Acquisition of Brabant

12 Months Ended

Dec. 31, 2014

Business Combinations [Abstract]

Acquisition of Brabant

Acquisition of Brabant Pharma Limited

On October 24, 2014, Zogenix Europe, a wholly-owned subsidiary of the Company, acquired all the capital stock of Brabant, a privately-held company organized under the laws of England and Wales, pursuant to the terms of the Sale and Purchase Agreement, dated October 24, 2014. Brabant owned worldwide development and commercialization rights to ZX008, low-dose fenfluramine, for the treatment of Dravet syndrome. Dravet syndrome is a rare and catastrophic form of pediatric epilepsy with life threatening consequences for patients and current treatment options are very limited. ZX008 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, the Company paid $20,000,000 in cash (plus $8,718,000 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 six months, and 11,995,202 shares of the Company’s common stock, plus potential cash payments of up to $95,000,000 based on the achievement of certain milestones. The aggregate purchase price was determined to be $88,200,000, including the cash paid of $20,000,000, market value of the 11,995,202 shares of the Company's common stock of $15,234,000 and fair value of the contingent purchase consideration for milestones of $53,000,000. The Company has agreed to use commercially reasonable efforts (as defined in the Sale and Purchase Agreement) to develop and commercialize ZX008 and to achieve the milestones. As of December 31, 2014, transaction costs of $300,000 were expensed as incurred in selling, general and administrative expense.

An initial liability of $53,000,000 was recorded for an estimate of the acquisition date fair value of the contingent purchase consideration. Any change in the fair value of the contingent purchase consideration subsequent to the acquisition date was and will be recognized in operating expenses within the consolidated statement of operations and comprehensive income (loss). The fair value of the milestone payments was measured by the probability-weighted discounted cash flows. Key assumptions used in the fair value assessments included discount rates ranging from 3.1% to 7.9%, probability weighted revenue projections, and probability and timing of achieving regulatory milestones. This fair value measurement of the contingent purchase consideration is based on significant inputs not observed in the market and thus represents a Level 3 measurement. Level 3 instruments are valued based on unobservable inputs that are supported by little or no market activity and reflect the Company’s own assumptions in measuring fair value.

As of December 31, 2014, the allocation of the purchase price to the assets acquired and liabilities assumed on the acquisition date was as follows (in thousands):

Cash and cash equivalents	$	74
Prepaid expenses and other current assets	34
Property and equipment	4
Intangible assets	102,500
Goodwill	6,234
Accounts payable	(112		)
Deferred tax liability	(20,500		)
Total purchase price	$	88,234

Intangible assets represent IPR&D related to ZX008. The IPR&D currently has an indefinite life and will be tested for potential impairment at least annually or whenever indicators of potential impairment are present. When appropriate, the IPR&D will be assigned a useful life and amortized over the estimated period of future economic benefit of the IPR&D, or impaired if the technology is abandoned and is not able to be used for another purpose. The fair value of the developed technology and trade name was estimated using an income approach. Under the income approach, an intangible asset’s fair value is equal to the present value of future economic benefits to be derived from ownership of the asset. The estimated fair value was developed by discounting future net cash flows to their present value at market-based rates of return.

The excess of the fair value of the total consideration over the estimated fair value of the net assets acquired was recorded as goodwill, which was primarily attributable to expected benefit derived from utilizing the Company's established research and development infrastructure and sales, marketing and distribution channels. The goodwill recognized is not deductible for income tax purposes.

Pro Forma Information (unaudited)

The following unaudited pro forma information presents the consolidated results of operations of the Company as if the acquisitions completed during the year ended December 31, 2014 had occurred at the beginning of the year, with pro forma adjustments to give effect to intercompany transactions to be eliminated and transaction costs directly associated with the acquisitions (in thousands, except per share amounts):

	Year ended December 31,
	2014		2013
Net revenues	$	40,531	$	33,012
Net income (loss)	7,873		(81,882		)
Net income (loss) per share, basic and diluted	$	0.06	$	(0.68	)

These unaudited pro forma consolidated financial results have been prepared for illustrative purposes only and do not purport to be indicative of the results of operations that actually would have resulted had the acquisition occurred on the first day of the earliest period presented, or of the future results of the combined entities. The unaudited pro forma consolidated financial information does not reflect any operating efficiencies and cost savings that may be realized as a result of the integration of the acquisition.