Document

 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q
 
x    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2018
 
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 001-13111
 
ASSERTIO THERAPEUTICS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

DELAWARE
94-3229046
(STATE OR OTHER JURISDICTION OF
(I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION)
IDENTIFICATION NUMBER)
 
100 South Saunders Road, Suite 300
Lake Forest, Illinois 60045
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES; ZIP CODE)
 
(224) 419-7106
(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.  Yes x No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).  Yes x No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. 
Large accelerated filer x
Accelerated filer ☐
 Non-accelerated filer ☐
Smaller reporting company ☐
Emerging growth company ☐
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ☐ No x
 
The number of issued and outstanding shares of the registrant’s Common Stock, no par value, as of November 5, 2018 was 63,939,066.
 
 
 
 
 



ASSERTIO THERAPEUTICS, INC.
 Quarterly Report on Form 10-Q
For the Quarterly Period Ended September 30, 2018

TABLE OF CONTENTS
 
 
 
 
 
 
 
Item 1. 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2. 
 
 
 
 
Item 3. 
 
 
 
 
Item 4. 
 
 
 
 
 
 
Item 1. 
 
 
 
 
Item 1A. 
 
 
 
 
Item 6. 
 
 
 
 
 

2

Table of Contents


PART I — FINANCIAL INFORMATION

ITEM 1.    FINANCIAL STATEMENTS
ASSERTIO THERAPEUTICS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
(Unaudited)
 
 
September 30,
2018
 
December 31, 2017
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
121,904

 
$
126,884

Short-term investments

 
1,205

Accounts receivable, net
43,912

 
72,482

Inventories, net
4,255

 
13,042

Prepaid and other current assets
57,297

 
17,238

Total current assets
227,368

 
230,851

Property and equipment, net
11,808

 
13,024

Intangible assets, net
717,542

 
793,873

Other long-term assets
26,789

 
869

Total assets
$
983,507

 
$
1,038,617

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
17,394

 
$
14,732

Accrued rebates, returns and discounts
80,913

 
135,828

Accrued liabilities
26,075

 
60,496

Income taxes payable

 
126

Current portion of Senior Notes
125,000

 
82,500

Contingent consideration liability, current portion

 
156

Interest payable
10,260

 
13,220

Other current liabilities
1,432

 
3,522

Total current liabilities
261,074

 
310,580

Contingent consideration liability, long-term portion
877

 
1,457

Senior Notes
177,466

 
274,720

Convertible Notes
283,061

 
269,510

Other long-term liabilities
18,620

 
12,842

Total liabilities
741,098

 
869,109

Commitments and contingencies

 

Shareholders’ equity:
 
 
 
Common stock
6

 
6

Additional paid-in capital
400,869

 
389,015

Accumulated deficit
(158,462
)
 
(219,508
)
Accumulated other comprehensive loss, net of tax
(4
)
 
(5
)
Total shareholders’ equity
242,409

 
169,508

Total liabilities and shareholders' equity
$
983,507

 
$
1,038,617

 
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

3

Table of Contents

ASSERTIO THERAPEUTICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(Unaudited)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Revenues:
 
 
 
 
 
 
 
Product sales, net
$
29,435

 
$
95,204

 
$
100,627

 
$
285,721

Commercialization agreement, net
27,781

 

 
142,760

 

Royalties and milestones
20,277

 
209

 
25,784

 
596

Total revenues
77,493

 
95,413

 
269,171

 
286,317

Costs and expenses:
 
 
 
 
 
 
 
Cost of sales (excluding amortization of intangible assets)
2,975

 
17,396

 
17,772

 
54,895

Research and development expenses
2,127

 
1,761

 
5,835

 
12,459

Selling, general and administrative expenses
33,409

 
48,850

 
93,750

 
147,379

Amortization of intangible assets
25,443

 
25,734

 
76,331

 
77,204

Restructuring charges
3,911

 
434

 
18,742

 
3,875

Total costs and expenses
67,865

 
94,175

 
212,430

 
295,812

Income (loss) from operations
9,628

 
1,238

 
56,741

 
(9,495
)
Other income (expense):
 
 
 
 
 
 
 
Litigation settlement
62,000

 

 
62,000

 

Interest and other income
677

 
72

 
973

 
604

Loss on prepayment of Senior Notes

 

 

 
(5,364
)
Interest expense
(17,190
)
 
(17,815
)
 
(52,268
)
 
(55,697
)
Total other income (expense)
45,487

 
(17,743
)
 
10,705

 
(60,457
)
Income (loss) before income taxes
55,115

 
(16,505
)
 
67,446

 
(69,952
)
Benefit (expense) from income taxes
(6,845
)
 
513

 
(6,400
)
 
560

Net income (loss)
$
48,270

 
$
(15,992
)
 
$
61,046

 
$
(69,392
)
Basic net income (loss) per share
$
0.76

 
$
(0.25
)
 
$
0.96

 
$
(1.11
)
Diluted net income (loss) per share
$
0.65

 
$
(0.25
)
 
$
0.93

 
$
(1.11
)
Shares used in computing basic net income (loss) per share
63,917

 
62,997

 
63,714

 
62,556

Shares used in computing diluted net income (loss) per share
82,690

 
62,997

 
82,282

 
62,556

 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

4

Table of Contents

ASSERTIO THERAPEUTICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(in thousands)
(Unaudited)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Net income (loss)
$
48,270

 
$
(15,992
)
 
$
61,046

 
$
(69,392
)
Unrealized (loss) gain on available-for-sale securities, net of tax

 
(5
)
 
1

 
12

Comprehensive income (loss)
$
48,270

 
$
(15,997
)
 
$
61,047

 
$
(69,380
)
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.


5

Table of Contents

ASSERTIO THERAPEUTICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited) 
 
Nine Months Ended September 30,
 
2018
 
2017
Operating Activities
 
 
 
Net income (loss)
$
61,046

 
$
(69,392
)
Adjustments for non-cash items:
 
 
 
Depreciation and amortization
80,729

 
79,031

Accretion of debt discount and debt issuance costs
16,298

 
14,249

Loss on prepayment of Senior Notes

 
5,364

Provision for inventory obsolescence
244

 
2,345

Gain on disposal of property and equipment
659

 
(275
)
Stock-based compensation
10,275

 
9,922

Change in fair value of contingent consideration
(552
)
 
(7,517
)
Other
34

 
244

Changes in assets and liabilities:
 
 
 
Accounts receivable
28,570

 
24,864

Receivables from collaborative partners

 
27

Inventories
8,543

 
272

Prepaid and other assets
(63,039
)
 
(4,428
)
Accounts payable and other accrued liabilities
(28,071
)
 
(20,648
)
Accrued rebates, returns and discounts
(54,915
)
 
5,463

Interest payable
(2,960
)
 
(4,616
)
Income taxes payable
(126
)
 

Net cash provided by operating activities
56,735

 
34,905

Investing Activities
 
 
 
Purchases of property and equipment
(3,987
)
 
(563
)
Proceeds from disposal of property and equipment
145

 
281

Proceeds from sale of other assets
80

 

Investment in convertible instrument
(3,000
)
 

Purchases of marketable securities

 
(7,074
)
Maturities of marketable securities
1,200

 
60,681

Net cash (used in) investing activities
(5,562
)
 
53,325

Financing Activities
 
 
 
Payment of contingent consideration liability
(184
)
 
(1,673
)
Repayment of Senior Notes
(57,500
)
 
(100,000
)
Fees for early repayment and modifications of Senior Notes

 
(4,000
)
Proceeds from issuance of common stock
1,852

 
7,529

Shares withheld for payment of employee's withholding tax liability
(321
)
 
(210
)
Net cash (used in) financing activities
(56,153
)
 
(98,354
)
Net (decrease) in cash and cash equivalents
(4,980
)
 
(10,124
)
Cash and cash equivalents at beginning of year
126,884

 
117,709

Cash and cash equivalents at end of period
$
121,904

 
$
107,585

Supplemental Disclosure of Cash Flow Information
 
 
 
Net cash paid for income taxes
$
4,871

 
$
121

Cash paid for interest
$
38,811

 
$
44,832

Capital expenditures incurred but not yet paid
$
30

 
$
87

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

6

Table of Contents

ASSERTIO THERAPEUTICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) 
NOTE 1.  ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
Organization
 
Assertio Therapeutics, Inc. (Assertio or the Company) is a specialty pharmaceutical company focused on neurology, orphan and specialty medicines. The Company’s current specialty pharmaceutical business includes the following three products which we market in the United States (U.S.):
 
Gralise® (gabapentin), a once daily product for the management of postherpetic neuralgia (PHN), was launched in October 2011.

CAMBIA® (diclofenac potassium for oral solution), a non-steroidal anti-inflammatory drug for the acute treatment of migraine attacks, was acquired in December 2013.

Zipsor® (diclofenac potassium) liquid filled capsules, a non-steroidal anti-inflammatory drug for the treatment of mild to moderate acute pain, was acquired in June 2012.

Assertio was formerly known as Depomed, Inc., a California corporation (Depomed). On August 14, 2018, Depomed reincorporated from California to Delaware and changed its name to Assertio Therapeutics, Inc. The use of the term “Company” in this filing refers to Depomed any time prior to the Effective Time and to Assertio any time after the Effective Time.

In January 2018, pursuant to the terms of an agreement the Company entered into with Collegium Pharmaceutical, Inc. (Collegium) in December 2017, the (Commercialization Agreement), the Company granted Collegium the right to commercialize the NUCYNTA franchise of pain products in the U.S.  Pursuant to the Commercialization Agreement, Collegium assumed all commercialization responsibilities for the NUCYNTA franchise effective January 9, 2018, including sales and marketing. The Company will receive a royalty on all NUCYNTA revenues based on certain net sales thresholds, with a minimum royalty of $132.0 million for the year ended December 31, 2018. The parties amended the Commercialization Agreement in November 2018 (Amendment) as described in Note 17. The Company expects to receive royalties from Collegium of $132 million for 2018 and royalties based on certain annual NUCYNTA net sales thresholds for future years. Both the Company and Collegium may terminate the Commercialization Agreement under certain circumstances, provided that Collegium may not terminate the agreement prior to the end of 2021. The NUCYNTA franchise includes two products currently marketed in the U.S. by Collegium:
 
NUCYNTA® ER (tapentadol extended release tablets), a product for the management of pain severe enough to require daily, around the clock, long term opioid treatment, including neuropathic pain associated with diabetic peripheral neuropathy (DPN) in adults, and for which alternate treatment options are inadequate; and

NUCYNTA® IR (NUCYNTA) (tapentadol), an immediate release version of tapentadol for the management of moderate to severe acute pain in adults.

In November 2017, the Company entered into definitive agreements with Slán Medicinal Holdings Limited (Slán) pursuant to which the Company acquired Slán’s rights to market the specialty drug cosyntropin depot (synthetic ACTH Depot) in the U.S., and Slán acquired the Company’s rights to Lazanda® (fentanyl) nasal spray. The Company believes cosyntropin depot can be second-to-market behind Mallinckrodt plc's marketed product, H-P Acthar gel. The Company expects Slán to file an NDA for cosyntropin depot in late 2018.
 
The Company actively seeks to expand its product portfolio through acquiring or in licensing commercially available products or late stage product candidates that may be marketed and sold effectively with its existing products through its sales and marketing capabilities.
 
The Company also has royalty and milestone producing license arrangements based on its proprietary Acuform® gastroretentive drug delivery technology, including with Ironwood Pharmaceuticals, Inc. (Ironwood).

7

Table of Contents

Basis of Presentation
 
The unaudited condensed consolidated financial statements and the related footnote information of the Company have been prepared pursuant to the requirements of the Securities and Exchange Commission (SEC) for interim reporting. As permitted under those rules and regulations, certain footnotes or other financial information that are normally required by U.S. generally accepted accounting principles (GAAP) have been condensed or omitted pursuant to such rules and regulations. In the opinion of the Company’s management, the accompanying interim unaudited condensed consolidated financial statements include all adjustments necessary for a fair presentation of the information for the periods presented. The results for the three and nine months ended September 30, 2018 are not necessarily indicative of results to be expected for the entire year ending December 31, 2018 or future operating periods.
 
The accompanying unaudited condensed consolidated financial statements and related financial information should be read in conjunction with the audited financial statements and the related notes thereto for the year ended December 31, 2017 included in the Company’s Annual Report on Form 10-K filed with the SEC (the 2017 Form 10-K). The balance sheet as of December 31, 2017 has been derived from the audited financial statements at that date, as filed in the Company’s 2017 Form 10-K.
 
Principles of Consolidation
 
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Depomed Bermuda Ltd (Depo Bermuda), Depo NF Sub, LLC (Depo NF Sub) and Depo DR Sub, LLC (Depo DR Sub). These subsidiaries were established historically to facilitate transactions. All intercompany accounts and transactions have been eliminated on consolidation.
Use of Estimates
 
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Estimates are used when accounting for amounts recorded in connection with acquisitions, including initial fair value determinations of assets and liabilities as well as subsequent fair value measurements. Additionally, estimates are used in determining items such as sales discounts and returns, depreciable and amortizable lives, share-based compensation assumptions and taxes on income. Although management believes these estimates are based upon reasonable assumptions within the bounds of its knowledge of the Company’s business and operations, actual results could differ materially from these estimates.
 
Acquisitions
 
The Company accounts for acquired businesses using the acquisition method of accounting, which requires that assets acquired and liabilities assumed be recorded at date of acquisition at their respective fair values. The fair value of the consideration paid, including contingent consideration, is assigned to the underlying net assets of the acquired business based on their respective fair values. Any excess or shortfall of the purchase price over the estimated fair values of the net assets acquired is recorded as goodwill or bargain purchase, as applicable.
 
Significant judgments are used in determining the estimated fair values assigned to the assets acquired and liabilities assumed and in determining estimates of useful lives of long-lived assets. Fair value determinations and useful life estimates are based on, among other factors, estimates of expected future net cash flows, estimates of appropriate discount rates used to present value expected future net cash flows, the assessment of each asset’s life cycle, and the impact of competitive trends on each asset’s life cycle and other factors. These judgments can materially impact the estimates used to allocate acquisition date fair values to assets acquired and liabilities assumed and the resulting timing and amounts charged to, or recognized in current and future operating results. For these and other reasons, actual results may vary significantly from estimated results.
 
Any changes in the fair value of contingent consideration resulting from a change in the underlying inputs is recognized in operating expenses until the contingent consideration arrangement is settled. Changes in the fair value of contingent consideration resulting from the passage of time are recorded within interest expense until the contingent consideration is settled.
 
If the acquired net assets do not constitute a business under the acquisition method of accounting, the transaction is accounted for as an asset acquisition and no goodwill is recognized. In an asset acquisition, the amount allocated to acquired in-process research and development (IPR&D) with no alternative future use is charged to expense at the acquisition date.

8

Table of Contents

 
Revenue Recognition
 
The Company accounts for revenue arising from contracts and customers in accordance with Accounting Standards Update (ASU or Update) 2014-9, Revenue from Contracts with Customers (ASC 606), which was adopted on January 1, 2018 using the modified retrospective transition method. There was no adjustment to the Company’s opening balance of accumulated deficit resulting from the adoption of this guidance.
 
Under ASC 606, the Company recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration which the Company expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that the Company determines are within the scope of ASC 606, the Company performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the Company satisfies a performance obligation. The Company only applies the five-step model to contracts when it is probable that Company will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract inception, once the contract is determined to be within the scope of ASC 606, the Company assesses the goods or services promised within each contract and determines those that are performance obligations and assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation, when (or as) the performance obligation is satisfied.

Variable consideration arising from sales or usage-based royalties, promised in exchange for a license of the Company’s Intellectual Property, is recognized at the later of (i) when the subsequent product sales occur or (ii) the performance obligation, to which some or all of the sales-based royalty has been allocated, has been satisfied.
 
The Company recognizes a contract asset relating to its conditional right to consideration for completed performance obligations. Accounts receivable are recorded when the right to consideration becomes unconditional. A contract liability is recorded for payments received in advance of the related performance obligation being satisfied under the contract.
 
The Company derives revenue from license fees, under its Commercialization Agreement with Collegium, sale of its products, and from license fees, milestones and royalties earned on license and collaborative arrangements. Royalty payments made on products that the Company is not actively commercializing, which are remitted to the licensor on a pass through basis, are recorded by the Company on a systematic basis in proportion to the underlying net product sales and are included as gross-to-net adjustments in the related revenue line in the Company’s Statements of Operations.
 
Product Sales
 
The Company sells commercial products to wholesale distributors and retail pharmacies. Product sales revenue is recognized when title has transferred to the customer and the customer has assumed the risks and rewards of ownership, which typically occurs on delivery to the customer. The Company’s performance obligation is to deliver product to the customer, and the performance obligation is completed upon delivery. The transaction price consists of a fixed invoice price and variable product sales allowances, which include rebates, discounts and returns. Product sales revenues are recorded net of applicable reserves for these product sales allowances. Receivables related to product sales are typically collected one to two months after delivery.
 
Product Sales Allowances—The Company considers products sales allowances to be variable consideration and estimates and recognizes product sales allowances as a reduction of product sales in the same period the related revenue is recognized. Product sales allowances are based on actual or estimated amounts owed on the related sales. These estimates take into consideration the terms of the Company’s agreements with customers, historical product returns, rebates or discounts taken, estimated levels of inventory in the distribution channel, the shelf life of the product and specific known market events, such as competitive pricing and new product introductions. The Company uses the most likely method in estimating product sales allowances. If actual future results vary from the Company’s estimates, the Company may need to adjust these estimates, which could have an effect on product sales and earnings in the period of adjustment. The Company’s sales allowances include:
 
Product Returns—The Company allows customers to return product for credit with respect to that product within six months before and up to 12 months after its product expiration date. The Company estimates product returns and associated credit on NUCYNTA ER and NUCYNTA, Gralise, CAMBIA, Zipsor and Lazanda. Estimates for returns are based on historical return trends by product or by return trends of similar products, taking into consideration the shelf life of the product at the time of shipment, shipment and prescription trends, estimated distribution channel inventory levels and consideration of the

9

Table of Contents

introduction of competitive products. The Company did not assume financial responsibility for returns of NUCYNTA ER and NUCYNTA previously sold by Janssen Pharma or Lazanda product previously sold by Archimedes Pharma US Inc. Under the Commercialization Agreement with Collegium for NUCYNTA ER and NUCYNTA and the divestiture of Lazanda to Slán, the Company is only financially responsible for product returns for product that were sold by the Company, which are identified by specific lot numbers.
 
The shelf life of NUCYNTA ER and NUCYNTA is 24 months to 36 months from the date of tablet manufacture. The shelf life of Gralise is 24 months to 36 months from the date of tablet manufacture. The shelf life of CAMBIA is 24 months to 48 months from the manufacture date. The shelf life of Zipsor is 36 months from the date of tablet manufacture. The shelf life of Lazanda is 24 to 36 months from the manufacture date. Because of the shelf life of the Company’s products and its return policy of issuing credits with respect to product that is returned within six months before and up to 12 months after its product expiration date, there may be a significant period of time between when the product is shipped and when the Company issues credit on a returned product. Accordingly, the Company may have to adjust these estimates, which could have an effect on product sales and earnings in the period of adjustments.
 
Wholesaler and Retail Pharmacy Discounts — The Company offers contractually determined discounts to certain wholesale distributors and retail pharmacies that purchase directly from it. These discounts are either taken off invoice at the time of shipment or paid to the customer on a quarterly basis one to two months after the quarter in which product was shipped to the customer.

Prompt Pay Discounts—The Company offers cash discounts to its customers (generally 2% of the sales price) as an incentive for prompt payment. Based on the Company’s experience, the Company expects its customers to comply with the payment terms to earn the cash discount.
 
Patient Discount Programs—The Company offers patient discount co-pay assistance programs in which patients receive certain discounts off their prescriptions at participating retail pharmacies. The discounts are reimbursed by the Company approximately one month after the prescriptions subject to the discount are filled.
 
Medicaid Rebates—The Company participates in Medicaid rebate programs, which provide assistance to certain low income patients based on each individual state’s guidelines regarding eligibility and services. Under the Medicaid rebate programs, the Company pays a rebate to each participating state, generally two to three months after the quarter in which prescriptions subject to the rebate are filled.
 
Chargebacks—The Company provides discounts to authorized users of the Federal Supply Schedule (FSS) of the General Services Administration under an FSS contract with the Department of Veterans Affairs. These federal entities purchase products from the wholesale distributors at a discounted price, and the wholesale distributors then charge back to the Company the difference between the current retail price and the price the federal entity paid for the product.
 
Managed Care Rebates—The Company offers discounts under contracts with certain managed care providers. The Company generally pays managed care rebates one to three months after the quarter in which prescriptions subject to the rebate are filled.
 
Medicare Part D Coverage Gap Rebates—The Company participates in the Medicare Part D Coverage Gap Discount Program under which it provides rebates on prescriptions that fall within the “donut hole” coverage gap. The Company generally pays Medicare Part D Coverage Gap rebates two to three months after the quarter in which prescriptions subject to the rebate are filled.
 
Royalties
 
For arrangements that include sales-based royalties and the license is deemed to be the predominant item to which the royalties relate, the Company recognizes royalty revenue at the later of (1) when the related sales occur, or (2) when the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied).
 
The Company currently receives royalties based on sales of CAMBIA in Canada and sales of NUCYNTA ER in Canada and Japan, which are recognized as revenue when the related sales occur as there are no continuing performance obligations by the Company under those agreements.
 

10

Table of Contents

Stock Based Compensation
 
The Company uses the Black Scholes option valuation model to determine the fair value of stock options and employee stock purchase plan (ESPP) shares. The determination of the fair value of stock based payment awards on the date of grant using an option valuation model is affected by the Company’s stock price as well as assumptions, which include the Company’s expected term of the award, the expected stock price volatility, risk free interest rate and expected dividends over the expected term of the award.
 
The Company uses historical option exercise data to estimate the expected term of the options. The Company estimates the volatility of its common stock price by using the historical volatility over the expected term of the options. The Company bases the risk free interest rate on U.S. Treasury zero coupon issues with terms similar to the expected term of the options as of the date of grant. The Company does not anticipate paying any cash dividends in the foreseeable future and therefore uses an expected dividend yield of zero in the option valuation models. As a result of adopting ASU 2016-9 Improvements to Employee Share-Based Payment Accounting, the Company made an accounting policy election to account for forfeitures as they occur, rather than estimating expected forfeitures at the time of the grant.
 
The fair value of each restricted stock unit (RSU) that does not contain a market condition is equal to the market value of our common stock as of the date of the grant. The Company’s performance stock units (PSUs) vest over a three year period based on the Relative Total Shareholder Return (TSR) of the Company’s common stock against the Russell 3000 Pharmaceuticals Total Return Index over the period. The grant-date fair value of the PSUs is determined using the Monte Carlo simulation method.
 
Recently Adopted Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (FASB) issued ASU 2014-9, Revenue from Contracts with Customers. This guidance outlines a new, single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. This new revenue recognition model provides a five-step analysis in determining when and how revenue is recognized. The new model requires revenue recognition to depict the transfer of promised goods or services to customers in an amount that reflects the consideration a company expects to receive in exchange for those goods or services.
 
The Company adopted ASC 606 using the modified retrospective method as of January 1, 2018. The Company determined that there was no cumulative effect of applying the new guidance to all contracts with customers that were not completed as of January 1, 2018, therefore no adjustment was required to the accumulated deficit as of the adoption date. Furthermore, upon adoption of the new guidance no adjustments to any prior year periods would have been reportable to present the condensed consolidated balance sheets, statements of operations, or statements of cash flows on a comparable basis to any current year reported balances or amounts.

In January 2017, the FASB issued ASU No. 2017-1, Business Combinations (Topic 805): Clarifying the Definition of a Business, which provides clarification on the definition of a business and adds guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The standard was effective for the Company beginning January 1, 2018. The future impact of ASU No. 2017-1 will be dependent upon the nature of the Company’s future acquisition or disposition transactions, if any.
 
In May 2017, the FASB issued accounting guidance to clarify which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. The new standard was required to be applied prospectively. The guidance was effective for the Company beginning January 1, 2018. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.
 
In March 2018, the FASB issued ASU No. 2018-5, Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118, which provides clarification and guidance on the income tax accounting implications of the Tax Cuts and Jobs Act. The standard was effective for the Company beginning January 1, 2018. The adoption of this guidance did not materially affect the Company’s consolidated financial statements.
 
In January of 2016, the FASB issued ASU No. 2016-1, Financial Instruments – Overall (Subtopic 405-20), Recognition and Measurement of Financial Assets and Financial Liabilities. ASU 2016-1 changed accounting for equity investments, financial liabilities under the fair value option and the presentation and disclosure requirements for financial instruments. In addition, it clarified guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. The guidance became effective for the Company on

11

Table of Contents

January 1, 2018 and required adoption using a modified retrospective approach, with certain exceptions. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.
 
Recently Issued Accounting Standards
 
In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40). It requires implementation costs incurred by customers in cloud computing arrangements to be deferred and recognized over the term of the arrangement, if those costs would be capitalized by the customer in a software licensing arrangement under the internal-use software guidance (Subtopic 350-40). This guidance is effective for interim and annual periods beginning after December 15, 2019. Early adoption is permitted. The Company is currently assessing the impact of this guidance on its consolidated financial statements and does not expect this guidance to have a material impact on its consolidated financial statements.
    
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820). It removes disclosure requirements on fair value measurements including the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, the policy for timing of transfers between levels, and the valuation processes for Level 3 fair value measurements. It also amends and clarifies certain disclosures and adds new disclosure requirements including the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements, and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. This guidance is effective for interim and annual periods beginning after December 15, 2019. An entity is permitted to early adopt any removed or modified disclosures and delay adoption of the additional disclosures until the effective date. The Company is currently evaluating this guidance and does not expect this guidance to have a material impact on its consolidated financial statements.

In February 2016, the FASB issued ASU 2016-2, Leases. This guidance requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease, respectively. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than twelve months regardless of classification. If the available accounting election is made, leases with a term of twelve months or less can be accounted for similar to existing guidance for operating leases. Additionally, the FASB issued ASU 2018-1, ASU 2018-10 and ASU 2018-11, Leases, (Topic 842); which allow a Land Easement Practical Expedient for Transition to Topic 842, some narrow scope exceptions and relief from the costs of implementing certain aspects of the standard, respectively. The new standard will be adopted using the modified retrospective approach and will be effective for the Company starting with the first quarter of 2019, with early adoption permitted. The Company will adopt the standard effective in the first quarter of 2019 and is currently assessing the impact of adopting this guidance on its consolidated financial statements and related disclosures. The Company does not expect the adoption to have a material impact on its consolidated statement of earnings. However, the new standard will require the Company to establish liabilities and corresponding right-of-use assets on its consolidated balance sheet for operating leases that exist as of the January 1, 2019 adoption date.
 
In June 2016, the FASB issued ASU 2016-13 (ASU 2016-13), Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. ASU 2016-13 replaces the existing incurred loss impairment model with an expected loss methodology, which will result in more timely recognition of credit losses. ASU 2016-13 is effective for annual reporting periods, and interim periods within those years beginning after December 15, 2019. The Company is currently in the process of evaluating the impact of the adoption of ASU 2016-13 on the Company’s consolidated financial statements.
 
In February 2018, the FASB issued ASU 2018-2, Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, that provides companies with an option to reclassify stranded tax effects resulting from enactment of the Tax Cuts and Jobs Act (TCJA) from accumulated other comprehensive income to retained earnings. The guidance will be effective for the Company beginning in the first quarter of 2019 with early adoption permitted, and would be applied either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the tax rate as a result of TCJA is recognized. The Company has not made a determination as to which alternative methods it will use when it adopts this standard, but does not expect the adoption of this ASU to have a material impact on its results of operations, financial position and cash flows.
 


12

Table of Contents

NOTE 2.  CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
 
Securities classified as cash and cash equivalents and short-term investments as of September 30, 2018 and December 31, 2017 are summarized below (in thousands). Estimated fair value is based on quoted market prices for these investments.
 
 
 
 
Gross
 
Gross
 
 
 
 
 
 
Unrealized
 
Unrealized
 
 
September 30, 2018
 
Cost
 
Gains
 
Losses
 
Fair Value
Cash and cash equivalents
 
 
 
 
 
 
 
 
Cash
 
$
106,702

 
$

 
$

 
$
106,702

Money market funds
 
13

 

 

 
13

Commercial paper
 
15,189

 

 

 
15,189

Total cash and cash equivalents
 
$
121,904

 
$

 
$

 
$
121,904

 
 
 
 
Gross
 
Gross
 
 
 
 
Amortized
 
Unrealized
 
Unrealized
 
 
December 31, 2017
 
Cost
 
Gains
 
Losses
 
Fair Value
Cash and cash equivalents
 
 
 
 
 
 
 
 
Cash
 
$
103,119

 
$

 
$

 
$
103,119

Money market funds
 
95

 

 

 
95

Commercial paper
 
23,670

 

 

 
23,670

Total cash and cash equivalents
 
126,884

 

 

 
126,884

Short-term investments
 
 
 
 
 
 
 
 
Corporate debt securities and commercial paper with maturities less than 1 year
 
1,210

 

 
(5
)
 
1,205

Total short-term investments
 
1,210

 

 
(5
)
 
1,205

Total
 
$
128,094

 
$

 
$
(5
)
 
$
128,089

 
The Company considers all highly liquid investments with a maturity at date of purchase of three months or less to be cash equivalents. Cash and cash equivalents generally consist of cash on deposit with banks, money market instruments, U.S. Agency discount notes, commercial paper and corporate debt securities.
 
The Company invests its cash in money market funds and marketable securities including U.S. Treasury and government agency securities, commercial paper, and high quality debt securities of financial and commercial institutions. To date, the Company has not experienced material losses on any of its balances. These securities are carried at fair value, which is based on readily available market information, with unrealized gains and losses included in “accumulated other comprehensive loss” within shareholders’ equity on the consolidated balance sheets. The Company uses the specific identification method to determine the amount of realized gains or losses on sales of marketable securities. Realized gains or losses have been insignificant and are included in “interest and other income” in the consolidated statement of operations.
 
As of September 30, 2018, the Company held zero securities in an unrealized loss position or that have been in a continuous loss position. The following table shows the gross unrealized losses and fair value of the Company’s investments with unrealized losses that were not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at December 31, 2017 (in thousands):
 
 
Less than 12 months
 
12 months or greater
 
Total
 
 
 
 
Gross
 
 
 
Gross
 
 
 
Gross
 
 
 
 
Unrealized
 
 
 
Unrealized
 
 
 
Unrealized
December 31, 2017
 
Fair Value
 
Losses
 
Fair Value
 
Losses
 
Fair Value
 
Losses
Corporate Debt Securities
 
$
1,205

 
$
(5
)
 
$

 
$

 
$
1,205

 
$
(5
)
 
The gross unrealized losses above were caused by interest rate increases. No significant facts or circumstances have arisen to indicate that there has been any deterioration in the creditworthiness of the issuers of the securities held by the

13

Table of Contents

Company. Based on the Company’s review of these securities, including the assessment of the duration and severity of the unrealized losses and the Company’s ability and intent to hold the investments until maturity, there were no material other than temporary impairments for these securities at September 30, 2018 or December 31, 2017. Gross realized gains and losses on marketable securities were not material for the three and nine months ended September 30, 2018 or 2017.
 
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs.
 
Level 1: Quoted prices in active markets for identical assets or liabilities.
Level 2: Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The following tables represent the Company’s fair value hierarchy for its financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2018 and December 31, 2017:
 
(in thousands)
 
 
 
 
 
 
 
 
September 30, 2018
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
 
Money market funds
 
$
13

 
$

 
$

 
$
13

Commercial paper
 

 
15,189

 

 
15,189

Total
 
$
13

 
$
15,189

 
$

 
$
15,202

Liabilities:
 
 
 
 
 
 
 
 
Contingent consideration—Zipsor
 
$

 
$

 
$
367

 
$
367

Contingent consideration—CAMBIA
 

 

 
510

 
510

Total
 
$

 
$

 
$
877

 
$
877

 
 
(in thousands)
 
 
 
 
 
 
 
 
December 31, 2017
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
 
Money market funds
 
$
95

 
$

 
$

 
$
95

Commercial paper
 

 
23,670

 

 
23,670

Corporate debt securities
 

 
1,205

 

 
1,205

Total
 
$
95

 
$
24,875

 
$

 
$
24,970

Liabilities:
 
 
 
 
 
 
 
 
Contingent consideration—Zipsor
 
$

 
$

 
$
464

 
$
464

Contingent consideration—Lazanda
 

 

 
156

 
156

Contingent consideration—CAMBIA
 

 

 
993

 
993

Total
 
$

 
$

 
$
1,613

 
$
1,613


14

Table of Contents

 
The fair value measurement of the contingent consideration obligations arises from the Zipsor, CAMBIA and Lazanda acquisitions and relates to fair value of the potential future contingent milestone payments and royalties payable under the respective agreements which are determined using Level 3 inputs. The remaining contingent consideration liability following the divestiture of Lazanda in November 2017 was $0.2 million. This liability was settled in the first quarter of 2018. The key assumptions in determining the fair value are the discount rate and the probability assigned to the potential milestones and royalties being achieved. At each reporting date, the Company re-measures the contingent consideration obligation arising from the above acquisitions to their estimated fair values. Any changes in the fair value of contingent consideration resulting from a change in the underlying inputs are recognized in operating expenses until the contingent consideration arrangement is settled. Changes in the fair value of contingent consideration resulting from the passage of time are recorded within interest expense until the contingent consideration is settled. The table below provides a summary of the changes in fair value recorded in interest expense and selling, general and administrative expenses for the three and nine months ended September 30, 2018 and 2017:
 
(in thousands)
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Fair value, beginning of the period
$
967

 
$
7,356

 
$
1,613

 
$
14,825

Changes in fair value recorded in interest expense
27

 
221

 
106

 
1,017

Changes in fair value recorded in selling, general and administrative expenses
(117
)
 
(1,415
)
 
(658
)
 
(7,542
)
Royalties and milestone paid

 
(526
)
 
(184
)
 
(2,664
)
Total
$
877

 
$
5,636

 
$
877

 
$
5,636

 
The estimated fair value of the 2.50% Convertible Senior Notes Due 2021, which the Company issued on September 9, 2014 is based on a market approach. The estimated fair value was approximately $276.9 million and $295.4 million (par value $345.0 million) as of September 30, 2018 and December 31, 2017, respectively, and represents a Level 2 valuation. The principal amount of the Senior Notes approximates their fair value as of September 30, 2018 and December 31, 2017, respectively and represents a Level 2 valuation. When determining the estimated fair value of the Company’s debt, the Company uses a commonly accepted valuation methodology and market-based risk measurements that are indirectly observable, such as credit risk. 
 
There were no transfers between Level 1, Level 2 or Level 3 of the fair value hierarchy during the three and nine months ended September 30, 2018 and 2017.
NOTE 3.  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 shares of common stock outstanding during the period. Diluted net income (loss) per share is calculated by dividing the net income (loss) by the weighted-average number of shares of common stock outstanding during the period, plus potentially dilutive common shares, consisting of stock options, RSUs, PSUs, ESPP and convertible debt. The Company uses the treasury-stock method to compute diluted earnings per share with respect to its stock options and equivalents. The Company uses the if-converted method to compute diluted earnings per share with respect to its convertible debt. For purposes of this calculation, options to purchase stock, including stock options, RSUs, PSUs and ESPP, are considered to be potential common shares and are only included in the calculation of diluted net income (loss) per share when their effect is dilutive. Basic and diluted earnings per common share are calculated as follows:
 

15

Table of Contents

 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(in thousands, except for per share amounts)
 
2018
 
2017
 
2018
 
2017
Basic net income (loss) per share
 
 
 
 
 
 
 
 
Net income (loss)
 
$
48,270

 
$
(15,992
)
 
$
61,046

 
$
(69,392
)
Denominator
 
63,917

 
62,997

 
63,714

 
62,556

Basic net income (loss) per share
 
$
0.76

 
$
(0.25
)
 
$
0.96

 
$
(1.11
)
 
 
 
 
 
 
 
 
 
Diluted net income (loss) per share
 
 
 
 
 
 
 
 
Numerator:
 
 
 
 
 
 
 
 
Net income (loss)
 
$
48,270

 
$
(15,992
)
 
$
61,046

 
$
(69,392
)
Add: Interest Expense on convertible debt, net of tax
 
5,340

 

 
15,815

 

Denominator:
 
 
 
 
 
 
 
 
Denominator for basic income (loss) per share
 
63,917

 
62,997

 
63,714

 
62,556

Add effect of diluted securities:
 
 
 
 
 
 
 
 
Stock options and equivalents and convertible debt
 
18,773

 

 
18,568

 

Denominator for diluted income (loss) per share
 
82,690

 
62,997

 
82,282

 
62,556

Diluted net income (loss) per share
 
$
0.65

 
$
(0.25
)
 
$
0.93

 
$
(1.11
)
 
The following table sets forth outstanding potentially dilutive common shares that are not included in the computation of diluted net income (loss) per share because to do so would be anti-dilutive:
 
 
 
September 30,
2018
 
September 30,
2017
(in thousands)
 
 
Convertible debt
 

 
17,931

Stock options and equivalents
 
3,359

 
7,393

Total potentially dilutive common shares
 
3,359

 
25,324


16

Table of Contents

NOTE 4.  REVENUE
 
Disaggregated Revenue
 
The following table summarizes revenue from contracts with customers for the three and nine months ended September 30, 2018 and 2017 (in thousands):
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2018
 
2017
 
2018
 
2017
Product sales, net
 
 
 
 
 
 
 
 
Gralise
 
$
14,630

 
$
21,103

 
$
43,272

 
$
57,777

CAMBIA
 
10,365

 
8,164

 
24,870

 
23,862

Zipsor
 
4,441

 
3,232

 
13,175

 
12,286

Total neurology product sales, net
 
29,436

 
32,499

 
81,317

 
93,925

NUCYNTA products
 
11

 
58,665

 
18,782

 
183,299

Lazanda
 
(12
)
 
4,040

 
528

 
13,239

Pharmacy benefit manager dispute reserve
 

 

 

 
(4,742
)
Total product sales, net
 
29,435

 
95,204

 
100,627

 
285,721

Commercialization agreement:
 
 
 
 
 
 
 
 
Commercialization rights and facilitation services, net
 
27,781

 

 
87,055

 

Revenue from transfer of inventory
 

 

 
55,705

 

Royalties and milestone revenue
 
20,277

 
209

 
25,784

 
596

Total revenues
 
$
77,493

 
$
95,413

 
$
269,171

 
$
286,317

 
NUCYNTA product sales for the nine months ended September 30, 2018 reflect the Company's sales of NUCYNTA between January 1 and January 8, 2018. During the three and nine months ended September 30, 2018 the Company recognized an insignificant amount of sales reserve estimate adjustments related to sales recognized for NUCYNTA and Lazanda in prior periods.  During the first quarter of 2018, in connection with the Collegium transaction, the Company recognized revenue of $12.5 million related to the release of NUCYNTA sales reserves which were primarily recorded in the fourth quarter of 2017, as financial responsibility for those reserves transferred to Collegium upon closing of the Commercialization Agreement.
 
Commercialization Agreement with Collegium
 
In January 2018, the Company entered into a Commercialization Agreement with Collegium (Commercialization Agreement), pursuant to which the Company granted Collegium the right to commercialize the NUCYNTA pain products in the U.S.  Under the Commercialization Agreement, Collegium assumed all commercialization responsibilities for NUCYNTA effective January 9, 2018, including sales and marketing. The Company will receive a royalty on all NUCYNTA revenues based on certain net sales thresholds, with a minimum royalty of $132 million for the year ended December 31, 2018. Pursuant to the Amendment to the Commercialization Agreement described in Note 17, royalties for fiscal years beginning 2019 will be based on certain annual NUCYNTA net sales thresholds for future years. The Company received an upfront payment of $10.0 million as well as $6.2 million with respect to the inventory of finished goods which was transferred to Collegium on closing of the transaction in January 2018.
The Company identified the following three performance obligations under the Commercialization Agreement:
1.
License to commercialize the NUCYNTA pain products,
2.
Services to arrange for supplies of NUCYNTA pain products using the Company’s existing contract manufacturing contracts with third parties; and
3.
Transfer of control of all NUCYNTA finished goods held at closing. 
 

In January 2018, the Company determined the total transaction price to be $553.2 million, which consists of $537.0 million in total annual minimum royalty payments, the $10.0 million upfront fee, and a $6.2 million payment for NUCYNTA finished goods inventory at cost. In accordance with the relevant Accounting Standard, the Company determined that the

17

Table of Contents

duration of the Commercialization Agreement begins on the effective date of January 9, 2018 and lasts through December 31, 2021, which is consistent with the contractual period in which the Company and Collegium have enforceable rights and obligations which include the minimum royalty period and the period in which Collegium would incur a $25.0 million termination penalty on terminating the agreement. See Note 17, for information regarding the Amendment to the Commercialization Agreement which impacts certain of these provisions in the fourth quarter of 2018.
 
The transaction price was allocated to the performance obligations noted above in proportion to their standalone selling prices and will be recognized as these performance obligations are satisfied by the Company. The transaction price allocated to the inventory transferred to Collegium on closing was $55.7 million and was recognized on the closing date as the control of such inventory was transferred to Collegium. The transaction price allocated to the other remaining performance obligations of the license to commercialize NUCYNTA and the related services to arrange for supplies was $497.5 million. This amount will be recognized ratably over time through December 31, 2021, which represents the period over which enforceable rights and obligations exist after considering the various termination rights for either parties that exist in the contract.  For the three and nine months ended September 30, 2018, the Company recognized $27.8 million and $87.1 million, respectively, related to the right to commercialize NUCYNTA and related facilitation services. Total revenue recognized for the three and nine months ended September 30, 2018 were $27.8 million and $142.8 million, respectively, which includes the portion of the transaction price allocated to inventory. The commercialization revenues were reduced by anticipated additional royalties payable to Grünenthal by the Company. See "Collegium" below for additional discussion.
 
The annual minimum royalty amounts are payable by Collegium in equal quarterly installments of $33.8 million, and are initially received through a lockbox sweep mechanism.  Remittances from customers on product sales of NUCYNTA made by Collegium are deposited to a designated lockbox account, separate from Collegium’s other receivables.  On a daily basis, 35% of the cash receipts in this lockbox account are swept to Assertio’s bank accounts up to the minimum cash royalty amounts which are $30.8 million for the three months ended March 31, 2018 and $33.8 million per quarter, thereafter. If the cash receipts received by Assertio in a quarter are lower than the minimum quarterly royalty, or if the royalty receivable to Assertio is above the minimum quarterly amount, Collegium is responsible to remit the remaining royalty payment within 45 days after the end of the each quarter.  For the nine months ended September 30, 2018, $98.3 million was received by Assertio. See Note 17 for information regarding the Amendment to the Commercialization Agreement.
 
Contract Assets and Liabilities
 
The following table presents changes in the Company’s contract assets and liabilities for the nine months ended September 30, 2018 (in thousands):
 
Balance
 
 
 
 
 
Balance
 
as of
 
 
 
 
 
as of
 
December 31, 2017
 
Additions
 
Deductions
 
September 30, 2018
Contract assets:
 

 
 

 
 

 
 
Contract asset, net - Collegium
$

 
$
55,705

 
$
(23,654
)
 
$
32,051

Contract asset - Ironwood

 
5,000

 
(5,000
)
 

 

 
60,705

 
(28,654
)
 
32,051

 
Collegium
 
The Company receives payments from Collegium based on the above described schedule as established in the Company’s contracts. Contract asset relates to conditional right to consideration for completed performance under the Commercialization Agreement. This contract asset relates to the revenue recognized by the company from the transfer of inventory to Collegium on the date of closing of the agreement in January 2018 net of the contract liability of $10.0 million resulting from the upfront payment received. Accounts receivable are recorded when the right to consideration becomes unconditional. As of September 30, 2018, $9.9 million and $22.1 million of the contract asset has been recorded within “Prepaid and other current assets” and “Other long-term assets,” respectively.
 

18

Table of Contents



The Company acquired the U.S. rights to NUCYNTA from Janssen Pharmaceuticals, Inc. (Janssen) in April 2015. As part of that transaction, the Company also acquired the related royalty obligations for NUCYNTA to Grünenthal, the originator of tapentadol. Pursuant to the terms of the Commercialization Agreement, Collegium will now remit payment on behalf of the Company to satisfy this royalty obligation In addition, as a condition of giving its consent to the Commercialization Agreement with Collegium, Grünenthal amended the terms of the original royalty agreement to require payment of a minimum royalty of $34.0 million per year on net sales of NUCYNTA greater than $180.0 million and equal to, or less than, $243.0 million for each of the years ended December 31, 2018 through 2021. In return for this agreement to pay minimum royalties, the Company received the right to share royalties with Grünenthal on annual net sales of NUCYNTA above $243.0 million during the same period. The Company is obligated to cover any shortfall between the minimum royalty amount of $34.0 million and the amounts paid to Grünenthal by Collegium for each of the years ended December 31, 2018 through 2021, as a result of which the Company could be obligated to pay up to $8.8 million per year for each of the years ended December 31, 2018 through 2021.

In the three months ended September 30, 2018, the Company recorded a royalty payable to Grünenthal of $3.7 million in anticipation of the Collegium payments to Grünenthal falling below the minimum of royalty amount of $34.0 million for the full 2018 fiscal year. Grünenthal royalties related to NUCYNTA sales for the three and nine months ended September 30, 2018 were $10.8 million and $25.2 million, respectively, of which approximately $7.1 million and $21.5 million, respectively, were paid directly by Collegium to Grünenthal. These royalties were recorded as a gross-to-net adjustment in the Revenue from Commercialization Agreement, net line in the Company’s Statement of Operations. Pursuant to the Amendment, Collegium will reimburse the Company for the amount of any minimum annual royalties paid by the Company to Grünenthal on net sales of NUCYNTA from 2019 to 2021 related to this Commercialization Agreement.

Collaboration and License Agreements
 
Ironwood Pharmaceuticals, Inc.  In July 2011, the Company entered into a collaboration and license agreement with Ironwood (Ironwood Agreement) granting Ironwood a license for worldwide rights to certain patents and other intellectual property rights to the Company’s Acuform drug delivery technology for IW 3718, an Ironwood product candidate under development for refractory GERD. The Company has received $3.4 million under the agreement, including a contingent milestone payment of $1.0 million in March 2014 as a result of the initiation of clinical trials relating to IW 3718 by Ironwood. The Company is entitled to receive additional contingent milestone payments upon the occurrence of certain development milestones and royalties on net sales of the product if approved.
 
The Company identified the following two performance obligations under the Ironwood Agreement: (1) the license to the Acuform technology and (2) formulation work associated with IW-3718. The license was granted in 2011 and the formulation work was completed in 2012. The Company has no ongoing performance obligations and has recognized all proceeds received to date as revenue.
 
The future contingent milestones under the Ironwood Agreement are considered variable consideration and are estimated using the most likely method. As part of implementation of ASC 606, the Company evaluated whether the future milestones under the Ironwood Agreement should have been included as part of the transaction price in periods before January 1, 2018. The Company concluded that because of development and regulatory risks at the time, it was probable that a significant revenue reversal could have occurred. Accordingly, the associated future contingent milestone values were not included in the transaction price for periods before January 1, 2018. At the end of each subsequent reporting period, the Company re-evaluates the probability or achievement of each such milestone and any related constraint, and if necessary, adjusts its estimates of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis, which would affect revenues and earnings in the period of adjustment. During the nine months ended September 30, 2018, the Company recognized and collected a $5.0 million milestone payment related to the dosing of the first patient in a Phase 3 trial. There was no revenue recognized under this agreement for the three and nine months ended September 30, 2017.

PDL BioPharma, Inc. In October 2013, the Company sold its interests in royalty and milestone payments under its license agreements relating to our Acuform technology in the Type 2 diabetes therapeutic area to PDL BioPharma, Inc. (PDL) for $240.5 million. On August 2, 2018 the Company sold its remaining interest in such payments to PDL for $20.0 million. The $20 million of revenue was recognized as royalty revenue in the three months ended September 30, 2018.

19

Table of Contents

NOTE 5.  STOCK-BASED COMPENSATION
 
The following table presents stock-based compensation expense recognized for stock options, stock awards, restricted stock units, performance-based restricted stock units and the Company’s Employee Stock Purchase Program (ESPP) in the Company’s Condensed Consolidated Statements of Operations (in thousands):
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Cost of sales
$

 
$
9

 
$
30

 
$
84

Research and development expense
270

 
45

 
337

 
652

Selling, general and administrative expense
2,674

 
2,857

 
7,523

 
9,134

Restructuring
(173
)
 
52

 
2,385

 
52

Total
$
2,771

 
$
2,963

 
$
10,275

 
$
9,922

 
At September 30, 2018, the Company had $16.3 million of total unrecognized compensation expense related to stock option grants and restricted stock units that will be recognized over an average vesting period of 2.2 years.

The reduction of stock based compensation expense related to restructuring is due to forfeitures of stock based compensation awards by employees who were terminated in conjunction with the Company's restructuring plan, see Note 15—Restructuring for additional discussion.
 
Performance-based Restricted Stock Units
 
During the nine months ended September 30, 2018, the Company granted Performance Stock Units (PSUs) with an aggregate target award of 523,187 units and a weighted-average grant-date fair value of $10.18 per unit. The PSUs vest in annual cliffs over a three year period based on the Relative Total Shareholder Return (TSR) of the Company’s common stock against the Russell 3000 Pharmaceuticals Total Return Index over the period. The ultimate award, which is determined at the end of the three-year cycle, can range from zero to 200% of the target. The recipients of the PSU awards will have voting rights and the right to receive a dividend once the underlying shares have been issued. The grant-date fair value is based upon the Monte Carlo simulation method.
 
The following table summarizes the PSU activity for the nine months ended September 30, 2018 under the 2014 Plan (in thousands, except per share data):
 
 
 
Weighted
 
Weighted
 
 
 
 
 
Average
 
Average
 
 
 
 
 
Grant Date
 
Remaining
 
 
 
 
 
Fair 
 
Contractual
 
Aggregate
 
Number of
 
Value
 
Term
 
Intrinsic Value
 
Shares
 
Per Share
 
(in years)
 
(in 000s)
Non-vested performance-based restricted stock units at December 31, 2017

 
$

 
 
 
 
Granted
523,187

 
10.18

 
 
 
 
Vested

 

 
 
 
 
Forfeited
(36,800
)
 
10.04

 
 
 
 
Non-vested performance-based restricted stock units at September 30, 2018
486,387

 
$
10.19

 
2.36
 
$
2,860

 
As of September 30, 2018, total unrecognized compensation cost related to PSUs was $3.7 million, which is expected to be recognized over the remaining weighted-average vesting period of 2.36 years.

20

Table of Contents

NOTE 6.  INVENTORIES, NET
 
Inventories, net, consist of raw materials, work in process and finished goods and are stated at the lower of cost or market and consist of the following (in thousands):
 
 
September 30,
2018
 
December 31,
2017
 
 
Raw materials
$
1,625

 
$
3,008

Work-in-process
802

 
204

Finished goods
1,828

 
9,830

Total
$
4,255

 
$
13,042

NOTE 7. ACCOUNTS RECEIVABLES, NET
 
Accounts receivables, net, consist of the following (in thousands):
 
 
September 30,
2018
 
December 31,
2017
 
 
Product sales, net
$
30,479

 
$
71,919

Receivables from collaborative partners
13,433

 
563

Total accounts receivable, net
$
43,912

 
$
72,482

 
NOTE 8.  ACCRUED LIABILITIES
 
Accrued liabilities consist of the following (in thousands):
 
 
September 30,
2018
 
December 31,
2017
 
 
Accrued compensation
$
4,205

 
$
7,345

Accrued royalties
4,715

 
17,370

Accrued restructuring and one-time termination costs
1,835

 
9,483

Other accrued liabilities
15,320

 
26,298

Total accrued liabilities
$
26,075

 
$
60,496

 
NOTE 9.  DEBT
 
Senior Notes
 
On April 2, 2015, the Company issued $575.0 million aggregate principal amount of senior secured notes (the Senior Notes) for aggregate gross proceeds of approximately $562.0 million pursuant to a Note Purchase Agreement dated March 12, 2015, among the Company and Deerfield Private Design Fund III, L.P., Deerfield Partners, L.P., Deerfield International Master Fund, L.P., Deerfield Special Situations Fund, L.P., Deerfield Private Design Fund II, L.P., Deerfield Private Design International II, L.P., BioPharma Secured Investments III Holdings Cayman LP, Inteligo Bank Ltd. and Phemus Corporation (collectively, the Purchasers) and Deerfield Private Design Fund III, L.P., as collateral agent. The Company used $550.0 million of the net proceeds received upon the sale of the Senior Notes to fund a portion of the Purchase Price paid to Janssen Pharma in connection with the NUCYNTA acquisition. The Company incurred debt issuance costs of $0.5 million for 2015.
 

21

Table of Contents

The Senior Notes will mature on April 14, 2021 (unless earlier prepaid or repurchased), are secured by substantially all of the assets of the Company and any subsidiary guarantors, and bear interest at the rate equal to the lesser of (i) 9.75% over the three month London Inter-Bank Offer Rate (LIBOR), subject to a floor of 1.0% and (ii) 11.95% (through the third anniversary of the purchase date) and 12.95% (thereafter). The interest rate is determined at the first business day of each fiscal quarter, commencing with the first such date following April 2, 2015. The interest rate for the three months ended September 30, 2018 and 2017 was 12.15% and 11.05%, respectively.

In April 2017, the Company prepaid and retired $100.0 million of the Senior Notes and paid a $4.0 million prepayment fee; and in November 2017, the Company prepaid and retired an additional $10 million of the Senior Notes and paid a $0.4 million prepayment fee. The Company recorded a net loss on prepayment of the Senior Notes of $5.9 million which represented the prepayment fees of $4.4 million and the immediate recognition of unamortized balances of debt discount and debt issuance costs of $1.5 million in 2017. This loss is recorded as a loss on prepayment of Senior Notes in the consolidated statements of operations for 2017.
 
The remaining $307.5 million of Senior Notes can be prepaid, at the Company’s option. The Company is required to repay the outstanding Senior Notes in full if the principal amount outstanding on its existing 2.50% Convertible Senior Notes due 2021 as of March 31, 2021, is greater than $100.0 million. In addition, if the successor entity in a Major Transaction, as defined in the Note Purchase Agreement, does not satisfy specified qualification criteria, the Purchasers may require the Company to prepay the Senior Notes upon consummation of the Major Transaction in an amount equal to the principal amount of outstanding Senior Notes, accrued and unpaid interest and a prepayment premium in an amount equal to what the Company would have otherwise paid in an optional prepayment described in the following paragraph. The Company is required to make mandatory prepayments on the Senior Notes in an amount equal to the proceeds it receives in connection with asset dispositions in excess of $10.0 million, together with accrued and unpaid interest on the principal amount prepaid.
 
Pursuant to the Note Purchase Agreement, upon the consummation of the sale of the Senior Notes on April 2, 2015, the Company and Depo NF Sub, LLC entered into a Pledge and Security Agreement with the Deerfield Private Design Fund III, L.P. (the Collateral Agent), pursuant to which the Company and Depo NF Sub each granted the Collateral Agent (on behalf of the Purchasers) a security interest in substantially all of their assets, other than specifically excluded assets.
 
On December 4, 2017, the Company and the Purchasers entered into an Amendment to the existing Note Purchase Agreement.  The Amendment facilitated the Company’s entry into a Commercialization Agreement, by and between the Company and Collegium and Collegium NF, LLC, a Delaware limited liability company and wholly owned subsidiary of Collegium, on December 4, 2017, pursuant to which the Company, or one of its subsidiaries, granted the right to Collegium and its sub licensees to commercialize NUCYNTA® in the United States of America, the District of Columbia and Puerto Rico.

In connection with its entry into the Commercialization Agreement, the Purchasers (i) waived the requirement that some or all of the Asset Disposition Proceeds realized from the granting of the Exclusive License be used to prepay the outstanding principal amount of the Notes pursuant to Section 2.7(b) of the Note Purchase Agreement and (ii) agreed to (a) replace the minimum net sales covenant in Section 6.7 of the Note Purchase Agreement with a minimum EBITDA covenant, and (b) made certain other amendments related to the amortization of the Notes. In addition, the prepayment premiums were amended to 4% of the principal amount of the Notes to be prepaid, if such prepayment occurs after the second anniversary of the Purchase Date but on or prior to the fifth anniversary of the Purchase Date; and (iii) zero, if such prepayment occurs after the fifth anniversary of the Purchase Date. The minimum EBITDA covenants stipulate that the Company’s EBITDA, measured as of the last day of the twelve month measurement period be (i) for the twelve month period from October 1, 2017 through to September 30, 2018 be at least $90 million and (ii) $125 million, thereafter.  The amendment also modified the repayment schedule; and required the Company to prepay and retire $10.0 million of the Senior Notes and pay a $0.4 million prepayment fee. The Company paid a $3.0 million upfront non-refundable amendment fee which, pursuant to the terms of the modification, can be off-set dollar for dollar against any future prepayment fees. The Purchasers have also consented to terms and conditions of the Amendment to the Commercialization Agreement with Collegium described in Note 17.

The Company accounted for the amendment as a debt modification in accordance with the applicable accounting standards. Accordingly, the $3.0 million amendment fee paid to the Purchasers on the fourth quarter of 2017 was capitalized and is being amortized over the remaining term of the Senior Notes. 
 
The Senior Notes and related indenture contain customary covenants, including, among other things, and subject to certain qualifications and exceptions, covenants that restrict the Company’s ability and the ability of its subsidiaries to: incur or guarantee additional indebtedness; create or permit liens on assets; pay dividends on capital stock or redeem, repurchase or retire capital stock or subordinated indebtedness; make certain investments and other restricted payments; engage in mergers, acquisitions, consolidations and amalgamations; transfer and sell certain assets; and engage in transactions with affiliates.

22

Table of Contents


The principal amount of the Senior Notes is repayable as of September 30, 2018 is as follows (amounts in thousands):

2018 (remainder)
$
25,000

2019
120,000

2020
80,000

2021
82,500

Total
$
307,500

 
The principal payment due in the remainder of 2018 was paid by the Company in October 2018. The Company is scheduled to make the Senior Notes principal payments of $125.0 million prior to September 30, 2019 and has classified this portion of the Senior Notes within the current liabilities section of the condensed consolidated balance sheet.
 
The following is a summary of the carrying value of the Senior Notes as of September 30, 2018 and December 31, 2017 (in thousands): 
 
September 30,
2018
 
December 31,
2017
 
 
Principal amount of the Senior Notes
$
307,500

 
$
365,000

Unamortized debt discount balance
(3,053
)
 
(4,717
)
Unamortized debt issuance costs
(1,981
)
 
(3,063
)
Total Senior Notes
$
302,466

 
$
357,220

The debt discount and debt issuance costs are being amortized as interest expense through April 2021 using the effective interest method. The following is a summary of interest expense for the three and nine months ended September 30, 2018 and 2017 (in thousands): 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Contractual interest expense
$
9,517

 
$
10,589

 
$
29,383

 
$
33,748

Amortization of debt discount and debt issuance costs
886

 
614

 
2,747

 
1,811

Total interest expense Senior Notes
$
10,403

 
$
11,203

 
$
32,130

 
$
35,559

 

Convertible Debt
 
On September 9, 2014, the Company issued $345.0 million aggregate principal amount of 2.50% Convertible Senior Notes Due 2021 (the Convertible Notes) resulting in net proceeds to the Company of $334.2 million after deducting the underwriting discount and offering expenses of $10.4 million and $0.4 million, respectively.
 
The Convertible Notes were issued pursuant to an indenture, as supplemented by a supplemental indenture dated September 9, 2014, between the Company and The Bank of New York Mellon Trust Company, N.A., as trustee (the Trustee), and mature on September 1, 2021, unless earlier converted, redeemed or repurchased. The Convertible Notes bear interest at the rate of 2.50% per annum, payable semi-annually in arrears on March 1 and September 1 of each year, beginning March 1, 2015.
 
Prior to March 1, 2021, holders of the 2021 Convertible Notes can convert their securities, at their option: (i) during any calendar quarter commencing after December 31, 2015, if the last reported sale price of the common stock for at least 20 trading days (whether or not consecutive) during the period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to $25.01 (130% of the $19.24 conversion price) on each applicable trading day; (ii) during the five business day period after any five consecutive trading day period in which the trading price per $1,000 principal amount of notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of our common stock and the conversion rate on each such trading day; and (iii) at any time upon the occurrence of specified corporate transactions, to include a change of control (as defined in the Notes Indenture). On or after March 1, 2021 to the close of business on the second scheduled trading day immediately preceding the maturity date, the holders of the 2021 Convertible Notes may convert all or any portion of their notes, in multiples of $1,000 principal

23

Table of Contents

amount, at the option of the holder regardless of the foregoing circumstances. The initial conversion rate of 51.9852 shares of common stock per $1,000 principal amount of Convertible Notes is equivalent to a conversion price of approximately $19.24 per share of common stock.
 
Upon conversion, the Company will pay or deliver, as the case may be, cash, shares of the Company's common stock or a combination of cash and shares of the Company's common stock, at the Company's election. If the conversion obligation is satisfied solely in cash or through payment and delivery of a combination of cash and shares, the amount of cash and shares, if any, due upon conversion will be based on a daily conversion value calculated on a proportionate basis for each trading day in a 40 trading day observation period.
 
The closing price of the Company’s common stock did not exceed 130% of the $19.24 conversion price for the required period during the quarter or the nine month period ended September 30, 2018. As a result, the Convertible Notes are not convertible as of September 30, 2018.
 
The Convertible Notes were accounted for in accordance with ASC Subtopic 470-20, Debt with Conversion and Other Options. Pursuant to ASC Subtopic 470-20, since the Convertible Notes can be settled in cash, shares of common stock or a combination of cash and shares of common stock at the Company’s option, the Company is required to separately account for the liability (debt) and equity (conversion option) components of the instrument. The carrying amount of the liability component of any outstanding debt instrument is computed by estimating the fair value of a similar liability without the conversion option. The amount of the equity component is then calculated by deducting the fair value of the liability component from the principal amount of the convertible debt instrument. The effective interest rate used in determining the liability component of the Convertible Notes was 9.34%. This resulted in the initial recognition of $226.0 million as the liability component net of a $119.0 million debt discount with a corresponding net of tax increase to paid-in capital of $73.3 million, representing the equity component of the Convertible Notes. The underwriting discount of $10.4 million and offering expenses of $0.4 million were allocated between debt issuance costs and equity issuance costs in proportion to the allocation of the proceeds. Equity issuance costs of $3.7 million related to the convertible notes were recorded as an offset to additional paid-in capital.
 
The following is a summary of the liability component of the Convertible Notes as of September 30, 2018 and December 31, 2017 (in thousands):
 
September 30,
2018
 
December 31,
2017
 
 
Principal amount of the Convertible Notes
$
345,000

 
$
345,000

Unamortized discount of the liability component
(59,006
)
 
(71,799
)
Unamortized debt issuance costs
(2,933
)
 
(3,691
)
Total Convertible Notes
$
283,061

 
$
269,510

 
The debt discount and debt issuance costs are being amortized as interest expense through September 2021. The following is a summary of interest expense for the three and six months ended September 30, 2018 and 2017 (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Stated coupon interest
$
2,156

 
$
2,156

 
$
6,468

 
$
6,468

Amortization of debt discount and debt issuance costs
4,604

 
4,225

 
13,551

 
12,438

Total interest expense Convertible Notes
$
6,760

 
$
6,381

 
$
20,019

 
$
18,906

 
NOTE 10.  SHAREHOLDERS’ EQUITY
 
Reclassification

On August 14, 2018, Depomed reincorporated from California to Delaware (the Reincorporation) and changed its name to Assertio Therapeutics, Inc. To effectuate the Reincorporation, Depomed merged with and into Assertio Therapeutics, Inc., a Delaware corporation and wholly owned subsidiary of Depomed prior to the effective time of the merger, with Assertio continuing as the surviving corporation. Pursuant to the merger, each share of Depomed common stock, no par value, was converted into one share of Assertio common stock, $0.0001 par value, and all outstanding Depomed equity awards were assumed by Assertio. As a result of the Reincorporation and the related conversion of each share of Depomed-California
common stock, no par value, into one share of Assertio-Delaware common stock, $0.0001 par value, the Company has separated the par value of stock within Common Stock from additional-paid-in-capital on the Company's Consolidated Balance Sheets. The Company has elected to present this change in disclosure retrospectively. Accordingly, to conform to current year presentation, the Company reclassified $313.9 million from common stock to additional paid-in capital as of December 31, 2017 on the Company's Consolidated Balance Sheets.

Option Exercises
 
For the three and nine months ended September 30, 2018, employees exercised options to purchase 34,551 shares and 262,443 shares, respectively, of the Company’s common stock with net proceeds to the Company of approximately $0.2 million and $1.5 million, respectively. For the three and nine months ended September 30, 2017, employees exercised options to purchase 50,159 shares and 863,511 shares, respectively, of the Company’s common stock with net proceeds to the Company of approximately $0.3 million and $6.3 million, respectively.

Restricted Stock Units
 
For the three and nine months ended September 30, 2018, the Company issued 2,597 shares and 204,142 shares of the Company’s common stock, respectively, due to vesting of restricted stock units. For the three and nine months ended September 30, 2017, the Company issued zero and 42,068 shares of the Company’s common stock due to vesting of restricted stock units, respectively.
 
NOTE 11.  INCOME TAXES
 
On December 22, 2017, the U.S. government enacted the Tax Cuts and Jobs Act (the Tax Act). The Tax Act includes significant changes to the U.S. corporate income tax system including, but not limited to, a federal corporate rate reduction from 35% to 21% and limitations on the deductibility of interest expense and executive compensation. In order to calculate the effects of the new corporate tax rate on our deferred tax balances, ASC 740 Income Taxes (ASC 740) required the re-measurement of our deferred tax balances as of the enactment date of the Tax Act, based on the rates at which the balances were expected to reverse in the future. Due to the Company’s full valuation allowance position, there was no change to the presentation of the deferred tax balances on the financial statements, except for the re-measurement of these deferred tax balances in the income tax footnote. The re-measurement resulted in a one-time reduction in federal & state deferred tax assets as of December 31, 2017 of approximately $25.5 million, which was fully offset by a corresponding change to the Company's valuation allowance. 
 
As of September 30, 2018, our net deferred tax assets are fully offset by a valuation allowance. The valuation allowance is determined in accordance with the provisions of ASC 740, Income taxes, which require an assessment of both negative and positive evidence when measuring the need for a valuation allowance.  Based on the weight of available evidence, the Company recorded a full valuation allowance against our net deferred assets beginning in the fourth quarter of 2016. The Company continued to provide a full valuation allowance against our net deferred assets in subsequent quarters. The Company reassesses the need for a valuation allowance on a quarterly basis.  If it is determined that a portion or all of the valuation allowance is not required, it will generally be a benefit to the income tax provision in the period such determination is made.
 
In the nine months ended September 30, 2018, the Company recorded an expense from income taxes of approximately $6.4 million that represents an effective tax rate of 9.5%. The difference between the income tax expense of $6.4 million and the tax at the statutory rate of 21% on current year operations is principally due to the change in valuation allowance in connection with the utilization of net operating losses in 2018. For the nine months ended September 30, 2017, the difference between the recorded provision for income taxes and the tax benefit based on the federal statutory rate of 35%, was primarily attributable to the impact of the valuation allowance. 
 
The Company files income tax returns in the United States federal jurisdiction and in various states, and the tax returns filed for the years 1997 through 2016 and the applicable statutes of limitation have not expired with respect to those returns. Because of net operating losses and unutilized R&D credits, substantially all of the Company’s tax years remain open to examination.  Interest and penalties, if any, related to unrecognized tax benefits, would be recognized as income tax expense by the Company. At September 30, 2018 the Company had approximately $1.2 million of accrued interest and penalties associated with unrecognized tax benefits.

24

Table of Contents

NOTE 12.  COMMITMENTS AND CONTINGENCIES
 
Leases
 
The Company has non-cancelable operating leases for our office buildings and is obligated to make payments under non-cancelable operating leases for automobiles used by our sales force. Future minimum lease payments under our non-cancelable operating leases at September 30, 2018 were as follows (in thousands):
 
Year Ending December 31,
 
Lease Payments
2018 (remainder)
 
$
667

2019
 
2,637

2020
 
2,509

2021
 
2,356

2022
 
2,188

Thereafter
 
632

Total
 
$
10,989

 
In April 2012, the Company entered into an office and laboratory lease agreement to lease approximately 52,500 rentable square feet in Newark, California (Newark Lease) commencing on December 1, 2012. The Company occupied approximately 8,000 additional rentable square feet commencing in July 2015.  The lease is due to expire on November 30, 2022.
 
The Company relocated its corporate headquarters from Newark, California to Lake Forest, Illinois in the third quarter of 2018. The Company has entered into a sublease for approximately 60% of the Newark facility and anticipates being able to sublease the remaining office space. The anticipated value of these subleases is in excess of the Company's remaining costs under the Newark lease and therefore no cease use cost has been recognized as of September 30, 2018.
 
Effective February 28, 2018, the Company entered into an Office Lease, in Lake Forest, Illinois (Lake Forest Lease) for its new corporate headquarters, where the Company leases approximately 31,000 rentable square feet of space. The initial tenant improvements in the space were completed in August 2018 and the Company began occupying the space at that time. The Lake Forest Lease term is for five years and six months. The Company has the right to renew the term of the Lease for one period of five years, provided that written notice is made to the Landlord no later than twelve months prior to the expiration of the initial term of the Lease. 
 
The Lake Forest Lease initial annual base rent is $18.00 per rentable square foot and will increase annually by $0.50 per rentable square foot. The lease is a triple net lease, with the Company required to pay its pro rata share of real estate taxes and operating expenses. The Landlord will make available to the Company a tenant improvement allowance of $28.00 per square rentable square foot, which the Company may use towards the initial build-out or apply to the payment of rent. 
 
As of September 30, 2018, the aggregate rent payable over the remaining term of the lease agreements was approximately $6.8 million on the Newark Lease and $3.1 million on the Lake Forest Lease, including the Company’s option to renew. Deferred rent was approximately $1.4 million as of September 30, 2018 and $1.4 million as of December 31, 2017. As of September 30, 2018 the Company had a liability of $3.2 million related to the deferred recognition of tenant improvement allowances.
 
Rent expense relating to the office lease agreements for the three and nine months ended September 30, 2018, was $0.2 million and $1.2 million, respectively. These amounts exclude the out of period adjustment related to the Newark, California tenant improvement allowance. See Note 16 for further discussion. Rent expense relating to the office lease agreements for the three and nine months ended September 30, 2017, was $0.1 million and $0.4 million, respectively.
 
The Company has an operating lease agreement with Enterprise FM Trust (Enterprise) for the lease of vehicles to be used by the Company's sales force, with the lease terms ranging from 24 to 48 months. As of September 30, 2018, the aggregate rent payable over the remaining lease term of the vehicle lease agreement was approximately $1.0 million. Rent expense relating to the lease of cars for the three and nine months ended September 30, 2018 was $0.1 million and $0.8 million, respectively.  Rent expense relating to the lease of cars for the three and nine months ended September 30, 2017 was $0.8 million and $2.4 million, respectively. 

25

Table of Contents


Legal Matters
 
Company v. NUCYNTA and NUCYNTA ER ANDA Filers
 
Actavis & Alkem:  In July 2013, Janssen Pharma filed patent infringement lawsuits in the U.S. District Court for the District of New Jersey (D.N.J.) against Actavis Elizabeth LLC, Actavis Inc. and Actavis LLC (collectively, Actavis), as well as Alkem Laboratories Limited and Ascend Laboratories, LLC (collectively, Alkem). The patent infringement claims against Actavis and Alkem relate to their respective ANDAs seeking approval to market generic versions of NUCYNTA and NUCYNTA ER before the expiration of U.S. Reissue Patent No. 39,593 (the ’593 Patent), U.S. Patent No. 7,994,364 (the ’364 Patent) and, as to Actavis only, U.S. Patent No. 8,309,060 (the ’60 Patent). In December 2013, Janssen Pharma filed an additional complaint in the D.N.J. against Alkem asserting that newly issued U.S. Patent No. 8,536,130 (the ’130 Patent) was also infringed by Alkem’s ANDA seeking approval to market a generic version of NUCYNTA ER. In August 2014, Janssen Pharma amended the complaint against Alkem to add additional dosage strengths.
Sandoz & Roxane:  In October 2013, Janssen Pharma received a Paragraph IV Notice from Sandoz, Inc. (Sandoz) with respect to NUCYNTA related to the ’364 Patent, and a Paragraph IV Notice from Roxane Laboratories, Inc. (Roxane) with respect to NUCYNTA related to the ’364 and ’593 Patents. In response to those notices, Janssen Pharma filed an additional complaint in the D.N.J. against Roxane and Sandoz asserting the ’364 Patent against Sandoz and the ’364 and ’593 Patents against Roxane. In April 2014, Janssen Pharma and Sandoz entered into a joint stipulation of dismissal of the case against Sandoz, based on Sandoz's agreement not to market a generic version of NUCYNTA products prior to the expiration of the asserted patents. In June 2014, in response to a new Paragraph IV Notice from Roxane with respect to NUCYNTA ER, Janssen Pharma filed an additional complaint in the D.N.J. asserting the ’364, ’593, and ’130 Patents against Roxane.
Watson:  In July 2014, in response to a Paragraph IV Notice from Watson Laboratories, Inc. (Watson) with respect to the NUCYNTA oral solution product and the ’364 and ’593 Patents, Janssen Pharma filed a lawsuit in the D.N.J. asserting the ’364 and ’593 Patents against Watson.
In each of the foregoing actions, the ANDA filers counterclaimed for declaratory relief of non-infringement and patent invalidity. At the time that the actions were commenced, Janssen Pharma was the exclusive U.S. licensee of the patents referred to above. On April 2, 2015, the Company acquired the U.S. rights to NUCYNTA ER and NUCYNTA from Janssen Pharma. As part of the acquisition, the Company became the exclusive U.S. licensee of the patents referred to above. The Company was added as a plaintiff to the pending cases and is actively litigating them.
In September 2015, the Company filed an additional complaint in the D.N.J. asserting the ’130 Patent against Actavis. The ’130 Patent issued in September 2013 and was timely listed in the Orange Book for NUCYNTA ER, but Actavis did not file a Paragraph IV Notice with respect to this patent.  In its new lawsuit, the Company claimed that Actavis would infringe or induce infringement of the ’130 Patent if its proposed generic products were approved. In response, Actavis counterclaimed for declaratory relief of non-infringement and patent invalidity, as well as an order requiring the Company to change the corrected use code listed in the Orange Book for the ’130 Patent.
In February 2016, Actavis, Actavis UT, Roxane and Alkem each stipulated to infringement of the ’593 and ’364 patents.  On March 9, 2016, a two-week bench trial on the validity of the three asserted patents and infringement of the ’130 patent commenced.  Closing arguments took place on April 27, 2016.  On September 30, 2016, the Court issued its final decision.  The Court found that the ’593, ’364 patent, and ’130 patents are all valid and enforceable, that Alkem will induce infringement of the ’130 patent, but that Roxane and Actavis will not infringe the ’130 patent.
On April 11, 2017, the Court entered final judgment in favor of the Company on the validity and enforceability of all three patents, on infringement of the ’593 and ’364 Patents by all defendants, and on infringement of the ’130 Patent against Alkem. The judgment includes an injunction enjoining all three defendants from engaging in certain activities with regard to tapentadol (the active ingredient in NUCYNTA), and ordering the effective date of any approval of Actavis, Actavis UT, and Roxane’s ANDAs, and Alkem’s ANDA for NUCYNTA IR to be no earlier than the expiry of the ’364 Patent (June 27, 2025), and the effective date of any approval of Alkem’s ANDA for NUCYNTA ER to be no early than the expiry of the ’130 Patent (September 22, 2028). The period of exclusivity with respect to all four defendants may in the future be extended with the award of pediatric exclusivity.
Notices of appeal were filed by defendants Alkem and Roxane concerning the validity of the ’364 and ’130 patents. The Company filed its own cross-appeal with regard to the Court’s finding that Roxane and Actavis will not infringe the claims of the ’130 Patent. The appeals have been consolidated at the Federal Circuit.  Briefing concluded in March 2018 and oral arguments occurred on September 4, 2018.  It is estimated that the Federal Circuit will issue a written decision in late 2018 or in the first quarter of 2019.  The ‘593 patent is not the subject of any appeals.

26

Table of Contents

Company v. Purdue
 
The Company sued Purdue Pharma L.P (Purdue) for patent infringement in a lawsuit filed in January 2013 in the U.S. District Court for the District of New Jersey. The lawsuit arose from Purdue’s commercialization of reformulated OxyContin® (oxycodone hydrochloride controlled-release) in the U.S. and alleges infringement of U.S. Patent Nos. 6,340,475 (the ‘475 Patent) and 6,635,280 (the ‘280 Patent), which expired in September 2016.
On September 28, 2015, the district court stayed the Purdue lawsuit pending the decision of the U.S. Court of Appeals for the Federal Circuit (CAFC) in Purdue’s appeal of the PTAB’s Final Written Decisions described below. On June 30, 2016, the district court lifted the stay based on the CAFC’s opinion and judgment affirming the PTAB’s Final Written Decisions confirming the patentability of the patent claims of the ‘475 and ‘280 Patents Purdue had challenged. On June 10, 2016, the Company filed a motion for leave to file a second amended Complaint to plead willful infringement. On June 21, 2016, Purdue filed an opposition to the Company’s motion for leave to plead willful infringement. On January 31, 2017, the Court granted the Company’s motion for leave to plead willful infringement.
On February 1, 2017, the Company filed a Second Amended Complaint pleading willful infringement. On July 10, 2017, the case was reassigned to Judge Wolfson. On February 15, 2017, Purdue answered the Company’s Second Amended Complaint and pled counterclaims of non-infringement, invalidity, unenforceability and certain affirmative defenses. On September 26, 2017, the case was reassigned to Judge Martinotti. On December 22, 2017, the Court set the close of expert discovery for March 30, 2018. On January 5, 2018, the Court vacated the January 25, 2018 pretrial conference.
On July 9, 2018, the Court issued an order administratively terminating the case pending the outcome of settlement discussions between the parties. On August 28, 2018, the Company and each of Purdue, The P.F. Laboratories, Inc. a New Jersey corporation, and Purdue Pharmaceuticals L.P., a Delaware limited partnership (collectively, Purdue Companies), entered into a Settlement Agreement. Pursuant to the Settlement Agreement: (i) Purdue Companies paid the Company $30 million on August 28, 2018 and will pay the Company an additional $32 million on February 1, 2019; (ii) each party covenanted not to the sue the other with regard to any alleged infringement of such party’s patents or patent rights as a result of the commercialization of the other party’s current product portfolio; (iii) each party covenanted not to challenge the other party’s patents or patent rights covering such other party’s current product portfolio; and (iv) each party agreed to a mutual release of claims relating to any claim or potential claim relating to the other party’s current product portfolio.
Securities Class Action Lawsuit
 
On August 23, 2017, the Company, its current chief executive officer and president, its former chief executive officer and president, and its former chief financial officer were named as defendants in a purported federal securities law class action filed in the United States District Court for the Northern District of California (Huang v. Depomed et al., No. 3:17-cv-4830-JST, N.D. Cal.). The action alleges violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 relating to certain prior disclosures of the Company about its business, compliance, and operational policies and practices concerning the sales and marketing of its opioid products and contends that the conduct supporting the alleged violations affected the value of Company common stock and is seeking damages and other relief. In an amended complaint filed on February 6, 2018, the lead plaintiff (referred to in its pleadings as the Depomed Investor Group), which seeks to represent a class consisting of all purchasers of Company common stock between July 29, 2015 and August 6, 2017, asserted the same claims arising out of the same and similar disclosures against the Company and the same individuals as were involved in the original complaint. The Company and the individuals filed a motion to dismiss the amended complaint on April 9, 2018. The lead plaintiff filed an opposition to the motion on June 8, 2018. The Company and the individuals filed a reply in support of their motion to dismiss on July 23, 2018. Oral arguments are scheduled for November 29, 2018. The Company believes that the action is without merit and intends to contest it vigorously.
In addition, three shareholder derivative actions were filed on behalf of the Company and purport to assert claims by the Company against its officers and directors for breach of fiduciary duty, arising out of the same factual allegations as the class action. Two of these actions were filed in the Northern District of California, the first on November 10, 2017 (Solak v. Higgins et al., No. 3:17-cv-6546-JST) and the second on November 15, 2017 (Ross v. Fogarty et al., No. 3:17-cv-6592- JST). The third derivative action was filed in the Superior Court of California, Alameda County (Singh v. Higgins, et al., RG17877280) on September 29, 2017. On December 7, 2017, the plaintiffs in Solak v. Higgins, et al. voluntarily dismissed the first federal derivative action. And, on January 18, 2018 and January 23, 2018, respectively, the remaining federal and state derivative actions were stayed pending the resolution of the motion to dismiss in the securities class action. The Company believes that these actions are without merit and intends to contest them vigorously.

27

Table of Contents

Opioid-Related Requests and Subpoenas
 
As a result of the greater public awareness of the public health issue of opioid abuse, there has been increased scrutiny of, and investigation into, the commercial practices of opioid manufacturers generally by federal, state, and local regulatory and governmental agencies. The Company received a letter from Senator Claire McCaskill (D-MO), the Ranking Member on the U.S. Senate Committee on Homeland Security and Governmental Affairs, requesting certain information from the Company regarding its prior commercialization of opioid products. The Company voluntarily furnished information responsive to Sen. McCaskill’s request. The Company has also received subpoenas or civil investigative demands focused on historical promotion and sales of Lazanda, NUCYNTA, and NUCYNTA ER from various State Attorneys General seeking documents and information regarding our prior sales and marketing of opioid products. In addition, the State of California Department of Insurance (CDI) has issued a subpoena to the Company seeking information relating to our prior sales and marketing of Lazanda. The CDI subpoena also seeks information on Gralise, a non-opioid product in our portfolio. The Company has received subpoenas from the U.S. Department of Justice (DOJ) seeking documents and information regarding our prior sales and marketing of opioid products. The Company also from time to time receives and complies with subpoenas from governmental authorities related to investigations primarily directed at third parties, including health care practitioners, pursuant to which our records related to agreements with and payments made to those third parties, among other items, are produced. As a general matter, the Company is cooperating with all of the requests from and investigations by regulators described above.
Multidistrict Opioid Litigation
 
A number of pharmaceutical manufacturers, distributors and other industry participants have been named in numerous lawsuits around the country brought by various groups of plaintiffs, including city and county governments, hospitals and others. In general, the lawsuits assert claims arising from defendants’ manufacturing, distributing, marketing and promoting of FDA-approved opioid drugs. The specific legal theories asserted vary from case to case, but most of the lawsuits include federal and state statutory claims as well as claims arising under state common law. Plaintiffs seek various forms of damages, injunctive and other relief and attorneys’ fees and costs.
For such cases filed in or removed to federal court, the Judicial Panel on Multi-District Litigation issued an order in December 2017, establishing a Multi-District Litigation court (MDL Court) in the Northern District of Ohio (In re National Prescription Opiate Litigation, Case No. 1:17-MD-2804). Since that time, more than 600 such cases that were originally filed in U.S. District Courts, or removed to federal court from state court, have been transferred to the MDL Court. The Company is currently involved in 16 lawsuits that have been transferred to the MDL Court and two additional federal lawsuits, one each in the Northern District of Georgia and the District of Arizona. The Arizona lawsuit was originally filed in state court and was removed to federal court. A motion to remand, which is being contested, is pending in that case. Plaintiffs may file additional lawsuits in which the Company may be named. Plaintiffs in the federal cases include county and municipal governmental entities, employee benefit plans, health clinics and health insurance providers who assert federal and state statutory claims and state common law claims, such as conspiracy, nuisance, fraud, negligence or deceptive trade practices. In these cases, plaintiffs seek a variety of forms of relief, including actual damages to compensate for alleged past and future costs such as to provide care and services to persons with opioid-related addiction or related conditions, injunctive relief to prohibit alleged deceptive marketing practices and abate an alleged nuisance, establishment of a compensation fund, disgorgement of profits, punitive and statutory treble damages, and attorneys’ fees and costs. These lawsuits are in the earliest stages of proceedings, and the Company intends to defend itself vigorously in these matters.
State Opioid Litigation
 
Related to the cases in the MDL Court noted above, there have been more than 200 similar lawsuits filed in state courts around the country, in which various groups of plaintiffs assert opioid-drug related claims against similar groups of defendants. The Company is currently named in 13 such cases -- three filed in Texas, three in Pennsylvania, three in Utah, two in Nevada and one each in Arkansas and Missouri. Plaintiffs may file additional lawsuits in which the Company may be named. In these cases, plaintiffs are asserting state common law and statutory claims against the defendants similar in nature to the claims asserted in the MDL cases. Plaintiffs are seeking past and future damages, disgorgement of profits, injunctive relief, punitive and statutory treble damages, and attorneys’ fees and costs. These lawsuits are likewise in their earliest stages, and the Company intends to defend itself vigorously in these matters.
General
 
The Company cannot reasonably predict the outcome of the legal proceedings described above, nor can the Company estimate the amount of loss, range of loss or other adverse consequence, if any, that may result from these proceedings or the amount of any gain in the event the Company prevails in litigation involving a claim for damages. As such the Company is not currently able to estimate the impact of the above litigation on its financial position or results of operations.

28

Table of Contents

The Company may from time to time become party to actions, claims, suits, investigations or proceedings arising from the ordinary course of our business, including actions with respect to intellectual property claims, breach of contract claims, labor and employment claims and other matters. The Company may also become party to further litigation in federal and state courts relating to opioid drugs. Although actions, claims, suits, investigations and proceedings are inherently uncertain and their results cannot be predicted with certainty, other than the matters set forth above, the Company is not currently involved in any matters that the Company believes may have a material adverse effect on its business, results of operations or financial condition. However, regardless of the outcome, litigation can have an adverse impact on the Company because of associated cost and diversion of management time.

NOTE 13. ACQUISITIONS
 
Asset Purchase Agreement with Slán
 
On November 7, 2017, the Company entered into an Asset Purchase Agreement (the Asset Purchase Agreement) with Slán Medicinal Holdings Limited (Slán) under which the Company acquired a license to market the specialty drug, cosyntropin depot in the United States and Canada. The term of the License Agreement runs from November 7, 2017, through the end of the 10-year period following the first commercial sale of an approved product (Licensed Product), but the Company may terminate the License Agreement if the U.S. Food and Drug Administration (FDA) determines that a Licensed Product is not approvable in the U.S. Under the terms of the Agreement, Slán is responsible for clinical and regulatory expenses associated with cosyntropin depot prior to its first approval by the FDA. Upon approval, the Company will be responsible for marketing and selling cosyntropin depot for the first seven years following the first commercial sale of a Licensed Product in the U.S., and Slán will be responsible for selling the Licensed Product during the remaining three years of the 10-year period.
 
The acquisition of cosyntropin depot was treated as an asset acquisition under the applicable guidance contained with U.S. GAAP. The fair value of the license to market cosyntropin depot was estimated to be approximately $24.9 million which, in accordance with the applicable accounting rules, was expensed as “acquired in process research and development” during the fourth quarter of 2017, as cosyntropin depot is still under development and the rights the Company acquired were deemed to have no alternative future use.
 
As consideration for this acquisition, the Company provided the seller all of the rights and obligations, as defined under the arrangement, associated with Lazanda and together with $5.0 million in cash to Slán. The divestiture of Lazanda was treated as a disposition of a business for accounting purposes and resulted in a gain of approximately $17.1 million which was recorded as “gain on divestiture of Lazanda” in the Company’s 2017 consolidated statements of operations. The Company determined that the divestiture of Lazanda does not qualify for reporting as discontinued operations as the divestiture does not constitute on its own a strategic shift that will have a significant effect on the Company’s operations and financial results.
 
The Cebranopadol Acquisition
 
On November 17, 2015, the Company entered into a definitive agreement to acquire the U.S. and Canadian rights to cebranopadol and its related follow-on compound from Grünenthal. The acquisition was completed on December 30, 2015.
 
Under the terms of the acquisition agreement, the Company entered into a settlement agreement with Endo Pharmaceuticals, Inc., a subsidiary of Endo International Plc (Endo) to resolve the Company's ongoing patent litigation against Endo for alleged infringement of three of the Company’s patents by Endo's OPANA® ER product (the Settlement). As the formulator of OPANA® ER, Grünenthal indemnified Endo for certain intellectual property matters, including the Company’s ongoing patent infringement lawsuit against Endo. The settlement agreement granted Endo a non-exclusive patent license in the United States, and a covenant not to sue outside the United States, for the currently marketed form of OPANA® ER. In addition, the Company provided Grünenthal with a limited covenant not to sue under certain of the Company’s Acuform® drug delivery patents with specific drug substances as well as $25.0 million in cash. The Company also agreed to pay Grünenthal royalties on net sales and one-time net sales milestones. There are no clinical, regulatory or approval contingent milestone payments.


29

Table of Contents

The cebranopadol acquisition was treated as an asset acquisition under the applicable guidance contained with U.S. GAAP. Accordingly, the total purchase consideration of $54.9 million was expensed to research and development expenses. The total expense of $54.9 million consists of $25.0 million paid in cash upon the closing of the acquisition and $29.9 million reflecting a one-time accounting adjustment to recognize the total non-cash fair value of each of the elements of the Settlement reached with Endo. The $29.9 million was recorded as income within “Non-cash gain on settlement agreement” and as an additional expense within “acquired in-process research and development” in the Company’s 2015 consolidated statements of operations. Significant judgments were used in determining the estimated fair values assigned to the elements of the Settlement, such as but not limited to, the probability of the Company succeeding in its litigation against Endo had the litigation not been resolved, estimates of royalty rates and any damages that may have been awarded by the court, the timing of such an award and estimates of appropriate discount rates used to present value these expected future net cash flows. An actual judgment awarded by the court may have differed materially from the amounts recorded.
 
In January 2018, the Company gave 120 days’ written notice of termination to Grünenthal of the cebranopadol license agreement.
 
The NUCYNTA Acquisition
 
On January 15, 2015, the Company, entered into an asset purchase agreement pursuant to which the Company acquired from Janssen and its affiliates the U.S. rights to the NUCYNTA franchise of pharmaceutical products (the NUCYNTA U.S. Product Rights) as well as certain related assets for $1.05 billion in cash (the Purchase Price).
 
The NUCYNTA franchise includes NUCYNTA ER (tapentadol) extended release tablets indicated for the management of pain, including neuropathic pain associated with diabetic peripheral neuropathy (DPN), severe enough to require daily, around-the-clock, long-term opioid treatment, NUCYNTA (tapentadol), an immediate release version of tapentadol, for management of moderate to severe acute pain in adults, and NUCYNTA (tapentadol) oral solution, an approved oral form of tapentadol that has not been commercialized (collectively, the Products).
 
Upon the consummation of the transaction on April 2, 2015, the Company acquired (i) rights to commercialize the Products in the United States, and (ii) certain other assets relating to the Products, including finished goods product inventory and certain manufacturing equipment. In addition, Janssen Pharma assigned to the Company all of its rights and obligations under the License Agreement (U.S.) (the License Agreement) by and among Janssen Pharma, Janssen Research & Development, LLC and Grünenthal GmbH (Grünenthal) pursuant to which Janssen has a royalty-bearing license to certain Grünenthal patents and other intellectual property rights covering the commercialization of the Products in the United States.
 
In connection with the transaction, the Company assumed responsibility for the ongoing legal proceedings relating to certain of the Grünenthal patents licensed under the License Agreement and Janssen Pharma’s clinical obligations relating to the Products and will be responsible for the associated post acquisition costs. Other than as set forth in the Asset Purchase Agreement, Janssen Pharma retained all liabilities relating to the Products associated with Janssen Pharma’s commercialization of the Products prior to the consummation of the transaction.
 
In connection with the Transaction, the Company, Janssen Pharma and certain affiliates of Janssen also entered into (i) supply agreements pursuant to which Janssen Pharma will manufacture and supply the Products to the Company until the Company, or its contract manufacturer, begins commercial production of the Products, following which the Company will manufacture and supply Janssen Pharma for its requirements for NUCYNTA outside of the United States and (ii) a supply agreement pursuant to which an affiliate of Janssen will manufacture and supply the Company with the active pharmaceutical ingredient contained in the Products.

In connection with the consummation of the transaction, on April 2, 2015, the Company sold an aggregate of $575.0 million principal amount of the Senior Notes for gross proceeds of approximately $562.0 million. The Company used $550.0 million of the net proceeds received upon the sale of the Senior Notes to fund a portion of the Purchase Price paid to Janssen Pharma.
 

30

Table of Contents

Pursuant to ASC Topic 805, Business Combinations, the Transaction was determined to be a business combination and was accounted for using the acquisition method of accounting. The following table presents a summary of the purchase price consideration for the Transaction:
 
(in thousands)
 
 
Cash Paid
 
$
1,050,000

Rebates payable by Seller
 
(9,977
)
Total Purchase Consideration
 
$
1,040,023

 
The rebates payable by Janssen Pharma represent a reduction to the total purchase consideration. The fair value of the rebates payable by Janssen Pharma was determined based on estimates that take into consideration the terms of agreements with customers, historical rebates taken, and the estimated amount of time it takes the product to flow through the distribution channel. The actual amount of rebates paid by Janssen Pharma, determined in the fourth quarter of 2015, was approximately $0.5 million lower than the Company’s estimate of $10.5 million recorded as of the acquisition date. Consequently, the total purchase consideration and the fair value of the NUCYNTA U.S. Product Rights was increased by $0.5 million.
 
Under the acquisition method of accounting, the Company has recognized net tangible and intangible assets acquired based upon their respective estimated fair values as of the acquisition date. The table below shows the fair values assigned to the assets acquired:
 
(in thousands)
 
 
NUCYNTA U.S. Product Rights
 
$
1,019,978

Inventories
 
11,590

Manufacturing Equipment
 
8,455

 
 
$
1,040,023

 
The fair value of inventories acquired included a step-up in the value of NUCYNTA inventories of $5.9 million that was fully amortized to cost of sales in 2015 as the acquired inventories were sold. The Company incurred non-recurring transaction costs of $12.3 million in 2015 with respect to the NUCYNTA Acquisition which were recorded in “Selling, general and administrative expenses” within the Company’s Condensed Consolidated Statement of Operations.
 
NUCYNTA U.S. Product Rights
 
The valuation of the NUCYNTA U.S. Product Rights was based on management’s estimates, information and reasonable and supportable assumptions. This estimated fair value was determined using the income approach under the discounted cash flow method. Significant assumptions used in valuing the NUCYNTA U.S. Product Rights included revenue projections based on assumptions relating to pricing and reimbursement rates, market size and market penetration rates, general and administrative expenses, sales and marketing expenses, research and development expenses for clinical and regulatory support and developing an appropriate discount rate. If the Company’s assumptions are not correct, there could be an impairment loss or, in the case of a change in the estimated useful life of the asset, a change in amortization expense. The NUCYNTA U.S. Product Rights intangible asset is amortized using the straight-line method over an estimated useful life of approximately ten years. The estimated useful life was determined based on the period of time over which the NUCYNTA U.S. Product Rights are expected to contribute to the Company’s future cash flows.

31

Table of Contents

NOTE 14.  INTANGIBLE ASSETS
 
The gross carrying amounts and net book values of our intangible assets were as follows (in thousands):
 
 
 
September 30, 2018
 
December 31, 2017
 
 
Remaining
 
Gross
 
    
 
 
 
Gross
 
    
 
    
 
 
Useful Life
 
Carrying
 
Accumulated
 
Net Book
 
Carrying
 
Accumulated
 
Net Book
Product rights
 
(In years)
 
Amount
 
Amortization
 
Value
 
Amount
 
Amortization
 
Value
NUCYNTA
 
7.2
 
$
1,019,978

 
$
(337,316
)
 
$
682,662

 
$
1,019,978

 
$
(266,590
)
 
$
753,388

CAMBIA
 
5.2
 
51,360

 
(24,607
)
 
26,753

 
51,360

 
(20,755
)
 
30,605

Zipsor
 
3.5
 
27,250

 
(19,123
)
 
8,127

 
27,250

 
(17,370
)
 
9,880

Total
 
 
 
$
1,098,588

 
$
(381,046
)
 
$
717,542

 
$
1,098,588

 
$
(304,715
)
 
$
793,873

 
Based on finite-lived intangible assets recorded as of September 30, 2018, and assuming the underlying assets will not be impaired and that the Company will not change the expected lives of the assets, future amortization expenses were estimated as follows (in thousands):
 
 
 
Estimated
 
 
Amortization
Year Ending December 31,
 
Expense
2018 (remainder)
 
$
25,443

2019
 
101,774

2020
 
101,774

2021
 
101,774

2022
 
99,969

Thereafter
 
286,808

Total
 
$
717,542

 
NOTE 15.  RESTRUCTURING CHARGES
 
In June 2017, the Company announced a limited reduction-in-force in order to streamline operations and achieve operating efficiencies. The activities related to that reduction-in-force were completed during the third quarter of 2017.  In December 2017, the Company initiated a company-wide restructuring plan following the entry into the Commercialization Agreement with Collegium. This plan focused on a reduction of the Company’s pain sales force during the first quarter of 2018, a reduction of the staff at its headquarters office during the second quarter of 2018 and a move from its headquarters facility in Newark, California to Lake Forest, Illinois in the third quarter of 2018.
 
The following table summarizes the total expenses recorded related to the 2017 restructuring and one-time termination cost activities by type of activity and the locations recognized within the consolidated statements of operations as restructuring costs (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Employee compensation costs
$
400

 
$
434

 
$
14,993

 
$
3,875

Fixed Asset disposals and accelerated depreciation of leasehold improvements
3,511

 

 
3,511

 

Other exit costs

 

 
238

 

Total restructuring costs
$
3,911

 
$
434

 
$
18,742

 
$
3,875


32

Table of Contents


Selected information relating to accrued restructuring, severance costs and one-time termination costs is as follows (in thousands):
 
Employee compensation costs
 
Fixed Asset and Other exit costs
 
Total
Balance at December 31, 2017
$
9,483

 
$

 
$
9,483

Net accruals
8,779

 
238

 
9,017

Non-cash adjustments
(258
)
 

 
(258
)
Cash paid
(11,184
)
 
(238
)
 
(11,422
)
Balance at March 31, 2018
$
6,820

 
$

 
$
6,820

Net accruals
5,814

 

 
5,814

Non-cash adjustments
(2,300
)
 

 
(2,300
)
Cash paid
(4,834
)
 

 
(4,834
)
Balance at June 30, 2018
5,500

 

 
5,500

Net accruals
400

 
3,511

 
3,911

Non-cash adjustments
173

 
(3,511
)
 
(3,338
)
Cash paid
(4,238
)
 

 
(4,238
)
Balance at September 30, 2018
$
1,835

 
$

 
$
1,835

 
As of September 30, 2018, the full $1.8 million accrued restructuring liability balance was classified as a current liability in the Condensed Consolidated Balance Sheet. The Company has incurred $31.9 million in related restructuring costs since the announcement of the plan in December 2017 through September 30, 2018. The Company expects to incur additional related restructuring costs of $1.5 million to $3.0 million through June 30, 2019.  

NOTE 16.  OUT OF PERIOD ADJUSTMENTS
 

During the three months ended September 30, 2018, the Company identified that it had understated restructuring costs by incorrectly derecognizing its deferred landlord incentives related to the Newark, California headquarters office lease since the plan to exit the facility had been established in December 2017. Accordingly, the Company recorded an adjustment during the three months ended September 30, 2017 to increase restructuring costs by $2.1 million, of which $0.3 million related to the year ended December 31, 2017, and its accrued liabilities as of September 30, 2018. This adjustment resulted in a decrease to EPS of $0.03 in the three months ended September 30, 2018.

During the three months ended March 31, 2017, the Company identified that it had understated the amount payable for the Branded Prescription Drug fee (BPD) relating to net sales of the NUCYNTA franchise since its acquisition in the second quarter of 2015. Accordingly, the Company recorded an adjustment during the three months ended March 31, 2017 to increase its BPD accrual relating to the net sales of the NUCYNTA franchise in the cumulative amount of $3.4 million of which $1.4 million and $2.0 million related to the years ended December 31, 2015 and 2016, respectively. This adjustment resulted in an increase in loss per share by $0.05 in the three months ended March 31, 2017.

In accordance with the relevant guidance, management evaluated the materiality of the errors from a qualitative and quantitative perspective. Based on such evaluation, the Company concluded that correcting the cumulative errors would not be material to the expected full year results for 2017 or to the third quarter of 2018, and correcting the errors would not have had a material impact on any individual prior period financial statements or affect the trend of financial results.
 
NOTE 17. SUBSEQUENT EVENTS

Amendment to Collegium Commercialization Agreement
On November 8, 2018, the Company, Collegium and Collegium NF, LLC, a Delaware limited liability company and wholly owned subsidiary of Collegium (Newco) entered into an amendment (Amendment) to the Commercialization Agreement. Pursuant to the Amendment, Collegium may only terminate the Commercialization Agreement after December 31, 2020, with 12-months’ notice. In the event any such termination notice has an effective date of termination prior to December 31, 2022, then Collegium shall pay a $5,000,000 termination fee to the Company concurrent with the delivery of such notice.

33

Table of Contents

The Amendment also provides that Collegium shall reimburse the Company for the amount of any minimum annual royalties paid by the Company to Grünenthal GmbH (Grünenthal) on net sales of the NUCYNTA franchise during the first four years of the Commercialization Agreement as provided in the Consent Agreement, dated as of November 30, 2017 (the Grünenthal Consent Agreement), by and among the Company, Grünenthal and Newco.
In connection with the Amendment, Collegium issued the Company a warrant to purchase up to 1,041,667 shares of Collegium common stock at an exercise price of $19.20 per share. The warrant is exercisable for a period of four years and contains customary terms, including with regard to net exercise.
Pursuant to the Amendment, the royalties payable by Collegium to the Company in connection with Collegium’s commercialization of NUCYNTA are amended such that effective as of January 1, 2019 through December 31, 2021, the Company will receive: (i) 65% of net sales of NUCYNTA up to $180,000,000, plus (ii) 14% of annual net sales of NUCYNTA between $180,000,000 and up to $210,000,000, plus (iii) 58% of annual net sales of NUCYNTA between $210,000,000 and $233,000,000, plus (iv) 20% of annual net sales of NUCYNTA between $233,000,000 and up to $258,000,000, plus (v) 15% of annual net sales of NUCYNTA above $258,000,000. Payments described in clauses (i), (ii) and (iii) hereof will be swept daily from a lock-box account of Newco where revenues from gross sales of NUCYNTA will be deposited. Payments described in clauses (iv) and (v) hereof will be paid annually within 60 days of the end of the calendar year. In connection with the Amendment, Collegium’s obligation to maintain a standby letter of credit with respect to royalties due to the Company on net sales of NUCYNTA occurring in 2018 will expire on the first to occur of February 28, 2019 or one business day after the date Collegium pays the Company its royalties owed for the quarter ended December 31, 2018. For the year ending December 31, 2018, the Company will receive total royalties from Collegium of $132 million.
The Amendment does not change the royalties the Company will receive on annual net sales of NUCYNTA by Collegium for the period beginning January 1, 2022 and for each year of the Commercialization Agreement term thereafter, which are: (i) 58% of net sales of NUCYNTA up to $233,000,000, payable quarterly within 45 days of the end of each calendar quarter, plus (ii) 25% of annual net sales of NUCYNTA between $233,000,000 and $258,000,000, plus (iii) 17.5% of annual net sales of NUCYNTA above $258,000,000. Payments described in clauses (ii) and (iii) hereof will be paid annually within 60 days of the end of the calendar year.
The Amendment provides that the Company may terminate the Commercialization Agreement upon 60 days’ prior written notice to Collegium in the event that (i) the net sales of NUCYNTA by Collegium during any period of 12 consecutive calendar months ending on or before December 31, 2021 are less than $180,000,000, or (ii) the net sales of NUCYNTA by Collegium during any period of 12 consecutive calendar months commencing on or after January 1, 2022 are less than $170,000,000.

34

Table of Contents

ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
FORWARD-LOOKING INFORMATION
 
Statements made in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this Quarterly Report on Form 10-Q that are not statements of historical fact are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act). We have based these forward-looking statements on our current expectations and projections about future events. Our actual results could differ materially from those discussed in, or implied by, these forward-looking statements. Forward-looking statements are identified by words such as “believe,” “anticipate,” “expect,” “intend,” “plan,” “will,” “may” and other similar expressions. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements. Forward-looking statements include, but are not necessarily limited to, those relating to:
the commercial success and market acceptance of our products;
the success of Collegium Pharmaceutical, Inc. (Collegium) in commercializing NUCYNTA® ER and NUCYNTA®;
the reversal or any successful appeal of the court’s favorable ruling in our patent infringement litigation against the filers of Abbreviated New Drug Applications (each, an ANDA) to market generic versions of NUCYNTA ER and NUCYNTA in the United States (U.S.);
any additional patent infringement or other litigation, investigation or proceeding that may be instituted related to us or any of our products, product candidates or products we may acquire;
our ability to generate sufficient cash flow from our business to make payments on our indebtedness and our compliance with the terms and conditions of the agreements governing our indebtedness;
our and our collaborative partners’ compliance or non-compliance with legal and regulatory requirements related to the development or promotion of pharmaceutical products in the U.S.;
our plans to acquire, in-license or co-promote other products;
the results of our research and development efforts including clinical studies relating to our product candidates, including cosyntropin depot;
submission, acceptance and approval of regulatory filings, including cosyntropin depot;
our ability to raise additional capital, if necessary;
our ability to successfully develop and execute our sales and marketing strategies;
variations in revenues obtained from commercialization and collaborative agreements, including contingent milestone payments, royalties, license fees and other contract revenues, including non-recurring revenues, and the accounting treatment with respect thereto;
our collaborative partners’ compliance or non-compliance with obligations under our collaboration agreements;
the outcome of both our opioid-related investigations and our opioid-related litigation brought by state and local governmental entities and private parties, and the costs and expenses associated therewith;
the regulatory strategy for cosyntropin depot and our and our collaborative partner’s ability to successfully develop and execute such strategy; and
our ability to attract and retain key executive leadership following our restructuring and office relocation.

Factors that could cause actual results or conditions to differ from those anticipated by these and other forward-looking statements include those more fully described in the “RISK FACTORS” section and elsewhere in this Quarterly Report on Form 10-Q. Except as required by law, we assume no obligation to update any forward-looking statement publicly, or to revise any forward-looking statement to reflect events or developments occurring after the date of this Quarterly Report on Form 10-Q, even if new information becomes available in the future. Thus, you should not assume that our silence over time means that actual events are bearing out as expressed or implied in any such forward-looking statement.


35

Table of Contents

COMPANY OVERVIEW
 
Assertio is a specialty pharmaceutical company focused on neurology, orphan and specialty medicines. Our current specialty pharmaceutical business includes the following three products which we market in the United States (U.S.):

Gralise® (gabapentin), a once daily product for the management of postherpetic neuralgia (PHN), that we launched in October 2011.

CAMBIA® (diclofenac potassium for oral solution), a non-steroidal anti-inflammatory drug for the acute treatment of migraine attacks, that we acquired in December 2013.

Zipsor® (diclofenac potassium) liquid filled capsules, a non-steroidal anti-inflammatory drug for the treatment of mild to moderate acute pain, that we acquired in June 2012.

Assertio was formerly known as Depomed, Inc., a California corporation (Depomed). On August 14, 2018, Depomed reincorporated from California to Delaware and changed its name to Assertio Therapeutics, Inc. The use of the term “Company” in this filing refers to Depomed any time prior to the Effective Time and to Assertio any time after the Effective Time.

In January 2018, pursuant to the terms of a Commercialization Agreement we entered into with Collegium Pharmaceutical, Inc. (Collegium) in December 2017, we granted Collegium the right to commercialize the NUCYNTA® franchise of pain products in the U.S. Pursuant to the Commercialization Agreement, Collegium assumed all commercialization responsibilities for the NUCYNTA franchise effective January 9, 2018, including sales and marketing. We will receive a royalty on all NUCYNTA revenues based on certain net sales thresholds, with a minimum royalty of $132.0 million for the year ended December 31, 2018. The parties amended the Commercialization Agreement in November 2018 (Amendment) as described in Note 17, "Subsequent Events" of the Notes to the unaudited condensed Consolidated Financial Statements. We expect to receive royalties from Collegium of $132 million for 2018 and royalties based on certain annual NUCYNTA net sales thresholds for future years. Both we and Collegium may terminate the Commercialization Agreement under certain circumstances, provided that Collegium may not terminate the agreement prior to the end of 2021. Additionally, we retained certain rights to co-promote NUCYNTA products, subject to providing advanced notice to Collegium. The NUCYNTA franchise includes two products currently marketed in the U.S. by Collegium:
 
NUCYNTA® ER (tapentadol extended release tablets), a product for the management of pain severe enough to require daily, around the clock, long term opioid treatment, including neuropathic pain associated with diabetic peripheral neuropathy (DPN) in adults, and for which alternate treatment options are inadequate; and

NUCYNTA® IR (NUCYNTA) (tapentadol), an immediate release version of tapentadol for the management of moderate to severe acute pain in adults.

In November 2017, we entered into definitive agreements with Slán Medicinal Holdings Limited and certain of its affiliates (Slán) pursuant to which we acquired Slán’s rights to market the specialty drug cosyntropin depot (synthetic ACTH Depot) in the U.S. and Canada, and Slán acquired our rights to Lazanda® (fentanyl) nasal spray. We believe cosyntropin depot can be second-to-market behind Mallinckrodt plc's marketed product, H-P Acthar gel. We expect Slán to file a New Drug Application (NDA) for cosyntropin depot by the end of 2018.
 
We actively seek to expand our product portfolio through acquiring or in licensing commercially available products or late stage product candidates that may be marketed and sold effectively through our sales and marketing capability.

We also have royalty and milestone producing license arrangements based on our proprietary Acuform® gastroretentive drug delivery technology, including with Ironwood Pharmaceuticals, Inc. (Ironwood).
 
In October 2013, we sold our interests in royalty and milestone payments under our license agreements relating to our Acuform technology in the Type 2 diabetes therapeutic area to PDL BioPharma, Inc. (PDL) for $240.5 million. On August 2, 2018, we sold our remaining interest in such payments to PDL for $20.0 million.
 

36

Table of Contents

Strategy
 
Our commercial strategy is based on three pillars: Maintain, Grow and Build.

We intend to “Maintain” our NUCYNTA franchise of pain products through our Commercialization Agreement with Collegium. In January 2018, pursuant to the terms of a Commercialization Agreement we entered into with Collegium in December 2017, we granted Collegium the right to commercialize the NUCYNTA franchise of pain products in the U.S. Pursuant to the Commercialization Agreement, Collegium assumed all commercialization responsibilities for the NUCYNTA franchise effective January 9, 2018, including sales and marketing. We will receive a royalty on all NUCYNTA revenues based on certain net sales thresholds, with a minimum royalty of $132 million for the year ending December 31, 2018. Pursuant to the Amendment to the Commercialization Agreement described in Note 17, "Subsequent Events" of the Notes to the unaudited condensed Consolidated Financial Statements, we expect to receive royalties from Collegium of $132 million for 2018 and royalties based on certain annual NUCYNTA net sales thresholds for future years. Both we and Collegium may terminate the Commercialization Agreement under certain circumstances, provided that Collegium may not terminate the agreement prior to the end of 2021.

We intend to “Grow” our neurology, orphan and specialty medicine business through organic and inorganic growth. We intend to “Build” a portfolio of high-value products positioned to address the needs of patients, physicians and payers. In November 2017 we acquired the exclusive rights to market cosyntropin depot (synthetic ACTH Depot) in the U.S. and Canada. Cosyntropin depot is a long-acting alcohol-free synthetic ACTH analogue. We expect that a New Drug Application will be filed with the U.S. Food and Drug Administration for cosyntropin depot by year end. We intend to file for a 505(b)(2) application for a diagnostic indication for suspected adrenocortical insufficiency. As previously announced, Assertio and our development partner began enrolling and dosing pediatric patients in a new clinical trial evaluating cosyntropin depot for the treatment of infantile spasms, a specific seizure type present in infantile epilepsy syndrome, a rare pediatric disorder. We are also seeking to bring additional specialty and orphan products into this portfolio.
 
In connection with our entry into the Commercialization Agreement with Collegium, we eliminated our pain sales force, relocated our headquarters and reduced our headquarters’ staff. Excluding restructuring charges we expect these actions will significantly reduce our operating expenses in future periods, further enabling us to implement our strategy.

OUR BUSINESS OPERATIONS
 
As of September 30, 2018, our revenues were generated primarily from the following commercialized products.
 
Gralise (Gabapentin)
 
Gralise is our proprietary, once daily formulation of gabapentin indicated for management of PHN, a persistent pain condition caused by nerve damage during a shingles, or herpes zoster, viral infection. We made Gralise commercially available in October 2011, following its U.S. Food and Drug Administration (FDA) approval in January 2011. The FDA has granted Orphan Drug exclusivity for PHN. Gralise product sales were $14.6 million and $21.1 million for the three months ended September 30, 2018 and 2017, respectively. Gralise product sales were $43.3 million and $57.8 million for the nine months ended September 30, 2018 and 2017, respectively.
 
CAMBIA (Diclofenac Potassium for Oral Solution)

CAMBIA is a non-steroidal anti-inflammatory drug (NSAID) indicated for the acute treatment of migraine attacks with or without aura in adults 18 years of age or older. We acquired CAMBIA in December 2013 from Nautilus Neurosciences, Inc.
 
We began shipping and recognizing product sales on CAMBIA in December 2013. Our CAMBIA product sales were $10.4 million and $8.2 million for the three months ended September 30, 2018 and 2017, respectively. CAMBIA product sales were $24.9 million and $23.9 million for the nine months ended September 30, 2018 and 2017, respectively.
 
Zipsor (Diclofenac Potassium) Liquid Filled Capsules
 
Zipsor is an NSAID indicated for relief of mild to moderate acute pain in adults. Zipsor uses proprietary ProSorb® delivery technology to deliver a finely dispersed, rapidly absorbed formulation of diclofenac. We acquired Zipsor in June 2012 from Xanodyne Pharmaceuticals, Inc.
 

37

Table of Contents

Our Zipsor® product sales were $4.4 million and $3.2 million for the three months ended September 30, 2018 and 2017, respectively, and Zipsor® product sales were $13.2 million and $12.3 million for the nine months ended September 30, 2018 and 2017, respectively.
 
NUCYNTA ER (Tapentadol Extended Release Tablets)
 
NUCYNTA ER is an extended release version of tapentadol that is indicated for the management of pain severe enough to require daily, around the clock, long term opioid treatment, including neuropathic pain associated with DPN in adults, and for which alternate treatment options are inadequate. We acquired the U.S. rights to NUCYNTA ER from Janssen Pharmaceuticals, Inc. (Janssen Pharma) and began shipping and recognizing product sales on NUCYNTA ER in April 2015. We began commercial promotion of NUCYNTA ER in June 2015.
 
NUCYNTA (Tapentadol)
 
NUCYNTA is an immediate release version of tapentadol that is indicated for the management of moderate to severe acute pain in adults. We acquired the U.S. rights to NUCYNTA from Janssen Pharma and began shipping and recognizing product sales on NUCYNTA in April 2015. We began commercial promotion of NUCYNTA in June 2015.

In January 2018, pursuant to the terms of a Commercialization Agreement we entered into with Collegium in December 2017, we granted Collegium the right to commercialize the NUCYNTA franchise of pain products in the U.S. Pursuant to the Commercialization Agreement, Collegium assumed all commercialization responsibilities for the NUCYNTA franchise effective January 9, 2018, including sales and marketing. We will receive a royalty on all NUCYNTA revenues based on certain net sales thresholds, with a minimum royalty of $132.0 million for the year ended December 31, 2018. Pursuant to the Amendment to the Commercialization Agreement described in Note 17, "Subsequent Events" of the Notes to the unaudited condensed Consolidated Financial Statements, we expect to receive royalties from Collegium of $132 million for 2018 and royalties based on certain annual NUCYNTA net sales thresholds for future years. Both we and Collegium may terminate the Commercialization Agreement under certain circumstances, provided that Collegium may not terminate the agreement prior to the end of 2021.

Lazanda (Fentanyl) Nasal Spray