing and future occupants of the Project, as determined in Landlord's reasonable opinion, (iii) the Lines therefor (including riser cables) shall be (x) appropriately insulated to prevent excessive electromagnetic fields or radiation,

(y) surrounded by a protective conduit reasonably acceptable to Landlord, and (z) identified in accordance with the "Identification Requirements," as that term is set forth herein-below, (iv) any new or existing Lines servicing the Premises shall comply with all applicable governmental laws and regulations, (v) as a condition to permitting the installation of new Lines, Tenant shall remove existing Lines located in or serving the Premises and repair any damage in connection with such removal, and (vi) Tenant shall pay all costs in connection therewith. All Lines shall be clearly marked with adhesive plastic labels (or plastic tags attached to such Lines with wire) to show Tenant's name, suite number, telephone number and the name of the person to contact in the case of an emergency (A) every four feet (4') outside the Premises (specifically including, but not limited to, the electrical room risers and other Common Areas), and (B) at the Lines' termination point(s) (collectively, the "Identification Requirements"). Upon the expiration of the Lease Term, or immediately following any earlier termination of this Lease, Tenant shall, at Tenant's sole cost and expense, remove all Lines installed by Tenant, and repair any damage caused by such removal. In the event that Tenant fails to complete such removal and/or fails to repair any damage caused by the removal of any Lines, Landlord may do so and may charge the cost thereof to Tenant. Landlord reserves the right to require that Tenant remove any Lines located in or serving the Premises which are installed in violation of these provisions, or which are at any time (1) are in violation of any Applicable Laws, (2) are inconsistent with then-existing industry standards (such as the standards promulgated by the National Fire Protection Association ( e.g., such organization's "2002 National Electrical Code")), or (3) otherwise represent a dangerous or potentially dangerous condition.

29.27 Development of the Project.

29.27.1    Subdivision. Landlord reserves the right to further subdivide all or a portion of the Project. Tenant agrees to execute and deliver, upon demand by Landlord and in the form requested by Landlord, any additional documents needed to conform this Lease to the circumstances resulting from such subdivision.

29.27.2    The Other Improvements. If portions of the Project or property adjacent to the Project (collectively, the "Other Improvements") are owned by an entity other than Landlord, Landlord, at its option, may enter into an agreement with the owner or owners of any or all of the Other Improvements to provide (i) for reciprocal rights of access and/or use of the Project and the Other Improvements, (ii) for the common management, operation, maintenance, improvement and/or repair of all or any portion of the Project and the Other Improvements, (iii) for the allocation of a portion of the Direct Expenses to the Other Improvements and the operating expenses and taxes for the Other Improvements to the Project, and

(iv) for the use or improvement of the Other Improvements and/or the Project in connection with the improvement, construction, and/or excavation of the Other Improvements and/or the Project. Nothing contained herein shall be deemed or construed to limit or otherwise affect Landlord's right to convey all or any portion of the Project or any other of Landlord's rights described in this Lease.

29.27.3    Construction of Project and Other Improvements. Tenant acknowledges that portions of the Project and/or the Other Improvements may be under construction following Tenant's occupancy of the Premises, and that such construction may result in levels of noise, dust, obstruction of access, etc. which are in excess of that present in a fully constructed project. Tenant hereby waives any and all rent offsets or claims of constructive eviction which may arise in connection with such construction.

29.28    Hazardous Substances. Tenant shall not cause or permit any hazardous materials to be generated, produced, brought upon, used, stored, treated or disposed of in or about the Premises or the Project by Tenant, its agents, employees, contractors, affiliates, sublessees or invitees. However, notwithstanding the preceding sentence, Landlord agrees that Tenant may use, store and properly dispose of commonly available household cleaners and chemicals to maintain the Premises and Tenant's routine office operations (such as printer toner and copier toner). At any time following Tenant's receipt of a request from Landlord, Tenant shall promptly complete a "hazardous materials questionnaire" using the form then­ provided by Landlord.

29.29    No Discrimination. Tenant covenants by and for itself, its heirs, executors, administrators and assigns, and all

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persons claiming under or through Tenant, and this Lease is made and accepted upon and subject to the following

conditions: that there shall be no discrimination against or segregation of any person or group of persons, on account of race, color, creed, sex, religion, marital status, ancestry or national origin in the leasing, subleasing, transferring, use, or enjoyment of the Premises, nor shall Tenant itself, or any person claiming under or through Tenant, establish or permit such practice or practices of discrimination or segregation with reference to the selection, location, number, use or occupancy, of tenants, lessees, sublessees, subtenants or vendees in the Premises.

29.30    Water Sensors. Tenant shall, at Tenant's sole cost and expense, be responsible for promptly installing web­ enabled wireless water leak sensor devices designed to alert the Tenant on a twenty-four (24) hour seven (7) day per week basis if a water leak is occurring in the Premises (which water sensor device(s) located in the Premises shall be referred to herein as "Water Sensors"). The Water Sensors shall be installed in any areas in the Premises where water is utilized (such as sinks, pipes, faucets, water heaters, coffee machines, ice machines, water dispensers and water fountains), and in locations that may be designated from time to time by Landlord (the "Sensor Areas"). In connection with any Alterations affecting or relating to any Sensor Areas, Landlord may require Water Sensors to be installed or updated in Landlord's sole and absolute discretion. With respect to the installation of any such Water Sensors, Tenant shall obtain Landlord's prior written consent, use an experienced and qualified contractor reasonably designated by Landlord, and comply with all of the other provisions of Article 8 of this Lease. Tenant shall, at Tenant's sole cost and expense, pursuant to Article 7of this Lease keep any Water Sensors located in the Premises (whether installed by Tenant or someone else) in good working order, repair and condition at all times during the Lease Term and comply with all of the other provisions of Article 7 of this Lease. Notwiithstanding any provision to the contrary contained herein, Landlord has neither an obligation to monitor, repair or otherwise maintain the Water Sensors, nor an obligation to respond to any alerts it may receive from the Water Sensors or which may be generated from the Water Sensors. Upon the expiration of the Lease Term, or immediately following any earlier termination of this Lease, Landlord reserves the right to require Tenant, at Tenant's sole cost and expense, to remove all Water Sensors installed by Tenant, and repair any damage caused by such removal; provided, however, if the Landlord does not require the Tenant to remove the Water Sensors as contemplated by the foregoing, then Tenant shall leave the Water Sensors in place together with all necessary user information such that the same may be used by a future occupant of the Premises (e.g., the Water Sensors shall be unblocked and ready for use by a third-party).

29.31    Joint and Several. If there is more than one Tenant, the obligations imposed upon Tenant under this Lease shall be joint and several.

29.32    Project or Building Name and Signage. Landlord shall have the right at any time to change the name of the Project or Building and to install, affix and maintain any and all signs on the exterior and on the interior of the Project or Building as Landlord may, in Landlord's sole discretion, desire. Tenant shall not use the name of the Project or Building or use pictures or illustrations of the Project or Building in advertising or other publicity or for any purpose other than as the address of the business to be conducted by Tenant in the Premises, without the prior written consent of Landlord.

29.33    Transportation Management. Tenant shall fully comply with all present or future programs intended to manage parking, transportation or traffic in and around the Building, and in connection therewith, Tenant shall take responsible action for the transportation planning and management of all employees located at the Premises by working directly with Landlord, any governmental transportation management organization or any other transportation-related committees or entities.

29.34    LEED Certification. Landlord may, in Landlord's sole and absolute discretion, elect to apply to obtain or maintain a LEED certification for the Project (or portion thereof), or other applicable certification in connection with Landlord's sustainability practices for the Project (as such sustainability practices are to be determined by Landlord, in its sole and absolute discretion, from time to time). In the event that Landlord elects to pursue such an aforementioned certification, Tenant shall, at Tenant's sole cost and expense, promptly cooperate with the Landlord's efforts in connection therewith and provide Landlord with any reasonable documentation it may need in order to obtain or maintain the aforementioned certification (which cooperation may include, but shall not be limited to, Tenant complying with certain standards pertaining to the purchase of materials used in connection with any Alterations or improvements undertaken by the Tenant in the Project, the sharing of documentation pertaining to any Alterations or improvements undertaken by Tenant in the Project with Landlord, and the sharing of Tenant's billing information pertaining to trash removal and recycling related to Tenant's operations in the Project).

29.35    Utility Billing Information. In the event that the Tenant is permitted to contract directly for the provision of electricity, gas and/or water services to the Premises with the third-party provider thereof (all in Landlord's sole and absolute discretion), Tenant shall promptly, but in no event more than five (5) business days following its receipt of each and every invoice for such items from the applicable provider, provide Landlord with a copy of each such invoice. Tenant acknowledges that pursuant to California Public Resources Code Section 25402.10 and the regulations adopted pursuant thereto (collectively the "Energy Disclosure Requirements"}, Landlord may be required to disclose information concerning Tenant's energy usage at the Building to certain third parties, including, without limitation, prospective purchasers, lenders and tenants of the Building (the "Tenant Energy Use Disclosure"). Tenant hereby (A) consents to all such Tenant Energy Use Disclosures, and (B) acknowledges that Landlord shall not be required to notify Tenant of any Tenant Energy Use Disclosure. Further, Tenant hereby releases Landlord from any and all losses, costs, damages, expenses and liabilities relating to, arising out of and/or resulting from any Tenant Energy Use Disclosure. The terms of this Section 29.35 shall survive the expiration or earlier termination of this Lease.

29.36    Green Cleaning/Recycling. To the extent a "green cleaning program" and/or a recycling program is implemented by Landlord in the Building and/or Project (each in Landlord's sole and absolute discretion), Tenant shall, at Tenant's sole cost and expense, comply with the provisions of each of the foregoing programs (e.g., Tenant shall separate waste appropriately so that it can be efficiently processed by Landlord's particular recycling contractors). To the extent Tenant fails to comply with any of Landlord's recycling programs contemplated by the foregoing, Tenant shall be required to pay any contamination charges related to such non-compliance.

29.37    Open-Ceiling Plan. In the event that the Premises has an "open ceiling plan", then Landlord and third parties leasing or otherwise using/managing or servicing space on the floor immediately above the Premises shall have the right to install, maintain, repair and replace mechanical, electrical and plumbing fixtures, devices, piping, ductwork and all other improvements through the floor above the Premises (which may penetrate through the ceiling of the Premises and be visible within the Premises during the course of construction and upon completion thereof) (as applicable, the "Penetrating Work"), as Landlord may determine in Landlord's sole and absolute discretion and with no approval rights being afforded to Tenant with respect thereto. Moreover, there shall be no obligation by Landlord or any such third party to enclose or otherwise screen any of such Penetrating Work from view within the Premises, whether during the course of construction or upon completion thereof. Since Tenant is anticipated to be occupying the Premises at the time the Penetrating Work is being performed, Landlord agrees that it shall (and shall cause third parties to) use commercially

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reasonable efforts to perform the Penetrating Work in a manner so as to attempt to minimize interference with Tenant's use of the Premises; provided, however, such Penetrating Work may be performed during normal business hours, without any obligation to pay overtime or other premiums. Tenant hereby acknowledges that, notwithstanding Tenant's occupancy of the Premises during the performance of any such Penetrating Work, Tenant hereby agrees that the performance of such Penetrating Work shall in no way constitute a constructive eviction of Tenant nor entitle Tenant to any abatement of rent. Neither Landlord nor any of the Landlord Parties or any third parties performing the Penetrating Work shall be responsible for any direct or indirect injury to or interference with Tenant's business arising from the performance of such Penetrating Work, nor shall Tenant be entitled to any compensation or damages from Landlord or any of the Landlord Parties or any third parties performing the Penetrating Work for loss of the use of the whole or any part of the Premises or of Tenant's personal property or improvements resulting from the performance of the Penetrating Work, or for any inconvenience or annoyance occasioned by the Penetrating Work. In addition, Tenant hereby agrees to promptly and diligently cooperate with Landlord and any of the third parties performing the Penetrating Work in order to facilitate the applicable party's performance of the particular Penetrating Work in an efficient and timely manner.

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IN WITNESS WHEREOF, Landlord and Tenant have caused this Lease to be executed the day and date first above written.

"LANDLORD":

KILROY REALTY, L.P.,

a Delaware limited partnership

By: Kilroy Realty Corporation, a Maryland corporation, General Partner

By: Brian Galligan    _

Its:SVP

By: John T. Fucci

Its:Sr. Vice President Asset Management

"TENANT":

ZOGENIX, INC.,

a Delaware corporation

By: Roger L. Hawley    

Its:CEO

By: Ann D. Rhoads                      

Its: CFO                  

*NOTE:

If Tenant is a corporation incorporated in a state other than California, then Tenant shall deliver to Landlord evidence in

a form reasonably acceptable to Landlord that the signatory(ies) is (are) authorized to execute this Lease.

EXHIBIT A

DEL MAR CORPORATE CENTER

OUTLINE OF PREMISES

EXHIBIT A

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EXHIBIT B

DEL MAR CORPORATE CENTER

WORK LEITER

This Work Letter shall set forth the terms and conditions relating to the construction of the improvements in the Premises. This Work Letter is essentially organized chronologically and addresses the issues of the construction of the Premises, in sequence, as such issues will arise during the actual construction of the Premises. All references in this Work Letter to Articles or Sections of "this Lease" shall mean the relevant portion of Articles 1 through 29 of the Office Lease to which this Work Letter is attached as Exhibit B and of which this Work Letter forms a part, and all references in this Work Letter to Sections of "this Work Letter" shall mean the relevant portion of Sections 1 through Q of this Work Letter.

ARTICLE 1

LANDLORD WORK IMPROVEMENTS

1.1    Base Building as Constructed by Landlord. Landlord has constructed, at its sole cost and expense, the "Base Building" (as the term is defined below). For the purposes hereof, the term "Base Building" shall include the structural portions of the Building, and the public restrooms, elevators, exit stairwells and the systems and equipment located in the internal core of the Building on the floor on which the Premises is located.

1.2    Demising Work. Landlord has established or may establish specifications for certain Building standard components to be used in the construction of the "Improvements" (as that term is defined below) in the Premises. The quality of the Improvements shall be materially consistent with the quality of such Building standards, provided that Landlord may, at Landlord' s option, require the Improvements to comply with certain Building standards. Landlord may make changes to said specifications for Building standards from time to time. As part of the "Improvements" (as that term is defined in Section 2 .1 below), Landlord, at its sole cost and expense (separate and apart from the "Improvement Allowance" defined in Section 1.3 below) shall cause the construction or installation of installation of one (1) new, Building standard demising wall (e.g., to the roof with insulation, separation of HVAC and utilities [and associated controls] and other Building-standard elements) separating the Premises from the remainder of the floor in which the Premises is located and perform all other work required to separate the Premises from the remainder of the floor in which the Premises is located (collectively, the "Demising Work") in the locations depicted on Exhibit A of this Lease, and provide access controls in the Premises. The cost of the Demising Work shall be at Landlord's sole cost and expense. Tenant may not change or alter the Demising Work.

1.3    Improvements. Using Building standard materials, components and finishes, Landlord shall cause the installation and/or construction of the improvements in the Premises (the "Improvements") pursuant to that certain space plan attached to this Lease as Exhibit A (the "Space Plan"). Tenant shall make no changes, additions or modifications to the Improvements or the Space Plan or require the installation of any "Non-Conforming Improvements" (as that term is defined in Article 2 of this Work Letter), without the prior written consent of Landlord, which consent may be withheld in Landlord's sole discretion if such change or modification would directly or indirectly delay the "Substantial Completion," as that term is defined in Section 5.1of this Work Letter of the Improvements or impose any additional costs. Notwithstanding the foregoing or any contrary provision of this Lease, all Improvements shall be deemed Landlord's property under the terms of this Lease. Notwithstanding any provision to the contrary contained in this Work Letter, in the event that the cost to construct the Improvements (which costs shall include a coordination fee in an amount equal to the product of (i) three percent (3%), and (ii) the total costs of the design and construction of the Improvements (and, if applicable, the Non-Conforming Improvements) in consideration for Landlord's supervision of the same) will exceed a total amount equal to Three Hundred Eighty-One Thousand Nine Hundred Forty-Two and 00/ 100 Dollars ($381,942.00) (i.e., Twenty-Two and 00/100 Dollars ($22.00) per each of the rentable square feet of the Premises) in the aggregate (the "Improvement Allowance"), then all such excess costs shall be paid to Landlord by Tenant in advance within five (5) days following Tenant's receipt of a request therefor, provided that Tenant may apply up to one (1) month of Base Rent Abatement (the "Additional Improvement Allowance") (i.e., $73,784.50) for the cost of any such excess Improvements, computer and telecommunication cabling, and/or signage. All such funds provided by Tenant shall be disbursed by Landlord and exhausted prior to disbursement of the Improvement Allowance. Notwithstanding any provision to the contrary contained in this Lease or this Work Letter, in no event shall the Landlord be obligated to pay for any costs or expenses associated with the purchase, installation or maintenance of any furniture (including, but not limited to, the cost of any reception desks, credenzas or chairs (whether identified on the Space Plan or not)), provided that as part of the "Improvements" Landlord's contractor will temporarily relocate Tenant's furniture to facilitate the installation of carpeting and painting, but shall not be required to move fixtures, equipment, art, cabling, audio/visual equipment, access controls, security systems and equipment and office signage related to Tenant's occupancy of the Premises. In addition, in the event that the Improvements cost less than the Improvement Allowance (the "Unused Improvement Allowance"), Tenant may elect, by written notice delivered to Landlord prior to Substantial Completion, to apply up to Thirty-Four Thousand Seven Hundred Twenty-Two and 00/100 Dollars ($34,722.00) of any Unused Improvement Allowance toward the cost of purchasing and installing computer and telecommunication cabling, and signage (subject to Section 23 of this Lease), with, in the event the Improvements cost less than the allowance, any remaining portion reverting to Landlord.

EXHIBIT B

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ARTICLE 2

OTHER IMPROVEMENTS; IMPROVEMENTS CHANGE

As more particularly set forth in Article Iabove and subject to all of the other terms and conditions of this Work Letter, Landlord shall, at Landlord's sole cost and expense, be responsible for the construction of the Building standard Improvements identified on the Space Plan and any otherwise "Non-Conforming Improvements" (as defined below) which Landlord agrees to include in its construction of the Building-standard Improvements (the "Additional Improvements"). Notwithstanding anything to the contrary contained herein including, without limitation, the items identified in the Final Working Drawings (as that term is defined in Section 3.3, below), Tenant shall be responsible for the cost of all items not identified on the Space Plan and/or any items requiring other than Building standard materials, components or finishes (collectively, the "Non-Conforming Improvements"). In the event Tenant desires such Non-Conforming Improvements, exclusive of any Additional Improvements, Tenant shall deliver written notice (the "Change Notice") of the same to Landlord, setting forth in detail the Non-Conforming Improvements (the "Improvements Change"). Landlord shall, following receipt of a Change Notice related to an Improvements Change, either (i) approve the Improvements Change, or (ii) disapprove the Improvements Change. In the event that Improvements Change is approved, and incorporated in the Final Working Drawings or the Improvements, any additional costs which arise in connection with such Improvements Change, and which are in excess of the Improvement Allowance and Additional Improvement Allowance, shall be paid by Tenant to Landlord in cash, in advance, upon Landlord's request (including but not limited to all costs incurred by Landlord in connection with its review of the Change Notice and any related documents) (all such costs shall collectively be referred to as the "Change Amount"). Any such amounts required to be paid by Tenant shall be disbursed by Landlord prior to any Landlord provided funds for the costs of construction of the Improvements. In the event Tenant fails to pay the Change Amount, then Landlord may, at its option, cease work in the Premises until such time as Landlord receives payment of such portion of the Change Amount (and such failure to deliver shall be treated as a Tenant Delay, as that term is defined in Section 5.2below).

ARTICLE 3

CONSTRUCTION DRAWINGS

3.1    Selection of Architect/Construction Drawings. To the extent deemed reasonably necessary by Landlord, Landlord shall retain Miller Design (the "Architect") to prepare the "Construction Drawings," as that term is defined in this Section 3.1. To the extent deemed reasonably necessary by Landlord, Landlord shall, in Landlord's sole and absolute discretion, retain the engineering consultants designated by Landlord (the "Engineers") to prepare all plans and engineering working drawings relating to the structural, mechanical, electrical, plumbing, HVAC, life safety, and sprinkler work of the Improvements. The plans and drawings to be prepared by Architect and the Engineers hereunder shall be known collectively as the "Construction Drawings." Landlord's review of the Construction Drawings as set forth in this Section 3, shall be for its sole purpose and shall not imply Landlord's revie .v of the same, or obligate Landlord to review the same, for quality, design, Code compliance or other like matters.

3.2 Intentionally Omitted.

3.3    Final Working Drawings. Within five (5) days following the full execution and delivery of this Lease by Landlord and Tenant, Tenant shall cooperate and coordinate with the Architect and the Engineers in order to allow the Architect and Engineers to complete the architectural and engineering drawings for the Premises based on the Space Plan, and which drawings shall be consistent with, and a logical extension of, the Space Plan. The final architectural working drawings shall be in a form to allow subcontractors to bid on the work and to obtain all applicable permits (collectively, the "Final Working Drawings").

3.4    Permits. The Final Working Drawings shall be approved by Landlord (the "Approved Working Drawings") and submitted to the City of San Diego not later than June 30, 2014 and prior to the commencement of the construction of the Improvements. Landlord shall submit the Approved Working Drawings to the appropriate municipal authorities for all applicable building and other permits necessary to allow "Contractor," as that term is defined in Section 4.1, below, to commence and fully complete the construction of the Improvements (the "Permits") No changes, modifications or alterations in the Approved Working Drawings may be made without the prior written consent of Landlord, provided that Landlord may withhold its consent, in its sole discretion, to any change in the Approved Working Drawings if such change would directly or indirectly delay the Substantial Completion of the Premises, or otherwise materially increase the costs of the Improvements (unless Tenant agrees to bear such increased cost). Any such foregoing cost increases shall also be deemed a component of the Change Amount.

3.5    Electronic Approvals. Notwithstanding any provision to the contrary contained in the Lease or this Work Letter, Landlord may, in Landlord's sole and absolute discretion, transmit or otherwise deliver any of the approvals required under this Work Letter via electronic mail to Tenant's representative identified in Section 5.1of this Work Letter, or by any of the other means identified in Section 29 .16of this Lease.

ARTICLE 4

TENANT'S AGENTS

4.1 Contractor. A contractor designated by Landlord ("Contractor") shall construct the Improvements.

4.2 Intentionally Omitted.

4.3 Construction of Improvements by Contractor under the Supervision ofLandlord.

4.3.l Change Amount. Within ten (10) days following a demand therefor from Landlord, Tenant shall deliver to Landlord cash in the amount of the Change Amount. The Change Amount shall be disbursed by Landlord towards the costs of the Improvements, as reasonably determined by Landlord. In the event that any revisions, changes, or substitutions shall be made to the Construction Drawings or the Improvements, any additional costs which arise in connection with such revisions, changes or substitutions or any other additional costs shall be paid by Tenant to Landlord immediately upon Landlord's request as an addition to the Change Amount. In addition, if any Non-Conforming Improvements shall require alterations in the Base Building (as contrasted with the Improvements), and if Landlord in its

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sole and exclusive discretion agrees to any such alterations, and notifies Tenant of the need and cost for such alterations, then Tenant shall pay the cost of such required changes in advance upon receipt of notice thereof. Tenant shall pay all direct architectural and/or engineering fees in connection therewith, plus eight percent (8%) of such direct costs for Landlord's servicing and overhead. In the event that Tenant fails to deliver the Change Amount as provided in this Section 4.3.1, then Landlord may, at its option, cease work in the Premises until such time as Landlord receives payment of the Change Amount (and such failure to deliver shall be treated as a Tenant delay in accordance with the terms of Section 5.2 below).

4.3.2    Landlord's Retention of Contractor. Landlord shall independently retain Contractor to construct the Improvements in accordance with the Approved Working Drawings and Landlord shall super\'ise the construction by Contractor.

4.3.3    Contractor's Warranties and Guaranties. Landlord hereby assigns to Tenant all warranties and guaranties by the Contractor relating to the Improvements, and Tenant hereby waives all claims against Landlord relating to or arising out of the design and construction of the Improvements and/or Non-Conforming Improvements.

4.4 Tenant's Agents. Tenant hereby protects, defends, indemnifies and holds Landlord harmless for any loss, claims, damages or delays arising from the actions of Tenant's space planner1architect and/or any separate contractors, subcontractors or consultants on the Premises or in the Building.

ARTICLE 5

COMPLETION OF THE IMPROVEMENTS;

LEASE COMMEN CEMENT DATE

5.1    ReadyforOccupancy. The Premises shall be deemed "Ready for Occupancy" upon the "Substantial Completion" of the Improvements, and Landlord's receipt of a certificate of occupancy, a temporary certificate of occupancy or its equivalent for the Premises. For purposes of this Lease, "Substantial Completion" of the Improvements shall occur upon the completion of construction of the Improvements in the Premises pursuant to the Approved Working Drawings, with the exception of any punch list items, and any tenant fixtures, work-stations, built-in furniture, or equipment to be installed by Tenant or under the supervision of Contractor.

5.2    Delay of the SubstantialCompletionof the Premises. Except as provided in this Section 5.2, the Lease Commencement Date shall occur as set forth in Article 2of the Lease and Section 5.1, above. If there shall be a delay or there are delays in the Substantial Completion of the Improvements or in the occurrence of any of the other conditions precedent to the Lease Commencement Date, as set forth in Article 2of the Lease, as a direct, indirect, partial, or total result of (each, a "Tenant Delay"):

5.2.1    Intentionally omitted;

5.2.2 Tenant's failure to timely approve any matter requiring Tenant's approval;

5.2.3 A breach by Tenant of the terms of this Work Letter or the Lease;

5.2.4 Tenant's request for changes in the Improvements;

5.2.5 Any Non-Conforming Improvements;

5.2.6    Tenant's requirement for materials, components, finishes or improvements which are not available in a commercially reasonable time given the anticipated date of Substantial Completion of the Improvements, as set forth in the Lease, or which are different from, or not included in, Landlord's Building standards;

5.2.7    Any failure by Tenant to pay for in cash in advance any costs for Non-Conforming Improvements (including, without limitation, the Change Amount);

5.2.8 Changes to the base, shell and core work of the Building required by the Non-Conforming Improvements; or

5.2.9 Any other acts or omissions of Tenant, or its agents, or employees;

then, notwithstanding anything to the contrary set forth in the Lease or this Work Letter and regardless of the actual date of the Lease Commencement Date, the Lease Commencement Date shall be deemed to be the date the Substantial Completion of the Improvements would have occurred if no Tenant delay or delays, as set forth above, had occurred.

ARTICLE 6

MISCELLANEOUS

6.1    Intentionally Omitted.

6.2    Tenant's Representative. Tenant has designated Beth Miller of Beth Miller Design as its sole representative with respect to the matters set forth in this Work Letter (whose e-mail address for the purposes of this Work Letter is bmiller@mdesign-interiors.com), who, until further notice to Landlord, shall have full authority and responsibility to act on behalf of the Tenant as required in this Work Letter.

6.3    Landlord's Representative. Landlord has designated Jake Brehm as "Project Manager" (whose e-mail address for the purposes of this Work Letter is jbrehm@kilrovrealtv.com ), who shall be responsible for the implementation of all Improvements to be performed by Landlord in the Premises. With regard to all matters involving such Improvements, Tenant shall communicate with the Project Manager rather than with the Contractor. Landlord shall not be responsible for any statement, representation or agreement made between Tenant and the Contractor or any subcontractor. It is hereby expressly acknowledged by Tenant that such Contra.ctor is not Landlord's agent

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and has no authority whatsoever to enter into agreements on Landlord's behalf or otherwise bind Landlord. The Project Manager will furnish Tenant with notices of substantial completion, cost estimates for above standard Improvements, Landlord's approvals or disapprovals of all documents to be prepared pursuant to this Work Letter and changes thereto.

6.4    Tenant's Agents. Tenant shall use commercially reasonable efforts to ensure that any and all contractors, subcontractors, laborers, materialmen and suppliers maintain labor harmony with the workforce or trades engaged in performing other work, labor or services in or about the Premises, Building or the Common Areas.

6.5    Time of the Essence in this Work Letter. Unless otherwise indicated, all references herein to a "number of days" shall mean and refer to calendar days. In all instances where Tenant is required to approve or deliver an item, if no written notice of approval is given or the item is not delivered within the stated time period, at Landlord's sole option, at the end of such period the item shall automatically be deemed approved or delivered by Tenant and the next succeeding time period shall commence.

6.6    Tenant's Lease Default. Notwithstanding any provision to the contrary contained in the Lease or this Work Letter, if any default by Tenant under the Lease or this Work Letter (including, without limitation, any failure by Tenant to fund in advance the costs for any Non-Conforming Improvements) occurs, then (i) in addition to all other rights and remedies granted to Landlord pursuant to the Lease, Landlord shall have the right to cause the cessation of construction of the Improvements (in which case, Tenant shall be responsible for any delay in the Substantial Completion of the Improvements and any costs occasioned thereby), and (ii) all other obligations of Landlord under the terms of the Lease and this Work Letter shall be forgiven until such time as such default is cured pursuant to the terms of this Lease.

6.2    Tenant's Representative. Tenant has designated Beth Miller of Beth Miller Design as its sole representative with respect to the matters set forth in this Work Letter (whose e-mail address for the purposes of this Work Letter is bmiller@mdesign-interiors.com), who, until further notice to Landlord, shall have full authority and responsibility to act on behalf of the Tenant as required in this Work Letter.

6.3    Landlord's Representative. Landlord has designated Jake Brehm as "Project Manager" (whose e-mail address for the purposes of this Work Letter is jbrehm@kilrovrealtv.com ), who shall be responsible for the implementation of all Improvements to be performed by Landlord in the Premises. With regard to all matters involving such Improvements, Tenant shall communicate with the Project Manager rather than with the Contractor. Landlord shall not be responsible for any statement, representation or agreement made between Tenant and the Contractor or any subcontractor. It is hereby expressly acknowledged by Tenant that such Contra.ctor is not Landlord's agent and has no authority whatsoever to enter into agreements on Landlord's behalf or otherwise bind Landlord. The Project Manager will furnish Tenant with notices of substantial completion, cost estimates for above standard Improvements, Landlord's approvals or disapprovals of all documents to be prepared pursuant to this Work Letter and changes thereto.

6.4    Tenant's Agents. Tenant shall use commercially reasonable efforts to ensure that any and all contractors, subcontractors, laborers, materialmen and suppliers maintain labor harmony with the workforce or trades engaged in performing other work, labor or services in or about the Premises, Building or the Common Areas.

6.5    Time of the Essence in this Work Letter. Unless otherwise indicated, all references herein to a "number of days" shall mean and refer to calendar days. In all instances where Tenant is required to approve or deliver an item, if no written notice of approval is given or the item is not delivered within the stated time period, at Landlord's sole option, at the end of such period the item shall automatically be deemed approved or delivered by Tenant and the next succeeding time period shall commence.

6.6    Tenant's Lease Default. Notwithstanding any provision to the contrary contained in the Lease or this Work Letter, if any default by Tenant under the Lease or this Work Letter (including, without limitation, any failure by Tenant to fund in advance the costs for any Non-Conforming Improvements) occurs, then (i) in addition to all other rights and remedies granted to Landlord pursuant to the Lease, Landlord shall have the right to cause the cessation of construction of the Improvements (in which case, Tenant shall be responsible for any delay in the Substantial Completion of the Improvements and any costs occasioned thereby), and (ii) all other obligations of Landlord under the terms of the Lease and this Work Letter shall be forgiven until such time as such default is cured pursuant to the terms of this Lease.

EXHIBIT C

DEL MAR CORPORATE CENTER

OPERATING EXPENSE DEFINITIONS AND CALCULATION PROCEDURES

1.1    Definitions of Key Terms Relating to Additional Rent. As used in this Exhibit C, the following terms shall have the meanings hereinafter set forth:

1.1.1    "Base Year" shall mean the period set forth in Section 5 of the Summary.

1.1.2    "Direct Expenses" shall mean "Operating Expenses" and "Tax Expenses"

1.1.3    "Expense Year" shall mean each calendar year in which any portion of the Lease Term falls, through and including the calendar year in which the Lease Term expires, provided that Landlord, upon notice to Tenant, may change the Expense Year once in any five (5) year period to any other twelve (12) consecutive month period, and, in the event of any such change, Tenant's Share of Direct Expenses shall be equitably adjusted for any Expense Year involved in any such change.

1.1.4    "Operating Expenses" shall mean all expenses, costs and amounts of every kind and nature which Landlord pays or accrues during any Expense Year because of or in connection with the ownership, management, maintenance, security, repair, replacement, renovation, restoration or operation of the Project, or any portion thereof, in accordance with sound real estate management and accounting practices, consistently applied. Without limiting the generality of the foregoing, Operating Expenses shall specifically include any and all of the following: (i) the cost of supplying all utilities (but excluding the cost of electricity, water and sewer services consumed in the Premises and the premises of other tenants of the Building and any other buildings in the Project (since Tenant is separately paying for the cost of electricity, water and sewer services pursuant to Section 6.1.2 of the Lease)), the cost of operating, repairing, replacing, maintaining, renovating and restoring the utility, telephone, mechanical, sanitary, storm drainage, and elevator systems, and the cost of maintenance and service contracts in connection therewith; (ii) the cost of licenses, certificates, permits and inspections and the cost of contesting any governmental enactments which may affect Operating Expenses, and the costs incurred in connection with a governmentally mandated transportation system management program or similar program; (iii) the cost of all insurance carried by Landlord in connection with the Project; (iv) the cost of landscaping, relamping, and all supplies, tools, equipment and materials used in the operation, repair and maintenance of the Project, or any portion thereof; (v) costs incurred in connection with the parking areas servicing the Project; (vi) fees and other costs, including management fees (which management fees shall not exceed three percent (3%) of gross rentals from the Project per annum), consulting fees, legal fees and accounting fees, of all contractors and consultants in connection with the management, operation, maintenance, replacement, renovation. repair and restoration of the Project; (vii) subject to item 1.1.4.13, payments under any equipment rental agreements and the fair rental value of any management office space; (\iii) subject to item 1.1.4.5, wages, salaries and other compensation and benefits, including taxes levied thereon, of all persons (other than persons generally considered to be higher in rank than the position of "Senior Asset Manager") engaged in the operation, maintenance and security of the Project; (ix) costs under any instrument pertaining to the sharing of costs by the Project; (x) operation, repair, maintenance, renovation , replacement and restoration of all systems and equipment and components thereof of the Project; (xi) the cost of janitorial, alarm, security and other services, replacement, renovation, restoration and repair of wall and floor coverings, ceiling tiles and fixtures in common areas, maintenance, replacement, renovation, repair and restoration of curbs and walkways, repair to roofs and re-roofing; (xii) amortization of the cost of acquiring or the rental expense of personal property used in the maintenance, operation and repair of the Project, or any portion thereof (which amortization calculation shall include interest at the "Interest Rate," as that term is set forth in Article25of this Lease); (xiii) the cost of capital improvements or other costs incurred in connection with the Project (A) to the extent the same are reasonably anticipated to effect economies in the operation or maintenance of the Project, or any portion thereof,

(B) that are required to comply with conservation programs, (C) which are replacements or modifications of nonstructural items located in the Common Areas required to keep the Common Areas in good order or condition, (D) that are required under any governmental law or regulation by a federal, state or local governmental agency, except for capital repairs, replacements or other improvements to remedy a condition existing prior to the Lease Commencement Date which an applicable governmental authority, if it had knowledge of such condition prior to the Lease Commencement Date, would have then required to be remedied pursuant to then-current governmental laws or regulations in their form existing as of the Lease Commencement Date and pursuant to the then-current interpretation of such governmental laws or regulations by the applicable governmental authority as of the Lease Commencement Date, or (E) that relate to the safety or security of the Project; provided, however, that any capital expenditure shall be amortized with interest at the Interest Rate over the shorter of (X) seven (7) years, (Y) its useful life as Landlord shall reasonably determine in accordance with sound real estate management and accounting practices consistently applied or (Z) with respect to those items included under item (A) above, their recovery/payback period as Landlord shall reasonably determine in accordance with sound real estate management and accounting practices, consistently applied; (xiv) costs, fees, charges or assessments imposed by, or resulting from any mandate imposed on Landlord by, any federal, state or local government for fire and police protection, trash removal, community services, or other services which do not constitute "Tax Expenses" as that term is defined in Section 1.1.5.l, below; (xv) payments under any easement, license, operating agreement, declaration, restrictive covenant, or instrument pertaining to the sharing of costs by the Building and/or the Project, and (xvi) costs of any additional services not provided to the Building and/or the Project as of the Lease Commencement Date but which are thereafter provided by Landlord in connection with its prudent management of the Building and/or the Project. Notwithstanding the foregoing, for purposes of this Lease, Operating Expenses shall not, however, include:

1.1.4.1. costs, including marketing costs, legal fees, space planners' fees, advertising and promotional expenses, and brokerage fees incurred in connection with the original construction or development, or original or future leasing of the Project, and costs, including permit, license and inspection costs, incurred with respect to the installation of improvements made for new tenants initially occupying space in the Project after the Lease Commencement Date or incurred in renovating or otherwise improving, decorating, painting or redecorating vacant space for tenants or other occupants of the Project (excluding, however, such costs relating to any common areas of the Project or parking facilities);except as set forth in items (xi), (xii), (xiii), and (xiv) above, depreciation. interest and principal payments on mortgages and other debt costs, if any, penalties and interest;

1.1.4.2    costs for which the Landlord is reimbursed by any tenant or occupant of the Project or by insurance by its carrier or any tenant's carrier or by anyone else (except to the extent of deductibles), and electric power costs for which any tenant directly contracts with the local public service company;

EXHIBIT C

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1.1.4.3 any bad debt loss, rent loss, or reserves for bad debts or rent loss;

1.1.4.4    costs associated with the operation of the business of the partnership or entity which constitutes the Landlord, as the same are distinguished from the costs of operation of the Project (which shall specifically include, but not be limited to, accounting costs associated with the operation of the Project). Costs associated with the operation of the business of the partnership or entity which constitutes the Landlord include costs of partnership accounting and legal matters, costs of defending any lawsuits with any mortgagee (except as the actions of the Tenant may be in issue), costs of selling, syndicating, financing, mortgaging or hypothecating any of the Landlord's interest in the Project, and costs incurred in connection with any disputes between Landlord and its employees, between Landlord and Project management, or between Landlord and other tenants or occupants, and Landlord's general corporate overhead and general and administrative expenses;

1.1.4.5    the wages and benefits of any employee who does not devote substantially all of his or her employed time to the Project unless such wages and benefits are prorated to reflect time spent on operating and managing the Project vis-a-vis time spent on matters unrelated to operating and managing the Project; provided, that in no event shall Operating Expenses for purposes of this Lease include wages and/or benefits attributable to personnel above the level of Senior Asset Manager;

1.1.4.6 amount paid as ground rental for the Project by the Landlord;

1.1.4.7    overhead and profit increment paid to the Landlord or to subsidiaries or affiliates of the Landlord for services in the Project to the extent the same exceeds the costs of such services rendered by qualified, first-class unaffiliated third parties on a competitive basis;

1.1.4.8    any compensation paid to clerks, attendants or other persons in commercial concessions operated by the Landlord, provided that any compensation paid to any concierge or parking attendants at the Project shall be includable as an Operating Expense;

1.1.4.9    rentals and other related expenses incurred in leasing air conditioning systems, elevators or other equipment which if purchased the cost of which would be excluded from Operating Expenses as a capital cost, except equipment not affixed to the Project which is used in providing janitorial or similar services and, further excepting from this exclusion such equipment rented or leased to remedy or ameliorate an emergency condition in the Project;

1.1.4.10    all items and services for which Tenant or any other tenant in the Project reimburses Landlord or which Landlord provides selectively to one or more tenants (other than Tenant) without reimbursement;

1.1.4.11    costs, other than those incurred in ordinary maintenance and repair, for sculpture, paintings, fountains or other objects of art;

1.1.4.12 any costs expressly excluded from Operating Expenses elsewhere in this Lease;

1.1.4.13    rent for any office space occupied by Project management personnel to the extent the size or rental rate of such office space exceeds the size or fair market rental value of office space occupied by management personnel of the Comparable Buildings, with adjustment where appropriate for the size of the applicable project;

1.1.4.14    costs to the extent arising from the gross negligence or willful misconduct of Landlord or its agents, employees, vendors, contractors, or providers of materials or services; and

1.1.4.15    costs incurred to comply with laws relating to the removal of hazardous material (as defined under applicable law) which was in existence in the Building or on the Project prior to the Lease Commencement Date, and was of such a nature that a federal, State or municipal governmental authority, if it had then had knowledge of the presence of such hazardous material, in the state, and under the conditions that it then existed in the Building or on the Project, would have then required the removal of such hazardous material or other remedial or containment action with respect thereto, but only to the extent those laws were then being actively enforced by the applicable government authority; and costs incurred to remove, remedy, contain, or treat hazardous material, which hazardous material is brought into the Building or onto the Project after the date hereof by Landlord or any other tenant of the Project and is of such a nature, at that time, that a federal, State or municipal governmental authority, if it had then had knowledge of the presence of such hazardous material, in the state, and under the conditions, that it then exists in the Building or on the Project, would have then required the removal of such hazardous material or other remedial or containment action with respect thereto, but only to the extent those laws were then being actively enforced by the applicable government authority.

If Landlord is not furnishing any particular work or service (the cost of which, if performed by Landlord, would be included in Operating Expenses) to a tenant who has undertaken to perform such work or service in lieu of the performance thereof by Landlord, Operating Expenses shall be deemed to be increased by an amount equal to the additional Operating Expenses which would reasonably have been incurred during such period by Landlord if it had at its own expense furnished such work or service to such tenant. If the Project is not at least ninety-five percent (95%) occupied during all or a portion of the Base Year or any Expense Year, Landlord will make an appropriate adjustment to the components of Operating Expenses for such year to determine the amount of Operating Expenses that would have been incurred had the Project been ninety-five percent (95%) occupied; and the amount so determined shall be deemed to have been the amount of Operating Expenses for such base year and any expense year(s). Operating Expenses for the Base Year shall not include

EXHIBIT C

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market-wide cost increases (including utility rate increases) due to extraordinary circumstances, including, but not limited to, Force Majeure, boycotts, strikes, conservation surcharges, embargoes or shortages, or amortized costs. In no event shall each of the components of Direct Expenses for any Expense Year related to utility costs, Tax Expenses, Project services costs or Project insurance costs be less than each of the corresponding components of Direct Expenses related to such utility costs, Tax Expenses, Project services costs and Project insurance costs in the Base Year. Landlord shall not (i) make a profit by charging items to Operating Expenses that are otherwise also charged separately to others and (ii) subject to Landlord's right to adjust the components of Operating Expenses described above in this paragraph, collect Operating Expenses from Tenant and all other tenants in the Building in an amount in excess of what Landlord incurs for the items included in Operating Expenses.

1.1.5 Taxes.

1.1.5.l "Tax Expenses" shall mean all federal, state, county, or local governmental or municipal taxes, fees, charges or other impositions of every kind and nature, whether general, special, ordinary or extraordinary, (including, without limitation, real estate taxes, general and special assessments, transit taxes, leasehold taxes or taxes based upon the receipt of rent, including gross receipts or sales taxes applicable to the receipt of rent, unless required to be paid by Tenant, personal property taxes imposed upon the fixtures, machinery, equipment, apparatus, systems and equipment, appurtenances, furniture and other personal property used in connection with the Project, or any portion thereof), which shall be paid or accrued during any Expense Year (without regard to any different fiscal year used by such goverrunental or municipal authority) because of or in connection with the ownership, leasing and operation of the Project, or any portion thereof (including, without limitation, the land upon which the Building and the parking structure serving the Building are located).

1.1.5.2    Tax Expenses shall include, without limitation: {i) Any tax on the rent, right to rent or other income from the Project, or any portion thereof, or as against the business of leasing the Project, or any portion thereof;

(ii)    Any assessment, tax, fee, levy or charge in addition to, or in substitution, partially or totally, of any assessment, tax, fee, levy or charge previously included within the definition of real property tax, it being acknowledged by Tenant and Landlord that Proposition 13 was adopted by the voters of the State of California in the June 1978 election ("Proposition 13") and that assessments, taxes, fees, levies and charges may be imposed by governmental agencies for such services as fire protection, street, sidewalk and road maintenance , refuse removal and for other governmental services formerly provided without charge to property owners or occupants, and, in further recognition of the decrease in the level and quality of governmental services and amenities as a result of Proposition 13, Tax Expenses shall also include any governmental or private assessments or the Project's contribution towards a governmental or private cost-sharing agreement for the purpose of augmenting or improving the quality of services and amenities normally provided by governmental agencies; {iii) Any assessment, tax, fee, levy, or charge allocable to or measured by the area of the Premises or the Rent payable hereunder, including, without limitation, any business or gross income tax or excise tax with respect to the receipt of such rent, or upon or with respect to the possession, leasing, operating, management, maintenance, alteration, repair, use or occupancy by Tenant of the Premises, or any portion thereof, (iv) Any assessment, tax, fee, levy or charge, upon this transaction or any document to which Tenant is a party, creating or transferring an interest or an estate in the Premises; and (v) all of the real estate taxes and assessments imposed upon or with respect to the Building and all of the real estate taxes and assessments imposed on the land and improvements comprising the Project.

1.1.5.3    Any costs and expenses (including, without limitation, reasonable attorneys' fees) incurred in attempting to protest, reduce or minimize Tax Expenses shall be included in Tax Expenses in the Expense Year such expenses are paid. Except as set forth in Section 1.1.5.4, below, refunds of Tax Expenses shall be credited against Tax Expenses and refunded to Tenant regardless of when received, based on the Expense Year to which the refund is applicable, provided that in no event shall the amount to be refunded to Tenant for any such Expense Year exceed the total amount paid by Tenant as an increase in Tax Expenses under this Exhibit C for such Expense Year. If Tax Expenses for any period during the Lease Term or any extension thereof are increased after payment thereof for any reason, including, without limitation, error or reassessment by applicable governmental or municipal authorities, Tenant shall pay Landlord upon demand Tenant's Share of any such increased Tax Expenses included by Landlord as Building Tax Expenses pursuant to the TCCs of this Lease. Notwithstanding anything to the contrary contained in this Section 1.1.5.3{except as set forth in Section 1.1.5.2, above), there shall be excluded from Tax Expenses (i) all excess profits taxes, franchise taxes, gift taxes, capital stock taxes, inheritance and succession taxes, estate taxes, federal and state income taxes, and other taxes to the extent applicable to Landlord's general or net income (as opposed to rents, receipts or income attributable to operations at the Project), (ii) any items included as Operating Expenses, and {iii) any items paid by Tenant under Section 4.2of the Lease. Notwithstanding anything to the contrary set forth in this Lease, only Landlord may institute proceedings to reduce Tax Expenses and the filing of any such proceeding by Tenant without Landlord's consent shall constitute an event of default by Tenant under this Lease. Notwithstanding the foregoing, Landlord shall not be obligated to file any application or institute any proceeding seeking a reduction in Tax Expenses.

1.1.6 "Tenant's Share" shall mean the percentage set forth in Section 6 of the Summary.

1.2    Allocation of Direct Expenses. The parties acknowledge that the Building is a part of a multi-building project and that the costs and expenses incurred in connection with the Project (i.e. the Direct Expenses) should be shared between the tenants of the Building and the tenants of the other buildings in the Project. Accordingly, as set forth in Section1.1above, Direct Expenses {which consists of Operating Expenses and Tax Expenses) are determined annually for the Project as a whole, and a portion of the Direct Expenses, which portion shall be determined by Landlord on an equitable basis, shall be allocated to the tenants of the Building (as opposed to the tenants of any other buildings in the Project) and such portion shall be the Direct Expenses for purposes of this Lease. Such portion of Direct Expenses allocated to the tenants of the Building shall include all Direct Expenses attributable solely to the Building and an equitable portion of the Direct Expenses attributable to the Project as a whole.

1.3    Calculation and Payment of Additional Rent. If for any Expense Year ending or commencing within the Lease Term, Tenant's Share of Direct Expenses for such Expense Year exceeds Tenant's Share of Direct Expenses applicable to the Base Year, then Tenant shall pay to Landlord, in the manner set forth in Section 1.3.1, below, and as Additional Rent, an amount equal to the excess (the "Excess").

1.3.l Statement ofActualDirect Expenses and Payment by Tenant. Landlord shall give to Tenant following the end of each Expense Year, a statement (the "Statement") which shall state in general major categories the Direct Expenses incurred or accrued for the particular Expense Year, and which shall indicate the amount of the Excess. Landlord shall use commercially reasonable efforts to deliver such Statement co Tenant on or before May 1 following the end of the Expense Year to which such Statement relates. Upon receipt of the Statement for each Expense Year commencing or ending during the Lease Term, if an Excess is present, Tenant shall pay, within thirty

EXHIBIT C

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(30) days after receipt of the Statement, the full amount of the Excess for such Expense Year, less the amounts, if any, paid during such Expense Year as "Estimated Excess," as that term is defined in Section 1.3.2, below, and if Tenant paid more as Estimated Excess than the actual Excess, Tenant shall receive a credit in the amount of Tenant's overpayment against Rent next due under this Lease. The failure of Landlord to timely furnish the Statement for any Expense Year shall not prejudice Landlord or Tenant from enforcing its rights under this Exhibit C. Even though the Lease Term has expired and Tenant has vacated the Premises, when the final determination is made of Tenant's Share of Direct Expenses for the Expense Year in which this Lease terminates, if an Excess is present, Tenant shall, within thirty (30) days after receipt of the Statement, pay to Landlord such amount, and if Tenant paid more as Estimated Excess than the actual Excess, Landlord shf.11, within thirty (30) days, deliver a check payable to Tenant in the amount of the overpayment. The provisions of this Section 1.3.1 shall survive the expiration or earlier termination of the Lease Term. Notwithstanding the immediately preceding sentence, Tenant shall not be responsible for Tenant's Share of any Direct Expenses attributable to any Expense Year which are first billed to Tenant more than one (1) calendar years after the Lease Expiration Date, provided that in any event Tenant shall be responsible for Tenant's Share of Direct Expenses which (x) were levied by any governmental authority or by any public utility companies, and (y) Landlord had not previously received an invoice therefor and which are currently due and owing (i.e., costs invoiced for the first time regardless of the date when the work or service relating to this Lease was performed), at any time following the Lease Expiration Date which are attributable to any Expense Year.

1.3.2 Statement of Estimated Direct Expenses. In addition, Landlord shall endeavor to give Tenant a yearly expense estimate statement (the "Estimate Statement") which shall set forth in general major categories Landlord's reasonable estimate (the "Estimate") of what the total amount of Direct Expenses for the then-current Expense Year shall be and the estimated excess (the "Estimated Excess") as calculated by comparing the Direct Expenses for such Expense Year, which shall be based upon the Estimate, to the amount of Direct Expenses for the Base Year. The failure of Landlord to timely furnish the Estimate Statement for any Expense Year shall not preclude Landlord from enforcing its rights to collect any Additional Rent under this ExhibitC, nor shall Landlord be prohibited from revising any Estimate Statement or Estimated Excess theretofore delivered to the extent necessary. Thereafter, Tenant shall pay, within thirty (30) days after receipt of the Estimate Statement, a fraction of the Estimated Excess for the then-current Expense Year (reduced by any amounts paid pursuant to the second to last sentence of this Section 1.3.2). Such fraction shall have as its numerator the number of months which have elapsed in such current Expense Year, including the month of such payment, and twelve (12) as its denominator. Until a new Estimate Statement is furnished (which Landlord shall have the right to deliver to Tenant at any time), Tenant shall pay monthly, with the monthly Base Rent installments, an amount equal to one-twelfth (1112) of the total Estimated Excess set forth in the previous Estimate Statement delivered by Landlord to Tenant. Throughout the Lease Term Landlord shall maintain records with respect to Direct Expenses in accordance with sound real estate management and accounting practices, consistently applied.

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EXHIBIT D

DEL MAR CORPORATE CENTER

RULES AND REGULATIONS

Tenant shall faithfully observe and comply with the following Rules and Regulations. Landlord shall not be responsible to Tenant for the nonperformance of any of said Rules and Regulations by or otherwise with respect to the acts or omissions of any other tenants or occupants of the Project. In the event of any conflict between the Rules and Regulations and the other provisions of this Lease, the latter shall control.

1.    Tenant shall not alter any lock or install any new or additional locks or bolts on any doors or windows of the Premises without obtaining Landlord's prior written consent. Tenant shall bear the cost of any lock changes or repairs required by Tenant. Two keys will be furnished by Landlord for the Premises, and any additional keys required by Tenant must be obtained from Landlord at a reasonable cost to be established by Landlord. Upon the termination of this Lease, Tenant shall restore to Landlord all keys of stores, offices, and toilet rooms, either furnished to, or otherwise procured by, Tenant and in the event of the loss of keys so furnished, Tenant shall pay to Landlord the cost of replacing same or of changing the lock or locks opened by such lost key if Landlord shall deem it necessary to make such changes.

2.    All doors opening to public corridors shall be kept closed at all times except for normal ingress and egress to the Premises.

3.    Landlord reserves the right to close and keep locked all entrance and exit doors of the Building during such hours as are customary for comparable buildings in the Del Mar Heights, California area. Tenant, its employees and agents must be sure that the doors to the Building are securely closed and locked when leaving the Premises if it is after the normal hours of business for the Building. Any tenant, its employees, agents or any other persons entering or leaving the Building at any time when it is so locked, or any time when it is considered to be after normal business hours for the Building, may be required to sign the Building register. Access to the Building may be refused unless the person seeking access has proper identification or has a previously arranged pass for access to the Building. Landlord will furnish passes to persons for whom Tenant requests same in writing. Tenant shall be responsible for all persons for whom Tenant requests passes and shall be liable to Landlord for all acts of such persons. The Landlord and his agents shall in no case be liable for damages for any error with regard to the admission to or exclusion from the Building of any person. In case of invasion, mob, riot, public excitement, or other communication, Landlord reserves the right to prevent access to the Building or the Project during the continuance thereof by any means it deems appropriate for the safety and protection of life and property.

4.    No furniture, freight or equipment of any kind shall be brought into the Building without prior notice to Landlord. All moving activity into or out of the Building shall be scheduled with Landlord and done only at such time and in such manner as Landlord designates. Landlord shall have the right to prescribe the weight, size and position of all safes and other heavy property brought into the Building and also the times and manner of moving the same in and out of the Building. Safes and other heavy objects shall, if considered necessary by Landlord, stand on supports of such thickness as is necessary to properly distribute the weight. Landlord will not be responsible for loss of or damage to any such safe or property in any case. Any damage to any part of the Building, its contents, occupants or visitors by moving or maintaining any such safe or other property shall be the sole responsibility and expense of Tenant.

5.    No furniture, packages, supplies, equipment or merchandise will be received in the Building or carried up or down in the elevators, except between such hours, in such specific elevator and by such personnel as shall be designated by Landlord.

6.    The requirements of Tenant will be attended to only upon application at the management office for the Project or at such office location designated by Landlord. Employees of Landlord shall not perform any work or do anything outside their regular duties unless under special instructions from Landlord.

7.    No sign, advertisement, notice or handbill shall be exhibited, distributed, painted or affixed by Tenant on any part of the Premises or the Building without the prior written consent of the Landlord. Tenant shall not disturb, solicit, peddle, or canvass any occupant of the Project and shall cooperate with Landlord and its agents of Landlord to prevent same.

8.    The toilet rooms, urinals, wash bowls and other apparatus shall not be used for any purpose other than that for which they were constructed, and no foreign substance of any kind whatsoever shall be thrown therein. The expense of any breakage, stoppage or damage resulting from the violation of this rule shall be borne by the tenant who, or whose servants, employees, agents, visitors or licensees shall have caused same.

9.    Tenant shall not overload the floor of the Premises, nor mark, drive nails or screws, or drill into the partitions, woodwork or drywall (except as reasonably required to hang cabinets, whiteboards, art, graphs) or in any way deface the Premises or any part thereof without Landlord's prior written consent.

10.    Except for vending machines intended for the sole use of Tenant's employees and invitees, no vending machine or machines other than fractional horsepower office machines shall be installed, maintained or operated upon the Premises without the written consent of Landlord.

11.    Tenant shall not use or keep in or on the Premises, the Building, or the Project any kerosene, gasoline, explosive material, corrosive material, material capable of emitting toxic fumes, or other inflammable or combustible fluid chemical, substitute or material. Tenant shall provide material safety data sheets for any Hazardous Material used or kept on the Premises.

12.    Tenant shall not without the prior written consent of Landlord use any method of heating or air conditioning other than that supplied by Landlord.

13.    Tenant shall not use, keep or permit to be used or kept, any foul or noxious gas or substance in or on the Premises, or permit or allow the Premises to be occupied or used in a manner offensive or objectionable to Landlord or other occupants of the Project by reason of noise, odors, or vibrations, or interfere with other tenants or those having business therein, whether by the use of any musical instrument, radio, phonograph, or in any other way. Tenant shall not throw anything out of doors, windows or skylights or down passageways.

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14.    Tenant shall not bring into or keep within the Project, the Building or the Premises any firearms, animals, birds, aquariums, or, except in areas designated by Landlord, bicycles or other vehicles.

15.    No cooking shall be done or permitted on the Premises, nor shall the Premises be used for the storage of merchandise, for lodging or for any improper, objectionable or immoral purposes. Notwithstanding the foregoing, Underwriters' laboratory-approved equipment and microwave ovens may be used in the Premises for heating food and brewing coffee, tea, hot chocolate and similar beverages for employees and visitors, provided that such use is in accordance with all applicable federal, state, county and city laws, codes, ordinances, rules and regulations.

16.    The Premises shall not be used for manufacturing or for the storage of merchandise except as such storage may be incidental to the use of the Premises provided for in the Summary. Tenant shall not occupy or permit any portion of the Premises to be occupied as an office for a messenger-type operation or dispatch office, public stenographer or typist, or for the manufacture or sale of liquor, narcotics, or tobacco in any form, or as a medical office, or as a barber or manicure shop, or as an employment bureau without the express prior written consent of Landlord. Tenant shall not engage or pay any employees on the Premises except those actually working for such tenant on the Premises nor advertise for laborers giving an address at the Premises.

17.    Landlord reserves the right to exclude or expel from the Project any person who, in the judgment of Landlord, is intoxicated or under the influence of liquor or drugs, or who shall in any manner do any act in violation of any of these Rules and Regulations.

18.    Tenant, its employees and agents shall not loiter in or on the entrances, corridors, sidewalks, lobbies, courts, halls, stairways, elevators, vestibules or any Common Areas for the purpose of smoking tobacco products or for any other purpose, nor in any way obstruct such areas, and shall use them only as a means of ingress and egress for the Premises.

19.    Tenant shall not waste electricity, water or air conditioning and agrees to cooperate fully with Landlord to ensure the most effective operation of the Building's heating and air conditioning system, and shall refrain from attempting to adjust any controls. Tenant shall participate in recycling programs undertaken by Landlord.

20.    Tenant shall store all its trash and garbage within the interior of the Premises. No material shall be placed in the trash boxes or receptacles if such material is of such nature that it may not be disposed of in the ordinary and customary manner of removing and disposing of trash and garbage in San Diego, California without violation of any law or ordinance governing such disposal. All trash, garbage and refuse disposal shall be made only through entry-ways and elevators provided for such purposes at such times as Landlord shall designate. If the Premises is or becomes infested with vermin as a result of the use or any misuse or neglect of the Premises by Tenant, its agents, servants, employees, contractors, visitors or licensees, Tenant shall forthwith, at Tenant's expense, cause the Premises to be exterminated from time to time to the satisfaction of Landlord and shall employ such licensed exterminators as shall be approved in writing in advance by Landlord.

21.    Tenant shall comply with all safety, fire protection and evacuation procedures and regulations established by Landlord or any governmental agency.

22.    Any persons employed by Tenant to do janitorial work shall be subject to the prior written approval of Landlord, and while in the Building and outside of the Premises, shall be subject to and under the control and direction of the Building manager (but not as an agent or servant of such manager or of Landlord), and Tenant shall be responsible for all acts of such persons.

23.    No awnings or other projection shall be attached to the outside walls of the Building without the prior written consent of Landlord, and no curtains, blinds, shades or screens shall be attached to or hung in, or used in connection with, any window or door of the Premises other than Landlord standard window coverings. All electrical ceiling fixtures hung in the Premises or spaces along the perimeter of the Building must be fluorescent and/or of a quality, type, design and a warm white bulb color approved in advance in writing by Landlord. Neither the interior nor exterior of any windows shall be coated or otherwise sunscreened without the prior written consent of Landlord. Tenant shall be responsible for any damage to the window film on the exterior windows of the Premises and shall promptly repair any such damage at Tenant's sole cost and expense. Tenant shall keep its window coverings closed during any period of the day when the sun is shining directly on the windows of the Premises. Prior to leaving the Premises for the day, Tenant shall extinguish all lights. Tenant shall abide by Landlord's regulations concerning the opening and closing of window coverings which are attached to the windows in the Premises, if any, which have a view of any interior portion of the Building or Building Common Areas.

24.    The sashes, sash doors, skylights, windows, and doors that reflect or admit light and air into the halls, passageways or other public places in the Building shall not be covered or obstructed by Tenant, nor shall any bottles, parcels or other articles be placed on the windowsills.

25.    Tenant must comply with requests by the Landlord concerning the informing of their employees of items of importance to the Landlord.

26.    Tenant must comply with any City of San Diego "NO-SMOKING" ordinances. If Tenant is required under the ordinance to adopt a written smoking policy, a copy of said policy shall be on file in the office of the Building. In addition, no smoking of any substance shall be permitted within the Project except in specifically designated outdoor areas. Within such designated outdoor areas, all remnants of consumed cigarettes and related paraphernalia shall be deposited in ash trays and/or waste receptacles. No cigarettes shall be extinguished and/or left on the ground or any other surface of the Project. Cigarettes shall be extinguished only in ashtrays. Furthermore, in no event shall Tenant, its employees or agents smoke tobacco products or other substances (x) within any interior areas of the Project, or (y) within two hundred feet (200') of the main entrance of the Building or the main entrance of any of the adjacent buildings, or (z) within seventy-five feet (75') of any other entryways into the Building.

27.    Tenant hereby acknowledges that Landlord shall have no obligation to provide guard service or other security measures for the benefit of the Premises, the Building or the Project. Tenant hereby assumes all responsibility for the protection of Tenant and its agents, employees, contractors, invitees and guests, and the property thereof, from acts of third parties, including keeping doors locked and other means of entry to the Premises closed, whether or not Landlord, at its option, elects to provide security protection for the Project or any portion thereof. Tenant further assumes the risk that any safety and security devices, services and programs which Landlord elects, in its sole discretion, to provide may not be effective, or may malfunction or be circumvented by an unauthorized third party, and Tenant shall, in addition to its other insurance obligations under this Lease, obtain its own insurance coverage to the extent Tenant desires protection against losses related to such occurrences. Tenant shall cooperate in any reasonable safety or security program

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developed by Landlord or required by law.

28. All office equipment of any electrical or mechanical nature shall be placed by Tenant in the Premises in

settings approved by Landlord, to absorb or prevent any vibration, noise and annoyance.

29.    Tenant shall not use in any space or in the public halls of the Building, any hand trucks except those equipped with rubber tires and rubber side guards.

30.    No auction, liquidation, fire sale, going-out-of-business or bankruptcy sale shall be conducted in the Premises without the prior written consent of Landlord.

31.    No tenant shall use or permit the use of any portion of the Premises for living quarters, sleeping apartments or lodging rooms.

32.    Tenant shall not purchase spring water, towels, janitorial or maintenance or other similar services from any company or persons not approved by Landlord. Landlord shall approve a sufficient number of sources of such services to provide Tenant with a reasonable selection, but only in such instances and to such extent as Landlord in its judgment shall consider consistent with the security and proper operation of the Building.

33.    Tenant shall install and maintain, at Tenant's sole cost and expense, an adequate, visibly marked and properly operational fire extinguisher next to any duplicating or photocopying machines or similar heat producing equipment, which may or may not contain combustible material, in the Premises only if required by the applicable governmental authority.

Landlord reserves the right at any time to change or rescind any one or more of these Rules and Regulations, or to make such other and further reasonable Rules and Regulations as in Landlord's judgment may from time to time be necessary for the management, safety, care and cleanliness of the Premises, Building, the Common Areas and the Project, and for the preservation of good order therein, as well as for the convenience of other occupants and tenants therein; provided, however, Landlord agrees that the Rules and Regulations shall not be unreasonably modified or enforced in a manner which will unreasonably interfere with the normal and customary conduct of Tenant's business. Landlord may waive any one or more of these Rules and Regulations for the benefit of any particular tenants, but no such waiver by Landlord shall be construed as a waiver of such Rules and Regulations in favor of any other tenant, nor prevent Landlord from thereafter enforcing any such Rules or Regulations against any or all tenants of the Project. Tenant shall be deemed to have read these Rules and Regulations and to have agreed to abide by them as a condition of its occupancy of the Premises.

EXHIBIT D

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EXHIBIT E

DEL MAR CORPORATE CENTER

FORM OF TENANT'S ESTOPPEL CERTIFICATE

The undersigned as Tenant under that certain Office Lease (the "Lease") made and entered into as of ______________,

20_ by and between as Landlord, and the undersigned as Tenant, for Premises on the _ floor(s) of the office building located at     ,, California, certifies as follows:

1.    Attached hereto as Exhibit A is a true and correct copy of the Lease and all amendments and modifications thereto. The documents contained in ExhibitArepresent the entire agreement between the parties as to the Premises.

2. The undersigned currently occupies the Premises described in the Lease, the Lease Term commenced on

-----, and the Lease Term expires on, and the undersigned has no option to terminate or cancel the Lease or to purchase all or any part of the Premises, the Building and/or the Project.

3.    Base Rent became payable on .

4.    The Lease is in full force and effect and has not been modified, supplemented or amended in any way except as provided in Exhibit A.

5.    Tenant has not transferred, assigned, or sublet any portion of the Premises nor entered into any license or concession agreements with respect thereto except as follows:

6.Tenant shall not modify the documents contained in ExhibitAwithout the prior written consent of Landlord's mortgagee.

7.    All monthly installments of Base Rent, all Additional Rent and all monthly installments of estimated Additional Rent have been paid when due through ________________The current monthly installment of Base Rent is $        _.

8.    All conditions of the Lease to be performed by Landlord necessary to the enforceability of the Lease have been satisfied and Landlord is not in default thereunder. In addition, the undersigned has not delivered any notice to Landlord regarding a default by Landlord thereunder.

9.    No rental has been paid more than thirty (30) days in advance and no security has been deposited with Landlord except as provided in the Lease.

10.    As of the date hereof: there are no existing defenses or offsets, or, to the undersigned's knowledge, claims or any basis for a claim, that the undersigned has against Landlord.

11.    If Tenant is a corporation or partnership, each individual executing this Estoppel Certificate on behalf of Tenant hereby represents and warrants that Tenant is a duly formed and existing entity qualified to do business in California and that Tenant has full right and authority to execute and deliver this Estoppel Certificate and that each person signing on behalf of Tenant is authorized to do so.

12.    There are no actions pending against the undersigned under the bankruptcy or similar laws of the United States or any state.

13.    Other than in compliance with all applicable laws and incidental to the ordinary course of the use of the Premises, the undersigned has not used or stored any hazardous substances in the Premises.

14.    To the undersigned's knowledge, all improvement work to be performed by Landlord under the Lease has been completed in accordance with the Lease and has been accepted by the undersigned and all reimbursements and allowances due to the undersigned under the Lease in connection with any improvement work have been paid in full.

The undersigned acknowledges that this Estoppel Certificate may be delivered to Landlord or to a prospective mortgagee or prospective purchaser, and acknowledges that said prospective mortgagee or prospective purchaser will be relying upon the statements contained herein in making the loan or acquiring the property of which the Premises is a part and that receipt by it of this certificate is a condition of making such loan or acquiring such property.

Executed at___ on the __ day of_, 20_

"Tenant":

,

a

By:

Its:

By:

Its:

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EXHIBIT F

DEL MAR CORPORATE CENTER

NOTICE OF LEASE TERM DATES

To:    

Re:    Office Lease dated , 20_ (the "Lease"), by and between , a

---------- ("Landlord"), and , a ("Tenant"), for approximately rentable square feet of space commonly known as Suite (the "Premises"), located on the() floor of that certain office building located at (the "Building").

Dear

Notwithstanding any provision to the contrary contained in the Lease, this letter is to confirm and agree upon the following:

I. Tenant has accepted the above-referenced Premises as being delivered in accordance with the Lease, and there is no deficiency in construction.

2. The Lease Term shall commence on or has commenced on _____________ ____for a term of

ending on __

3. Rent commenced to accrue on , in the amount of .

4. Ifthe Lease Commencement Date is other than the first day of the month, the first billing will contain a pro rata adjustment. Each biUing thereafter shall be for the full amount of the monthly installment as provided for inthe Lease.

5.    Your rent checks should be made payable to at

6. The rentable and usable square feet of the Premises areand respectively.

7. Tenant's Share of Direct Expenses with respect to the Premises is % of the Project.

8. Capitalized terms used herein that are defined in the Lease shall have the same meaning when used herein. Tenant confirms that the Lease has not been modified or altered except as set forth herein, and the Lease is in full force and effect. Landlord and Tenant acknowledge and agree that to each party's actual knowledge,

neither party is in default or violation of any covenant, provision, obligation, agreement or condition in the Lease.

If the provisions of this letter correctly set forth our understanding, please so acknowledge by signing at the place provided below on the enclosed copy of this letter and returning the same to Landlord.

"Landlord":

a__

By: Its:

By: Its:

Agreed to and Accepted

as of , 20 "Tenant":

a

By: Its:

By: Its:

EXHIBIT F

-1-

EXHIBIT G

EXHIBIT G

-1-

EX-31.1

Exhibit 31.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Roger L. Hawley, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Zogenix, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the consolidated financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

/s/ Roger L. Hawley

Roger L. Hawley

Chief Executive Officer

Date: November 6, 2014

EX-31.2

Exhibit 31.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Ann D. Rhoads, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Zogenix, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the consolidated financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

/s/ Ann D. Rhoads

Ann D. Rhoads

Chief Financial Officer

Date: November 6, 2014

EX-32.1

Exhibit 32.1

CERTIFICATION

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

(Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code)

In connection with the Quarterly Report on Form 10-Q of Zogenix, Inc. (the “Company”) for the period ended September 30, 2014, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Roger L. Hawley, as Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:

1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: November 6, 2014

/s/ Roger L. Hawley

Roger L. Hawley

Chief Executive Officer

The foregoing certification is being furnished solely to accompany the Report pursuant to 18 U.S.C. § 1350, and is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing. A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

EX-32.2

Exhibit 32.2

CERTIFICATION

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

(Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code)

In connection with the Quarterly Report on Form 10-Q of Zogenix, Inc. (the “Company”) for the period ended September 30, 2014, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Ann D. Rhoads, as Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:

1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: November 6, 2014

/s/ Ann D. Rhoads

Ann D. Rhoads

Chief Financial Officer

The foregoing certification is being furnished solely to accompany the Report pursuant to 18 U.S.C. § 1350, and is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing. A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

XML

Stock-Based Compensation Expense (Detail) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2014	Sep. 30, 2013	Sep. 30, 2014	Sep. 30, 2013
Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Line Items]
Stock-based compensation expense	$ 2,042	$ 2,215	$ 7,334	$ 5,780
Cost of sales
Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Line Items]
Stock-based compensation expense	101	119	369	227
Research and development
Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Line Items]
Stock-based compensation expense	262	316	983	782
Selling, general and administrative
Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Line Items]
Stock-based compensation expense	1,679	1,780	5,982	4,570
Restructuring
Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Line Items]
Stock-based compensation expense	$ 0	$ 0	$ 0	$ 201

XML

Summary of Significant Accounting Policies - Schedule of Calculation of Diluted Net Loss Per Share (Detail)	3 Months Ended	9 Months Ended	3 Months Ended	9 Months Ended
	Sep. 30, 2013 Common stock options and restricted stock units	Sep. 30, 2013 Common stock options and restricted stock units	Sep. 30, 2014 Common stock options	Sep. 30, 2014 Common stock options
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
Anti-dilutive securities excluded from computation of earnings per share amount	1,776,000	1,776,000	58,000	9,909,000

XML

Sale of Sumavel DosePro Business Sale of Sumavel DosePro Business

9 Months Ended

Sep. 30, 2014

Discontinued Operations and Disposal Groups [Abstract]

Sale of Sumavel DosePro Business

Sale of Sumavel DosePro Business

Endo Ventures Bermuda Limited and Endo Ventures Limited Asset Purchase Agreement

On May 16, 2014, the Company closed the APA with Endo Ventures Bermuda and Endo Ventures, pursuant to which the Company sold its Sumavel DosePro business to Endo, including the registered trademarks, certain contracts, the NDA and other regulatory approvals, the books and records, marketing materials and product data relating to Sumavel DosePro. Upon Closing of the APA, Endo paid the Company $85,000,000 in cash, $8,500,000 of which was deposited into escrow to fund potential indemnification claims for a period of 12 months, and $4,624,000 in cash for the purchase of Sumavel DosePro finished goods inventory on hand at the Company's standard cost. In addition to the upfront cash payments, the Company is eligible to receive additional cash payments of up to $20,000,000 based on the achievement of pre-determined sales and gross margin milestones.

Furthermore, Endo Ventures assumed responsibility for the Company’s royalty obligation to Aradigm Corporation on sales of Sumavel DosePro.

At the Closing, the Company and Endo Ventures Bermuda entered into a license agreement (License Agreement), pursuant to which the Company granted Endo an exclusive, perpetual, sublicensable, irrevocable (unless terminated as set forth in the License Agreement), fully paid-up, royalty-free license to make and have made, use and research, develop and commercialize Sumavel DosePro throughout the world under a specified subset of the Company's technology patents. The Company retained all rights to the DosePro technology patents and know-how for use with other products. Either party may terminate the License Agreement in the event of the other party's uncured material breach.

At the Closing, the Company and Endo Ventures entered into the Supply Agreement, pursuant to which the Company will retain the sole and exclusive right and the obligation to manufacture, have manufactured, supply or have supplied Sumavel DosePro to Endo, subject to Endo’s right to qualify and maintain a back-up manufacturer. Endo will exclusively purchase all Sumavel DosePro supplied by the Company at the cost of goods sold plus a 2.5% mark-up. The Company will grant Endo a manufacturing license under certain circumstances outlined in the Supply Agreement, if Endo requires the use of a back-up supplier. Representatives from the Company and Endo will participate on a joint supply committee for general oversight and strategic functions regarding the Supply Agreement. Further, under the Supply Agreement, Endo will support the Company’s Sumavel DosePro manufacturing operations with an interest-free working capital advance equivalent to the book value of the inventory of materials and unreleased finished goods held by the Company in connection with the manufacture of the Sumavel DosePro minus the accounts payable associated with such materials and unreleased finished goods, capped initially at $7,000,000 and subject to annual adjustment. The working capital advance is evidenced by a promissory note (the Note) and is secured by liens on materials and unreleased finished Sumavel DosePro inventory.

The Supply Agreement may be terminated by either party upon three years' prior written notice, provided that the notice cannot be given prior to the fifth anniversary of the Closing date. Either party may also terminate the Supply Agreement in the following circumstances: (i) if the other party breaches any material term of the agreement and fails to cure such breach within a specified time period following written notice; or (ii) upon the occurrence of certain financial difficulties. Endo Ventures also may terminate the Supply Agreement in the following circumstances: (i) if Sumavel DosePro has been deemed ineffective or unsafe by the applicable governmental authorities; or (ii) if the Company fails to supply to Endo Ventures a minimum quantity of Sumavel DosePro over the course of a six month period which results in Endo Ventures being unable to supply Sumavel DosePro to its trade customers.

Further upon Closing, the Company and Endo Ventures entered into other ancillary agreements associated with the APA, pursuant to which the Company will help facilitate the transfer of the Sumavel DosePro business to Endo Ventures, which Endo Ventures assumed responsibility for as of the Closing date. The services to be provided by the Company include assistance with co-pay/voucher programs, continuation of Zogenix Product Express services, regulatory support and processing of all payment claims made under the Company's National Drug Code. Services provided by the Company will be provided over various time periods specified in the agreements.

The Company accounted for the agreement for the sale of the Sumavel DosePro business as a sale of a business and, as such, was required to estimate the fair value of the business, including the product rights under the APA, DosePro technology license and Sumavel DosePro finished goods inventory on hand at Closing. The Company estimated the fair value of the product rights using an income approach valuation technique through a discounted cash flow method. The assumptions used in the discounted cash flow method included estimated Sumavel DosePro units to be sold in the market based on current demand forecasts, net selling price of Sumavel DosePro based on current market price, working capital needs estimated by management and a discount rate based on a market participant weighted average cost of capital.

The Company estimated the fair value of the DosePro technology license using a relief from royalty valuation method, whereby the presumed royalty savings from owning the license was estimated. The valuation considered royalty rates involving other injection technologies in the current pharmaceutical space.

The Company estimated the fair value of the Sumavel DosePro finished goods inventory on hand at Closing (which was sold to Endo at standard cost) using a market approach reflecting the estimated costs incurred by the Company in performing monitoring and quality control services on inventory supplied to Endo.

The agreements entered into concurrently with the sale of the Sumavel DosePro business, including the License Agreement and Supply Agreement, contain various elements and, as such, are deemed to be an arrangement with multiple deliverables as defined under authoritative accounting guidance (see Note 2). Several non-contingent deliverables were identified within the agreements. The Company identified the contract manufacturing services, manufacturing license, transition services and performance on joint supply committee as separate non-contingent deliverables within the arrangement. The transition services and manufacturing license have standalone value and qualify as separate units of accounting. Performance on the joint supply committee does not have standalone value from the contract manufacturing services, and as such, these two deliverables qualify as one unit of accounting. The non-contingent consideration received from the Endo agreements was allocated to these separate units of accounting, including the sale of the Sumavel DosePro business, based on their respective fair values, using the relative selling price method.

The Company developed its BESP for each non-contingent deliverable, as VSOE and TPE was not available, in order to allocate the non-contingent arrangement consideration to the three undelivered units of accounting. The Company used a market valuation approach to develop the BESP for contract manufacturing services through the use of market rates available for comparable contract manufacturing services and consideration of internal costs of performing inventory monitoring and quality control services. Significant increases in the hours necessary to perform inventory monitoring and quality controls services would result in a significant increase in the fair value of the contract manufacturing services.

The Company developed the BESP for the manufacturing license by estimating the total number of hours required to qualify another manufacturer, the hourly rate of internal regulatory and manufacturing employees that are required to qualify another manufacturer and the market rate for estimated cost of travel required to qualify another manufacturer. The Company developed the BESP for the transition services through use of an estimate of the total number of hours required to complete the services and the hourly rate of an internal employee that performs the services, which was compared to hourly market rates for similar consulting services. The Company developed the BESP for performance on the joint supply committee through use of an estimate of the total number of participation hours required on the committee and the hourly rate of the internal employees that participate on the joint supply committee. Significant increases in the estimated number of hours required to qualify another manufacturer, required to perform transition services, or required for performance on the joint supply committee would significantly increase the fair value of these deliverables.

The Company allocated $9,100,000 of the upfront consideration to contract manufacturing services, which includes a discount valued at $4,748,000 related to the interest free working capital advance, and an immaterial amount of the upfront consideration was allocated to the manufacturing license, transition services and performance on the joint supply committee. Revenue associated with each of the undelivered elements will be recognized when the element is delivered.

As of June 30, 2014, the Company determined that the Sumavel DosePro business, which is comprised of the product rights under the APA, DosePro technology license and Sumavel DosePro finished goods inventory purchased at Closing, had been fully delivered, and, therefore representing control of the business obtained by Endo. As such, a gain on sale of business of $79,980,000, net of $660,000 in related transaction costs, was recognized for the sale of the Sumavel DosePro business in the consolidated statement of operations and comprehensive income (loss) for the three and nine months ended September 30, 2014.

Based on the Sumavel DosePro finished goods inventory delivered and the contract manufacturing services performed, as measured using a proportional performance method, during the three and nine months ended September 30, 2014 a total of $4,225,000 and $6,463,000, respectively, was recognized as contract manufacturing revenue in the statement of operations and comprehensive income (loss). An immaterial amount of revenue was recognized for performance of transition services and performance on the joint supply committee during the three and nine months ended September 30, 2014.

As of September 30, 2014, the Company had $8,863,000 remaining in deferred revenue attributed to the Endo arrangement.

The $79,980,000 gain on sale of Sumavel DosePro business was calculated as the difference between the allocated non-contingent consideration amount for the business and the net carrying amount of the assets transferred to Endo. The following sets forth the net assets and calculation of the gain on sale as of Closing (in thousands):

Non-contingent consideration received	$	89,624
Imputed interest on working capital advance	4,748
Carrying value of Sumavel DosePro inventory on hand at Closing	(4,624		)
Transaction costs	(660		)
Deferred revenue associated with undelivered elements	(9,108		)
Net gain on sale of business	$	79,980

The net gain on sale of business may be adjusted in future periods by the contingent consideration, of up to $20,000,000, based upon the achievement of pre-determined sales and gross margin milestones. Any future adjustment of the net gain on sale of business will be determined through use of the relative selling price method.

Further, as noted above, Endo Ventures provided the Company with an interest-free working capital advance upon Closing. The working capital advance of $7,000,000, which is evidenced by the Note, was recorded as a note payable on the consolidated balance sheet at Closing, net of a $4,748,000 debt discount. The fair value of the debt discount was established using a market approach, including an interest rate reflecting recent term sheets provided to the Company for offerings of debt instruments, interest rates on the Company's most recent debt instruments, and market interest rates on similar debt instruments. The debt discount will be amortized as interest expense using the effective interest method over the minimum eight year term of the Supply Agreement, as the working capital advance must be repaid upon termination of the Supply Agreement. The Company recognized $83,000 and $123,000 of interest expense during the three and nine months ended September 30, 2014, respectively, related to the working capital advance from Endo.

The sale of the Sumavel DosePro business does not qualify as discontinued operations as the Company will have significant continuing involvement in the business as the exclusive supplier of Sumavel DosePro over the term of the Supply Agreement.

XML

Collaboration and Financing Agreements - Additional Information (Detail) (USD $)	0 Months Ended	1 Months Ended	3 Months Ended		9 Months Ended			9 Months Ended	0 Months Ended	3 Months Ended	9 Months Ended	3 Months Ended		9 Months Ended					3 Months Ended		9 Months Ended			0 Months Ended	9 Months Ended	0 Months Ended	9 Months Ended	0 Months Ended	9 Months Ended	0 Months Ended			1 Months Ended			3 Months Ended		9 Months Ended			0 Months Ended	3 Months Ended		9 Months Ended		3 Months Ended		9 Months Ended				1 Months Ended
	Jul. 18, 2011	Jul. 18, 2011	Sep. 30, 2014	Sep. 30, 2013	Sep. 30, 2014	Sep. 30, 2013	Dec. 31, 2013	Sep. 30, 2014 Embedded Derivative Liabilities [Member]	Jul. 18, 2011 Healthcare Royalty Financing Agreement [Member]	Sep. 30, 2014 Healthcare Royalty Financing Agreement [Member]	Sep. 30, 2014 Healthcare Royalty Financing Agreement [Member]	Sep. 30, 2014 Healthcare Royalty Financing Agreement [Member] Embedded Derivative Liabilities [Member]	Sep. 30, 2013 Healthcare Royalty Financing Agreement [Member] Embedded Derivative Liabilities [Member]	Sep. 30, 2014 Healthcare Royalty Financing Agreement [Member] Embedded Derivative Liabilities [Member]	Sep. 30, 2013 Healthcare Royalty Financing Agreement [Member] Embedded Derivative Liabilities [Member]	May 16, 2014 Healthcare Royalty Financing Agreement [Member] Embedded Derivative Liabilities [Member]	Dec. 31, 2013 Healthcare Royalty Financing Agreement [Member] Embedded Derivative Liabilities [Member]	Jul. 18, 2011 Healthcare Royalty Financing Agreement [Member] Embedded Derivative Liabilities [Member]	Sep. 30, 2014 Healthcare Royalty Financing Agreement [Member] Common Stock Warrant Liabilities [Member]	Sep. 30, 2013 Healthcare Royalty Financing Agreement [Member] Common Stock Warrant Liabilities [Member]	Sep. 30, 2014 Healthcare Royalty Financing Agreement [Member] Common Stock Warrant Liabilities [Member]	Sep. 30, 2013 Healthcare Royalty Financing Agreement [Member] Common Stock Warrant Liabilities [Member]	Jul. 18, 2011 Healthcare Royalty Financing Agreement [Member] Common Stock Warrant Liabilities [Member]	Jul. 18, 2011 Healthcare Royalty Financing Agreement [Member] Scenario 1 [Member]	Sep. 30, 2014 Healthcare Royalty Financing Agreement [Member] Scenario 1 [Member]	Jul. 18, 2011 Healthcare Royalty Financing Agreement [Member] Scenario 2 [Member]	Sep. 30, 2014 Healthcare Royalty Financing Agreement [Member] Scenario 2 [Member]	Jul. 18, 2011 Healthcare Royalty Financing Agreement [Member] Scenario 3 [Member]	Sep. 30, 2014 Healthcare Royalty Financing Agreement [Member] Scenario 3 [Member]	Jul. 18, 2011 Minimum [Member] Healthcare Royalty Financing Agreement [Member] Scenario 1 [Member]	Jul. 18, 2011 Maximum [Member] Healthcare Royalty Financing Agreement [Member] Scenario 1 [Member]	Sep. 12, 2014 Daravita License Agreement [Member]	Oct. 31, 2013 Daravita License Agreement [Member]	May 31, 2012 Daravita License Agreement [Member]	Aug. 30, 2011 Daravita License Agreement [Member]	Sep. 30, 2014 Mallinckrodt LLC Co-Promotion Agreement [Member]	Sep. 30, 2013 Mallinckrodt LLC Co-Promotion Agreement [Member]	Sep. 30, 2014 Mallinckrodt LLC Co-Promotion Agreement [Member]	Sep. 30, 2013 Mallinckrodt LLC Co-Promotion Agreement [Member]	Mar. 31, 2014 Mallinckrodt LLC Co-Promotion Agreement [Member]	Jun. 27, 2013 Valeant Pharmaceuticals North America LLC Co-Promotion Agreement [Member]	Sep. 30, 2014 Valeant Pharmaceuticals North America LLC Co-Promotion Agreement [Member]	Sep. 30, 2013 Valeant Pharmaceuticals North America LLC Co-Promotion Agreement [Member]	Sep. 30, 2014 Valeant Pharmaceuticals North America LLC Co-Promotion Agreement [Member]	Sep. 30, 2013 Valeant Pharmaceuticals North America LLC Co-Promotion Agreement [Member]	Sep. 30, 2014 Astellas Pharma Us Inc Co Promotion Agreement [Member]	Sep. 30, 2013 Astellas Pharma Us Inc Co Promotion Agreement [Member]	Sep. 30, 2014 Astellas Pharma Us Inc Co Promotion Agreement [Member]	Sep. 30, 2013 Astellas Pharma Us Inc Co Promotion Agreement [Member]	Jul. 31, 2014 Astellas Pharma Us Inc Co Promotion Agreement [Member]	Jul. 31, 2013 Astellas Pharma Us Inc Co Promotion Agreement [Member]	Nov. 30, 2007 Research and development Daravita License Agreement [Member]
Debt Instrument [Line Items]
Non Refundable Up Front Payment																																																				$ 500,000
Additional Payments On Achievement Of Series Of Milestones, Paid																																	2,750,000	1,000,000	750,000
Royalty Agreement Term																																15 years
Research and Development Arrangement, Automatic Term Extension																																3 years
Co-promotion agreement termination notice period																																									6 months
Agreement Termination Notice Period Net Sales Contingent																																									30 days
Agreement Termination Notice Period Change of Control Contingent																																									90 days
Sales Revenue, Services, Net																																										446,000	232,000	2,427,000	232,000
Incurred Service Fee Expenses																																				0	249,000	100,000	618,000
Tail payment liability related interest expense																																														0	40,000	87,000	327,000
Tail payment liability																																								491,000										1,218,000	2,032,000
Change in tail payment liability																																						321,000
CoPromotion Agreement Additional Term Increments																																									12 months
Debt instrument, outstanding									30,000,000
Common stock issued and sold to Healthcare Royalty, amount			141,000		141,000		139,000		1,500,000
Common stock issued and sold to Healthcare Royalty, shares			141,045,000		141,045,000		138,927,000		388,601
Common stock issued and sold to Healthcare Royalty, price per share									$ 3.86
Warrant exercisable to Healthcare Royalty, shares	225,000	225,000
Warrant exercisable to Healthcare Royalty, price per share (usd per share)	$ 9.00										$ 9.00
Term of warrant exercisable											10 years
Revenue Interest Rate																								5.00%		2.50%		0.50%		5.00%	5.75%
Net product sales amount received											10,000,000														75,000,000		75,000,000		150,000,000
Fixed Debt Repayment Dates											January 31, 2015, January 31, 2016 and January 31, 2017
Fixed Payments for Jan 31,2015										10,000,000	10,000,000
Fixed Payments for Jan 31,2016										10,000,000	10,000,000
Fixed Payments for Jan 31,2017										10,000,000	10,000,000
Agreement termination date										Mar. 31, 2018
Terminate payment base amount																									52,500,000
Borrowed internal rate of return																									19.00%		17.00%
Repayment of debt					40,041,000	0
Fair value of embedded derivatives																247,000	233,000
Aggregate net proceed from financing agreement									29,485,000
Financing discounts									476,000									605,000					790,000
Change in fair value								14,000				0	1,474,000	14,000	912,000				125,000	(8,000)	397,000	(43,000)
Loss on early extinguishment of debt			$ 0	$ 0	$ 1,254,000	$ 0

XML

Sale of Sumavel DosePro Business Net Assets and Calculation of Gain on Sale (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended			0 Months Ended	9 Months Ended
	Sep. 30, 2014	Sep. 30, 2013	Sep. 30, 2014	Sep. 30, 2013	Dec. 31, 2013	May 16, 2014 Sumavel DosePro	Sep. 30, 2014 Sumavel DosePro	May 16, 2014 Sumavel DosePro
Income Statement, Balance Sheet and Additional Disclosures by Disposal Groups, Including Discontinued Operations [Line Items]
Non-contingent consideration received								$ 89,624
Imputed interest on working capital advance								4,748
Carrying value of Sumavel DosePro inventory on hand at Closing	5,901		5,901		1,112			(4,624)
Transaction costs								(660)
Deferred revenue associated with undelivered elements							(8,863)	(9,108)
Net gain on sale of business	$ 0	$ 0	$ 79,980	$ 0		$ 79,980	$ 79,980

XML

Common Stock Warrants - Additional Informational (Detail) (USD $)	0 Months Ended		1 Months Ended	9 Months Ended	12 Months Ended
	Jul. 27, 2012	Jul. 18, 2011	Jul. 18, 2011	Sep. 30, 2014	Dec. 31, 2013
Schedule Of Common Stock [Line Items]
Shares of common stock exercisable through warrants	15,784,200
Warrants exercise price per share	$ 2.50
Warrants expiry date	July 27, 2017
Term of common stock warrant exercisable (years)	5 years	10 years
Proceeds from warrant exercises				$ 1,163,000	$ 259,000
Fair value of warrant liabilities				3,912,000	30,849,000
Warrant exercisable to Healthcare Royalty, shares		225,000	225,000
Warrant exercisable to Healthcare Royalty, price per share (usd per share)		$ 9.00
Healthcare Royalty
Schedule Of Common Stock [Line Items]
Fair value of warrant liabilities				$ 95,000	$ 492,000
Common stock warrants
Schedule Of Common Stock [Line Items]
Warrants exercised				465,250	103,500

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Operating Lease Narrative (Details) (USD $)	0 Months Ended	9 Months Ended
	Aug. 05, 2014 sqft	Sep. 30, 2014 sqft	Aug. 05, 2014
Leases [Abstract]
Office space rented (in square feet)	17,361	13,124
Lease term	64 months
Leases renewal term	5 years
Monthly base rent			$ 73,784
Yearly base rent rate increase (in percent)	3.25%
Rent abatement in month three (in percent)	100.00%
Rent abatement in month two (in percent)	100.00%
Rent abatement in month four (in percent)	100.00%
Rent abatement in month five (in percent)	100.00%
Rent abatement in month six (in percent)	50.00%
Tenant improvement allowance	$ 382,000

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Inventory, net

9 Months Ended

Sep. 30, 2014

Disclosure Inventory Net [Abstract]

Inventory, net

Inventory (in thousands)

	September 30, 2014		December 31, 2013
Raw materials	$	2,183	$	2,770
Work in process	10,154		6,054
Finished goods	5,901		1,112
Deferred cost of goods sold	1,033		—
	$	19,271	$	9,936

Deferred cost of goods sold consists of the costs of Zohydro ER associated with the deferred revenue, which are included in inventory, until such time the related deferred revenue is recognized.

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Stock-Based Compensation - Assumptions used in Black-Scholes Option-Pricing Model (Detail)	3 Months Ended		9 Months Ended
	Sep. 30, 2014	Sep. 30, 2013	Sep. 30, 2014	Sep. 30, 2013
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Risk free interest rate , minimum			1.60%	0.80%
Risk free interest rate, maximum			2.00%	1.70%
Expected volatility, minimum			83.80%	82.80%
Expected volatility, maximum			84.90%	87.90%
Minimum [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Expected term			5 years 1 month	5 years
Maximum [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Expected term			6 years 1 month	6 years 1 month
Stock Options [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Risk free interest rate , minimum	2.00%	1.50%
Risk free interest rate, maximum	2.00%	1.70%
Expected volatility, minimum	83.80%	82.80%
Expected volatility, maximum	83.80%	83.90%
Expected dividend yield	0.00%	0.00%	0.00%	0.00%
Stock Options [Member] | Minimum [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Expected term	6 years 1 month	5 years 1 month
Stock Options [Member] | Maximum [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Expected term	6 years 1 month	6 years

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Consolidated Balance Sheets (USD $) In Thousands, unless otherwise specified	Sep. 30, 2014	Dec. 31, 2013
Current assets:
Cash and cash equivalents	$ 50,527	$ 72,021
Restricted cash	8,500	0
Trade accounts receivable, net	5,886	6,665
Inventory	19,271	9,936
Prepaid expenses and other current assets	6,406	4,257
Total current assets	90,590	92,879
Property and equipment, net	10,615	13,011
Other assets	5,821	6,614
Total assets	107,026	112,504
Current liabilities:
Accounts payable	8,177	4,622
Accrued expenses	12,650	18,865
Accrued compensation	5,206	3,952
Common stock warrant liabilities	4,007	31,341
Deferred revenue	9,303	0
Total current liabilities	39,343	58,780
Notes Payable, Noncurrent	2,375	0
Long-term debt, less current portion	0	28,802
Deferred revenue, less current portion	7,458	0
Other long-term liabilities	315	6,496
Commitments and contingencies
Stockholders' equity:
Common stock	141	139
Additional paid-in capital	438,533	428,534
Accumulated deficit	(381,139)	(410,247)
Total stockholders’ equity	57,535	18,426
Total liabilities and stockholders’ equity	$ 107,026	$ 112,504

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Organization and Basis of Presentation

9 Months Ended

Sep. 30, 2014

Organization, Consolidation and Presentation of Financial Statements [Abstract]

Organization and Basis of Presentation

Organization and Basis of Presentation

Zogenix, Inc. (the Company) is a pharmaceutical company committed to developing and commercializing therapies that address specific clinical needs for people living with pain-related conditions and central nervous system disorders who need innovative treatment alternatives to help them return to normal daily functioning. On October 25, 2013, the Company received marketing approval from the U.S. Food and Drug Administration (FDA) for Zohydro® ER (hydrocodone bitartrate) extended-release capsules, CII, an opioid agonist, extended-release oral formulation of hydrocodone without acetaminophen, for the management of pain severe enough to require daily, around-the-clock, long-term opioid treatment and for which alternative treatment options are inadequate. Zohydro ER is the first extended-release oral formulation of hydrocodone without acetaminophen. The Company launched Zohydro ER in March 2014. On September 30, 2014, the Company submitted a supplemental New Drug Application (sNDA) for a modified formulation of Zohydro ER which was has been designed to have abuse deterrent properties. The new capsule formulation contains additional inactive ingredients that are intended to make the product more difficult to abuse by injection and nasal insufflation. The The FDA assigned a Prescription Drug User Free Act, or PDUFA, target action date on the sNDA of January 30, 2015, and, if approved, we anticipate a transition from the currently marketed product to this new capsule formulation of Zohydro ER in the second quarter of 2015.

The Company’s first commercial product, Sumavel® DosePro® (sumatriptan injection) Needle-free Delivery System, was launched in January 2010. Sumavel DosePro offers fast-acting, easy-to-use, needle-free subcutaneous administration of sumatriptan for the acute treatment of migraine and cluster headache in a pre-filled, single-use delivery system. Sumavel DosePro is the first drug product approved by the FDA that allows for the needle-free, subcutaneous delivery of medication. On April 23, 2014, the Company entered into an asset purchase agreement (Asset Purchase Agreement) with Endo Ventures Bermuda Limited (Endo Ventures Bermuda) and Endo Ventures Limited (Endo Ventures and, together with Endo Ventures Bermuda, Endo), pursuant to which, and on the terms and subject to the conditions thereof, among other things, the Company agreed to sell its Sumavel DosePro business to Endo, including the registered trademarks, certain contracts, the New Drug Application (NDA) and other regulatory approvals, the books and records, marketing materials and product data relating to Sumavel DosePro. The Asset Purchase Agreement closed on May 16, 2014 (the Closing) and in connection with the Closing, the Company and Endo Ventures also entered into a supply agreement (the Supply Agreement), pursuant to which the Company will retain the sole and exclusive right and the obligation to manufacture, have manufactured, supply or have supplied Sumavel DosePro to Endo Ventures, subject to Endo Venture’s right to qualify and maintain a back-up manufacturer. Further, under the Supply Agreement, Endo will support the Company’s Sumavel DosePro manufacturing operations with a working capital advance equivalent to the book value of the inventory of materials and unreleased finished goods held by the Company in connection with the manufacture of Sumavel DosePro minus the accounts payable associated with such materials and unreleased finished goods, capped initially at $7,000,000 and subject to annual adjustment. Upon the Closing, and in addition to the working capital advance, Endo paid the Company $85,000,000, $8,500,000 of which was deposited into escrow to fund potential indemnification claims for a period of 12 months, and $4,624,000 for finished goods inventory on hand at Closing. In addition to the upfront cash payment, the Company is eligible to receive additional cash payments of up to $20,000,000 based on the achievement of pre-determined sales and gross margin milestones (see Note 4).

On October 24, 2014, Zogenix Europe Limited (Zogenix Europe), a wholly-owned subsidiary of the Company, acquired Brabant Pharma Limited, a privately-held company organized under the laws of England and Wales (Brabant), pursuant to the terms of a Sale and Purchase Agreement (the Sale and Purchase Agreement), dated October 24, 2014. Brabant owns worldwide development and commercialization rights to Brabafen, low-dose fenfluramine, for the treatment of Dravet syndrome (also known as Severe Myoclonic Epilepsy of Infancy). Dravet syndrome is a rare and catastrophic form of pediatric epilepsy with life threatening consequences for patients and current treatment options are very limited. Brabafen has recently received orphan drug designation in Europe and the United States for the treatment of Dravet syndrome. Under the terms of the Sale and Purchase Agreement, Zogenix Europe paid consideration of (i) $20,000,000 in cash (plus $8,432,000 which represents the net cash position of Brabant at the closing), of which $2,000,000 was deposited into escrow to fund potential indemnification claims for a period of 6 months, and (ii) 11,995,202 shares of the Company’s common stock. Zogenix Europe also committed to paying up to an aggregate amount of $95,000,000 in connection with the achievement of certain milestones for Brabafen, including $50,000,000 in regulatory milestones and $45,000,000 in sales milestones. The Company has agreed to use commercially reasonable efforts (as defined in the Sale and Purchase Agreement) to develop and commercialize Brabafen and to achieve the milestones (see Note 9).

The Company was incorporated in the state of Delaware on May 11, 2006 as SJ2 Therapeutics, Inc. and commenced operations on August 25, 2006. On August 28, 2006, the Company changed its name to Zogenix, Inc.

The Company has incurred significant net losses since inception and has relied on its ability to fund its operations through equity financings, debt financings, revenues from the sale of product and proceeds from business collaborations. As the Company continues to incur losses, successful transition to profitability is dependent upon achieving a level of revenues adequate to support the Company’s cost structure. This may not occur and, unless and until it does, the Company will continue to need to raise additional cash. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern and do not include any adjustments that might result from the outcome of this uncertainty. This basis of accounting contemplates the recovery of the Company’s assets and the satisfaction of liabilities in the normal course of business.

Management expects operating losses and negative cash flows to continue for at least the next year as the Company continues to incur costs related to the commercialization of Zohydro ER, the introduction of Zohydro ER with abuse deterrent properties to the market, if approved, the clinical development of Relday and Brabafen, required post-market testing for Zohydro ER, safe use initiatives for Zohydro ER and additional development activities with respect to Zohydro ER, including the development of multiple formulations of extended-release hydrocodone with abuse deterrent properties. Management may pursue additional opportunities to raise further capital, if required, through public or private equity offerings, including through a controlled equity offering program, debt financings, receivables financings or through collaborations or partnerships with other companies to further support its planned operations. There can be no assurance that the Company will be able to obtain any source of financing on acceptable terms, or at all. If the Company is unsuccessful in raising additional required funds, it may be required to significantly delay, reduce the scope of or eliminate one or more of its development programs or its commercialization efforts, or cease operating as a going concern. The Company also may be required to relinquish, license or otherwise dispose of rights to product candidates or products that it would otherwise seek to develop or commercialize itself on terms that are less favorable than might otherwise be available.

On November 6, 2014, the Company entered into a controlled equity offering sales agreement with Cantor Fitzgerald & Co., or Cantor, as sales agent, under which the Company can issue and sell shares of its common stock having an aggregate offering price of up to $25,000,000 from time to time through Cantor. Sales of the Company's common stock made pursuant to the controlled equity offering program, if any, will be made on the Nasdaq Global Market under the Company's shelf registration statement on Form S-3 filed on November 6, 2014, following such time as the registration statement is declared effective by the SEC. However, such registration statement cannot be declared effective until such time as the Company has filed certain financial statements from its recent acquisition of Brabant as required by SEC rules, which must be filed within 71 days of the date of the Company's Current Report on Form 8-K filed with the SEC on October 27, 2014. There can be no assurance that Cantor will be successful in consummating sales under the program based on prevailing market conditions or in the quantities or at the prices that the Company deems appropriate.

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Subsequent Event Narrative (Details) (Subsequent event, USD $)	0 Months Ended				0 Months Ended
	Nov. 05, 2014 payment	Oct. 29, 2014	Oct. 24, 2014 Brabant	Oct. 24, 2014 Brabant	Oct. 24, 2014 Brabant Regulatory milestone	Oct. 24, 2014 Brabant Sales milestone	Oct. 29, 2014 Zohydro ER	Nov. 05, 2014 Carncinogenicity Data
Subsequent Event [Line Items]
Cash paid to acquire business			$ 20,000,000
Escrow Deposit				2,000,000
Shares issued in acquisition			11,995,202
Contingent consideration			95,000,000		50,000,000	45,000,000
Product, Exclusivity Period							3 years
Royalty payment							5,000,000	3,500,000
Payment period		15 days						30 days
Royalty payment on July 1, 2015							5,000,000
Minimum sales threshold to receive royalty payments							$ 5,000,000
Royalty Agreement, Number of Payments	1

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Summary of Significant Accounting Policies - Assets and Liabilities Measured at Fair Value on a Recurring Basis (Detail) (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Sep. 30, 2014 Minimum [Member]	Sep. 30, 2014 Quoted Prices in Active Markets for Identical Assets (Level 1) [Member] Common Stock Warrant Liabilities [Member]		Dec. 31, 2013 Quoted Prices in Active Markets for Identical Assets (Level 1) [Member] Common Stock Warrant Liabilities [Member]		Dec. 31, 2013 Quoted Prices in Active Markets for Identical Assets (Level 1) [Member] Embedded Derivative Liabilities [Member]		Sep. 30, 2014 Quoted Prices in Active Markets for Identical Assets (Level 1) [Member] Money market fund shares [Member]		Dec. 31, 2013 Quoted Prices in Active Markets for Identical Assets (Level 1) [Member] Money market fund shares [Member]		Sep. 30, 2014 Significant Other Observable Inputs (Level 2) [Member] Common Stock Warrant Liabilities [Member]		Dec. 31, 2013 Significant Other Observable Inputs (Level 2) [Member] Common Stock Warrant Liabilities [Member]		Dec. 31, 2013 Significant Other Observable Inputs (Level 2) [Member] Embedded Derivative Liabilities [Member]		Sep. 30, 2014 Significant Other Observable Inputs (Level 2) [Member] Money market fund shares [Member]		Dec. 31, 2013 Significant Other Observable Inputs (Level 2) [Member] Money market fund shares [Member]		Sep. 30, 2014 Significant Unobservable Inputs (Level 3) [Member] Common Stock Warrant Liabilities [Member]		Dec. 31, 2013 Significant Unobservable Inputs (Level 3) [Member] Common Stock Warrant Liabilities [Member]		Dec. 31, 2013 Significant Unobservable Inputs (Level 3) [Member] Embedded Derivative Liabilities [Member]		Sep. 30, 2014 Significant Unobservable Inputs (Level 3) [Member] Money market fund shares [Member]		Dec. 31, 2013 Significant Unobservable Inputs (Level 3) [Member] Money market fund shares [Member]		Sep. 30, 2014 Estimate of Fair Value, Fair Value Disclosure [Member] Common Stock Warrant Liabilities [Member]		Dec. 31, 2013 Estimate of Fair Value, Fair Value Disclosure [Member] Common Stock Warrant Liabilities [Member]		Dec. 31, 2013 Estimate of Fair Value, Fair Value Disclosure [Member] Embedded Derivative Liabilities [Member]		Sep. 30, 2014 Estimate of Fair Value, Fair Value Disclosure [Member] Money market fund shares [Member]		Dec. 31, 2013 Estimate of Fair Value, Fair Value Disclosure [Member] Money market fund shares [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Maximum volatility rate	40.00%
Assets
Assets measured at fair value on a recurring basis								$ 46,919	[1]	$ 69,120	[1]							$ 0	[1]	$ 0	[1]							$ 0	[1]	$ 0	[1]							$ 46,919	[1]	$ 69,120	[1]
Liabilities
Liabilities measured at fair value on a recurring basis		$ 0	[2]	$ 0	[2]	$ 0	[3]					$ 0	[2]	$ 0	[2]	$ 0	[3]					$ 4,007	[2]	$ 31,341	[2]	$ 233	[3]					$ 4,007	[2]	$ 31,341	[2]	$ 233	[3]

[1] Cash equivalents are comprised of money market fund shares and are included as a component of cash and cash equivalents on the consolidated balance sheets.

[2] Common stock warrant liabilities include liabilities associated with warrants issued in connection with the Company's July 2012 public offering of common stock and warrants (see Note 6) and warrants issued in connection with the Healthcare Royalty financing agreement (see Note 6), which are measured at fair value using the Black-Scholes option pricing valuation model. The assumptions used in the Black-Scholes option pricing valuation model for both common stock warrant liabilities were: (a) a risk-free interest rate based on the rates for U.S. Treasury zero-coupon bonds with maturities similar to those of the remaining contractual term of the warrants; (b) an assumed dividend yield of zero based on the Company’s expectation that it will not pay dividends in the foreseeable future; (c) an expected term based on the remaining contractual term of the warrants; and (d) given the Company’s lack of relevant historical data due to the Company’s limited historical experience, an expected volatility based upon the Company's historical volatility, supplemented with historical volatility of comparable companies whose share prices have been publicly available for a sufficient period of time. The significant unobservable input used in measuring the fair value of the common stock warrant liabilities associated with the Healthcare Royalty financing agreement is the expected volatility. Significant increases in volatility would result in a higher fair value measurement. The following additional assumptions were used in the Black-Scholes option pricing valuation model to measure the fair value of the warrants sold in the July 2012 public offering: (a) management's projections regarding the probability of the occurrence of an extraordinary event and the timing of such event; and for the valuation scenario in which an extraordinary event occurs that is not an all cash transaction or an event whereby a public acquirer would assume the warrants, and (b) an expected volatility rate using the Company's historical volatility, supplemented with historical volatility of comparable companies, through the projected date of public announcement of an extraordinary transaction, blended with a rate equal to the lesser of 40% and the 180-day volatility rate obtained from the HVT function on Bloomberg as of the trading day immediately following the public announcement of an extraordinary transaction. The significant unobservable inputs used in measuring the fair value of the common stock warrant liabilities associated with the July 2012 public offering are the expected volatility and the probability of the occurrence of an extraordinary event. Significant increases in volatility would result in a higher fair value measurement and significant increases in the probability of an extraordinary event occurring would result in a significantly lower fair value measurement. The decrease in the fair value of the common stock warrant liabilities as of September 30, 2014 was primarily driven by the decrease in the Company's stock price at September 30, 2014 as compared against December 31, 2013 measurement dates.

[3] Embedded derivatives were measured at fair value using various discounted cash flow valuation models and were included as a component of other long-term liabilities on the consolidated balance sheet at December 31, 2013. The assumptions used in the discounted cash flow valuation models included: (a) management's revenue projections and a revenue sensitivity analysis based on possible future outcomes; (b) probability weighted net cash flows based on the likelihood of Healthcare Royalty receiving interest payments over the term of the Healthcare Royalty financing agreement; (c) probability of bankruptcy; (d) weighted average cost of capital that included the addition of a company specific risk premium to account for uncertainty associated with the Company achieving future cash flows; (e) the probability of a change in control occurring during the term of the Healthcare Royalty financing agreement; and (f) the probability of an exercise of the embedded derivative instruments. The significant unobservable inputs used in measuring the fair value of the embedded derivatives were management’s revenue projections. Significant decreases in these significant inputs would result in a higher fair value measurement of the liability. The embedded derivatives were derecognized in May 2014 as a result of the early extinguishment of the Healthcare Royalty Financing Agreement (see Note 5).

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Summary of Significant Accounting Policies - Basic and Diluted Net Loss Per Share (Detail) (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2014	Sep. 30, 2013	Sep. 30, 2014	Sep. 30, 2013
Numerator
Net loss for basic EPS	$ (12,825)	$ (10,852)	$ 29,108	$ (45,240)
Common stock warrants	0	0	26,418	0
Net loss for diluted EPS	$ (12,825)	$ (10,852)	$ 2,690	$ (45,240)
Denominator
Weighted average common shares outstanding, basic	141,045	104,682	140,110	102,136
Common stock warrants, shares	0	0	364	0
Weighted average common shares outstanding, diluted	141,045	104,682	140,474	102,136
Basic net loss per share, usd per share	$ (0.09)	$ (0.10)	$ 0.21	$ (0.44)
Diluted net loss per share, usd per share	$ (0.09)	$ (0.10)	$ 0.02	$ (0.44)

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Summary of Significant Accounting Policies

9 Months Ended

Sep. 30, 2014

Accounting Policies [Abstract]

Summary of Significant Accounting Policies

Summary of Significant Accounting Policies

Financial Statement Preparation and Use of Estimates

The unaudited consolidated financial statements contained in this Quarterly Report on Form 10-Q have been prepared by Zogenix, Inc. according to the rules and regulations of the Securities and Exchange Commission (SEC) and, therefore, certain information and disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (GAAP) have been omitted.

In the opinion of management, the accompanying unaudited consolidated financial statements for the periods presented reflect all adjustments, which are normal and recurring, necessary to fairly state the financial position, results of operations and cash flows. These unaudited consolidated financial statements should be read in conjunction with the audited financial statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013 filed with the SEC on March 7, 2014.

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results may differ from those estimates.

Principles of Consolidation

The unaudited interim consolidated financial statements include the accounts of Zogenix, Inc. and its wholly owned subsidiary Zogenix Europe Limited, which was incorporated under the laws of England and Wales in June 2010. All intercompany transactions and investments have been eliminated in consolidation. Zogenix Europe Limited’s functional currency is the U.S. dollar, the reporting currency of its parent.

Restricted Cash

In connection with its sale of the Sumavel DosePro business in May 2014, the Company has $8,500,000 of cash in escrow as of September 30, 2014 to fund potential indemnification claims for a period of 12 months (see Note 4). The Company classifies the cash flow from this restricted cash as an investing activity in the consolidated statement of cash flows as the source of the restricted cash is related to the sale of the Sumavel DosePro business.

Further, in December 2009, the Company issued a line of credit for $200,000 in connection with an operating lease which was collateralized by a certificate of deposit in the same amount and recorded as restricted cash within other assets on the consolidated balance sheet as of December 31, 2013. This line of credit and certificate of deposit were terminated in February 2014 in connection with a renegotiation of the operating lease.

Fair Value Measurements

The carrying amount of financial instruments consisting of cash, restricted cash, trade accounts receivable, prepaid expenses and other current assets, accounts payable, accrued expenses and accrued compensation included in the Company’s consolidated financial statements are reasonable estimates of fair value due to their short maturities. Based on the borrowing rates currently available to the Company for loans with similar terms, management believes the fair value of long-term debt approximates its carrying value. The accrued liability for the annual tail payment due to Astellas Pharma US, Inc. (Astellas) (see Note 5) for the termination of the Company’s co-promotion agreement was measured at fair value in December 2011 using a present value technique, which incorporated the Company’s own credit risk as measured by the most recent round of debt financing with Healthcare Royalty Partners (Healthcare Royalty) (formerly Cowen Healthcare Royalty Partners II, L.P.).

Authoritative guidance establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

Level 1: Observable inputs such as quoted prices in active markets;

Level 2: Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and

Level 3: Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

The Company classifies its cash equivalents within Level 1 of the fair value hierarchy because it values its cash equivalents using quoted market prices. The Company classifies its common stock warrant liabilities and embedded derivative liabilities within Level 3 of the fair value hierarchy because they are valued using valuation models with significant unobservable inputs. Assets and liabilities measured at fair value on a recurring basis at September 30, 2014 and December 31, 2013 are as follows (in thousands):

	Fair Value Measurements at Reporting Date Using
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)	Significant Unobservable Inputs (Level 3)	Total
At September 30, 2014
Assets
Cash equivalents(1)	$	46,919	—	—	$	46,919
Liabilities
Common stock warrant liabilities(2)	$	—	—	4,007	$	4,007
At December 31, 2013
Assets
Cash equivalents(1)	$	69,120	—	—	$	69,120
Liabilities
Common stock warrant liabilities(2)	$	—	—	31,341	$	31,341
Embedded derivative liabilities(3)	$	—	—	233	$	233

(1) Cash equivalents are comprised of money market fund shares and are included as a component of cash and cash equivalents on the consolidated balance sheets.

(2) Common stock warrant liabilities include liabilities associated with warrants issued in connection with the Company's July 2012 public offering of common stock and warrants (see Note 6) and warrants issued in connection with the Healthcare Royalty financing agreement (see Note 6), which are measured at fair value using the Black-Scholes option pricing valuation model. The assumptions used in the Black-Scholes option pricing valuation model for both common stock warrant liabilities were: (a) a risk-free interest rate based on the rates for U.S. Treasury zero-coupon bonds with maturities similar to those of the remaining contractual term of the warrants; (b) an assumed dividend yield of zero based on the Company’s expectation that it will not pay dividends in the foreseeable future; (c) an expected term based on the remaining contractual term of the warrants; and (d) given the Company’s lack of relevant historical data due to the Company’s limited historical experience, an expected volatility based upon the Company's historical volatility, supplemented with historical volatility of comparable companies whose share prices have been publicly available for a sufficient period of time. The significant unobservable input used in measuring the fair value of the common stock warrant liabilities associated with the Healthcare Royalty financing agreement is the expected volatility. Significant increases in volatility would result in a higher fair value measurement. The following additional assumptions were used in the Black-Scholes option pricing valuation model to measure the fair value of the warrants sold in the July 2012 public offering: (a) management's projections regarding the probability of the occurrence of an extraordinary event and the timing of such event; and for the valuation scenario in which an extraordinary event occurs that is not an all cash transaction or an event whereby a public acquirer would assume the warrants, and (b) an expected volatility rate using the Company's historical volatility, supplemented with historical volatility of comparable companies, through the projected date of public announcement of an extraordinary transaction, blended with a rate equal to the lesser of 40% and the 180-day volatility rate obtained from the HVT function on Bloomberg as of the trading day immediately following the public announcement of an extraordinary transaction. The significant unobservable inputs used in measuring the fair value of the common stock warrant liabilities associated with the July 2012 public offering are the expected volatility and the probability of the occurrence of an extraordinary event. Significant increases in volatility would result in a higher fair value measurement and significant increases in the probability of an extraordinary event occurring would result in a significantly lower fair value measurement. The decrease in the fair value of the common stock warrant liabilities as of September 30, 2014 was primarily driven by the decrease in the Company's stock price at September 30, 2014 as compared against December 31, 2013 measurement dates.

(3) Embedded derivatives were measured at fair value using various discounted cash flow valuation models and were included as a component of other long-term liabilities on the consolidated balance sheet at December 31, 2013. The assumptions used in the discounted cash flow valuation models included: (a) management's revenue projections and a revenue sensitivity analysis based on possible future outcomes; (b) probability weighted net cash flows based on the likelihood of Healthcare Royalty receiving interest payments over the term of the Healthcare Royalty financing agreement; (c) probability of bankruptcy; (d) weighted average cost of capital that included the addition of a company specific risk premium to account for uncertainty associated with the Company achieving future cash flows; (e) the probability of a change in control occurring during the term of the Healthcare Royalty financing agreement; and (f) the probability of an exercise of the embedded derivative instruments. The significant unobservable inputs used in measuring the fair value of the embedded derivatives were management’s revenue projections. Significant decreases in these significant inputs would result in a higher fair value measurement of the liability. The embedded derivatives were derecognized in May 2014 as a result of the early extinguishment of the Healthcare Royalty Financing Agreement (see Note 5).

The following table provides a reconciliation of liabilities measured at fair value using significant unobservable inputs (Level 3) for the nine months ended September 30, 2014 (in thousands):

	Common Stock Warrant Liabilities			Embedded Derivative Liabilities
Balance at December 31, 2013	$	31,341		$	233
Changes in fair value	(26,418		)	14
Derecognition of liability	—			(247		)
Exercises	$	(916	)	$	—
Balance at September 30, 2014	$	4,007		$	—

Changes in fair value of the liabilities shown in the table above are recorded through change in fair value of warrant liabilities and change in fair value of embedded derivatives in other income (expense) in the consolidated statements of operations and comprehensive income (loss). The derecognition of the embedded derivative liabilities was included in the loss on early extinguishment of debt in non-operating expenses in the consolidated statements of operations and comprehensive income (loss).

Net Income (Loss) per Share

Basic net income (loss) per share is calculated by dividing the net income (loss) by the weighted average number of common shares outstanding for the period, reduced by weighted average shares subject to repurchase, without consideration for common stock equivalents. Diluted net loss per share is computed by dividing the net income (loss) by the weighted average number of common share equivalents outstanding for the period determined using the treasury-stock method and as-if converted method, as applicable. For purposes of this calculation, stock options, restricted stock units and warrants are considered to be common stock equivalents and are only included in the calculation of diluted net loss per share when their effect is dilutive.

The following table presents the computation of basic and diluted net income (loss) per share (in thousands, except per share amounts):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2013			2014			2013
Numerator
Net income (loss), basic	(12,825		)	(10,852		)	29,108			(45,240		)
Effect of dilutive securities:
Common stock warrants	$	—		$	—		$	(26,418	)	$	—
Net income (loss), diluted	$	(12,825	)	$	(10,852	)	$	2,690		$	(45,240	)
Denominator
Weighted average common shares outstanding, basic	141,045			104,682			140,110			102,136
Effect of dilutive securities:
Common stock warrants	—			—			364			—
Weighted average common shares outstanding, diluted	141,045			104,682			140,474			102,136
Basic net income (loss) per share	$	(0.09	)	$	(0.10	)	$	0.21		$	(0.44	)
Diluted net income (loss) per share	$	(0.09	)	$	(0.10	)	$	0.02		$	(0.44	)

There were 58,000 and 9,909,000 dilutive securities (in common stock equivalent shares), from common stock options, excluded from the calculation of diluted net loss during the three and nine months ended September 30, 2014, respectively, because to include them would be anti-dilutive. There were 1,776,000 dilutive securities (in common stock equivalent shares), from common stock options and restricted stock units, excluded from the calculation of diluted net loss during the three and nine months ended September 30, 2013 because to include them would be anti-dilutive. All common stock warrants disclosed in Note 6 were excluded from the calculation of diluted net loss during the three months ended September 30, 2014 and 2013, and during the nine months ended September 30, 2013, as the exercise price of the warrants was greater than the Company's average stock price during these periods.

Impairment of Long-Lived Assets

The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. As a result of the sale of its Sumavel DosePro business in May 2014, the Company recorded an impairment charge of $838,000 in the consolidated statement of operations and comprehensive income (loss) during the nine months ended September 30, 2014 related to the disposal of construction in progress that will no longer be placed into service.

Revenue Recognition

The Company recognizes revenue from the sale of Sumavel DosePro and Zohydro ER, and from contract manufacturing, license fees, milestones and service fees earned on collaborative arrangements. Revenue is recognized when (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred and title has passed, (iii) the price is fixed or determinable and (iv) collectability is reasonably assured. Revenue from sales transactions where the buyer has the right to return the product is recognized at the time of sale only if (a) the Company’s price to the buyer is substantially fixed or determinable at the date of sale, (b) the buyer has paid the Company, or the buyer is obligated to pay the Company and the obligation is not contingent on resale of the product, (c) the buyer’s obligation to the Company would not be changed in the event of theft or physical destruction or damage of the product, (d) the buyer acquiring the product for resale has economic substance apart from that provided by the Company, (e) the Company does not have significant obligations for future performance to directly bring about resale of the product by the buyer, and (f) the amount of future returns can be reasonably estimated. The Company currently defers recognition of revenue on product shipments of Zohydro ER until the right of return no longer exists, as the Company currently cannot reliably estimate expected returns of the product at the time of shipment given the limited sales history of Zohydro ER.

Revenue arrangements with multiple elements are divided into separate units of accounting if certain criteria are met, including whether the delivered element has stand-alone value to the customer. The consideration received is allocated among the separate units based on their respective fair values, and the applicable revenue recognition criteria are applied to each of the separate units. The application of the multiple element guidance requires subjective determinations, and requires the Company to make judgments about the individual deliverables and whether such deliverables are separable from the other aspects of the contractual relationship. Deliverables are considered separate units of accounting provided that: (1) the delivered item(s) has value to the customer on a stand-alone basis and (2) if the arrangement includes a general right of return relative to the delivered item(s), delivery or performance of the undelivered item(s) is considered probable and substantially in the Company's control. In determining the units of accounting, the Company evaluates certain criteria, including whether the deliverables have stand-alone value, based on the consideration of the relevant facts and circumstances for each arrangement. In addition, the Company considers whether the buyer can use the other deliverable(s) for their intended purpose without the receipt of the remaining element(s), whether the value of the deliverable is dependent on the undelivered item(s), and whether there are other vendors that can provide the undelivered element(s).

Arrangement consideration that is fixed or determinable is allocated among the separate units of accounting using the relative selling price method, and the applicable revenue recognition criteria, as described above, are applied to each of the separate units of accounting in determining the appropriate period or pattern of recognition. The Company determines the estimated selling price for deliverables within each agreement using vendor-specific objective evidence (VSOE) of selling price, if available, third-party evidence (TPE) of selling price if VSOE is not available, or management's best estimate of selling price (BESP) if neither VSOE nor TPE is available. Determining the BESP for a unit of accounting requires significant judgment. In developing the BESP for a unit of accounting, the Company considers applicable market conditions and relevant entity-specific factors, including factors that were contemplated in negotiating the agreement with the customer and estimated costs.

Product Revenue, Net

The Company sells Zohydro ER, and sold Sumavel DosePro through May 2014, in the United States to wholesale pharmaceutical distributors and retail pharmacies, or collectively the Company's customers, subject to rights of return within a period beginning six months prior to, and ending 12 months following, product expiration. The Company recognized Sumavel DosePro product sales at the time title transferred to its customer, and reduced product sales for estimated future product returns and sales allowances in the same period the related revenue was recognized.

Given the limited sales history of Zohydro ER, the Company cannot reliably estimate expected returns of the product at the time of shipment. Accordingly, the Company defers recognition of revenue on Zohydro ER product shipments until the right of return no longer exists, which occurs at the earlier of the time Zohydro ER is dispensed through patient prescriptions or expiration of the right of return. The Company estimates Zohydro ER patient prescriptions dispensed using an analysis of third-party syndicated data. Zohydro ER was launched in March 2014 and, accordingly, the Company does not have a significant history estimating the number of patient prescriptions dispensed. If the Company underestimates or overestimates patient prescriptions dispensed for a given period, adjustments to revenue may be necessary in future periods. The deferred revenue balance does not have a direct correlation with future revenue recognition as the Company will record sales deductions at the time the prescription unit is dispensed.

The Company will continue to recognize Zohydro ER revenue upon the earlier to occur of prescription units dispensed or expiration of the right of return until it can reliably estimate product returns, at which time the Company will record a one-time increase in revenue related to the recognition of revenue previously deferred, net of estimated future product returns and sales allowances. In addition, the costs of Zohydro ER associated with the deferred revenue are recorded as deferred costs, which are included in inventory, until such time the related deferred revenue is recognized.

Product sales allowances for Zohydro ER and Sumavel DosePro include wholesaler and retail pharmacy distribution fees, prompt pay discounts, chargebacks, rebates and patient discount programs, and are based on amounts owed or to be claimed on the related sales. These estimates take into consideration the terms of the Company's agreements with its customers and third-party payors and the levels of inventory within the distribution and retail channels that may result in future rebates or discounts taken. In certain cases, such as patient support programs, the Company recognizes the cost of patient discounts as a reduction of revenue based on estimated utilization. If actual future results vary, the Company may need to adjust these estimates, which could have an effect on product revenue in the period of adjustment. The Company records product sales deductions in the statement of operations at the time product revenue is recognized.

In connection with the Closing of the Asset Purchase Agreement (APA) in May 2014, whereby Endo acquired the Company's Sumavel DosePro business, Endo purchased the Company's existing finished goods inventory of Sumavel DosePro at standard cost. The Company will be financially responsible for all returns of Sumavel DosePro product distributed by the Company prior to Closing of the APA up to a maximum per unit amount as specified in the agreements. The Company will also be financially responsible for payment of Sumavel DosePro product sales allowances on product distributed by the Company prior to Closing of the APA. Endo will be responsible for payment of all other Sumavel DosePro returns and sales allowances.

Contract Manufacturing Revenue

In connection with the Closing of the APA in May 2014, the Company and Endo Ventures entered into the Supply Agreement, pursuant to which the Company retains the sole and exclusive right and the obligation to manufacture, have manufactured, supply or have supplied Sumavel DosePro to Endo Ventures (see Note 4). The Company recognizes deferred revenue related to its supply of Sumavel DosePro as contract manufacturing revenue when earned on a "proportional performance" basis, as product is delivered. The Company recognizes revenue related to its sale of Sumavel DosePro product, equal to the cost of contract manufacturing plus a 2.5% mark-up, upon the transfer of title to Endo. The Company supplies Sumavel DosePro product based on non-cancellable purchase orders. The Company initially defers revenue for any consideration received in advance of services being performed and product being delivered, and recognizes revenue pursuant to the related pattern of performance, based on total product delivered relative to the total estimated product delivery over the minimum eight year term of the Supply Agreement. The Company continually evaluates the performance period and will adjust the period of revenue recognition if circumstances change.

In addition, the Company follows the authoritative accounting guidance when reporting revenue as gross when the Company acts as a principal versus reporting revenue as net when the Company acts as an agent. For transactions in which the Company acts as a principal, has discretion to choose suppliers, bears credit risk and performs a substantive part of the services, revenue is recorded at the gross amount billed to a customer and costs associated with these reimbursements are reflected as a component of cost of sales for contract manufacturing services.

Segment Reporting

Management has determined that the Company operates in one business segment, which is the development and commercialization of pharmaceutical products for people living with pain-related conditions and central nervous system disorders.

Recent Accounting Pronouncements

In April 2014, the Financial Accounting Standards Board (FASB) issued an accounting update that raises the threshold for disposals to qualify as discontinued operations and allows companies to have significant continuing involvement with and continuing cash flows from or to the discontinued operations. This accounting update also requires additional disclosures for discontinued operations and new disclosures for individually material disposal transactions that do not meet the definition of a discontinued operation. This guidance will be effective for fiscal years beginning after December 15, 2014, with early adoption permitted. The Company does not expect that the adoption of the guidance will have a material impact on the Company's financial statements.

In May 2014, the FASB issued new accounting guidance related to revenue recognition. This new standard will replace all current GAAP guidance on this topic and eliminate all industry-specific guidance. The new revenue recognition standard provides a unified model to determine when and how revenue is recognized. The core principle is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration for which the entity expects to be entitled in exchange for those goods or services. This guidance will be effective for fiscal years beginning after December 16, 2016, including interim periods within that reporting period, and can be applied either retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. Early adoption is prohibited. The Company is evaluating the timing and impact of adopting this new accounting standard on its financial statements and related disclosures.

In June 2014, the FASB issued new accounting guidance related to stock compensation. The new standard requires that a performance target that affects vesting, and that could be achieved after the requisite service period, be treated as a performance condition. As such, the performance target should not be reflected in estimating the grant date fair value of the award. This update further clarifies that compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the periods for which the requisite service has already been rendered. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015 and can be applied either prospectively or retrospectively to all awards outstanding as of the beginning of the earliest annual period presented as an adjustment to opening retained earnings. Early adoption is permitted. The Company does not expect that the adoption of the guidance will have a material impact on the Company's financial statements.

In August 2014, the FASB issued new accounting guidance which requires management to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and provide related footnote disclosures. The guidance is effective for annual and interim reporting periods beginning on or after December 15, 2016. Early adoption is permitted. The Company does not expect that the adoption of the guidance will have a material impact on the Company’s financial statements.

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Consolidated Balance Sheets (Parenthetical) (USD $)	Sep. 30, 2014	Dec. 31, 2013
Statement of Financial Position [Abstract]
Common Stock, Par or Stated Value Per Share	$ 0.001	$ 0.001
Common Stock, Shares Authorized	200,000,000	200,000,000
Common Stock, Shares, Issued	141,045,000	138,927,000
Common Stock, Shares, Outstanding	141,045,000	138,927,000

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Inventory, net (Tables)

9 Months Ended

Sep. 30, 2014

Disclosure Inventory Net [Abstract]

Inventory, Net

	September 30, 2014		December 31, 2013
Raw materials	$	2,183	$	2,770
Work in process	10,154		6,054
Finished goods	5,901		1,112
Deferred cost of goods sold	1,033		—
	$	19,271	$	9,936

Deferred cost of goods sold consists of the costs of Zohydro ER associated with the deferred revenue, which are included in inventory, until such time the related deferred revenue is recognized.

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Document and Entity Information	9 Months Ended
	Sep. 30, 2014	Nov. 03, 2014
Document and Entity Information [Abstract]
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Sep. 30, 2014
Document Fiscal Year Focus	2014
Document Fiscal Period Focus	Q3
Trading Symbol	ZGNX
Entity Registrant Name	ZOGENIX, INC.
Entity Central Index Key	0001375151
Current Fiscal Year End Date	--12-31
Entity Filer Category	Accelerated Filer
Entity Common Stock, Shares Outstanding		153,040,066

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Sale of Sumavel DosePro Business (Tables)

9 Months Ended

Sep. 30, 2014

Discontinued Operations and Disposal Groups [Abstract]

Schedule of Net Assets and Calculation of the Gain on Sale

The following sets forth the net assets and calculation of the gain on sale as of Closing (in thousands):

Non-contingent consideration received	$	89,624
Imputed interest on working capital advance	4,748
Carrying value of Sumavel DosePro inventory on hand at Closing	(4,624		)
Transaction costs	(660		)
Deferred revenue associated with undelivered elements	(9,108		)
Net gain on sale of business	$	79,980

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Consolidated Statements of Operations and Comprehensive Loss (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2014	Sep. 30, 2013	Sep. 30, 2014	Sep. 30, 2013
Revenue:
Net product revenue	$ 4,125	$ 6,897	$ 16,675	$ 22,693
Contract revenue	4,225	0	6,463	0
Service and other revenue	447	271	2,494	398
Total revenue	8,797	7,168	25,632	23,091
Operating expenses:
Cost of sales	706	5,354	6,463	14,144
Cost of contract manufacturing	3,986	0	5,921	0
Royalty expense	425	281	1,223	901
Research and development	5,289	2,544	12,947	9,358
Selling, general and administrative	19,056	10,011	71,197	36,491
Restructuring	0	0	0	876
Impairment of long-lived assets	0	0	838	0
Net gain on sale of business	0	0	(79,980)	0
Total operating expenses	29,462	18,190	18,609	61,770
Loss from operations	(20,665)	(11,022)	7,023	(38,679)
Other income (expense):
Interest income	6	1	18	12
Interest expense	(84)	(1,587)	(2,999)	(4,795)
Loss on early extinguishment of debt	0	0	(1,254)	0
Change in fair value of warrant liabilities	7,948	215	26,418	(2,780)
Change in fair value of embedded derivatives	0	1,474	(14)	912
Other income (expense)	15	67	(39)	90
Total other income (expense)	7,885	170	22,130	(6,561)
Net loss before income taxes	(12,780)	(10,852)	29,153	(45,240)
Provision for income taxes	(45)	0	(45)	0
Net loss	(12,825)	(10,852)	29,108	(45,240)
Net income (loss) per share, basic, usd per share	$ (0.09)	$ (0.10)	$ 0.21	$ (0.44)
Net income (loss) per share, diluted, usd per share	$ (0.09)	$ (0.10)	$ 0.02	$ (0.44)
Weighted average common shares outstanding, basic	141,045	104,682	140,110	102,136
Weighted average common shares outstanding, diluted	141,045	104,682	140,474	102,136
Comprehensive loss	$ (12,825)	$ (10,852)	$ 29,108	$ (45,240)

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Operating Lease

9 Months Ended

Sep. 30, 2014

Leases [Abstract]

Operating Lease

Operating Lease

On August 5, 2014, the Company entered into a new operating lease (the Lease) for approximately 17,361 rentable square feet of office space located in San Diego, California. The Company intends to use the leased premises as its corporate headquarters, and the new lease is expected to commence on December 1, 2014 upon expiration of the Company’s current San Diego office sublease of approximately 13,124 rentable square feet in the same location.

The Lease term will expire 64 months after the Lease commencement date with an option to renew the Lease for an additional five years. The initial base rent will be $73,784 per month, with 100% of rent being abated for the second, third, fourth and fifth months of the Lease term and 50% of rent being abated for the sixth month of the Lease term. The base rent will increase approximately 3.25% on a yearly basis throughout the Lease term. The Lease also requires the Company to pay additional rent consisting of a portion of common area and pass-through expenses in excess of base year amounts. The Company will begin to amortize rent expense related to this operating lease using a straight-line method when it gains access to the new leased space, which had not occurred as of September 30, 2014. Further, under the Lease, the landlord will provide up to $382,000 in a tenant improvements allowance to support interior improvements for the rented space. The tenant improvements will be capitalized by the Company as the improvements are made.

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Common Stock Warrants

9 Months Ended

Sep. 30, 2014

Disclosure Common Stock Warrants Additional Informational [Abstract]

Common Stock Warrants

Common Stock Warrants

In July 2012, in connection with a public offering of common stock and warrants, the Company sold warrants to purchase 15,784,200 shares of common stock (including over-allotment purchase). The warrants are exercisable at an exercise price of $2.50 per share and will expire on July 27, 2017, which is five years from the date of issuance. As the warrants contain a cash settlement feature upon the occurrence of certain events that may be outside of the Company’s control, the warrants are recorded as a current liability and are marked to market at each reporting period (see Note 2). During the nine months ended September 30, 2014, warrants to purchase 465,250 shares of common stock were exercised, and during the year ended December 31, 2013, warrants to purchase 103,500 shares of common stock were exercised. The Company recognized $1,163,000 and $259,000 in proceeds from the exercise of warrants during the nine months ended September 30, 2014 and during the year ended December 31, 2013, respectively. There were no warrants exercised during the three months ended September 30, 2014. The fair value of the warrants outstanding was approximately $3,912,000 and $30,849,000 as of September 30, 2014 and December 31, 2013, respectively.

In July 2011, upon the closing of and in connection with the Financing Agreement (see Note 5), the Company issued to Healthcare Royalty a warrant exercisable into 225,000 shares of common stock. The warrant is exercisable at $9.00 per share of common stock and has a term of ten years. As the warrant contains covenants where compliance with such covenants may be outside of the Company’s control, the warrant was recorded as a current liability and is marked to market at each reporting date (see Note 2). The fair value of the warrant was approximately $95,000 and $492,000 as of September 30, 2014 and December 31, 2013, respectively.

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Summary of Significant Accounting Policies - Reconciliation of Liabilities Measured at Fair Value Using Significant Observable Inputs Level 3 (Detail) (USD $) In Thousands, unless otherwise specified	9 Months Ended
	Sep. 30, 2014
Warrants and Rights Outstanding [Member]
Fair Value, Liabilities Measured on Recurring Basis, Unobservable Input Reconciliation, Calculation [Roll Forward]
Beginning Balance	$ 31,341
Changes in fair value	(26,418)
Derecognition of liability	0
Exercises	(916)
Ending Balance	4,007
Embedded Derivative Liabilities [Member]
Fair Value, Liabilities Measured on Recurring Basis, Unobservable Input Reconciliation, Calculation [Roll Forward]
Beginning Balance	233
Changes in fair value	14
Derecognition of liability	(247)
Exercises	0
Ending Balance	$ 0

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Stock-Based Compensation (Tables)

9 Months Ended

Sep. 30, 2014

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

Assumptions used in the Black-Scholes Option-Pricing Model

The assumptions used in the Black-Scholes option-pricing model for the three and nine months ended September 30, 2014 and 2013 are as follows:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2014		2013		2014	2013
Risk free interest rate	2.0%		1.5% to 1.7%		1.6% to 2.0%	0.8% to 1.7%
Expected term	6.1 years		5.1 to 6.0 years		5.1 to 6.1 years	5.0 to 6.1 years
Expected volatility	83.8%		82.8% to 83.9%		83.8% to 84.9%	82.8% to 87.9%
Expected dividend yield	—	%	—	%	—%	—%

Stock-Based Compensation Expense

The Company recognized stock-based compensation expense as follows (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2014		2013		2014		2013
Cost of goods sold	$	101	$	119	$	369	$	227
Research and development	262		316		983		782
Selling, general and administrative	1,679		1,780		5,982		4,570
Restructuring	—		—		—		201
Total	$	2,042	$	2,215	$	7,334	$	5,780

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Summary of Significant Accounting Policies (Policies)

9 Months Ended

Sep. 30, 2014

Accounting Policies [Abstract]

Financial Statement Preparation and Use of Estimates

Financial Statement Preparation and Use of Estimates

The unaudited consolidated financial statements contained in this Quarterly Report on Form 10-Q have been prepared by Zogenix, Inc. according to the rules and regulations of the Securities and Exchange Commission (SEC) and, therefore, certain information and disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (GAAP) have been omitted.

In the opinion of management, the accompanying unaudited consolidated financial statements for the periods presented reflect all adjustments, which are normal and recurring, necessary to fairly state the financial position, results of operations and cash flows. These unaudited consolidated financial statements should be read in conjunction with the audited financial statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013 filed with the SEC on March 7, 2014.

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results may differ from those estimates.

Principles of Consolidation

Principles of Consolidation

The unaudited interim consolidated financial statements include the accounts of Zogenix, Inc. and its wholly owned subsidiary Zogenix Europe Limited, which was incorporated under the laws of England and Wales in June 2010. All intercompany transactions and investments have been eliminated in consolidation. Zogenix Europe Limited’s functional currency is the U.S. dollar, the reporting currency of its parent.

Restricted Cash

Restricted Cash

In connection with its sale of the Sumavel DosePro business in May 2014, the Company has $8,500,000 of cash in escrow as of September 30, 2014 to fund potential indemnification claims for a period of 12 months (see Note 4). The Company classifies the cash flow from this restricted cash as an investing activity in the consolidated statement of cash flows as the source of the restricted cash is related to the sale of the Sumavel DosePro business.

Further, in December 2009, the Company issued a line of credit for $200,000 in connection with an operating lease which was collateralized by a certificate of deposit in the same amount and recorded as restricted cash within other assets on the consolidated balance sheet as of December 31, 2013. This line of credit and certificate of deposit were terminated in February 2014 in connection with a renegotiation of the operating lease.

Fair Value Measurements

Fair Value Measurements

The carrying amount of financial instruments consisting of cash, restricted cash, trade accounts receivable, prepaid expenses and other current assets, accounts payable, accrued expenses and accrued compensation included in the Company’s consolidated financial statements are reasonable estimates of fair value due to their short maturities. Based on the borrowing rates currently available to the Company for loans with similar terms, management believes the fair value of long-term debt approximates its carrying value. The accrued liability for the annual tail payment due to Astellas Pharma US, Inc. (Astellas) (see Note 5) for the termination of the Company’s co-promotion agreement was measured at fair value in December 2011 using a present value technique, which incorporated the Company’s own credit risk as measured by the most recent round of debt financing with Healthcare Royalty Partners (Healthcare Royalty) (formerly Cowen Healthcare Royalty Partners II, L.P.).

Authoritative guidance establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

Level 1: Observable inputs such as quoted prices in active markets;

Level 2: Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and

Level 3: Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

The Company classifies its cash equivalents within Level 1 of the fair value hierarchy because it values its cash equivalents using quoted market prices. The Company classifies its common stock warrant liabilities and embedded derivative liabilities within Level 3 of the fair value hierarchy because they are valued using valuation models with significant unobservable inputs.

Changes in fair value of the liabilities shown in the table above are recorded through change in fair value of warrant liabilities and change in fair value of embedded derivatives in other income (expense) in the consolidated statements of operations and comprehensive income (loss). The derecognition of the embedded derivative liabilities was included in the loss on early extinguishment of debt in non-operating expenses in the consolidated statements of operations and comprehensive income (loss).

Net Loss per Share

Net Income (Loss) per Share

Basic net income (loss) per share is calculated by dividing the net income (loss) by the weighted average number of common shares outstanding for the period, reduced by weighted average shares subject to repurchase, without consideration for common stock equivalents. Diluted net loss per share is computed by dividing the net income (loss) by the weighted average number of common share equivalents outstanding for the period determined using the treasury-stock method and as-if converted method, as applicable. For purposes of this calculation, stock options, restricted stock units and warrants are considered to be common stock equivalents and are only included in the calculation of diluted net loss per share when their effect is dilutive.

Impairment of Long-Lived Assets

Impairment of Long-Lived Assets

The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. As a result of the sale of its Sumavel DosePro business in May 2014, the Company recorded an impairment charge of $838,000 in the consolidated statement of operations and comprehensive income (loss) during the nine months ended September 30, 2014 related to the disposal of construction in progress that will no longer be placed into service.

Revenue Recognition

Revenue Recognition

The Company recognizes revenue from the sale of Sumavel DosePro and Zohydro ER, and from contract manufacturing, license fees, milestones and service fees earned on collaborative arrangements. Revenue is recognized when (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred and title has passed, (iii) the price is fixed or determinable and (iv) collectability is reasonably assured. Revenue from sales transactions where the buyer has the right to return the product is recognized at the time of sale only if (a) the Company’s price to the buyer is substantially fixed or determinable at the date of sale, (b) the buyer has paid the Company, or the buyer is obligated to pay the Company and the obligation is not contingent on resale of the product, (c) the buyer’s obligation to the Company would not be changed in the event of theft or physical destruction or damage of the product, (d) the buyer acquiring the product for resale has economic substance apart from that provided by the Company, (e) the Company does not have significant obligations for future performance to directly bring about resale of the product by the buyer, and (f) the amount of future returns can be reasonably estimated. The Company currently defers recognition of revenue on product shipments of Zohydro ER until the right of return no longer exists, as the Company currently cannot reliably estimate expected returns of the product at the time of shipment given the limited sales history of Zohydro ER.

Revenue arrangements with multiple elements are divided into separate units of accounting if certain criteria are met, including whether the delivered element has stand-alone value to the customer. The consideration received is allocated among the separate units based on their respective fair values, and the applicable revenue recognition criteria are applied to each of the separate units. The application of the multiple element guidance requires subjective determinations, and requires the Company to make judgments about the individual deliverables and whether such deliverables are separable from the other aspects of the contractual relationship. Deliverables are considered separate units of accounting provided that: (1) the delivered item(s) has value to the customer on a stand-alone basis and (2) if the arrangement includes a general right of return relative to the delivered item(s), delivery or performance of the undelivered item(s) is considered probable and substantially in the Company's control. In determining the units of accounting, the Company evaluates certain criteria, including whether the deliverables have stand-alone value, based on the consideration of the relevant facts and circumstances for each arrangement. In addition, the Company considers whether the buyer can use the other deliverable(s) for their intended purpose without the receipt of the remaining element(s), whether the value of the deliverable is dependent on the undelivered item(s), and whether there are other vendors that can provide the undelivered element(s).

Arrangement consideration that is fixed or determinable is allocated among the separate units of accounting using the relative selling price method, and the applicable revenue recognition criteria, as described above, are applied to each of the separate units of accounting in determining the appropriate period or pattern of recognition. The Company determines the estimated selling price for deliverables within each agreement using vendor-specific objective evidence (VSOE) of selling price, if available, third-party evidence (TPE) of selling price if VSOE is not available, or management's best estimate of selling price (BESP) if neither VSOE nor TPE is available. Determining the BESP for a unit of accounting requires significant judgment. In developing the BESP for a unit of accounting, the Company considers applicable market conditions and relevant entity-specific factors, including factors that were contemplated in negotiating the agreement with the customer and estimated costs.

Product Revenue, Net

The Company sells Zohydro ER, and sold Sumavel DosePro through May 2014, in the United States to wholesale pharmaceutical distributors and retail pharmacies, or collectively the Company's customers, subject to rights of return within a period beginning six months prior to, and ending 12 months following, product expiration. The Company recognized Sumavel DosePro product sales at the time title transferred to its customer, and reduced product sales for estimated future product returns and sales allowances in the same period the related revenue was recognized.

Given the limited sales history of Zohydro ER, the Company cannot reliably estimate expected returns of the product at the time of shipment. Accordingly, the Company defers recognition of revenue on Zohydro ER product shipments until the right of return no longer exists, which occurs at the earlier of the time Zohydro ER is dispensed through patient prescriptions or expiration of the right of return. The Company estimates Zohydro ER patient prescriptions dispensed using an analysis of third-party syndicated data. Zohydro ER was launched in March 2014 and, accordingly, the Company does not have a significant history estimating the number of patient prescriptions dispensed. If the Company underestimates or overestimates patient prescriptions dispensed for a given period, adjustments to revenue may be necessary in future periods. The deferred revenue balance does not have a direct correlation with future revenue recognition as the Company will record sales deductions at the time the prescription unit is dispensed.

The Company will continue to recognize Zohydro ER revenue upon the earlier to occur of prescription units dispensed or expiration of the right of return until it can reliably estimate product returns, at which time the Company will record a one-time increase in revenue related to the recognition of revenue previously deferred, net of estimated future product returns and sales allowances. In addition, the costs of Zohydro ER associated with the deferred revenue are recorded as deferred costs, which are included in inventory, until such time the related deferred revenue is recognized.

Product sales allowances for Zohydro ER and Sumavel DosePro include wholesaler and retail pharmacy distribution fees, prompt pay discounts, chargebacks, rebates and patient discount programs, and are based on amounts owed or to be claimed on the related sales. These estimates take into consideration the terms of the Company's agreements with its customers and third-party payors and the levels of inventory within the distribution and retail channels that may result in future rebates or discounts taken. In certain cases, such as patient support programs, the Company recognizes the cost of patient discounts as a reduction of revenue based on estimated utilization. If actual future results vary, the Company may need to adjust these estimates, which could have an effect on product revenue in the period of adjustment. The Company records product sales deductions in the statement of operations at the time product revenue is recognized.

In connection with the Closing of the Asset Purchase Agreement (APA) in May 2014, whereby Endo acquired the Company's Sumavel DosePro business, Endo purchased the Company's existing finished goods inventory of Sumavel DosePro at standard cost. The Company will be financially responsible for all returns of Sumavel DosePro product distributed by the Company prior to Closing of the APA up to a maximum per unit amount as specified in the agreements. The Company will also be financially responsible for payment of Sumavel DosePro product sales allowances on product distributed by the Company prior to Closing of the APA. Endo will be responsible for payment of all other Sumavel DosePro returns and sales allowances.

Contract Manufacturing Revenue

Contract Manufacturing Revenue

In connection with the Closing of the APA in May 2014, the Company and Endo Ventures entered into the Supply Agreement, pursuant to which the Company retains the sole and exclusive right and the obligation to manufacture, have manufactured, supply or have supplied Sumavel DosePro to Endo Ventures (see Note 4). The Company recognizes deferred revenue related to its supply of Sumavel DosePro as contract manufacturing revenue when earned on a "proportional performance" basis, as product is delivered. The Company recognizes revenue related to its sale of Sumavel DosePro product, equal to the cost of contract manufacturing plus a 2.5% mark-up, upon the transfer of title to Endo. The Company supplies Sumavel DosePro product based on non-cancellable purchase orders. The Company initially defers revenue for any consideration received in advance of services being performed and product being delivered, and recognizes revenue pursuant to the related pattern of performance, based on total product delivered relative to the total estimated product delivery over the minimum eight year term of the Supply Agreement. The Company continually evaluates the performance period and will adjust the period of revenue recognition if circumstances change.

In addition, the Company follows the authoritative accounting guidance when reporting revenue as gross when the Company acts as a principal versus reporting revenue as net when the Company acts as an agent. For transactions in which the Company acts as a principal, has discretion to choose suppliers, bears credit risk and performs a substantive part of the services, revenue is recorded at the gross amount billed to a customer and costs associated with these reimbursements are reflected as a component of cost of sales for contract manufacturing services.

Segment Reporting

Segment Reporting

Management has determined that the Company operates in one business segment, which is the development and commercialization of pharmaceutical products for people living with pain-related conditions and central nervous system disorders.

Recent Accounting Pronouncements

Recent Accounting Pronouncements

In April 2014, the Financial Accounting Standards Board (FASB) issued an accounting update that raises the threshold for disposals to qualify as discontinued operations and allows companies to have significant continuing involvement with and continuing cash flows from or to the discontinued operations. This accounting update also requires additional disclosures for discontinued operations and new disclosures for individually material disposal transactions that do not meet the definition of a discontinued operation. This guidance will be effective for fiscal years beginning after December 15, 2014, with early adoption permitted. The Company does not expect that the adoption of the guidance will have a material impact on the Company's financial statements.

In May 2014, the FASB issued new accounting guidance related to revenue recognition. This new standard will replace all current GAAP guidance on this topic and eliminate all industry-specific guidance. The new revenue recognition standard provides a unified model to determine when and how revenue is recognized. The core principle is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration for which the entity expects to be entitled in exchange for those goods or services. This guidance will be effective for fiscal years beginning after December 16, 2016, including interim periods within that reporting period, and can be applied either retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. Early adoption is prohibited. The Company is evaluating the timing and impact of adopting this new accounting standard on its financial statements and related disclosures.

In June 2014, the FASB issued new accounting guidance related to stock compensation. The new standard requires that a performance target that affects vesting, and that could be achieved after the requisite service period, be treated as a performance condition. As such, the performance target should not be reflected in estimating the grant date fair value of the award. This update further clarifies that compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the periods for which the requisite service has already been rendered. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015 and can be applied either prospectively or retrospectively to all awards outstanding as of the beginning of the earliest annual period presented as an adjustment to opening retained earnings. Early adoption is permitted. The Company does not expect that the adoption of the guidance will have a material impact on the Company's financial statements.

In August 2014, the FASB issued new accounting guidance which requires management to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and provide related footnote disclosures. The guidance is effective for annual and interim reporting periods beginning on or after December 15, 2016. Early adoption is permitted. The Company does not expect that the adoption of the guidance will have a material impact on the Company’s financial statements.

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Stock-Based Compensation

9 Months Ended

Sep. 30, 2014

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

Stock-Based Compensation

Stock-Based Compensation

The Company uses the Black-Scholes option-pricing model for determining the estimated fair value of stock-based compensation for stock-based awards to employees and the board of directors. The assumptions used in the Black-Scholes option-pricing model for the three and nine months ended September 30, 2014 and 2013 are as follows:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2014		2013		2014	2013
Risk free interest rate	2.0%		1.5% to 1.7%		1.6% to 2.0%	0.8% to 1.7%
Expected term	6.1 years		5.1 to 6.0 years		5.1 to 6.1 years	5.0 to 6.1 years
Expected volatility	83.8%		82.8% to 83.9%		83.8% to 84.9%	82.8% to 87.9%
Expected dividend yield	—	%	—	%	—%	—%

The risk-free interest rate assumption was based on the rates for U.S. Treasury zero-coupon bonds with maturities similar to those of the expected term of the award being valued. The assumed dividend yield was based on the Company’s expectation of not paying dividends in the foreseeable future. The weighted average expected term of options was calculated using the simplified method as prescribed by accounting guidance for stock-based compensation. This decision was based on the lack of relevant historical data due to the Company’s limited historical experience. In addition, due to the Company’s limited historical data, the estimated volatility was calculated based upon the Company's historical volatility, supplemented with historical volatility of comparable companies whose share prices are publicly available for a sufficient period of time.

The Company recognized stock-based compensation expense as follows (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2014		2013		2014		2013
Cost of goods sold	$	101	$	119	$	369	$	227
Research and development	262		316		983		782
Selling, general and administrative	1,679		1,780		5,982		4,570
Restructuring	—		—		—		201
Total	$	2,042	$	2,215	$	7,334	$	5,780

As of September 30, 2014, there was approximately $15,079,000 of total unrecognized compensation costs related to outstanding employee and board of director stock options and restricted stock units, which is expected to be recognized over a weighted average period of 2.6 years.

As of September 30, 2014, there were 181,000 unvested stock options outstanding to consultants, with approximately $151,000 of related unrecognized compensation expense based on a September 30, 2014 measurement date. These unvested stock options outstanding to consultants are expected to vest over a weighted average period of 2.2 years. In accordance with accounting guidance for stock-based compensation, the Company re-measures the fair value of stock option grants to non-employees at each reporting date and recognizes the related income or expense during their vesting period. The income recognized from the valuation of stock options and restricted stock units to consultants was $80,000 and $230,000 for the three and nine months ended September 30, 2014, respectively, and was immaterial for the three and nine months ended September 30, 2013. Stock option expense for awards issued to consultants is included in the consolidated statement of operations and comprehensive income (loss) within selling, general and administrative expense.

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Subsequent Event

9 Months Ended

Sep. 30, 2014

Subsequent Events [Abstract]

Subsequent Event

Subsequent Events

Brabant Pharma Limited Sales and Purchase Agreement

On October 24, 2014, Zogenix Europe acquired Brabant, pursuant to the terms of the Sale and Purchase Agreement dated October 24, 2014, by and among Zogenix Europe, the Company, Brabant and Anthony Clarke, Richard Stewart, Ann Soenen-Darcis, Jennifer Watson, Reyker Nominees Limited and Aquarius Life Science Limited (collectively, the Sellers). In connection with the consummation of the transactions on October 24, 2014 (the closing) contemplated by the Sale and Purchase Agreement, Zogenix Europe purchased the issued share capital of Brabant from the Sellers (the Acquisition) and the Company agreed to guarantee the obligations, commitments, undertakings and warranties of Zogenix Europe. Brabant owns worldwide development and commercialization rights to Brabafen, low-dose fenfluramine, for the treatment of Dravet syndrome (also known as Severe Myoclonic Epilepsy of Infancy). Dravet syndrome is a rare and catastrophic form of pediatric epilepsy with life threatening consequences for patients and current treatment options are very limited. Brabafen has recently received orphan drug designation in Europe and the United States for the treatment of Dravet syndrome.

Under the terms of the Sale and Purchase Agreement, at the closing Zogenix Europe paid to the Sellers consideration of (i) $20,000,000 in cash (plus $8,432,000 which represents the net cash position of Brabant at the closing), of which $2,000,000 (the escrow amount) will be deposited into escrow to fund potential indemnification claims for a period of 6 months, and (ii) 11,995,202 shares (the Shares) of the Company’s common stock. Zogenix Europe also committed to paying up to an aggregate amount of $95,000,000 in connection with the achievement of certain milestones for Brabafen, including $50,000,000 in regulatory milestones and $45,000,000 in sales milestones. The Company has agreed to use commercially reasonable efforts (as defined in the Sale and Purchase Agreement) to develop and commercialize Brabafen and to achieve the milestones.

In September 2012, Brabant entered into a collaboration and license agreement with the Universities of Antwerp and Leuven in Belgium (the Universities), which was amended and restated in October 2014. Under the terms of the agreement, the Universities granted Brabant an exclusive worldwide license to use the data obtained from the study, as well as certain intellectual property related to fenfluramine for the treatment of Dravet syndrome. Brabant is required to pay a mid single-digit percentage royalty on net sales of fenfluramine for the treatment of Dravet syndrome or, in the case of a sublicense of fenfluramine for the treatment of Dravet syndrome, a percentage in the mid-twenties of the sub-licensing revenues. The agreement terminates in September 2020; however, upon the commencement of Phase 3 clinical trials of fenfluramine or marketing approval by a regulatory authority, the agreement will be extended until September 2045. The agreement may be terminated by the Universities if Brabant: (a) does not use commercially reasonable efforts to (i) develop and commercialize fenfluramine for the treatment of Dravet syndrome or related conditions stemming from infantile epilepsy, or (ii) seek approval of fenfluramine for the treatment of Dravet syndrome in the United States; or (b) if Brabant becomes insolvent, shall make an assignment for the benefit of creditors, or shall have a petition in bankruptcy filed for or against it or for any similar relief has been filed against it. Brabant can terminate the agreement upon specified prior written notice to the Universities.

Both Zogenix Europe and the Sellers agreed to customary warranties and covenants in the Sale and Purchase Agreement. The Sellers agreed to indemnify Zogenix Europe for certain matters, including breaches of warranties and covenants included in the Sale and Purchase Agreement, up to the escrow amount, subject to limited exceptions.

Pursuant to the Sale and Purchase Agreement, the Company has agreed to prepare and file a registration statement on Form S-3 covering the resale of the Shares issued to the Sellers within 90 days of the closing and to use commercially reasonable efforts to cause such registration statement to be declared effective as promptly as practicable following the filing.

The Company will complete its accounting for this business combination during the fourth quarter of 2014.

Purdue Pharma L.P. Waiver Agreement

On October 29, 2014, the Company entered into a waiver agreement (the Waiver Agreement) with Purdue Pharma L.P. (Purdue) pursuant to which the Company granted a waiver to Purdue of the three-year Hatch-Waxman regulatory exclusivity period with respect to NDA 202880 for Zohydro ER in support of Purdue’s single-entity, extended-release hydrocodone product which is the subject of pending NDA 206627 and any single-entity, once-daily hydrocodone successor products or NDAs filed by Purdue (the Purdue Products). In addition, Purdue granted the Company a waiver of the Hatch-Waxman regulatory exclusivity period with respect to Purdue Products in support of our single-entity, twice-a-day hydrocodone product, including Zohydro ER and any successor products with any abuse deterrent properties or labeling claims. Under the terms of the Waiver Agreement, Purdue will pay to the Company (i) $5,000,000 within fifteen (15) days of the date of the Waiver Agreement, (ii) $5,000,000 on July 1, 2015, and (iii) a percentage royalty in the low single-digits on Purdue’s net sales of Purdue Product commencing on October 1, 2015 and ending on October 25, 2016, only to the extent such royalty payment by Purdue in the aggregate would exceed $5,000,000 and then only with respect to royalties in excess of such amount.

Teva Letter Agreement

On November 5, 2014, the Company entered into a letter agreement (the Letter Agreement) with Teva Pharmaceuticals USA, Inc. (Teva), under which the Comapny granted Teva a right of reference to certain carcinogenicity data generated by the Company for hydrocodone bitrate for use in connection with Teva’s NDA for its extended-release hydrocodone product candidate. Teva is obligated to pay the Company a one-time fee of $3,500,000 within 30 days of the date of the Letter Agreement.

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Summary of Significant Accounting Policies (Tables)

9 Months Ended

Sep. 30, 2014

Accounting Policies [Abstract]

Assets and Liabilities Measured at Fair Value on a Recurring Basis

Assets and liabilities measured at fair value on a recurring basis at September 30, 2014 and December 31, 2013 are as follows (in thousands):

	Fair Value Measurements at Reporting Date Using
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)	Significant Unobservable Inputs (Level 3)	Total
At September 30, 2014
Assets
Cash equivalents(1)	$	46,919	—	—	$	46,919
Liabilities
Common stock warrant liabilities(2)	$	—	—	4,007	$	4,007
At December 31, 2013
Assets
Cash equivalents(1)	$	69,120	—	—	$	69,120
Liabilities
Common stock warrant liabilities(2)	$	—	—	31,341	$	31,341
Embedded derivative liabilities(3)	$	—	—	233	$	233

(1) Cash equivalents are comprised of money market fund shares and are included as a component of cash and cash equivalents on the consolidated balance sheets.

(2) Common stock warrant liabilities include liabilities associated with warrants issued in connection with the Company's July 2012 public offering of common stock and warrants (see Note 6) and warrants issued in connection with the Healthcare Royalty financing agreement (see Note 6), which are measured at fair value using the Black-Scholes option pricing valuation model. The assumptions used in the Black-Scholes option pricing valuation model for both common stock warrant liabilities were: (a) a risk-free interest rate based on the rates for U.S. Treasury zero-coupon bonds with maturities similar to those of the remaining contractual term of the warrants; (b) an assumed dividend yield of zero based on the Company’s expectation that it will not pay dividends in the foreseeable future; (c) an expected term based on the remaining contractual term of the warrants; and (d) given the Company’s lack of relevant historical data due to the Company’s limited historical experience, an expected volatility based upon the Company's historical volatility, supplemented with historical volatility of comparable companies whose share prices have been publicly available for a sufficient period of time. The significant unobservable input used in measuring the fair value of the common stock warrant liabilities associated with the Healthcare Royalty financing agreement is the expected volatility. Significant increases in volatility would result in a higher fair value measurement. The following additional assumptions were used in the Black-Scholes option pricing valuation model to measure the fair value of the warrants sold in the July 2012 public offering: (a) management's projections regarding the probability of the occurrence of an extraordinary event and the timing of such event; and for the valuation scenario in which an extraordinary event occurs that is not an all cash transaction or an event whereby a public acquirer would assume the warrants, and (b) an expected volatility rate using the Company's historical volatility, supplemented with historical volatility of comparable companies, through the projected date of public announcement of an extraordinary transaction, blended with a rate equal to the lesser of 40% and the 180-day volatility rate obtained from the HVT function on Bloomberg as of the trading day immediately following the public announcement of an extraordinary transaction. The significant unobservable inputs used in measuring the fair value of the common stock warrant liabilities associated with the July 2012 public offering are the expected volatility and the probability of the occurrence of an extraordinary event. Significant increases in volatility would result in a higher fair value measurement and significant increases in the probability of an extraordinary event occurring would result in a significantly lower fair value measurement. The decrease in the fair value of the common stock warrant liabilities as of September 30, 2014 was primarily driven by the decrease in the Company's stock price at September 30, 2014 as compared against December 31, 2013 measurement dates.

(3) Embedded derivatives were measured at fair value using various discounted cash flow valuation models and were included as a component of other long-term liabilities on the consolidated balance sheet at December 31, 2013. The assumptions used in the discounted cash flow valuation models included: (a) management's revenue projections and a revenue sensitivity analysis based on possible future outcomes; (b) probability weighted net cash flows based on the likelihood of Healthcare Royalty receiving interest payments over the term of the Healthcare Royalty financing agreement; (c) probability of bankruptcy; (d) weighted average cost of capital that included the addition of a company specific risk premium to account for uncertainty associated with the Company achieving future cash flows; (e) the probability of a change in control occurring during the term of the Healthcare Royalty financing agreement; and (f) the probability of an exercise of the embedded derivative instruments. The significant unobservable inputs used in measuring the fair value of the embedded derivatives were management’s revenue projections. Significant decreases in these significant inputs would result in a higher fair value measurement of the liability. The embedded derivatives were derecognized in May 2014 as a result of the early extinguishment of the Healthcare Royalty Financing Agreement (see Note 5).

Reconciliation of Liabilities Measured at Fair Value Using Significant Observable Inputs (Level 3)

The following table provides a reconciliation of liabilities measured at fair value using significant unobservable inputs (Level 3) for the nine months ended September 30, 2014 (in thousands):

	Common Stock Warrant Liabilities			Embedded Derivative Liabilities
Balance at December 31, 2013	$	31,341		$	233
Changes in fair value	(26,418		)	14
Derecognition of liability	—			(247		)
Exercises	$	(916	)	$	—
Balance at September 30, 2014	$	4,007		$	—

Basic and Diluted Net Loss Per Share

The following table presents the computation of basic and diluted net income (loss) per share (in thousands, except per share amounts):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2013			2014			2013
Numerator
Net income (loss), basic	(12,825		)	(10,852		)	29,108			(45,240		)
Effect of dilutive securities:
Common stock warrants	$	—		$	—		$	(26,418	)	$	—
Net income (loss), diluted	$	(12,825	)	$	(10,852	)	$	2,690		$	(45,240	)
Denominator
Weighted average common shares outstanding, basic	141,045			104,682			140,110			102,136
Effect of dilutive securities:
Common stock warrants	—			—			364			—
Weighted average common shares outstanding, diluted	141,045			104,682			140,474			102,136
Basic net income (loss) per share	$	(0.09	)	$	(0.10	)	$	0.21		$	(0.44	)
Diluted net income (loss) per share	$	(0.09	)	$	(0.10	)	$	0.02		$	(0.44	)

Schedule of Calculation of Diluted Net Loss Per Share

There were 58,000 and 9,909,000 dilutive securities (in common stock equivalent shares), from common stock options, excluded from the calculation of diluted net loss during the three and nine months ended September 30, 2014, respectively, because to include them would be anti-dilutive. There were 1,776,000 dilutive securities (in common stock equivalent shares), from common stock options and restricted stock units, excluded from the calculation of diluted net loss during the three and nine months ended September 30, 2013 because to include them would be anti-dilutive. All common stock warrants disclosed in Note 6 were excluded from the calculation of diluted net loss during the three months ended September 30, 2014 and 2013, and during the nine months ended September 30, 2013, as the exercise price of the warrants was greater than the Company's average stock price during these periods.

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Stock-Based Compensation - Additional Information (Detail) (USD $) In Thousands, unless otherwise specified	3 Months Ended	9 Months Ended
	Sep. 30, 2014	Sep. 30, 2014
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Share-based Compensation, Nonemployee, Fair Value Increase (Decrease)	$ 80	$ 230
Consultants [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Share-based Compensation Arrangement by Share-based Payment Award, Options, Nonvested, Number of Shares	181	181
Employee Service Share-based Compensation, Nonvested Awards, Compensation Not yet Recognized, Stock Options	151	151
Stock Options [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Total unrecognized compensation costs	$ 15,079	$ 15,079
Recognition over weighted average periods		2 years 7 months 8 days
Stock Options [Member] | Consultants [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Share-based Compensation Arrangement by Share-based Payment Award, Award Vesting Period		2 years 2 months

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Summary of Significant Accounting Policies - Additional Information (Details) (USD $)	3 Months Ended		9 Months Ended			0 Months Ended
	Sep. 30, 2014 segment	Sep. 30, 2013	Sep. 30, 2014	Sep. 30, 2013	Dec. 31, 2009	May 16, 2014 Sumavel DosePro	Sep. 30, 2014 Sumavel DosePro
Line of Credit Facility [Line Items]
Cost of goods sold mark-up, in percent						2.50%
Restricted Cash and Cash Equivalents							$ 8,500,000
Line of Credit Facility, Maximum Borrowing Capacity					200,000
Impairment of long-lived assets	$ 0	$ 0	$ 838,000	$ 0
Number of business segments	1

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Inventory, Net (Detail) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2014	Dec. 31, 2013
Disclosure Inventory Net [Abstract]
Raw materials	$ 2,183	$ 2,770
Work in process	10,154	6,054
Finished goods	5,901	1,112
Deferred cost of goods sold	1,033	0
Inventory, net	$ 19,271	$ 9,936

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Consolidated Statements of Cash Flows (USD $) In Thousands, unless otherwise specified	9 Months Ended
	Sep. 30, 2014	Sep. 30, 2013
Operating activities:
Net loss for basic EPS	$ 29,108	$ (45,240)
Adjustments to reconcile net loss to net cash used in operating activities:
Stock-based compensation	7,334	5,579
Share-Based Compensation, Restructuring Costs	0	201
Depreciation and amortization	1,227	1,395
Amortization of debt issuance costs and non-cash interest	370	422
Loss on early extinguishment of debt	1,254	0
Net gain on sale of business	(79,980)	0
Impairment of long-lived assets	838	0
Change in fair value of warrant liabilities	(26,418)	2,780
Change in fair value of embedded derivatives	14	(912)
Changes in operating assets and liabilities:
Trade accounts receivable	779	(518)
Inventory, net	(9,335)	797
Prepaid expenses and other current assets	(10,595)	482
Other assets	(4,978)	614
Accounts payable and accrued expenses	2,377	205
Restructuring liabilities	0	6
Deferred revenue	16,761	0
Net cash used in operating activities	(71,244)	(34,189)
Investing activities:
Purchases of property and equipment	(85)	(785)
Proceeds from sale of business	89,624	0
Restricted cash from sale of business	(8,500)	0
Net cash provided by (used in) investing activities	81,039	(785)
Financing activities:
Proceeds from note payable	7,000	0
Repayment of debt	(40,041)	0
Proceeds from exercise of common stock options	1,508	0
Proceeds from issuance of common stock	244	11,098
Net cash provided by financing activities	(31,289)	11,098
Net (decrease) increase in cash and cash equivalents	(21,494)	(23,876)
Cash and cash equivalents at beginning of period	72,021	41,228
Cash and cash equivalents at end of period	$ 50,527

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Collaboration and Financing Agreements

9 Months Ended

Sep. 30, 2014

Collaborative and Financing Agreements [Abstract]

Collaboration and Financing Agreements

Collaboration and Financing Agreements

Daravita Ltd License Agreement

In 2007, the Company entered into a license agreement (the Daravita License Agreement) with Daravita Limited (Daravita), formerly Alkermes Pharma Ireland Limited, which was amended in 2009 and then again on September 12, 2014. Under the terms of the Daravita License Agreement, Daravita granted the Company an exclusive license in the United States and its possessions and territories, with defined sub-license rights to third parties other than certain technological competitors of Daravita, to certain Daravita intellectual property rights related to Zohydro ER. The Daravita License Agreement grants the Company the exclusive right under certain Daravita patents and patent applications to import, use, offer for sale and sell oral controlled-release capsule or tablet formulations of hydrocodone, where hydrocodone is the sole active ingredient, for oral prescriptions in the treatment or relief of pain, pain syndromes or pain associated with medical conditions or procedures in the United States. This right enables the Company to exclusively develop and sell Zohydro ER in the United States. Daravita has retained the exclusive right to take action in the event of infringement or threatened infringement by a third party of Daravita's intellectual property rights under the Daravita License Agreement. The Company has the right to pursue an infringement claim against the alleged infringer should Daravita decline to take or continue an action.

Under the Daravita License Agreement, the Company paid an upfront fee of $500,000 to Daravita, which was recorded as research and development expense. The Company paid additional milestone payments in the amount of $750,000 to Daravita in August 2011 in connection with the completion of the treatment phase of the Company’s pivotal efficacy Phase 3 clinical trial, Study 801, and $1,000,000 upon submission of the first Zohydro ER NDA to the FDA in May 2012, which were recorded as research and development expense. Lastly, the Company paid a milestone payment of $2,750,000 upon the first NDA approval of Zohydro ER in October 2013, which was recorded as other assets in the consolidated balance sheet and is being amortized over the estimated life of the technology, through November 2019.

In addition, the Company is required to pay a mid single-digit percentage royalty on net sales of the product for an initial royalty term equal to the longer of the expiration of Daravita’s patents covering the product in the United States, or 15 years after commercial launch, if Daravita does not have patents covering the product in the United States. After the initial royalty term, the Daravita License Agreement will continue automatically for three-year rolling periods during which the Company will continue to pay royalties to Daravita on net sales of the product at a reduced low single-digit percentage rate in accordance with the terms of the Daravita License Agreement.

Under the terms of the Daravita License Agreement, the Company and Daravita agreed that, subject to a separate commercial manufacturing and supply agreement entered into by the Company and Daravita in November 2012, Daravita is the exclusive manufacturer and supplier to the Company of Zohydro ER, subject to certain exceptions. Daravita also granted to the Company, in the event that Daravita is unwilling or unable to manufacture or supply commercial product to the Company, a non-exclusive license to make product under Daravita's intellectual property rights. This non-exclusive license also includes the right to sublicense product manufacturing to a third party, other than certain technological competitors of Daravita.

On September 12, 2014, the Company and Daravita entered into a third amendment (Third Amendment) to the Daravita License Agreement. Pursuant to the Third Amendment, the Company may exercise its option to obtain an exclusive license to certain abuse-deterrent technology and know-how from Altus Formulation Inc. (Altus) (pursuant to that certain Development and Option Agreement, dated November 1, 2013, by and between the Company and Altus). Following such exercise and the first commercial sale by the Company, its affiliates or any of its permitted sublicensees of any extended-release formulations of hydrocodone using Altus’ abuse-deterrent technology (Altus Product), Daravita will be entitled to receive from the Company a royalty on net sales of Altus Product through the date that is 15 years following the first commercial sale of the Altus Product in the United States and its possessions and territories. Prior to December 31, 2019, such royalty will be (i) in the mid single-digits if Daravita or an affiliate is the manufacturer of the Altus Product or (ii) in the low twenty-percent-range if Daravita or an affiliate is not the manufacturer of the Altus Product. After December 31, 2019, such royalty will be in the high single digits, regardless of whether Daravita or an affiliate is the manufacturer. Neither the Company nor Daravita shall be obligated to have Daravita or an affiliate manufacture commercial supplies of Altus Product for the Company. No monetary value was exchanged in connection with the Third Amendment during the three and nine months ended September 30, 2014.

Either party may terminate the Daravita License Agreement upon a material, uncured default or certain insolvency events of the other party or upon 12 months written notice prior to the end of the initial royalty term or any additional three-year rolling period. The Company may also terminate the Daravita License Agreement, with or without cause, at any point in time upon 12 months' prior written notice, or if the sale of Zohydro ER is prohibited by regulatory authorities.

Mallinckrodt LLC Co-Promotion Agreement

On June 6, 2012, the Company and Mallinckrodt LLC (Mallinckrodt) entered into a co-promotion agreement (the Co-Promotion Agreement), which was originally scheduled to terminate on June 30, 2014. Under the terms of the Co-Promotion Agreement, Mallinckrodt was granted a co-exclusive right (with the Company) to promote Sumavel DosePro to a mutually agreed prescriber audience in the United States. Mallinckrodt’s sales team began selling Sumavel DosePro to its customer base of prescribers in August 2012.

In partial consideration of Mallinckrodt’s sales efforts, the Company paid Mallinckrodt a service fee on a quarterly basis through January 31, 2014 that represented a specified fixed percentage of net sales of prescriptions generated from Mallinckrodt’s prescriber audience over a baseline amount of net sales to the same prescriber audience. Amounts payable to Mallinckrodt for service fees are reflected as selling, general and administrative expenses. For the three and nine months ended September 30, 2014, the Company incurred $0 and $100,000, respectively, in service fee expenses under the Co-Promotion Agreement, excluding the tail-payment expense discussed below. For the three and nine months ended September 30, 2013, the Company incurred $249,000 and $618,000, respectively, in service fee expenses under the Co-Promotion Agreement.

In January 2014, the Company entered into an amendment to the Co-Promotion Agreement, whereby the Co-Promotion Agreement terminated on January 31, 2014. The Company assumed full responsibility for the commercialization of Sumavel DosePro in February 2014. In connection with the termination of the Co-Promotion Agreement, the Company is required to make a one-time tail payment to Mallinckrodt, calculated as a fixed percentage of net sales from the Mallinckrodt targeted prescriber audience during the 12 month period ending on January 31, 2015. An initial liability of $491,000 for this estimated tail payment was recorded as service fee expense in selling, general and administrative expenses in the statement of operations upon the Co-Promotion Agreement termination in January 2014. This estimated tail payment liability was adjusted based on actual year-to-date net sales through September 30, 2014, which resulted in a credit of $321,000 to service fee expense in selling, general and administrative expenses in the statement of operations during the three and nine months ended September 30, 2014.

Valeant Pharmaceuticals North America LLC Co-Promotion Agreement

On June 27, 2013, the Company entered into a co-promotion agreement (the Valeant Agreement) with Valeant Pharmaceuticals North America LLC (Valeant). Under the terms of the Valeant Agreement, the Company was granted the exclusive right (with Valeant or any of its affiliates) to promote Migranal® (dihydroergotamine mesylate) Nasal Spray (Migranal) to a prescriber audience of physicians and other health care practitioners in the United States. The Company's sales team began promoting Migranal to prescribers in August 2013. The term of the Valeant Agreement will run through December 31, 2015 (unless otherwise terminated), and can be extended by mutual agreement of the parties in additional 12 month increments. Valeant remains responsible for the manufacture, supply and distribution of Migranal for sale in the United States. In addition, Valeant supplies the Company with a specified amount of product samples every six months, and the Company will reimburse Valeant for the cost of additional samples and any promotional materials ordered by the Company. The cost of any additional samples and any promotional materials ordered by the Company will be recognized as selling, general and administrative expenses.

In partial consideration of the Company's sales efforts, Valeant pays the Company a co-promotion fee on a quarterly basis that represents specified percentages of net sales generated by the Company over defined baseline amounts of net sales (Baseline Forecast or Adjusted Baseline Forecast). In addition, upon completion of the co-promotion term, and only if the Valeant Agreement is not terminated by Valeant due to a bankruptcy event (as defined in the Valeant Agreement) or the inability of the Company to comply with its material obligations under the Valeant Agreement, Valeant will be required to pay the Company an additional tail payment calculated as a fixed percentage of the Company's net sales over the Baseline Forecast (or Adjusted Baseline Forecast) during the first full six months following the last day of the term.

The Company may terminate the Valeant Agreement in the event of a Valeant supply failure (as defined in the Valeant Agreement) or material product recall, or if the net sales price in a fiscal quarter is less than a specified percentage of the net sales price in the immediately preceding quarter, if the reduction in such net sales price would have a material adverse effect on the Company's financial return as a result of performance of its obligation under the Valeant Agreement.

Either party may terminate the Valeant Agreement with six months notice. Either party may terminate the Valeant Agreement with 30 days prior notice if the Company's net sales within a fiscal quarter fall below the Baseline Forecast (or Adjusted Baseline Forecast) for one or more fiscal quarters, or following the commercial introduction of a generic product to Migranal promoted or otherwise commercialized by a third party in the United States. In addition, either party may terminate the Valeant Agreement in the event of a change of control of itself or the other party (upon 90 days prior written notice), upon any action taken or objection raised by governmental authority that prevents either party from performing its obligations under the Valeant Agreement, upon the filing of an action alleging patent infringement, in connection with the material breach of the other party's material obligations, or if a bankruptcy event of the other party occurs.

The Company recognizes co-promotion fees received under the Valeant Agreement as service revenue in the period in which its promotional activities generate net sales over the Baseline Forecast or Adjusted Baseline Forecast. For the three and nine months ended September 30, 2014, the Company recognized service revenue of $446,000 and $2,427,000, respectively, under the Valeant Agreement. For the three and nine months ended September 30, 2013, the Company recognized service revenue of $232,000 under the Valeant Agreement.

Astellas Pharma US, Inc. Co-Promotion Agreement

In July 2009, the Company entered into the co-promotion agreement with Astellas (Astellas Co-Promotion Agreement). Under the terms of the agreement, the Company granted Astellas the co-exclusive right (with the Company) to market and sell Sumavel DosePro in the United States until June 30, 2013. Under the Astellas Co-Promotion Agreement, both Astellas and the Company were obligated to collaborate and fund the marketing of Sumavel DosePro and to provide annual minimum levels of sales effort directed at Sumavel DosePro during the term. In December 2011, the Company entered into an amendment to the Astellas Co-Promotion Agreement, or the amended Astellas Co-Promotion Agreement, whereby the agreement terminated on March 31, 2012.

Following completion of the co-promotion term in March 2012, the Company was required to pay Astellas one tail payment in July 2013 and another tail payment in July 2014, calculated as decreasing fixed percentages (ranging from mid-twenties down to a mid-teen percentage) of net sales in the Astellas Segment during the 12 months ended March 31, 2012. The fair value of the tail payments is being accreted through interest expense through the dates of payment in July 2013 and July 2014. The first tail payment of $2,032,000 was made in July 2013 and the second tail payment of $1,218,000 was made in July 2014. The Company recognized $0 and $40,000 of related interest expense during the three months ended September 30, 2014 and 2013, respectively, and recognized $87,000 and $327,000 of related interest expense during the nine months ended September 30, 2014 and 2013, respectively.

Healthcare Royalty Financing Agreement

On July 18, 2011, the Company closed the royalty financing agreement (the Financing Agreement) with Healthcare Royalty. Under the terms of the Financing Agreement, the Company borrowed $30,000,000 from Healthcare Royalty (the Borrowed Amount) and the Company agreed to repay such Borrowed Amount together with a return to Healthcare Royalty, as described below, out of the Company’s direct product sales, co-promotion revenues and out-license revenues (collectively, Revenue Interest) that the Company may record or receive as a result of worldwide commercialization of the Company’s products including Sumavel DosePro, Zohydro ER and other future products. The Financing Agreement was originally scheduled to terminate on March 31, 2018, but Healthcare Royalty exercised its right to early terminate the Financing Agreement on May 16, 2014, as discussed below.

Upon the closing of and in connection with the Financing Agreement, the Company issued and sold to Healthcare Royalty $1,500,000 of the Company’s common stock, or 388,601 shares, at a price of $3.86 per share. The Company also issued to Healthcare Royalty a warrant exercisable for up to 225,000 shares of the Company’s common stock. The warrant is exercisable at $9.00 per share and has a term of 10 years. As the warrant contains covenants where compliance with such covenants may be outside the control of the Company, the warrant was recorded as a current liability and marked to market at each reporting date using the Black-Scholes option pricing valuation model (see Note 2).

Under the Financing Agreement, the Company was obligated to pay to Healthcare Royalty:

• 5% to 5.75% of the first $75,000,000 of Revenue Interest recorded (in the case of net product sales) or received (in the case of co-promotion revenues and license fees) by the Company in a calendar year (initially 5% and then 5.75% after the co-promotion agreement with Astellas terminated on March 31, 2012);

• 2.5% of the next $75,000,000 of Revenue Interest recorded (in the case of net product sales) or received (in the case of co-promotion revenues and license fees) by the Company in a calendar year; and

• 0.5% of Revenue Interest over and above $150,000,000 recorded (in the case of net product sales) or received (in the case of co-promotion revenues and license fees) by the Company in a calendar year.

Net sales of Sumavel DosePro outside the United States were only included in the Revenue Interest if such net sales exceeded $10,000,000. The Company was also obligated to make three fixed payments of $10,000,000 on (or before, at the option of the Company) each of January 31, 2015, January 31, 2016 and January 31, 2017.

As security for the payment of the Company's obligations under the Financing Agreement, the Company also entered into a security agreement whereby the Company granted to Healthcare Royalty a security interest in all assets of the Company, including intellectual property and other rights of the Company to the extent necessary or used to commercialize the Company products. Healthcare Royalty’s security interest was extinguished upon early termination of the Financing Agreement on May 16, 2014.

The Company had the option to terminate the Financing Agreement at the Company’s election in connection with a change of control of the Company, upon the payment of a base amount of $52,500,000, or, if higher, an amount that generated a 19% internal rate of return on the Borrowed Amount as of the date of prepayment, in each case reduced by the Revenue Interest and principal payments received by Healthcare Royalty up to the date of prepayment.

Healthcare Royalty had the option to terminate the Financing Agreement at its election in connection with a change of control of the Company (which includes the sale, transfer, assignment or licensing of the Company’s rights in the United States to either Sumavel DosePro or Zohydro ER), or an event of default (which includes the occurrence of a bankruptcy event or other material adverse change in the Company’s business), as defined in the Financing Agreement. Healthcare Royalty exercised its option to terminate the Financing Agreement in connection with the Company's sale of the Sumavel DosePro business to Endo on May 16, 2014. Upon termination of the Financing Agreement by Healthcare Royalty, the Company was obligated to make a final payment (Final Payment) of $40,041,000 to Healthcare Royalty, which was an amount that generated a 17% internal rate of return on the Borrowed Amount as of the date of prepayment, reduced by the Revenue Interest and principal payments received by Healthcare Royalty up to the date of Final Payment. The Company no longer has any further payment obligations under the Financing Agreement after the Final Payment was made.

The rights of the Company and Healthcare Royalty to terminate the Financing Agreement early, as well as the change in the Revenue Interest rate from 5% to 5.75% in connection with the early termination of the Astellas Co-Promotion Agreement, met the definition of an embedded derivative. As a result, the Company carved out these embedded derivatives from the Financing Agreement and determined the fair value of each derivative using various discounted cash flow valuation models taking into account the probability of these events occurring and various scenarios surrounding the potential Revenue Interest payments that would be made if these events occurred (see Note 2). The aggregate fair value of the embedded derivatives as of December 31, 2013 was $233,000 and is included in other long-term liabilities. The fair value of the embedded derivatives of $247,000 was derecognized upon termination of the Financing Agreement on May 16, 2014 and is included in the loss on early extinguishment of debt in the statement of operations and comprehensive income (loss) for the nine months ended September 30, 2014.

The Company received aggregate net proceeds of $29,485,000 from the Financing Agreement (including the purchase of common stock). The discounts, which were being amortized using the effective interest method over the term of the arrangement within interest expense, include the fair value of the common stock warrants issued to Healthcare Royalty of $790,000 upon the closing of the Financing Agreement, fees payable to Healthcare Royalty in connection with the execution of the arrangement of $476,000 and the fair value of embedded derivatives of $605,000 upon the closing of the Financing Agreement. The Company has recognized other income (expense) in relation to the change in the fair value of the Healthcare Royalty common stock warrant of $125,000 and $397,000 for the three and nine months ended September 30, 2014, respectively, and $(8,000) and $(43,000) for the three and nine months ended September 30, 2013, respectively, in the statement of operations and comprehensive income (loss). The Company has recognized other income in relation to the change in the fair value of the embedded derivatives of $0 and $14,000 for the three and nine months ended September 30, 2014, respectively, and $1,474,000 and $912,000 for the three and nine months ended September 30, 2013, respectively, in the statement of operations and comprehensive income (loss).

Upon early termination of the Financing Agreement on May 16, 2014, and the Company's Final Payment to Healthcare Royalty, the Company determined that the early termination resulted in an extinguishment of the outstanding debt and recognized a loss on early extinguishment of debt of $1,254,000 which was recorded as non-operating expenses in the statement of operations and comprehensive income (loss). The loss on early extinguishment of debt is related to the write-off of the unamortized balances of the debt discounts (which includes derecognition of the embedded derivative liabilities, as discussed above), debt acquisition costs, and accrued interest expenses related to the Financing Agreement.

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Sale of Sumavel DosePro Business - Additional Information (Details) (USD $)	3 Months Ended		9 Months Ended			0 Months Ended	3 Months Ended	9 Months Ended		3 Months Ended	9 Months Ended
	Sep. 30, 2014	Sep. 30, 2013	Sep. 30, 2014	Sep. 30, 2013	May 16, 2014 Notes Payable, Other Payables	May 16, 2014 Sumavel DosePro	Sep. 30, 2014 Sumavel DosePro	Sep. 30, 2014 Sumavel DosePro	May 16, 2014 Sumavel DosePro	Sep. 30, 2014 Sumavel DosePro Notes Payable, Other Payables	Sep. 30, 2014 Sumavel DosePro Notes Payable, Other Payables	May 16, 2014 Sumavel DosePro Notes Payable, Other Payables	May 16, 2014 Sumavel DosePro Purchasing Entity
Income Statement, Balance Sheet and Additional Disclosures by Disposal Groups, Including Discontinued Operations [Line Items]
Business Combination, Contingent Consideration, Asset													$ 20,000,000
Proceeds from sale of business			89,624,000	0		85,000,000
Escrow Deposit									8,500,000
Revenue from finished goods inventory						4,624,000
Contingent consideration, additional cash payments													20,000,000
Cost of goods sold mark-up, in percent						2.50%
Face amount of debt					7,000,000							7,000,000
Transaction costs									660,000
Contract Receivable									9,100,000
Debt discount									4,748,000			4,748,000
Net gain on sale of business	0	0	79,980,000	0		79,980,000		79,980,000
Contract revenue	4,225,000	0	6,463,000	0			4,225,000	6,463,000
Deferred Revenue							8,863,000	8,863,000	9,108,000
Interest expense										$ 83,000	$ 123,000

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Organization and Basis of Presentation Narrative (Details) (USD $)	9 Months Ended			0 Months Ended		0 Months Ended			0 Months Ended
	Sep. 30, 2014	Sep. 30, 2013	Nov. 06, 2014 Subsequent event	Oct. 24, 2014 Subsequent event Brabant	Oct. 24, 2014 Subsequent event Brabant	Oct. 24, 2014 Subsequent event Brabant Regulatory milestone	Oct. 24, 2014 Subsequent event Brabant Sales milestone	May 16, 2014 Notes Payable, Other Payables	May 16, 2014 Sumavel DosePro	May 16, 2014 Sumavel DosePro	May 16, 2014 Sumavel DosePro Purchasing Entity	May 16, 2014 Sumavel DosePro Notes Payable, Other Payables
Income Statement, Balance Sheet and Additional Disclosures by Disposal Groups, Including Discontinued Operations [Line Items]
Face amount of debt								$ 7,000,000				$ 7,000,000
Revenue from finished goods inventory									4,624,000
Proceeds from sale of business	89,624,000	0							85,000,000
Escrow Deposit					2,000,000					8,500,000
Contingent consideration, additional cash payments											20,000,000
Cash paid to acquire business				20,000,000
Additional cash to acquire business				8,432,000
Shares issued in acquisition				11,995,202
Contingent consideration				95,000,000		50,000,000	45,000,000
Common Stock, Value, Authorized			$ 25,000,000