Sale of Zohydro ER business

9 Months Ended

Sep. 30, 2015

Discontinued Operations and Disposal Groups [Abstract]

Sale of Zohydro ER business

Sale of Zohydro ER business

On March 10, 2015, the Company entered into the Asset Purchase Agreement whereby the Company agreed to sell its Zohydro ER business to Pernix, and on April 24, 2015, the Company completed the sale to Ferrimill, a subsidiary of Pernix, as a substitute purchaser. The Zohydro ER business divestiture included the registered patents and trademarks, certain contracts, the new drug application and other regulatory approvals, documentation and authorizations, the books and records, marketing materials and product data relating to Zohydro ER.

The Company received consideration of $80,000,000 in cash, $10,000,000 of which has been deposited in escrow to fund potential indemnification claims for a period of 12 months, and $10,614,000 in Pernix Therapeutics common stock. Further, Ferrimill purchased $926,000 of Zohydro ER inventory. The Company also received consideration due based on percentage of purchase discounts received by Ferrimill through September 30, 2015 based on an assigned supply agreement of $2,057,000 which is recorded as current assets of discontinued operations in the consolidated balance sheet at September 30, 2015. The Company has agreed to indemnify the purchaser for certain intellectual property matters up to an aggregate amount of $5,000,000.

In addition to the cash payment paid at closing, the Company is eligible to receive additional cash payments of up to $283,500,000 based on the achievement of pre-determined milestones, including a $12,500,000 payment upon approval by the U.S. Food and Drug Administration of an abuse-deterrent extended-release hydrocodone tablet (currently in development in collaboration with Altus Formulation Inc.) and up to $271,000,000 in potential sales milestones, as well as a percentage of purchase discounts received by Ferrimill based on an assigned supply agreement up to a total of $2,400,000, of which $2,057,000 has been received as of September 30, 2015. The purchaser will assume responsibility for the Company's obligations under the purchased contracts and regulatory approvals, as well as other liabilities associated with the Zohydro ER business arising after the sale date. The Company retained all liabilities and certain assets associated with the Zohydro ER business arising prior to the sale.

The net gain on sale of the Zohydro ER business totaling $73,101,000 was calculated as the difference between the fair value of non-contingent consideration received for the business and the carrying value of the net assets transferred to Ferrimill. The net gain on sale of business may be adjusted in future periods by the contingent consideration based upon the achievement of pre-determined regulatory approval and sales milestones and eligible purchase discounts received by the acquirer.

The following summarizes the gain on sale (in thousands):

Non-contingent consideration received	$	93,597
Carrying value of assets transferred to Ferrimill	(2,532		)
Transaction costs	(1,966		)
Net gain on sale of business before income tax	89,099
Income tax expense (see Note 11)	(15,998		)
Net gain on sale of business	$	73,101

As a result of the Company's strategic decision to sell the Zohydro ER business and focus on clinical development of ZX008 and Relday, the consolidated statement of operations and comprehensive income (loss) for the three and nine months ended September 30, 2014 and the consolidated balance sheet as of December 31, 2014 have been retrospectively revised to reflect the financial results from the Zohydro ER business, and the related assets and liabilities, as discontinued operations. The results of operations from discontinued operations presented below include certain allocations that management believes fairly reflect the utilization of services provided to the Zohydro ER business. The allocations do not include amounts related to general corporate administrative expenses or interest expense. Therefore, the results of operations from the Zohydro ER business do not necessarily reflect what the results of operations would have been had the business operated as a stand-alone entity.

The following table summarizes the results of discontinued operations for the periods presented in the consolidated statements of operations and comprehensive income (loss) for the three and nine months ended September 30, 2015 and 2014 (in thousands):

	Three Months Ended September 30,						Nine Months Ended September 30,
Discontinued operations	2015			2014			2015			2014
Revenues:
Net product revenue	$	1,280		$	3,914		$	10,459		$	6,624
Operating expenses:
Cost of product sold	182			706			2,134			1,201
Royalty expense	77			353			785			712
Research and development	(232		)	2,377			5,596			4,331
Selling, general and administrative	472			11,842			14,706			42,332
Restructuring expense	20			—			588			—
Gain on sale of business	(46		)	—			(89,099		)	—
Total operating (income) expense	473			15,278			(65,290		)	48,576
Other income	78			—			5,078			—
Net income (loss) from discontinued operations before tax	885			(11,364		)	80,827			(41,952		)
Income tax expense	(2,520		)	—			(15,998		)	—
Net income (loss) from discontinued operations	$	(1,635	)	$	(11,364	)	$	64,829		$	(41,952	)

The following table summarizes the assets and liabilities of discontinued operations as of September 30, 2015 and December 31, 2014 related to the Zohydro ER business (in thousands):

	September 30, 2015		December 31, 2014
Assets
Current assets
Trade accounts receivable	$	53	$	2,799
Inventory	69		1,995
Prepaid expenses and other current assets	3,660		2,402
Total current assets of discontinued operations	3,782		7,196
Other assets	4		2,673
Total assets of discontinued operations	$	3,786	$	9,869
Liabilities
Current liabilities
Accounts payable	$	384	$	3,781
Accrued expenses	4,181		9,470
Accrued compensation	—		1,933
Deferred revenue	588		7,123
Total current liabilities of discontinued operations	5,153		22,307
Total liabilities of discontinued operations	$	5,153	$	22,307

Total stock-based compensation related to discontinued operations was $905,000 and $1,400,000 for the nine months ended September 30, 2015 and 2014, respectively. Total amortization expense related to discontinued operations was $166,000 and $333,000 for the nine months ended September 30, 2015 and 2014, respectively.