Acquisition of Zogenix International Limited

12 Months Ended

Dec. 31, 2016

Business Combinations [Abstract]

Acquisition of Zogenix International Limited

October 24, 2014, Zogenix Europe Limited (Zogenix Europe), a wholly-owned subsidiary of the Company, acquired all the capital stock of Zogenix International Limited, a privately-held company organized under the laws of England and Wales. Zogenix International Limited owned worldwide development and commercialization rights to ZX008, low-dose fenfluramine, for the treatment of Dravet syndrome. The Company paid cash consideration of $20.0 million, net of cash acquired, issued 11,995,202 shares of the Company’s common stock valued at $15.2 million and contingent consideration with an estimated acquisition date fair value of $53.0 million for an aggregate purchase price of $88.2 million. Under the contingent consideration arrangement, the Company agreed to pay up to $95.0 million if certain milestones are achieved, including regulatory approvals and sales targets. Transaction costs associated with this acquisition of $0.3 million were expensed as incurred in selling, general and administrative expense in 2014.

The fair value of contingent consideration liability on the acquisition date of $53.0 million was estimated based on the probability of achieving the specified objectives using a probability-weighted discounted cash flow model. This fair value measurement is based on significant inputs not observed in the market and thus represents a Level 3 measurement as defined in connection with the fair value hierarchy (see Note 2). Any future change in the estimated fair value of the contingent consideration will be recognized in operating expenses within the consolidated statements of operations.

The Company accounted for this acquisition as a business combination and recorded the assets acquired and liabilities assumed at their respective fair values as of the acquisition date. The following summarizes the aggregate purchase price allocation (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 acquired represent in-process research and development (IPR&D) related to ZX008. The in-process research and development currently has an indefinite life and is tested for potential impairment at least annually or whenever indicators of potential impairment are present. Upon completion and development of the related project, the IPR&D will be assigned a useful life and amortized over the estimated period of its future economic benefit, 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. The goodwill recognized is not deductible for income tax purposes.