Sale of Zohydro ER business

12 Months Ended

Dec. 31, 2016

Discontinued Operations and Disposal Groups [Abstract]

Sale of Zohydro ER Business

March 10, 2015, the Company entered into an asset purchase agreement with Pernix Ireland Limited and Pernix Therapeutics (collectively, Pernix) whereby the Company agreed to sell its Zohydro ER business to Pernix, and on April 24, 2015, the Company completed the sale to Ferrimill Limited, 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 $80.0 million in cash, subject to an escrow holdback of $10.0 million, and $10.6 million in Pernix Therapeutics common stock. The escrow period expired in March 2016. The Company may receive additional cash payments, not to exceed $283.5 million based on the achievement of certain regulatory and sales milestones. As of December 31, 2016, the Company had not received and does not expect to receive any additional cash payments. The Company recognized an after-tax gain of $75.4 million in discontinued operations in 2015.

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 statements of operations for the year ended December 31, 2014 was retrospectively revised to reflect the financial results from the Zohydro ER business as discontinued operations. The results of operations for 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 presented in the consolidated statements of operations for the periods indicated (in thousands):

	Year Ended December 31,
Discontinued operations	2016			2015			2014
Net product revenue	$	532		$	11,299		$	11,584
Operating expense (income):
Cost of product sold	15			2,205			10,554
Royalty expense	32			835			1,127
Research and development	—			5,504			7,043
Selling, general and administrative	1,594			14,820			54,260
Restructuring expense	—			588			—
Gain on sale of business	—			(89,484		)	—
Total operating expense (income)	1,641			(65,532		)	72,984
Other income	—			5,077			8,500
Net (loss) income from discontinued operations before tax	(1,109		)	81,908			(52,900		)
Tax benefit (expense)	88			(14,060		)	—
Net loss (income) from discontinued operations	$	(1,021	)	$	67,848		$	(52,900	)

Other income of $5.0 million in 2015 was attributed to payment received for the Company’s waiver of its regulatory exclusivity rights. Other income in 2014 was comprised of $3.5 million for the sale of right of reference to certain carcinogenicity data generated by the Company and a $5.0 million payment received for the Company’s waiver of its regulatory exclusivity rights.

The following table summarizes the assets and liabilities of discontinued operations as of December 31, 2016 and 2015 related to the Zohydro ER business (in thousands):

	December 31,
	2016		2015
Assets
Current assets
Trade accounts receivable	$	—	$	4
Inventory	—		15
Prepaid expenses and other current assets	—		189
Total current assets of discontinued operations	$	—	$	208
Liabilities
Current liabilities
Accrued expenses	414		2,796
Deferred revenue	—		110
Total current liabilities of discontinued operations	$	414	$	2,906

Stock-based compensation included in discontinued operations was $0.7 million in 2015 and $2.0 million in 2014. Amortization expense included in discontinued operations was $0.2 million in 2015 and $0.6 million in 2014. These noncash expenses included in discontinued operations were not material in 2016.

On May 16, 2014, the Company completed the sale of its Sumavel DosePro business to Endo, which included registered trademarks, regulatory and all rights to market, sell and distribute Sumavel DosePro under the trademark and commercialization rights 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. The Company received $85.0 million in cash, subject to an escrow holdback of $8.5 million, and $4.6 million in cash for the purchase of Sumavel DosePro finished goods inventory on hand at the Company’s standard cost. The escrow period expired in May 2015.

As part of the transaction, the Company entered into a supply agreement with Endo for the exclusive right, and contractual obligation, to manufacture and supply Sumavel DosePro to Endo. Endo will purchase all Sumavel DosePro from the Company at cost plus a 2.5% mark-up and reimburse the Company for its royalty obligations due Aradigm Corporation on sales of Sumavel DosePro. The agreement provides for an initial term of 8 years. To support the Company’s Sumavel DosePro manufacturing operations, Endo provided the Company with an interest-free working capital advance of $7.0 million under a promissory note (see Note 10). The working capital advance is collateralized by liens on materials and unreleased finished Sumavel DosePro inventory and matures upon termination of the supply agreement.

The Company accounted for this transaction as a multiple-element arrangement and applied the applicable accounting guidance to separate the discrete deliverables into different units of accounting, and to determine the arrangement consideration for those separate units of accounting. The Company identified two primary deliverables consisting of the asset sale of the Company’s Sumavel DosePro business and the long-term contract manufacturing supply agreement, which includes the interest-free working capital advance. Other deliverables include a transition services agreement and participation in a joint supply committee with Endo which were determined to have minimal value relative to the total sales consideration. The Company determined that the asset sale and supply agreement each had standalone value and represented separate units of accounting. Cash consideration received of $89.6 million was allocated to the asset sale and supply agreement based on the relative selling price method (see Note 2). Approximately $85.3 million was allocated to the asset sale and the remaining $4.4 million was allocated to the supply agreement, which includes the interest-free working capital advance. This resulted in a gain of $80.0 million, net of $0.7 million in transaction costs, on the sale of Sumavel DosePro business. The cash consideration allocated to the supply agreement consists of imputed interest of $4.7 million on the interest-free working capital advance, based on the Company’s incremental borrowing rate for a debt instrument with similar terms, and $9.1 million for Sumavel DosePro products to be delivered over the term of the supply agreement. The Company recorded the imputed interest as debt discount against the working capital advance proceeds and will amortize the debt discount using the effective interest method over the term of the supply agreement. The $9.1 million was recorded as deferred revenue and is to be recognized as contract manufacturing revenue as services are performed using the proportional performance method. The sale of the Sumavel DosePro business did not qualify as discontinued operations due to continuing involvement based on the applicable accounting guidance in effect in 2014.